Buyers may soon see opportunities they haven't had in a while
The gap between mortgage rates and 10-year Treasury yields has reached its narrowest point in more than three years, creating new opportunities for homebuyers and homeowners considering refinancing.
According to a new report by Redfin, the mortgage spread dropped to 2.26 percentage points as of Aug. 22. That is down from about 2.5 percentage points at the beginning of summer and 2.68 points a year ago.
The mortgage spread measures the difference between what lenders charge for home loans and the benchmark 10-year Treasury yield. When the gap narrows, it typically signals that mortgage rates can fall independently of Federal Reserve policy decisions.
Source: Redfin
Historical context shows recovery pattern
The current spread level marks a substantial recovery from the financial uncertainty of recent years. In 2021, when mortgage rates hit record lows, the spread fell to around 1.5 percentage points—below typical levels.
But the spread doubled during 2022 and 2023, reaching levels often seen during periods of financial turmoil. That expansion came as mortgage rates increased, markets grew more uncertain and lenders raised interest rates to hedge against risk.
“Think of the spread like a restaurant meal,” said Chen Zhao, Redfin’s head of economic research. “The Treasury yield is the cost of raw ingredients, the mortgage rate is the price of the meal on the table, and the spread is the restaurant’s markup, which covers the cost of the chef, rent on the restaurant, profit margin, etc.”
Zhao added that regardless of ingredient costs, a lower restaurant markup reduces the customer’s bill. Likewise, a lower mortgage spread helps reduce mortgage rates regardless of Fed actions.
Market conditions create buyer opportunities
The narrowing spread comes as analysts describe a buyer’s market. Many sellers have become more open to negotiations, including price reductions, as homes remain on the market longer.
Combined with declining rates, the current conditions may offer favorable timing for locking in lower monthly housing payments. The spread still has room to fall before reaching the typical range of 1.5 to 2 percentage points, suggesting potential for further rate decreases.
“It’s important to note that if the Fed cuts interest rates as expected in September—or more than expected—mortgage rates may fall more than anticipated because the spread is also falling,” Zhao said.
Real impact on purchasing power
The rate changes have created tangible benefits for potential buyers. A household with a $3,000 monthly budget can now afford a $439,000 home with the current average mortgage rate of 6.55%.
That is about $20,000 more in purchasing power compared with May, when rates peaked at 7.08%. Redfin agents across several markets have reported stronger buyer activity in recent weekends as mortgage rates declined.
The company’s analysis suggests that continued spread compression could amplify any future Fed rate cuts, potentially creating even more favorable conditions for homebuyers and those looking to refinance.
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