Mortgage Rates Treasury Yields Spike and Homebuying Costs Rise

Mortgage rates are on the rise, and it's not just a matter of fluctuating interest rates. The 10-year Treasury yield, a key benchmark for mortgage rates, has spiked to 2.9%, its highest level since 2013. This means that homebuyers can expect to pay more for their mortgages.

The 10-year Treasury yield has a direct impact on mortgage rates, as mortgage-backed securities are often used as collateral for these loans. As the yield increases, lenders pass on the higher costs to borrowers. In fact, the average 30-year fixed mortgage rate has already risen to 4.7%, up from 3.9% just a few months ago.

Homebuyers are feeling the pinch of these rising costs. According to recent data, the median home price in the US is now $270,000, and with mortgage rates at 4.7%, the monthly mortgage payment for a $270,000 home would be around $1,300. This is a significant increase from just a few years ago, when mortgage rates were lower and monthly payments were around $1,000.

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Mortgage rates jumped abruptly higher after the Fed's rate cut, with the average lender increasing rates by at least 0.20% from earlier in the morning.

The top-tier conventional 30-year fixed rate will easily be back over 7% for the average lender. This sudden spike has nothing to do with the Fed's rate cut, but rather the Fed's rate cut/hike outlook.

The Fed communicates its outlook 4 times a year via the summary of economic projections and the infamous "dot plot". Today's dot plot showed the median Fed member sees much higher rates by the end of next year compared to the last dot plot 3 months ago.

The bond market didn't like the new dot plot, with yields/rates jumping at 2pm ET and continuing higher during Powell's presser starting at 2:30pm. By 4pm, 10yr Treasury yields had risen more than 0.10% – a very big move for a single day.

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5yr Treasuries, which are currently even more similar to the bonds that dictate mortgage rates, were up more than 0.13%. Almost every lender "repriced" to higher rates at least once today.

If you're in the market for a mortgage, be prepared for higher rates tomorrow morning. Any lender still showing the same rates from this morning will likely be much higher tomorrow morning.

The spike in mortgage rates due to treasury yields has a significant impact on consumers. Many prospective homebuyers are now facing higher monthly mortgage payments, which can be a major obstacle to purchasing a home.

The average 30-year fixed mortgage rate has increased from 3.5% to 4.5% in just a few months, adding hundreds of dollars to monthly mortgage payments.

For example, a borrower who previously qualified for a $300,000 mortgage at 3.5% interest may now be priced out of the same home due to the higher interest rate.

Consumers are also seeing higher interest rates on other types of loans, such as home equity lines of credit and personal loans.

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As consumers, it's essential to be aware of warning signs that may indicate a potential downturn in the market. Rising inflation rates can lead to reduced consumer spending power.

Higher interest rates can make borrowing money more expensive, which may lead to decreased consumer confidence and spending.

A sudden surge in stock prices can be a warning sign for consumers, as it may indicate a market correction is overdue.

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The monthly mortgage payment is a significant expense for many consumers.

The national median family income for 2024 is $97,800, according to the U.S. Department of Housing and Urban Development.

The median price of an existing home sold in November 2024 was $406,100, according to the National Association of Realtors.

Based on a 20 percent down payment and a 7.08 percent mortgage rate, the monthly payment is $2,179.

This amount amounts to 27 percent of the typical family's monthly income.

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The 10-year Treasury yield surged to a 16-year high of 3.86% as investors anticipated a sharp interest rate hike by the Federal Reserve.

This significant increase in Treasury yields had a ripple effect on the mortgage market, causing mortgage rates to spike.

According to data from Freddie Mac, the 30-year fixed mortgage rate rose to 6.9%, a 20-year high, on May 18th, 2023.

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The empirical evidence for the mortgage duration effect is clear. A study examining the mortgage spread against the yield curve slope found a statistically significant negative correlation of -0.24.

The relationship between the two series isn't obvious at first glance, but a scatter plot reveals a more nuanced picture. The connection between the mortgage spread and the yield curve slope hinges on whether the yield curve is upward or downward sloping.

In upward sloping yield curves, there's only a slight negative relationship between the two, with a correlation of -0.03. This is because current mortgage rates are likely to be lower than future mortgage rates, making mortgages a long-duration asset.

However, when the yield curve is downward sloping, the relationship becomes sharply negative, with a correlation of -0.84. This is because current mortgage rates are likely to be higher than future mortgage rates, leading to rapid refinancing and making mortgages short-duration assets.

The yield curve's slope is a key driver of this relationship, with backward-bending yield curves often arising in recessions. This means that large increases in mortgage spreads can occur just as the economy is slipping into recession.

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The model used to analyze the relationship between mortgage spreads and the T10T2 yield curve slope is quite impressive. It's based on a simple and lightly parameterized model with fully rational agents and competitive, risk-neutral lenders.

The model assumes that every household owns a house and decides whether to stay with its current mortgage or refinance to a new one, with a 2 percent refinance cost equal to the house value. This is a realistic assumption, as many people do refinance their mortgages to take advantage of lower interest rates.

Households in the model are influenced by taste shocks that idiosyncratically affect their decision to repay, which is a key factor in determining the mortgage spread. When nearly indifferent between refinancing and staying, approximately half of households will refinance and half will repay.

The model also takes into account the fact that mortgages are typically interest-only loans with an effective duration of at most 30 years due to an exogenous chance of refinancing per quarter. This is a crucial aspect of the model, as it affects the pricing of mortgages and their relationship with the T10T2 yield curve slope.

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The government bond risk-free rate in the model varies over time, evolving according to an AR(1) process estimated from nominal, secondary market, three-month Treasury bill rates. This gives quarterly persistence of 0.974 with a quarterly innovation of 0.0016 (0.64 percent annualized) and an unconditional mean of 0.0096 (3.90 percent annualized).

The model's results show an exceptional fit between the equilibrium relationship between the T10T2 yield curve slope and the mortgage spread, which is a strong indicator of the model's accuracy. The relationship between the mortgage spread and the T10T2 yield curve slope is particularly interesting, as it flattens and reverses as the yield curve transitions from downward sloping to flat and then upward sloping.

The model's mechanism operates through the mortgage market's endogenous changes in maturity, which is a key factor in determining the mortgage spread. As the yield curve inverts and becomes increasingly inverted, the expected duration of new mortgages falls to as low as one year.

The expected duration of new mortgages rises monotonically to 10 years when the T10T2 is 0.7 percent, and then continues to rise to as much as 30 years when the T10T2 is 2.6 percent. This drives the mortgage spread up, as the mortgage behaves more like a 30-year bond, which has a yield higher than the T10.

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