Housing Demand Shows Resilience Amidst Economic Headwinds

U.S. housing demand demonstrated positive year-over-year growth last week, defying expectations even as the Federal Reserve adopted a hawkish stance, geopolitical tensions escalated with the Iran conflict, and mortgage rates climbed, pushing the 10-year Treasury yield to yearly highs. Weekly data indicated growth in pending sales, total pending sales, and purchase applications. However, this growth has decelerated in recent weeks as mortgage rates surpassed a key threshold of 6.64%. The duration for which rates remain above this level is directly correlated with a softening of housing demand, a pattern observed consistently over the past few years. Despite significant global events, including the resurgence of the Iran conflict and a more restrictive Federal Reserve policy, the housing market is currently performing "ok."

A critical factor contributing to the market's resilience is the improvement in mortgage spreads, which have historically ranged from 1.60% to 1.80%. In the past week, these spreads were recorded at 2%. The improvement in mortgage spreads is described as the "housing hero story of the year," particularly as they are projected to be better in 2026. The ability of mortgage rates to remain near 6% in recent years (2023, 2024, 2025, and 2026) was not a result of Federal Reserve policy but rather the bond market anticipating and reacting to potentially overly restrictive Fed policies, which pushed the 10-year yield below 4%. This economic and labor growth scare was the primary driver for lower yields.

In contrast to previous years, where mortgage spreads were significantly wider than normal, leading to rates easily exceeding 7% when economic data improved, 2026 marked the first year without a forecast of rates above 7%. This projection was solely attributed to the anticipated improvement in mortgage spreads. Even with the current 10-year Treasury yield at 4.74%, a hawkish Federal Reserve, and Middle East instability that has twice sent Brent Crude oil prices above $100 and kept inflation above target for the entire year, mortgage rates have not yet breached 7%. This stability is directly attributable to the more favorable mortgage spreads. The sensitivity of housing demand to mortgage rates above 7% underscores the importance of these spreads. The article highlights that if mortgage spreads had not improved as they typically do at this stage of the economic cycle, the housing data for the current year would present a markedly different picture.