Interest Rates and the Housing Market

Politicians and the media have made “interest rates” a foremost talking point since 2020. First, interest rates and inflation were historically low, and suddenly inflation jumped to 9% and mortgage interest rates shot higher. As interest rates subsequently receded to around 6% home buyers started looking for an affordable property. Just as the market shifted to favor buyers, reluctant sellers began to reduce listing prices. During the summer mortgage interest rates began to creep upwards in response to inflationary concerns and the national debt reaching $40 trillion. This week the interest rate on 30-year fixed mortgages breached the 7% threshold.

During these sudden changes in interest rates, most people lost perspective of the fact that inflation has averaged 2.64% since 1990. What people fail to comprehend is the power of compound interest. That average 2.64% inflation has created a total increase in prices of 155.5% during that period of time!

The average interest rate on the 10-year US Treasury (UST) has been 4.25% to 4.50% since 1990. During this period the average 30-year fixed mortgage interest rates where in the 5% to 6% range after dropping from 10.56% in April of 1990. The difference between the 10-year UST interest rate and the 30-year fixed mortgage interest rate is called the mortgage coupon rate.

Mortgage Coupon Rate

The mortgage coupon rate is the annual rate of interest that is added to the interest payment due on a mortgage loan, which is passed through monthly to the investor in Mortgage-Backed Securities (MBS). This coupon rate is determined by the Freddie Mac Guide. The difference between the 10-Year US Treasury interest rate and the actual 30-Year Mortgage Interest Rate is called the “spread.”

Fannie Mae and Freddie Mac purchase approximately 70% of the entire U.S. residential mortgage loan market. In other words, these two government-backed agencies purchase approximately $7 trillion of conventional FHA conforming 30-year mortgages on houses from the original lenders and bundle these loans into investment products called Mortgage-Backed Securities with a guaranteed timely repayment of principal and interest.

The government guarantee behind Mortgaged-Backed Securities helps keep the mortgage coupon rate lower. The average mortgage coupon rate spread – the difference between the 30-year fixed mortgage rate and the 10-year U.S. Treasury yield – historically averages between 1.7 to 1.8 percentage points. Without the government guarantee the investors would demand a higher yield on Mortgage-Backed Securities, which would be added to the interest rate on the 30-year fixed mortgage.

In 2023, the spread was 3.10% due to economic uncertainty.  Today, despite the war with Iran and fluctuating oil prices, the spread is 2.01%. This is much closer to the normal spread of 1.7% to 1.8%.

Federal Funds Rate

The Federal Reserve acts as the central bank of the United States. It is responsible for managing monetary policy (money supply and the Federal Funds Rate. It often reacts to the fiscal policies (spending) implemented by Congress and the Administration. Its mandate is to regulate banks and maintain financial stability, especially during geopolitical and economic crises. The goals are to maximize employment (stimulate the economy) while maintaining stable prices (keeping inflation around 2.0%).

The Federal Reserve meets eight times a year to set interest rates and regulate the money supply.  They can stimulate a slowing economy by lowering the Federal Funds Rate charged to large banks, and increasing the money supply to facilitate borrowing. It became quite evident following the excessive monetary stimulus in response to the pandemic that lower interest rates and increased money supply dramatically increases inflation.

10-Year U.S. Treasury Yield

The 10-year U.S. Treasury yield plays a central role in the global economy. It not only determines mortgage interest rates, it influences borrowing costs, economic growth, and the behavior of financial markets. Hence, investors use the 10-year Treasury yield as a reference to gain insight on current market trends and stock market risk.

The 10-year Treasury, like all government bonds, are considered to be the lowest risk. Therefore, investors view them as a “safe haven” during times of excessive valuations and economic uncertainty. In this manner, investors use the 10-year Treasury as a window into the broader economic outlook. As investors rush to purchase Treasuries during a rush to safety, the yield on the 10-year Treasury drops lower. Conversely, when investors prefer the higher returns in the stock market, the government lowers the price of Treasuries to attract buyers of our debt, so the yields increase.

