Why are mortgage rates approaching 7% again if inflation is cooling and the trade war has softened?
You would think interest rates would be coming down thanks to both falling prices and reduced tension with trade partners like China.
Instead, the 10-year bond yield keeps rising, and at last glance was above 4.50% today.
Combine that with a spread of around 250 basis points (bps) and home buyers are looking at a 7% 30-year fixed mortgage rate.
Clearly this is unwelcome news if you’re in the market to buy a home. But why is it happening this time?
Bonds Like Economic Weakness but Not Uncertainty
If I were to guess, I would say it boils down to ongoing uncertainty and defensiveness.
For one, there is no actual trade deal as of yet. All there is a temporary 90-day agreement to hold off on larger tariffs between the two superpowers.
So there’s a thought that this is merely a delay, and three months from now will be back in the same boat.
In addition, there are the unforeseen consequences of the past couple months of tariff talk and back-and-forth on trade deals that have yet to show up in the data.
There’s a decent possibility that could muddle the inflation data and other key economic reports released in coming months.
And it might not present itself until June, July, August, etc.
That makes it difficult for the federal reserve to move forward with important monetary policy changes if they don’t know what that’ll look like.
As such, you might see bonds continue to sell off or at least not see much in the way of gains. That pushes up their yields and leads to higher mortgage rates too.
Of course, traders seem to be happy to buy into the stock market at the same time, despite all this uncertainty.
They appear optimistic that the trade tensions have come off the boil, and will likely look a lot less damaging in the near future.
Mortgage Rates Are Hurting Whether Trade Talks Improve or Worsen
But bonds (and by extension mortgage rates) are hurting both ways, whether the trade war is worsening or improving.
Trade impasse? Mortgage rates up. Trade deal? Mortgage rates up!
Meanwhile, stocks seem to be reacting relatively normally. They go up when trade tensions ease, and go down when trade tensions worsen.
Bond yields seem to just keep going up regardless. And that is bad news for anyone looking to buy a home or refinance an existing mortgage.
One silver lining is mortgage rate spreads have improved lately despite the uptick in bond yields.
But that doesn’t mean we won’t see 7% mortgage rates again during the key spring home buying season. Per MND, they’re literally knocking at the door (6.99% today).
7% Mortgage Rates Are More Than Psychological
At first, I thought it was psychological, seeing a mortgage rate that starts with a seven as opposed to a six.
The more I dug into it, the more I realized the reason it’s a seven and not a six is what’s giving people hesitation.
If you look at the difference in monthly payment for a 7% rate versus say a 6.75% rate, it’s pretty negligible.
But if you look at why the rates are different, why they went back up to 7%, you realize it’s this increased uncertainty.
If you’re a prospective home buyer, the last thing you want is increased doubt and/or volatility in the markets.
So really it goes beyond just that quarter of a percentage point.
It’s about where the economy is headed and how comfortable the consumer is stepping into one of the largest decisions of their life.
If consumer confidence is low due to uncertainty in the economy, job market, etc., that alone can be a deal breaker.
So perhaps pay less attention to the difference in mortgage rate and more to the difference in sentiment.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.