Mortgage rates hit a new yearly low before the Fed meets

Mortgage rates dropped to a new low for 2025 on Monday morning, reaching 6.25%. This decline follows disappointing manufacturing data from the New York Fed, which has caused bond yields to decrease. And mortgage spreads continue to adjust positively as they have all year. The question now is whether this trend can continue throughout the week, especially with the Federal Reserve meeting approaching.

Last year, we saw a similar situation where mortgage rates fell towards 6%, and the Fed subsequently cut rates by 0.50%, citing a weaker labor market than initially expected. However, the current labor data is showing even poorer performance than last year, as I discussed in our weekend Housing Market Tracker article.

On a positive note, mortgage spreads are displaying better behavior in 2025, which is helping to mitigate the impact of rising bond yields.

Mortgage spreads

I often joke that if people see a mortgage spread, they should hug it and take a selfie with it, because mortgage rates would not be at 6.25% today if the spreads didn’t improve. I was looking for improvements of 0.27%-0.41% in mortgage spreads this year from an average level of 2.54% last year. We have made significant progress in reducing mortgage spreads this year.

Historically, mortgage spreads have ranged between 1.60% and 1.80%. We do have some more room to improve, as the chart below shows. The worst levels of the mortgage spreads were in the early 1980s, when they were near 6%, and we had mortgage rates of 18%. Back then, mortgage rates would have been near 12%-13% with normal spreads then. So you can see that the mortgage spreads have had dramatic periods before. 

Bu we don’t even have to go back that far. If the spreads today were as bad as they were at the peak of 2023, mortgage rates would currently be 0.81% percentage points higher. Conversely, if the spreads returned to their normal range, mortgage rates would be 0.49% to 0.69% lower than today’s level.

If we were at the best levels of normal spreads, we would have mortgage rates at 5.60% to 5.80% today. If you look at the recent history of the spreads, we still have some room left to head lower, which means we don’t need too much help from the 10-year yield.

Conclusion

In today’s episode of the HousingWire Daily podcast, Sarah and I discuss the upcoming Federal Reserve meeting and what to expect this time around. Everyone is anticipating a 0.25% rate cut, and, as usual, the bond market reacted by driving mortgage rates down to a new yearly low on Monday morning. 

However, unless the Fed adopts a more dovish tone in its language and we receive disappointing economic data, much of the potential rate cut has already been factored into the current mortgage rates. Therefore, this time, the focus for the Fed is more on their wording than on the actual rate-cut itself, especially considering the divisions among certain Fed members.