As HousingWire lead analyst Logan Mohtashami pointed out earlier this week, the spread between the 10-year Treasury rate and 30-year mortgage rates has narrowed significantly over the past two years.
Digital Lender CEO Vishal Garg better.comsaid in an email interview with HousingWire that it was a “big deal” to compress the spread because the Fed has yet to reach a neutral policy rate despite small cuts for more than a year.
“We have already started seeing a pick-up in customer engagement and reduced lock volume on Better.com as rates have come down,” Garg said. “With the Fed returning to the MBS market, we expect pricing to be more competitive, particularly in terms of loans.”
Fed policy moves
Garg’s comments referred to the Fed’s decision in late October to end its quantitative tightening (QT) efforts this month.
The central bank started making its principal payments from its treasury securities holdings that matured above the monthly cap of $5 billion in October and November. And now it is recovering principal payments from its portfolio of agency loans and agency mortgage-backed securities (MBS) received during the same two months that exceed $35 billion a month.
“The Fed’s decision to end QT and reintroduce MBS yields is a meaningful tailwind for the mortgage market,” Garg said. “Although spreads have narrowed from their peak, they are still well above historical norms, hovering around 200 to 225 basis points versus a long-term average of 150. The Fed’s re-entry as a buyer could help close that gap.”
Although the current Fed leadership under Powell has taken a conservative stance on the pace and frequency of rate cuts, that could change later when a new Fed chair is installed in 2026.
President Donald Trump has made no secret of his desire for very low interest rates. And a 200 bps cut in the federal funds rate, for example, could change the mortgage market. “
“There are about 20% of Americans with more than 6% of debt,” he said. “A drop like this would refinance a brain drain, and in many cases save families $300 to $500 a month.
“For new buyers, it will improve affordability and unlock demand for pent-up millions from out-of-market prices during this uptrend cycle.”
Interest rate traders are very confident that the Fed will issue a third straight cut in benchmark rates on Wednesday. CME GroupThe FeedWatch tool on Tuesday showed a 90% chance of a 25-bps cut. But looking forward to January, 70% say the cuts will be put on hold.
“The Fed still lacks official employment data for October and November, but September’s unemployment rate of 4.44 percent already sits above the committee’s central threshold for ‘excessive employment,’ indicating a softening labor market,” First American said senior economist Sam Williamson.
If the reduction is made as expected by the committee, the decision is likely to yield multiple amounts
Differences – possibly in both directions – such as the weighting of rising distributive feds against rising employment concerns are the weighting of inflationary risks.
Effects of the housing market
This week’s housing market tracker shows that pending home sales continue to run higher than last year, while demand for purchase mortgages is at its highest rate in three years.
Home price appreciation has also slowed, which has affected monthly mortgage payments. Data from October Mortgage Bankers Association Home beer affordability appeared to have improved for a fifth straight month as the average monthly payment among purchase applicants was $2,039, $88 less than a year ago.
“Housing affordability is finally moving in the right direction, with several months of year-over-year improvements cooling home prices, incomes growing faster than prices, and rates easing at the margin,” Williamson said.
“Together, these forces point to a measured, but steady, recovery over the next year — even if mortgage rates don’t drop meaningfully.”
Garg said steady growth in home prices is helping more consumers re-enter the housing market. Markets like Texas, Florida, Georgia and the Carolinas are best looking to see the benefits for first-time buyers and move-up buyers. Where home prices, sales inventory and job growth trends are favorable.
Refinance opportunities are also likely to appear more frequently as rates gradually lower, and Garg said his company is poised to recapture many of its existing customers.
“Repossession is everything in a refi market, and the window to win over these lenders is incredibly short,” he said. “Once rates drop into the money, most borrowers who refinance will do so within two to four weeks of realizing they can save.
“If you’re not the first lender to show them their personal savings and provide the momentum they need to help them start saving before their next mortgage payment, you’ve already lost.”
