Mortgage spreads are almost back to normal

In a week marked by discussions of the potential firing of Federal Reserve Chair Jerome Powell and inflation data, mortgage rates remained relatively calm, thanks to improvements in mortgage spreads.

Mortgage spreads have improved significantly since 2023, leaving us just 0.49% from normal levels, based on the data we use. This means we can achieve near 6% mortgage rates without the 10-year yield dropping below 4%, provided spreads continue to improve. Why is this important? Over the past few years, I have seen housing demand improve as mortgage rates have trended from 6.64% toward 6%. This is something we haven’t been able to get yet in 2025, in terms of duration.

Mortgage spreads

In 2023, when mortgage rates reached 8%, the year was hampered by mortgage spreads hitting new cycle highs. Initially, mortgage spreads showed signs of improvement early in the year. However, the Silicon Valley banking crisis caused a spike in spreads and the situation remained challenging throughout the year. 

In 2024, the spreads began to improve, and in 2025, we are now only 0.49% away from returning to normal levels. Looking ahead to the rest of this year and beyond, even as the 10-year yield has increased recently, the damage to mortgage rates appears limited, as spreads continue to improve, especially during times when bond yields rise. This trend is a positive sign that the housing market performs well without sudden rate shocks. 

If the spreads were as bad as they were at the peak of 2023, mortgage rates would currently be 0.81 % higher. Conversely, if the spreads returned to their normal range, mortgage rates would be 0.49%-0.69% lower than today’s level. Historically, mortgage spreads have ranged between 1.60% and 1.80%.

The best levels of normal spreads would mean mortgage rates at 6.12% to 6.32% today, a notable difference.

10-year yield and mortgage rates

In my 2025 forecast, I anticipated the following ranges:

• Mortgage rates between 5.75% and 7.25%
• The 10-year yield fluctuates between 3.80% and 4.70%

Last week was crazy! We had two fascinating inflation reports, a back and forth about whether Powell would be fired, and more headlines about Powell needing to be investigated for the Federal Reserve’s remodeling project. Fed Governor Christopher Waller spoke about potential Fed rate cuts in July, while retail sales and jobless claims data came in as expected.

What did all of this mean for the 10-year yield? The yield started the week at 4.42%, rose to nearly 4.50%, and then fell back to finish the week at 4.42%. Mortgage rates ended the week at 6.81%, down from 6.83% at the beginning of the week. We are not far from the lowest rates of the year. Improved mortgage spreads have helped mitigate the impact of higher yields, preventing rates from exceeding 7% as often in 2025 as they did in the past two years.

Weekly housing inventory data

Now that we have removed the July 4th data from the system, we can return to our normal weekly tracker data. The most significant story for housing in 2024 and 2025 has been the growth in inventory. While active listings have not yet returned to normal levels, they are at a point where sellers no longer have the upper hand, and buyers are back in the game.

• Weekly inventory change (July 11-July 18): Inventory rose from 846,863 to 856,751
• The same week last year (July 12 -July 19): Inventory rose from 651,403 to 668,358

New listings data

The new listing data experienced a nice snap-back last week, which is usually the case after the July 4th holidays are processed. This year, I got my minimum target level of 80,000 new listings per week during the seasonal peak, but we didn’t get a few weeks of new listings trending between 80,000 and 100,000, which would be normal.

To give you some perspective, during the years of the housing bubble crash, new listings were soaring between 250,000 and 400,000 per week for many years. Here’s last week’s new listings data over the past two years:

• 2025: 73,272
• 2024: 68,877

Price-cut percentage

In a typical year, approximately one-third of homes experience price reductions, highlighting the dynamic nature of the housing market. Homeowners adjust their sale prices as inventory levels rise and mortgage rates stay elevated. This data line has stabilized over the last two weeks, as mortgage rates have fallen. 

For my 2025 price forecast, I anticipated a modest increase in home prices of approximately 1.77%. This suggests that 2025 will likely see negative real home prices again. In 2024, my forecast of a 2.33% increase proved inaccurate, primarily because rates fell to around 6% and demand improved in the second half of the year. As a result, home prices increased by 4% in 2024. 

The rise in price reductions this year compared to last year reinforces my cautious growth forecast for 2025. Here are the percentages of homes that saw price reductions in the previous week in the last two years:

• 2025: 41.3%
• 2024: 39%

Purchase application data

The purchase application data experienced a significant weekly decline from its year-to-date peak, dropping 12% week over week, but rising 13% year over year. This year, a key theme in my analysis has been that the year-over-year growth we are observing is mainly due to new listings returning to more normal levels. As shown below, the year-over-year growth numbers are performing significantly better than the week-to-week data. 

Here is the weekly data for 2025:

• 12 positive readings
• 10 negative readings
• 5 flat prints
• 24 straight weeks of positive year-over-year data
• 11 straight weeks of double-digit growth year over year 

Weekly pending sales

Our weekly pending home sales provide a week-to-week glimpse into the data; however, this data line can also be impacted by holidays and any short-term shocks. Now that the July 4th holiday is over, we can return to our normal routines. The bounce-back we’re seeing here is that weekly sales are returning to normal. 

Weekly pending sales for last week

• 2025: 66,781
• 2024: 61,736

Total pending sales

The latest weekly data on total pending sales from Altos offers valuable insights into current trends in housing demand. Typically, mortgage rates around 6% are necessary for significant growth in the housing market. Last week, our total pending home sales data decreased slightly to levels below those of previous year.

Weekly pending sales for the last week over the past several years:

• 2025: 386,185
• 2024: 382,429

The week ahead: Home sales data

This week, we will receive reports on both existing and new home sales. I don’t expect much change in existing home sales, and I believe others feel the same way. If we do see year-over-year growth, it will likely be due to the low expectations set by previous reports over the past few months. For new home sales, I’ll focus on the completed units for sale. As this number increases, it suggests that builders are still less likely to grow housing permits anytime soon, as I mentioned in this article. 

We receive jobless claims data every Thursday, and this data line has shown improvement over the past few weeks.

Of course, we will be watching for the crazy headlines that have become common this year, but we are also getting closer to the Aug. 1 deadline for trade deals, and any deals that get done are a positive story.