Mortgage Costs Aren’t Falling With Interest Rates

Commentary, News

By Ben Eisen, markets reporter

Interest rates have been plummeting, but the cost of taking out a mortgage hasn’t fallen as fast.

Falling rates are usually a boon to the housing market, since that typically lowers the interest rates that lenders offer on mortgages. Borrowers can then buy homes or refinance their existing mortgages at a lower monthly cost. But they haven’t been feeling the full benefit of the recent rate swoon, one reason the housing market has remained cool over the past year.

Melissa Cohn, a mortgage broker and banker at Family First Funding in New York, said she has been trying to temper clients’ expectations in recent months about how low of a mortgage rate is available to them.

“A lot of people hear stories about where rates should be and come in with unreasonable expectations,” she said.

Mortgage rates are closely linked to yields on 10-year Treasury notes. Since the end of June, the Treasury yield has fallen about 0.4 percentage point but the average mortgage rate has fallen less than a tenth of a percentage point. The gap between the two rates is near its highest in more than seven years, according to Dow Jones Market Data.

The average 30-year fixed rate for a mortgage was 3.65% last week, according to mortgage giant Freddie Mac. That is among the lowest average rates this year, but it has bounced up and down in recent months.

Mortgage executives, traders and investors tend to watch the spread between the 10-year Treasury yield and the 30-year mortgage rate as a barometer of the mortgage market’s health.

The spread blew out as the market imploded in 2008, when Treasury yields plummeted but lenders were slower to adjust mortgage rates.

More recently, the difference has signaled that borrowers’ relatively strong appetite for mortgages is outpacing the industry’s ability to make them. Many lenders scaled back last year as mortgage demand dropped, so the current demand is stretching their capacity.

“When the spreads widen, the banks make more money and the borrowers don’t get as low of a rate as they otherwise would have,” said Walt Schmidt, who oversees mortgage strategies at FTN Financial, a broker dealer.


For a longer version of this article online, click here.


Do you expect mortgage costs to eventually follow interest rates lower? Let the author know your thoughts at ben.eisen@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location.

Leave a Reply