Teri Savage, Senior Trader on the BlueBay U.S. Fixed Income team, discusses the market and policy impacts of housing market pressures in the US.
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Hello, welcome back to The Weekly Fix. My name is Teri Savage, and I am a Senior Mortgage Trader with RBC’s BlueBay Fixed Income team in Minneapolis, MN.
It is quite an interesting time in the mortgage market. The U.S. housing market has taken center stage recently as there is talk that the Trump Administration is considering declaring a national housing emergency due to record low affordability in the U.S. for homes. U.S. Treasury Secretary Bessent recently told reporters; President Trump might declare a national housing emergency this fall. This rhetoric puts the spotlight on mortgage rates.
First off, we are in a situation where the average home in the U.S. is unaffordable for the average homebuyer. The housing affordability index hit the lowest reading in the 2nd quarter of this year, since its inception in 1986! What we have experienced over the past 5 years is home price growth well exceeding personal income growth in the U.S. We are now in environment where there is quite a large gap between an affordable home and the median home price in the U.S.
This low housing affordability is not only coming from the price of a median home, but also from mortgage rates, since most home buyers finance a portion of their home purchase. The 30-year mortgage rate has remained stubbornly above 6% for the past 3 years - currently hovering around 6.35%. To help ease the affordability in the U.S., the Administration has been focused on bringing interest rates down - specifically calling on Fed Chair Jerome Powell to lower the Fed funds rate. The aim is to bring down borrowing costs, specifically mortgage rates. And the Federal Reserve is widely expected to cut the Fed funds rate this Wednesday.
Which brings me to what we have been seeing in the markets recently.
Treasury rates have steadily declined since mid-August. This decline in interest rates is on the heels of the U.S. labor market showing signs of stress. Which in turn, is increasing the likelihood of multiple rate cuts over the next year by the Federal Reserve. Last week, we saw the 10-year trade almost through 4%. The 10-year hasn’t closed below 4% since last October, except for a brief 3.99% in April on tariff concerns.
So how does the Fed funds rate and the 10-year Treasury rate affect the mortgage rate? The 30-year mortgage rate is well correlated with the 10-year Treasury rate. Many mortgage investors refer to this rate correlation as highly directional. Regarding the Fed funds rate, this short-term rate influences the 10-year Treasury rate, as it’s a proxy for expectations of future Fed policy and the path for the economy. To help achieve lower mortgage rates, the key is lowering the Fed funds rate which will likely also bring down longer, 10-year Treasury rates.
The other part of the equation in lowering mortgage rates, is narrowing the spread on mortgages versus treasuries. This spread is quite simply the risk or cost of a mortgage. What we have recently been seeing in the mortgage market is mortgage spreads to treasuries tightening. And we are currently at the tightest spread levels in almost a year. The anticipation of rate cuts, a low volatility environment and a reach for mortgage duration, as rates have declined, have all contributed to the tightening we are seeing in mortgage spreads.
Which bring me back to what I referenced earlier - if the administration is to issue an emergency declaration for the U.S. housing market, part of the focus will likely be on lowering interest rates via the Fed Funds rate. To get solid traction on housing affordability, we need to have mortgage rates decline to near 5%, so there is plenty of work needed here.
Summary:
For mortgage investors, we think it is important to stay nimble. Given the administration’s focus on the housing market and the impact that the mortgage market has on housing, it is vital for us as mortgage investors to pay close attention to policies which can impact mortgage rates and spreads. We are cognizant of the administration’s goal of bringing down housing costs by lowering rates. And are keeping this message forefront as we navigate the mortgage market.
Thank you for watching. And enjoy the week!
Key points
The U.S. housing market faces record-low affordability due to home price growth outpacing income growth and persistently high mortgage rates (above 6%).
The Trump Administration is considering declaring a national housing emergency to address these challenges, with a focus on lowering interest rates to improve affordability.
The Federal Reserve is expected to cut the Fed funds rate to reduce borrowing costs, which could lower the 10-year Treasury rate and, in turn, the 30-year mortgage rate.
Mortgage investors should remain flexible and closely monitor policies affecting mortgage rates and spreads, as the administration prioritizes improving affordability.
