As Logan Mohtashami, HousingWire’s chief analyst, noted earlier this week, spreads between 10-year Treasury yields and 30-year Treasury mortgage rates have fallen significantly over the past two years.
Vishal Garg, CEO of digital lender Better.comsaid in an email interview with HousingWire that it is “a big deal” if spreads tighten as the Fed has not yet reached a neutral policy rate despite a series of small cuts that have lasted for more than a year.
“We are already seeing an increase in consumer engagement and slot volume at Better.com as rates have dropped,” Garg said. “With a Fed back in the MBS market, we expect prices to become more competitive, especially for conforming loans.”
Fed policy moves
In his comments, Garg referred to the Fed’s decision in late October to begin phasing out quantitative tightening (QT) this month.
The central bank began rolling over repayments on its government bonds maturing in October and November above a monthly limit of $5 billion. And it is now reinvesting principal payments from its portfolio of government bonds and mortgage-backed securities (MBS) received in the same two months, which amount to more than $35 billion per month.
“The Fed’s decision to end the QT and begin reinvesting MBS proceeds is a major boost to the mortgage market,” Garg said. “Even though spreads have fallen from their peaks, they are still well above historical norms and hover around 200 to 225 basis points, versus a long-term average closer to 150. The return of the Fed as a buyer could help close that gap.”
While the current Fed leadership under Powell has taken a conservative stance on the speed and frequency of rate cuts, this could change later in 2026 once a new Fed chair is inaugurated.
President Donald Trump has made no secret of his desire for much lower interest rates. And a 200 basis point drop in Fed rates, for example, could be “transformative for the mortgage market,” Garg said.
“There are about 20% of Americans with loans above 6%,” he said. “Such a drop would make refinancing a no-brainer, saving families $300 to $500 per month in many cases.
“For first-time buyers, it would dramatically improve affordability and release pent-up demand from the million people who have been priced out of the market during this high-interest rate cycle.”
Interest rate traders remain confident that the Fed will cut rates for the third time in a row on Wednesday. The CME Group‘s FedWatch tool Tuesday showed that the chance of a 25 bp cut was 90%. But looking ahead to January, 70% say cuts will be suspended.
“The Fed still doesn’t have official employment data for October and November, but September’s 4.44 percent unemployment rate is already above the Committee’s central ‘maximum employment’ range, underscoring a weakening labor market,” First American That’s according to senior economist Sam Williamson.
“If the committee were to make cuts as expected, the decision would likely yield multiple returns
dissent – possibly in both directions – as an increasingly divided Fed weighs upside inflation risks against rising employment concerns.”
Consequences for the housing market
This week’s Housing Market Tracker shows pending home sales remain higher than this time last year, while demand for owner-occupied mortgages has reached a three-year high.
House price growth has also slowed, impacting monthly mortgage payments. Data for October of the Association of Mortgage Bankers showed that affordability for homebuyers improved for the fifth month in a row, as the average monthly payment of $2,039 among buyers was $88 lower than a year ago.
“Housing affordability is finally moving in the right direction, with several consecutive months of year-over-year improvement as house price growth cools, incomes rise faster than prices, and interest rates decline at the margins,” said Williamson.
“Taken together, these forces point to a moderate but sustained recovery in purchasing power into next year – even if mortgage rates do not fall significantly.”
Garg said stable housing price growth will allow more consumers to get back into the housing market. Better to see benefits for first-time buyers and first-time buyers in markets like Texas, Florida, Georgia and the Carolinas – areas where home prices, for-sale inventory and employment growth trends are favorable.
Refinancing opportunities are also likely to become more common as interest rates gradually lower, and Garg said his company is prepared to recapture many of its current customers.
“Recapture is everything in a refi market, and the window to win that borrower is shockingly short,” he said. “Once interest rates have fallen 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 deliver the speed needed to help them start saving before their next mortgage payment, you’ve already lost.”
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