Inflation data was warm last week, but mortgage rates remain near their lowest levels for 2025 because mortgage spreads continue to outperform. Last week featured a hot Producer Price Index (PPI) report and a core Consumer Price Index (CPI) inflation rate of 3.1% year-over-year, and still - mortgage rates didn’t budge much.
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The stability in mortgage spreads has helped maintain these lower rates even as the 10-year yield has increased. If we had the worst mortgage spreads of 2023, mortgage rates would have been 0.70%-0.80% higher even before last week. The unsung hero of housing in 2025 is mortgage spreads.

Mortgage spreads

The improvement in mortgage spreads in 2025 doesn’t seem to be getting the attention it deserves because I believe most people are unaware of it. Demand could have suffered severely if mortgage spreads hadn’t improved from the worst levels of 2023. With additional rate cuts, a dovish stance from the Fed and less market volatility, we can expect gradual improvements in the spreads over time. This was my mindset going into 2024 and it has continued into this year as well.

For 2025, I anticipated a 0.27%-0.41% improvement, starting from a 2.54% average in 2024, which had already shown improvement in 2024. While we haven’t quite reached that target level yet, we are very close now.

Last week was yet another example of why better mortgage spreads matter: When bond yields made an aggressive move higher, the spreads got better, limiting the damage to mortgage rates. In 2023 and even in 2024, mortgage rates would have not only been higher to start the week, but would have gone even higher with rising yields. The next time you see a mortgage spread, say thank you!

If the spreads were as bad as they were at the peak of 2023, mortgage rates would currently be 0.80% higher. Conversely, if the spreads returned to their normal range, mortgage rates would be 0.50%-0.70% 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 5.88% % to 6.08% 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 fluctuating between 3.80% and 4.70%
  
  To keep it simple on what happened last week, the PPI inflation report was hotter than anticipated, which caused bond yields to increase, reaching 4.30% before ending the week at 4.32%. Mortgage rates started the week at 6.58%, dipped to 6.53%, and then returned to where they began at 6.58%.
  
  It has been a long time since people have experienced a noticeable downtrend in mortgage spreads, making it unfamiliar territory for them to see how resilient mortgage rates can be at this stage of the cycle. We don’t need sub-4% on the 10-year yield to get near 6% mortgage rates anymore