The case for sub-7% mortgage rates is back in play

Article Summary

10-year yield and mortgage rates

In a housing forecast, I projected mortgage rates in a range of 5.75% to 6.75% and the 10-year Treasury yield between 3.80% and 4.60%.

During a recent Federal Reserve week, even Fed Chair Kevin Warsh acknowledged that tighter policy has created financial strain for some AI companies. The Fed has been warning for some time that artificial intelligence could be inflationary, and as some AI firms run into debt-financing problems and miss earnings expectations, the 10-year yield has drifted lower despite higher oil prices and steady economic data.

Still, if the Iran conflict were to end, oil could settle in a range of $67 to $82. If the trade war does not intensify further and AI growth slows, that combination could support lower mortgage rates. The move would not have to be dramatic, but it could be enough to push rates below 7%, and mortgage demand has historically responded strongly when rates fall under 6.64%.

There is also a path for rates to remain above 7% if the AI narrative rebounds, the conflict continues, and the trade war goes on. That would also require economic reports to stay strong, as they have recently. A clear head-and-shoulders pattern has formed in the 10-year yield, and a break lower from that pattern could help bring mortgage rates under 7%.

Mortgage spreads

Mortgage spreads have widened somewhat lately, but they are still hovering near multi-year lows. It remains important for spreads to stay closer to 2% than 3%, because without that cushion mortgage rates would already be above 8%. In addition, getting mortgage rates back near 7% would have been nearly impossible without a much larger drop in the 10-year yield.

When the 10-year yield falls, spreads can sometimes widen after a sharp move higher because they are meant to absorb volatility. Over time, though, that pressure fades and rates can move lower again. What would be more concerning is a sudden change in Fed policy into a major rate-hike cycle, or a credit shock such as the Silicon Valley Bank crisis.

Historically, mortgage spreads have generally ranged from 1.60% to 1.80%. In the latest week, spreads were unchanged at 2.23%.

Here is a comparison of mortgage rates over the past three years based on the current 10-year yield level:

• If spreads were as bad as the worst levels seen in 2023, mortgage rates would be 8.15% instead of 7.27%.
• If spreads matched the worst levels seen in 2024, mortgage rates would be 7.77%.
• If spreads matched the worst levels seen in 2025, mortgage rates would be 7.58%.

Weekly pending sales

Our pending home sales measure offers a week-to-week view, although holidays and short-term swings can distort the numbers. This data usually shows up in closed sales 30 to 60 days later.

The main takeaway from the past two weeks is that lower rates, even while still above 7%, have helped stabilize demand. Weekly pending home sales remain higher than they were two weeks earlier. That is the only conclusion to draw for now, and future data will show how rates affect demand going forward. As a rule of thumb over the past several years, housing demand has typically improved when rates are below 6.64% and moving toward 6%, while it has generally weakened when rates are above 6.64% and pushing higher.

Here are the pending sales totals from the latest week compared with the same period in the prior year:

• 2026: 52,050
• 2025: 55,214

Purchase applications

Purchase applications, which look ahead 30 to 90 days, have softened as mortgage rates climbed above 6.64% and then moved above 7%. I expected some week-to-week improvement last week, and our tracker also pointed to growth. Applications did rise 4% week over week, but they remain sharply lower on a year-over-year basis. When rates were closer to 6%, every week except one showed annual growth.

Here are the purchase application statistics so far in 2026:

• 15 positive week-to-week prints
• 23 negative week-to-week prints
• 5 flat week-to-week prints
• 10 weeks of double-digit year-over-year growth
• 25 weeks of positive year-over-year growth
• 13 negative year-over-year prints

Housing inventory

Inventory growth has been relatively subdued this year, with some weeks even running below the prior year. In fact, it is the weakest inventory growth in some time. That has partly been because rates were lower earlier in the year and the market was closer to normal. But higher mortgage rates and softer demand tend to bring more homes onto the market, and the year-over-year comparisons are much easier now than they were earlier in the year. Those easier comparisons will remain in place until mid-2027.

Even with easier comparisons, inventory growth is still running at 6.78%.

• Weekly inventory change: inventory rose from 911,956 to 914,833
• Same week a year earlier: inventory fell from 862,924 to 856,751

New listings

New listings are following their usual seasonal decline. The current year has been the strongest for new listings since 2022, with levels topping 80,000 at several points. One concern at current rate levels is that some sellers may stay put because many sellers are also buyers. This week showed a year-over-year decline, and I will be watching to see whether that develops into a trend. Even so, the current year has been the strongest for new listings in some time.

In a normal market, new listings usually range from 80,000 to 100,000 per week during peak periods. For comparison, during the housing bubble years, weekly new listings ran between 250,000 and 400,000 for several years.

Here is the latest new-listings data compared with the prior year:

• 2026: 60,151
• 2025: 64,191

Price-cut percentage

Typically, about one-third of homes receive price cuts before selling, reflecting normal housing-market churn. This year’s price-cut share has been lower than last year’s. That changed once rates moved above 6.64% and then above 7%, when demand weakened and the year-over-year price-cut rate rose by 1%.

In my home-price forecast for the year, I projected a national decline of -0.62%. Home-price growth has barely moved this year, and that forecast may be difficult to reach, since most home-price indexes are still showing gains of 1% to 2%. The latest Case-Shiller report showed year-over-year growth of 2.1%, though that data lags current conditions by a few months.

The week ahead: Jobs data, oil, AI and politics

This week brings a long list of variables that could move rates, and many of them are significant.

The market has avoided the worst-case scenario for now, but if the conflict continues, the trade war worsens, and economic data remains firm alongside an AI rebound, rates could stay elevated. On the other hand, there is a case for sub-7% mortgage rates, and an upcoming HousingWire Daily podcast episode will explore the tension between AI and housing. It will be worth watching whether the head-and-shoulders pattern in the 10-year yield holds or breaks lower.

This week should offer a useful test of bond-market demand now that the AI trade has shown some weakness. If the environment improved further, with no additional conflict and no worsening trade war, mortgage rates could already be below 7%.