Normal Mortgage Interest Rates

The U.S. News & World Report’s 2026 Spring Homebuying Survey of 1,207 Americans revealed that 62% of respondents were still waiting for mortgage interest rates to fall before looking to purchase a home. This was lower than the 80% who were waiting for mortgage rates to fall in 2025. Interestingly, of the 62% almost half of them regretted not purchasing a house in 2025.

Economists at Fannie Mae and the Mortgage Bankers Association all predict the residential mortgage interest rates will remain above 6.0% until well into 2027. Consumer lending analyst Erika Giovanetti believes people have gotten used to mortgage interest rates above 6.0%.

Since 1975, the median mortgage interest rate is 7.23%. It has varied from a historical high of 18.63% in 1981 to a historical low of 2.81% in 2022. So, the current median mortgage interest rate of 6.30% from 2020 to 2026 is actually quite normal. Since the extraordinarily low mortgage interest rates around 3.0% occurred within the past few years it has distorted the reality of a generation of prospective homebuyers.

The reality is that waiting for mortgage interest rates to fall is the serious home buyer’s folly. Since no one can actually predict the trend of 10-year Treasury yields, serious home buyers should direct their attention and efforts toward activities that will actually lower the interest rate on a current mortgage – activities that lower their borrowing risk factors.

The difference of 1.0% is even more significant when it involves the Mortgage Interest Rate. On a 30-year fixed $1,000,000 mortgage, a 7.0% interest rate increases the monthly interest and principal payment by $657.52 compared to a 6.0% mortgage interest rate. Over 30 years, the total lifetime interest paid increases by $236,707.09 on a 7.0% mortgage interest rate compared to a 6.0% rate.

Mortgage Interest Rates and Borrower’s Risk Factors

The financial crisis of 2008, which almost destroyed the global economy, was largely caused by mortgage fraud. Some unscrupulous mortgage brokers processed “liar loans” for borrowers that didn’t qualify for residential mortgages due to no funds for a down payment, lack of income to make payments, and poor credit rating. These were called “subprime” loans because they posed a higher risk for investors who would eventually purpose them via Mortgage-Backed Securities. Unfortunately, these fraudulent loans were combined with very high quality, low-risk mortgages to make the mortgage-backed securities seem moderate risk to the investors.  Obviously, when the majority of subprime loans defaulted the mortgage-backed securities became almost worthless.

The important point is that every borrower has the ability to lower the interest rate on their mortgage by improving their risk factors:

• Boost credit score
• Eliminate consumer debts
• Increase savings
• Lower debt-to-income ratio
• Make larger down payment
• Buy discount points
• Use mortgage buy-down

Securing the best mortgage interest rate isn’t necessarily about timing; it’s about preparation and strategy. Prudent home buyers begin the borrowing process months or years before they begin the home buying process. It requires time and discipline to improve the financial profile. Borrowers with a strong financial profile are in a much better position to compare lenders and negotiate the most favorable terms for a mortgage.

Align Financial Profile with Home Prices

Prospective borrowers who focus on strengthening their financial profile have a clear understanding of their home buying budget. These prudent homebuyers don’t fall in love with homes they can’t afford and require them to “stretch” financially to qualify for a mortgage.

Essentially, financially prudent home buyers apply for the mortgage before they actually begin looking at houses via online portals. Most lenders will provide a Pre-Qualification Letter based upon a brief consultation and superficial determination of the borrower’s debt-to-income ratio. This helps the prospective borrower begin the process of improving their financial profile so they can apply for a Pre-Approval Letter.

Pre-Approval Letters state the maximum loan amount for which the borrower will likely be approved based upon the specified down payment and review of actual financial statements, payroll statements, and income tax returns. However, a pre-approval is not a loan guarantee. Final approval of a mortgage involves an in-depth underwriting process that includes an appraisal of the specific property that will be used as collateral for the loan.

