Why Aren't Mortgage Rates Dropping? The Treasury Spread Explained

REAL TALK REAL ESTATE THIS WEEK'S EPISODE

"Why aren't rates dropping?" We break down the ONE number that explains it all.

Jay & Andy dig into "the spread" — the gap between the 10-year Treasury yield and your 30-year mortgage rate. Here's the punchline:

For 50+ years, mortgage rates have tracked the 10-year Treasury almost in lockstep
The "normal" gap between them (the spread) averages 1.76 points
In 2023 that gap blew out to 3.19 — which is WHY rates spiked toward 8%
Today it's down to 2.01 — just above normal — which is why rates sit around 6.69%

The takeaway: the spread has already done most of its shrinking. That means most of the "easy" rate relief has already happened — don't wait around for an 8%→5% miracle drop. If you're planning to buy in the next 6-12 months, the math says get moving, not wait it out.

Listen to the episode below.

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Episode Transcript

Andy: I'm Andy Webb.

Jay: I'm Jay Day.

Andy: And this is Real Talk Real Estate. Jay, we hear a lot of terms come out of your mouth and just in the news in general. We hear about Federal Reserve, we hear about stock market prices, we hear about the economy's good, the economy's bad, all these things that factor in. But where exactly do mortgage rates come from? We feel like they're attached to certain things, but what really determines the mortgage rates?

Jay: That's a great question. I mean, right now, affordability is a big question.

Andy: Huge.

Jay: Because in affordability, you've got groceries, you've got your mortgage, you've got gas prices.

Andy: It's a whole big picture.

Jay: And we have a lot of people that have been in the situation where they're like, I'm waiting for mortgage rates to fall before I do anything. However, and I don't want to discourage anybody, but I thought it would be good to sort of break down what's behind the scenes that actually lets you know how these mortgage rates are determined. So it's a pattern that's happened over the last 50 years. So mortgage rates, they don't move on their own. It's not like its own little index that moves on its own. They tend to follow the 10-year Treasury yield. And that number is tied to how investors feel about the economy.

Andy: Oh, goodness.

Jay: So it's a feeling.

Andy: It's a vibe.

Jay: Yeah. And if you think, people think mortgage rates are high, how have people felt about the economy recently?

Andy: Yeah, exactly. That's right.

Jay: So it's not an exact science. There's plenty of other factors that come in that impact it. However, when the economy looks strong, the yield tends to climb over time. When the outlook gets shaky, it tends to ease. So for 50 years, the 10-year Treasury yield and mortgage rates have moved almost in lockstep. So very, very similar. Now, the gap between them is what they call the spread. And you'll hear mortgage people talk in terms of the spread. On average, the gap runs about 1.76% points. And that spread impacts mortgage rates. The wider the spread tends to be, then that pushes mortgage rates higher than the Treasury yield alone. And it helps narrow them down to what the Treasury rate is. So one of the big reasons rates probably won't drop, because let's talk about what's happening with everything right now. So if you're hoping that mortgage rates are going to drop a lot, here's the reality. They probably won't, at least anytime soon. One of the big reasons is it comes down to that spread between the 10-year Treasury and mortgage rates. A few years ago, the gap was much wider as uncertainty in the economy pushed. It actually went as high as 3.19 points in 2023 with a separation between the two. And again, historically, it's in the ones. So now here's the part that's worth noting. The gap has been narrowing lately. It's down to about 2.01, just above the long-term average of 1.76. So when the gap is wide, there's more room for rates to fall. But when it's relatively normal like it is now, that means there's less wiggle room that the rates are going to fall. So if you look at that and we see that the gap is where it is, you're wondering, well, then why aren't mortgage rates higher, right? So today's mortgage rates and Treasury yields plus today's mortgage rate is basically that Treasury yield plus the spread. So when either one moves, your rate moves with it, there are three different rates that are all built off the 10-year Treasury yield. And the Treasury yield is 4.68 to show you just how much the spread matters in your bottom line. So again, we're talking about all of these different things. If the spread was still stretched out like it was in 2023, rates would be pushing closer to 8% right now. But because they've narrowed down to that little over 2%, we don't have that. And that's because the spread was over a full point wider than it is today. But now, with the spread narrowing recently, today's rates are just under – they're like 6.69, 6.875. So that's sort of a middle scenario. And that is why your mortgage payment – if we look again, your mortgage payment is probably not going to change because as we're getting a little bit tighter, we already don't have the rates as high as they should be if you look at where they would be. Does that make sense? When you're looking at – we had a 3% difference. Now we're down to 2. The spread is typically 1.79. So realistically, we would be at a spot where things should be higher. But they're not. And because there's no gap, now we're in a position where we're probably not going to see anything adjust down because we already have that narrowing happening. And as we talked about, uncertainty, that leads to these rates to be where they are. So if you're listening to this, and I know this is pretty confusing, and it's interesting because even as I read it and look through it, it's hard to understand. You can understand it in generalities. And again, when you're talking to mortgage people, they talk about the spread because that's basically where they also make some of their profits. The bottom line is, as long as the economy stays the way that it is, and we've seen also the Fed's not doing much with the rates, we're probably in this safe zone right now that's just going to be floating under 7%.

Andy: Right. To look into your crystal ball, what would it take for rates to go down? Would the economy have to get better or worse? The spread has to get smaller, larger?

