Mortgage spreads
The positive development in mortgage spreads in 2025 seems to be flying under the radar, with most people unaware of its significance. Without the improvement in mortgage spreads from the lows of 2023, demand could have been severely impacted. Thanks to rate cuts, a dovish stance from the Fed, and reduced market volatility, we are seeing gradual enhancements in spreads over time. This positive trend has carried over from 2024 into this year as well.
My projection for 2025 was a 0.27%-0.41% improvement from the 2.54% average in 2024, which had already shown improvement. While we haven’t quite reached that target yet, we are getting very close.
Last week demonstrated the importance of better mortgage spreads when bond yields surged, resulting in improved spreads that helped cushion the impact on mortgage rates. In previous years, higher mortgage rates would have been exacerbated by rising yields, but the improved spreads have helped mitigate this effect. The significance of healthy mortgage spreads cannot be overstated.
If the spreads were as dire as they were in the peak of 2023, mortgage rates would currently be 0.80% higher. Conversely, a return to normal spreads could lead to mortgage rates being 0.50%-0.70% lower than their current levels. Historically, mortgage spreads have ranged between 1.60% and 1.80%, with normal spreads translating to mortgage rates of 5.88% to 6.08% today, a notable difference.
10-year yield and mortgage rates
In my 2025 forecast, I predicted the following ranges:
- Mortgage rates between 5.75% and 7.25%
- The 10-year yield fluctuating between 3.80% and 4.70%
Last week saw bond yields rise due to a hotter-than-expected PPI inflation report, reaching 4.30% before settling at 4.32%. Mortgage rates started the week at 6.58%, dipped to 6.53%, and then returned to their initial levels at 6.58%.
The recent downtrend in mortgage spreads, while unfamiliar to many, showcases how resilient mortgage rates can be at this stage of the economic cycle. With an improving spread, we no longer need sub-4% on the 10-year yield to reach near 6% mortgage rates; getting closer to 4% with a healthier spread is now sufficient.
Weekly housing inventory data
The recent drop in inventory two weeks ago was surprising, considering the stabilization observed in mid to late June. While an inventory decline in the first week of August is uncommon, it was more prevalent in the pre-COVID era. Despite this, a pickup was expected this week, but the increase was minimal.
The year-over-year inventory growth has decreased from 33% to 23%, a positive trend even without rates nearing 6%. Regardless of the future trajectory of inventory levels, the growth in inventory in 2025 has been beneficial for the housing market.
Last week, inventory saw a slight increase:
- Weekly inventory change (Aug. 8-Aug. 15): Inventory rose from 859,096 to 860,068
- The same week last year (Aug. 9-Aug. 16): Inventory rose from 692,833 to 698,161
New listings data
New listings data peaked during the week of May 23, with a total of 83,143 listings. Since then, there has been a gradual decline, currently trending below 2022 levels. Despite expectations for a bounce this week, the increase was minimal, resulting in a negative year-over-year comparison.
During the housing bubble crash years, new listings soared to between 250,000 and 400,000 per week for an extended period. Comparing last week’s new listings data over the past two years:
- 2025: 66,679
- 2024: 67,476
Price-cut percentage
In a typical year, around one-third of homes experience price reductions, reflecting a normal part of the housing market cycle. Higher inventory levels and mortgage rates often lead to more price reductions. The increase in price reductions this year compared to last year aligns with a cautious growth forecast for 2025, indicating a possible negative trend in real home prices.
My 2025 price forecast anticipated a modest increase in home prices, but recent data suggests a cooling down of the growth rate. Last week’s percentages of homes with price reductions over the past few years:
Purchase application data
Last week saw a 1% week-to-week growth and a 17% year-over-year gain in purchase application data. The increase in new listings year over year can explain the growth in purchase apps data. With mortgage rates below 6.64%, we may see better week-to-week data if rates continue to fall.
Weekly data for 2025:
- 15 positive readings
- 11 negative readings
- 5 flat prints
- 28 straight weeks of positive year-over-year data
- 15 consecutive weeks of double-digit growth year over year
Total pending sales
The latest total pending sales data indicates current trends in housing demand. With mortgage rates around 6.58%, it will be interesting to see how the data responds if rates head towards 6% with duration.
Total pending sales:
- 2025: 377,582
- 2024: 365,944
Weekly pending sales
Weekly pending home sales offer insights into short-term trends, with last week showing a slight increase. These weekly pending contracts typically reflect sales data 30-60 days out.
Weekly pending sales for last week:
- 2025: 67,173
- 2024: 66,638
The week ahead: Jackson Hole, housing data, bond auctions and Fed speeches
Fed Chair Jerome Powell’s upcoming speech at The Kansas City Fed’s annual Economic Policy Symposium in Jackson Hole, Wyoming, will be closely watched this week for insights on the recent jobs data and inflation concerns.
The week will also feature housing data releases, including builder confidence data, housing starts, and existing home sales. Despite mortgage rates hitting year-to-date lows, which may not be reflected in this week’s reports, an increase in builder confidence could be anticipated. Additionally, bond auctions and speeches from key Federal Reserve officials could impact the markets.