Layla Zulfa
Mortgage rates are anticipated to stay above the 6% threshold, even with a potential de-escalation of geopolitical tensions. This outlook is primarily shaped by ongoing inflationary pressures, the Federal Reserve’s monetary policy, and the dynamics of mortgage spreads, which collectively limit the downward movement of borrowing costs. This assessment was shared by Logan Mohtashami, HousingWire’s Lead Analyst, during a presentation at the American Credit Union Mortgage Association (ACUMA) Make Your Mark Conference in Las Vegas on Tuesday.
Mohtashami’s remarks underscored the complex interplay of global and domestic economic factors influencing the mortgage market. He highlighted that recent surges in oil prices and a concurrent rise in the 10-year Treasury yield have significantly complicated projections for mortgage rates. Even if immediate geopolitical conflicts, such as the one in the Middle East, were to conclude and oil prices were to retract to the $68-$70 per barrel range, mortgage rates could still hover around 6.5% to 6.75%. This persistence is largely contingent on the Federal Reserve offering clearer signals regarding its intentions for interest rate reductions.
"There’s not a lot of history of mortgage rates going below 5.75% for decades and decades," Mohtashami stated, emphasizing a historical precedent for higher baseline rates in the current economic environment. This historical perspective suggests that a return to the ultra-low rates seen in previous decades is unlikely in the short to medium term, irrespective of short-term market fluctuations.
The Influence of Mortgage Spreads and Treasury Yields
The trajectory of mortgage rates is a function of two primary components: Treasury yields and mortgage spreads. Mohtashami explained that while mortgage spreads have demonstrated substantial improvement from the elevated levels witnessed during the 2023 banking crisis, they remain a critical factor. He provided a stark illustration: had spreads remained at their worst 2023 levels, current mortgage rates would likely be around 8.36%. This indicates that the market has absorbed some of the stress, but the underlying pricing mechanisms still exert significant influence.
Further elaborating on the impact of spreads, Mohtashami noted that using the most stressed spread levels from 2024 would place mortgage rates near 7.96%. Even using the worst levels from the preceding year, 2023, would translate to approximately 7.87%. These figures underscore the extent to which improved spread dynamics have prevented even higher borrowing costs in the current environment.
Historically, mortgage spreads tend to widen or deteriorate under two primary conditions: when the Federal Reserve aggressively increases interest rates or when credit markets experience significant stress and begin to break down. Mohtashami clarified that neither of these conditions is currently manifesting with the severity observed during past financial crises, suggesting a more stable, albeit elevated, pricing environment for mortgages.
Labor Market Resilience and Its Impact on Rates
The labor market, a key focus for the Federal Reserve in its inflation-fighting efforts, is also unlikely to provide a near-term catalyst for significantly lower mortgage rates. Mohtashami introduced the concept of "breakeven" job growth – the minimum number of jobs required each month to maintain a stable unemployment rate. This figure is currently estimated to be around 33,000 jobs per month, or potentially even lower. This suggests that the economy can absorb several months of weaker job reports without triggering a substantial increase in unemployment.
Consequently, Mohtashami emphasized that jobless claims, rather than monthly job creation figures, are a more critical indicator for monitoring potential deterioration in the labor market. A sustained rise in jobless claims would signal a more pronounced economic slowdown, which could then influence the Federal Reserve’s monetary policy decisions and, by extension, mortgage rates. However, as of the conference, labor market data has remained resilient, providing little impetus for immediate rate cuts.
A Healthier, Though Constrained, Housing Market
Despite the prevailing elevated mortgage rates, Mohtashami asserted that housing market conditions have become healthier. This improvement is characterized by a cooling of home price appreciation and a modest increase in inventory. "Home sales aren’t crashing anymore, and inventory is not escalating," he stated, adding, "We’re just trying to get back to normal." This sentiment suggests a market that is moving away from the extreme volatility of recent years and towards a more sustainable equilibrium.