Jay: I mean, realistically, I think, so the challenge is, the government, we all see that inflation is happening. But they always skew the numbers of is it really happening, is it not happening. Basically, when people stop buying things, that's when the scare starts to happen, so they have to make adjustments to make things more affordable.

Andy: Right.

Jay: So as long as people are buying houses, if we got into a situation where homes are sitting for six months, eight months, a year, then we're going to start seeing, they realize they have to do something to get movement in the economy. So the economy has to basically come to a standstill for them to say, okay, we've got to lower these rates.

Andy: Gotcha.

Jay: Because what happens is the rates start to go up to try to balance inflation so that people actually, they try to get them up to a point to slow people down from buying at mass consumption.

Andy: Right.

Jay: Does that make sense?

Andy: No, I get it.

Jay: Yeah. So, again, as people are buying, we're just in a position where the market isn't on fire as far as things flying off the shelf, but it's also not moving at a turtle pace.

Andy: Right. It's kind of just chugging along.

Jay: Yeah.

Andy: So what I'm hearing is it's directly inversely proportional, basically. If the economy's doing great, home prices are pretty much going to stay where they are, if not go up. If the economy is doing less great, then the home prices are probably going to come down. Mortgage prices are going to come down.

Jay: Yes. Because, again, their whole point is to try to not have inflation where things get out of control of what they cost. And the reality is we're there, in my opinion.

Andy: Oh, we are. You're right.

Jay: You know, you go to the grocery store, and it's like 200 bucks, and you're like, I didn't even have like a, I had like one of the little carts, and that wasn't even full.

Andy: Yeah. But until people stop buying, I mean, we're still buying.

Jay: Yes.

Andy: And like you said, until people stop buying, I mean, we're buying because we have to, but until we don't, things are probably going to remain with the status quo.

Jay: Absolutely. And I mean, we're in one of these areas, too. I mean, even the rentals, everything is sort of, it's gotten very, very expensive.

Andy: Oh, very. You said a mouthful.

Jay: Yeah. And what we tell people is the only, one of the big advantages, you know, it used to be there was a big tax savings based on your income. That's not always true and based on certain things. But the advantage of having a mortgage and a fixed mortgage is that you know what your payment is going to be. You know, when you're renting, you don't know what the rent is going to be. And let's say that you're not renting in an apartment complex. You're renting someone's home. At any point, they could decide, you know, your lease is about to be up, now they're going to sell it, so you've got to move. So owning a home creates some stability and it can create some longer-term wealth options. Most people get a large portion of their wealth through real estate. You know, that's how people, they'll start with the townhouse, then a couple years later, they'll use that equity and they'll buy a detached home. So it's been something that's been consistent over the years of a way to have, you know, basically grow wealth and then also to have the consistency of owning a place that you know is yours.

Andy: But this mortgage situation we're talking about, it kind of slows that down because then you may own a home and you want to buy another, but you wait because you're expecting these rates to sit or go higher.

Jay: And that's where inventory slows down because people are like, I've got a good rate now, I don't like the rates that are out there, I'm just going to sort of sit this one out and wait for things to change.

Andy: It's what people you hear sometimes say, the golden handcuffs.

Jay: Yes. And that's, so what we've seen over the last couple of years, that's a great point, is that's why more people, what's made more people start to sell their home is because the pain has outdone the waiting.

Andy: Right.

Jay: Whether it's divorce, somebody passed away, your job moved, so you have to sell.

Andy: You don't have a choice.

Jay: And that's really been the big pushing point for people because, you know, if people have a 3.5% interest rate and now they're looking to, you know, be it, you know, 6.8, that's a big number.

Andy: That's a huge shift. That's double probably what you paid in, you know, when you got it.

Jay: Exactly.

Andy: But if people have questions, they need help navigating this time, they could call you.

Jay: Absolutely. Absolutely. And if you want to get into all the deep dive of the mortgage side, we have great mortgage lenders we work with that live and breathe this stuff. Actually, I probably should have saved this topic for Christina because she was in the mortgage world before me. She understands it much, much better than I do.

Andy: But she's available too. Again, just give you guys a call.

Jay: Oh, yeah. So you ready for the House of the Week?

Andy: I would love to hear for this week's House of the Week.

Jay: 112 Glade Boulevard in Walkersville. It's a detached home listed for $525,000. Four bedrooms, two and a half baths, just under 2,500 finished square feet. It's been remodeled. The kitchen has granite countertops. The cabinets were freshly painted. LVP flooring across the entire main level. HVAC was replaced in 2024. Water heater in 2023. Radon mitigation system installed in 2024. The roof and gutters were replaced in 2021. Light fixtures 2025. There's a primary suite with a walk-in closet and a full bathroom. Laundry's on the main level. The basement is finished. And it's a fully fenced backyard with a deck, patio, and shed. So this one has a little bit of it all. There's actually some community amenities as well, like a pool. So if you're looking for a detached home not too far from things, 112 Glade Boulevard in Walkersville, $525,000. Four beds, two and a half baths, and almost all of the high ticket items are already replaced so you don't have to worry about dipping into your wallet anytime soon for any big repairs.

Andy: That sounds amazing. You can go check it out. We've got that posted on our website and our Facebook page. We posted a link to it as well so you can see it and then call and set up a tour with you guys.

Jay: Absolutely.

Andy: I'm Andy Webb.

Jay: I'm Jay Day.

Andy: And we'll be back for more Real Talk Real Estate.