The Plight of Market Timers

In most cases the friends and relatives who brag about their 3% mortgage interest rates were simply lucky. Michael Burry and a few savvy investors were portrayed in the movie, The Big Short as being smart enough to predict the bursting of the housing bubble. After interviewing mortgage brokers, they discovered the prevalence of “liar loans” infiltrating the subprime mortgages, and the financial vulnerability of the investment brokers that insured the fraudulent sub-prime mortgage-backed securities (MBSs) with collateralized debt obligations (CDOs).

Bond traders are some of the savviest financial investors. Unlike stock traders, bonds do not have potential for significant appreciation in value. A bond is simply a contract to guarantee payment of a specific amount of interest to the bondholder over a specific period of time, and then repay the original amount of money invested.

Once a 10-year bond has been purchased from the U.S. Treasury it will yield a specific interest rate until the bond matures at a specific date – ten years later. During the subsequent ten years, if interest rates increase, the bond will decrease in value. Conversely, if interest rates decrease, the bond becomes more valuable.

In a similar manner, mortgage interest rates and home prices tend to be inversely correlated. When mortgage interest rates increase, home prices remain flat or even decrease in the current market. Conversely, when mortgage interest rates decrease the sale prices of similar homes in the current market tend to increase.

This phenomenon isn’t based on the value of the house, it related to the ability of home buyers to qualify for a mortgage, make the down payment, and afford the monthly payments. Therefore, people who wait for mortgage interest rates to drop so they can qualify to purchase their dream home, will end up paying a higher price for the same home.

The economy as a whole, and the housing industry specifically, go through cycles. The role of the Federal Reserve is to soften the highs and lows during each cycle. Sometime Fed Chairs like Alan Greenspan managed the responsibility quite well, while others have failed quite miserably. The Fed’s response to the pandemic was a case in point – interest rates were kept too low for too long and the money supply was dramatically increased, which fueled a tremendous surge in inflation.

The ancient market maxim, “buy low and sell high” applies equally to the stock investors and home buyers. Warren Buffett’s maxim, “Buy when others are fearful, and sell when others are greedy,” also applies to success in home buying. Real estate has always been a hedge against inflation, so it was the huge inflationary surge that caused home prices to rise dramatically.

During dire economic times, when households are defaulting on mortgages, and lenders are foreclosing on homes, many homes can be purchased at bargain prices. Yet, it is during these time that lenders tighten credit, so only those people who are financially prepared with solid credit or cash can take advantage of the occasional “buy low” opportunities.

Time in the Market Reduces Risk

The problem with home buyers who attempt to time favorable mortgage interest rates or lower home prices is that they fail to prepare while they are waiting for the opportunity to arrive. Hence, the opportunity only seems obvious to them in hindsight, which is too late.

Even successful professional real estate investors avoid trying to time the market. The seldom get rich making short-term investments. Historical data indicates that residential real estate predictably appreciates when it has been held for ten years or longer.

When prospective home buyers think of their purchase in terms of a decade or more instead of worrying about minor fluctuations in mortgage interest rates, or trying to anticipate what the Federal Reserve will decide about interest rates during its next meeting, they will eliminate one of the major stresses associated with the home buying process.

The Selling and Buying Paradox

While prospective buyers are waiting for home prices to fall, prospective sellers are hoping for home prices to rise. When viewing the market from a decade or more, residential real estate tends to appreciate in value. However, within each decade the markets in various locations can vacillate between rising prices (seller’s market) and falling prices (buyer’s market).

Typically, communities with desirable school districts that attract families tend to favor sellers during the spring – summer months, and they tend to favor buyers during the fall – winter months. Since buyers have the option to buy or rent or house, they are more susceptible to the folly of market timing. Conversely, sellers are often committed to selling their home in the near future due to a change in their life circumstances.

Since they cannot usually time the market, sellers generally benefit from working with a real estate consultant like George. His book, Because Dreams Deserve an Exceptional Home was written to help sellers of luxury homes complete the sale of their property for an optimum price during the fewest days on market. The information in this book helps sellers view the market from the perspective of buyers who are actively looking to purchase a home, so they tend to follow George’s suggestions to properly prepare, present, promote and price their homes according the prevailing market circumstances. These factors prevail regardless of mortgage interest rates.