The slower pace of inventory growth, according to Mohtashami, is a positive development. It mitigates the risk of either a rapid acceleration in home prices or a sharp decline, fostering a more stable environment for both buyers and sellers. This gradual return to normalcy is a key factor in the market’s current resilience.
Furthermore, Mohtashami directly addressed concerns that the current housing market might mirror the conditions that preceded the 2008 financial crisis. He presented compelling evidence to the contrary, focusing on critical metrics such as credit performance, borrower equity, and down payment levels.
Key Differentiators from the 2008 Crisis
Mohtashami highlighted several crucial differences:
- Homeowner Equity: Approximately 40% of U.S. homes are now owned outright, free of any mortgage. This represents a significant buffer against market downturns. Aggregate homeowner equity is substantially higher than during the housing bubble that preceded the 2008 crisis, providing homeowners with a stronger financial cushion.
- Loan-to-Value Ratios: The loan-to-value (LTV) ratio for mortgaged homes is considerably lower than in the pre-recessionary period of 2006-2008. This indicates that borrowers are generally taking on less debt relative to the value of their homes, reducing the risk of negative equity.
- Credit Performance: The overall performance of mortgage credit has been strong. This is a direct contrast to the subprime lending practices that characterized the lead-up to the 2008 crisis. Current underwriting standards are more stringent, and borrowers are generally in better financial standing.
These factors collectively suggest that the current housing market is on a much more stable footing and is far less susceptible to the kind of systemic collapse experienced in 2008.
Affordability Remains the Primary Constraint
Mohtashami clarified that the primary impediment to housing demand is not a lack of available homes but rather affordability challenges. He also countered the notion that homeowners with low mortgage rates are effectively "locked in" and unwilling to sell, thereby constricting supply.
He explained that the share of homeowners holding mortgages below 4% is gradually declining as existing borrowers sell their homes and move, a natural part of the housing lifecycle. Demographics play a significant role, with Baby Boomers, Gen X, millennials, and Gen Z continuing to actively participate in the market. This sustained intergenerational demand creates a steady flow of both buyers and sellers, preventing a complete market freeze.
"If there was an authentic mortgage rate lockdown, home sales would be around 1.86 to 2.24 million," Mohtashami posited. "Nobody would sell their home and buy another home." The current market activity, he argued, contradicts this extreme scenario, indicating that while there are challenges, they are not insurmountable.
Instead, the market is constrained by the cost of financing and the resulting housing affordability. Mohtashami expressed optimism that this situation could improve as wage growth continues to outpace home-price appreciation, and as mortgage rates eventually decline. The recent moderation in home-price appreciation is viewed as a positive development, allowing household incomes more time to adjust and catch up with housing costs.
Path to Lower Mortgage Rates: A Multifaceted Approach
A sustained decline in mortgage rates would necessitate a confluence of several factors. These include a significant easing of geopolitical tensions, a subsequent drop in energy prices, and a reduction in inflationary pressures stemming from tariffs and other economic policies.
The Federal Reserve’s policy response remains a critical variable. Mohtashami noted that the central bank is currently in a delicate position. While economic growth has remained robust, commodity prices have introduced new inflationary concerns, limiting the Fed’s room to maneuver for aggressive rate cuts.
"We’re in a much healthier spot," Mohtashami concluded, offering a cautiously optimistic outlook. "As long as price growth cools down and wages rise, affordability gets better. When rates go a little bit lower, we’ve got growth for years." This perspective suggests that the housing market, while currently navigating a period of elevated costs, is poised for sustained growth once key economic indicators align to facilitate a more favorable interest rate environment. The current resilience, coupled with the potential for gradual improvement, paints a picture of a market adapting to new realities rather than facing an impending collapse. The focus remains on achieving a balanced economic environment where affordability improves, enabling a broader segment of the population to access homeownership and driving continued activity in the housing sector.
