Understanding Mortgage Spreads and Housing Market Dynamics in 2025

Mortgage Spreads: An Overview

Mortgage spreads, defined as the difference between the 10-year Treasury yield and the 30-year mortgage rate, currently present a noteworthy situation. Historically, these spreads have typically ranged from 1.60% to 1.80% and remained relatively stable over the past decade. However, recent trends show that spreads are now elevated.

If current spreads were comparable to the peak levels observed in 2023, mortgage rates could be about 0.75% higher than they are today. Conversely, a return to historical norms could potentially lower rates by 0.55% to 0.75%, bringing them closer to around 6%.

10-Year Yield Compared to Mortgage Rates

In projections for 2025, it’s estimated that mortgage rates may range between 5.75% and 7.25%, while the 10-year yield is expected to fluctuate between 3.80% and 4.70%. Recent developments indicate fluctuations in the 10-year yield, which briefly surpassed 4.50% before stabilizing. Improved mortgage spreads have helped to mitigate the impact of these rising yields on mortgage rates.

On a notable note, Moody’s recent downgrade of U.S. debt has prompted a slight rise in the 10-year yield, although many analysts are not overly concerned about this development amid ongoing budget discussions.

Purchase Application Activity

Recent data indicates a significant uptick in purchase applications, rising by 18% year over year last week, following a 13% increase the previous week. This growth is particularly surprising given the elevated mortgage rates, which typically do not foster such trends. It’s essential to note that this purchase application data reflects trends 30 to 90 days in advance and may not yet be visible in existing home sales reports.

Total Pending Sales Trends

According to the latest data from Altos, total pending sales are slightly higher than last year, indicating stabilizing demand despite elevated mortgage rates. For 2025, pending sales reached 409,896, compared to 400,653 in 2024 and 387,251 in 2023.

Inventory Levels on the Rise

Encouragingly, inventory levels are increasing, signaling a return to more normalized market conditions. As of May 2025, inventory rose to about 767,274 from 755,895. This marks a positive shift from the all-time low of 240,497 in 2022. For context, inventory levels in 2015 peaked at over 1.1 million.

New Listings Data

New listing data is also on the rise, with last week revealing that listings hit the minimum forecast of 80,000 during peak seasonal periods. While there was a slight decrease last week, both new listings and purchase applications show positive yearly trends, which is a departure from the past few years. In comparison, new listings for the previous years stand at:

• 2025: 76,112
• 2024: 67,530
• 2023: 59,072

Price Adjustments in the Market

In typical years, approximately one-third of homes experience price reductions, reflecting the dynamic nature of the housing market. A modest increase in home prices of about 1.77% is projected for 2025. The current growth in price cuts indicates a cautious outlook as homeowners adjust their pricing strategies amid changing market conditions, with approximately 37.4% of properties seeing adjustments in 2025.

Upcoming Market Considerations

In the upcoming week, market observers will closely monitor reactions to the recent debt downgrade and remarks from several Federal Reserve leaders. Reports on existing and new home sales are also anticipated, with predictions suggesting potential discrepancies from expected figures based on the recent surge in purchase applications.

In conclusion, despite elevated mortgage rates, the housing market is displaying resilience through improved spreads, increased purchase applications, and expanding inventory levels. Understanding these dynamics is crucial for stakeholders as we progress through 2025.