For the 30-year mortgage rate to go to 8%, the spread between the 10-year Treasury note and the 30-year rate has to widen, economists say
Surging mortgage rates are driving more house hunters to seek refuge in riskier adjustable-rate mortgages, which feature a lower introductory rate.
Will the average 30-year mortgage rate hit 8% this year? It's possible but not probable, experts say.
The 30-year rate jumped 20 basis points in two days to 7.37% on Thursday, the highest level since May 2024, according to a daily survey by Mortgage News Daily, which surveys lenders.
A separate weekly report by Freddie Mac, based on submitted mortgage applications, noted a 8-basis-point jump in the average 30-year mortgage rate to 7.03% on Thursday. That's the highest level for the 30-year since January 2025.
The 30-year rate jumped higher in response to the 10-year Treasury yield BX:TMUBMUSD10Y hitting its highest level since 2007 on Wednesday. Bond investors are worried about inflation, particularly because of higher oil prices but also for a slew of other reasons.
Mortgage rates rise due to economic and political uncertainty. They don't directly follow the Federal Reserve's benchmark short-term interest rate, which was raised last week to a range of 3.75% to 4%. Instead, they tend to move in tandem with the yield on the 10-year Treasury note.
With the 10-year Treasury yield up sharply and the outlook for the U.S. economy unclear, does this mean 8% mortgage rates are back on the table?
"Mortgage rates of 8% are not an impossibility," Lisa Sturtevant, chief economist at Bright MLS, told MarketWatch.
"A lot depends on the conflict in the Middle East, inflation and ongoing economic uncertainty," she said. "But for now, I'm thinking it's most likely that rates will stay in the 7% to 7.5% range this fall."
For the 30-year mortgage rate to go to 8%, the spread between the 10-year Treasury note and the 30-year mortgage would have to widen, economists said.
Mortgage rates are calculated by adding what's called a spread to the 10-year Treasury note, factoring in the industry's costs for originating a mortgage, as well as the additional risk present in a mortgage-backed security relative to the safer 10-year Treasury note, according to Fannie Mae.
"If something in the [mortgage-backed securities] market causes the spread between the 10-year and mortgage rates to widen, that would increase the chance of reaching 8%," Jake Krimmel, a senior economist at Realtor.com, told MarketWatch.
The spread is "running close to 200 basis points right now, versus something more like 250 basis points back in May 2025 and around 300 basis points in the summer of 2023," he added.
For that reason, although 8% mortgage rates are a possible outcome, "possible and probable aren't the same thing," said Jason Madiedo, chief executive and co-founder of SimplyPMG, a national lender that works mostly with first-time buyers.
The 30-year rate was last at 8% in October 2023, according to MND data.
High mortgage rates are at odds with promises made by Donald Trump on the campaign trail before the 2024 presidential election, which included lowering rates and improving home-buying prospects for Americans.
Nearly 70% of U.S. households cannot afford a new home at a 7% mortgage rate and a median price of $413,595, Na Zhao, a principal economist at the National Association of Home Builders, told MarketWatch.
If the 30-year mortgage rate goes up to 7.5% from 7%, around 2.1 million households will be priced out of the market, Zhao added. If the rate goes up further to 8%, another 2.2 million households will be priced out of the market.
"In total, that is 4.3 million households that cannot afford to buy a median-priced new home if [mortgage rates] increase from 7% to 8%," Zhao said.
Home buyers are increasingly turning to adjustable-rate mortgages to seek relief from high rates.
The share of buyers applying for an ARM instead of a fixed-rate mortgage was 9.8% as of the week of Sept. 18, the Mortgage Bankers Association reported. That's the highest share since November 2023.
ARMs are a riskier option compared with fixed-rate mortgages. A popular product in the run-up to the subprime-mortgage crisis, ARMs offer a lower interest rate up front for a fixed number of years before adjusting periodically based on the prevailing interest rate. Prior to the 2008-09 recession, ARMs also came with the risk of balloon payments after the fixed-rate period expired, which left homeowners exposed to payment shocks.
Federal regulations have since limited how much an ARM rate can increase within a set period of time.
Nonetheless, people who bought homes recently and who banked on rates going lower are now in a position where their already high payment is expected to increase even more.
Related: More than 70% of recent home buyers were counting on mortgage rates to drop. Now they're stuck.
Higher mortgage rates also spell trouble for the housing market.
Home sales are already in a slump, and rising mortgage rates will likely bring things to a standstill.
Sellers should also brace for more pain. As of Sept. 24, 42% of home listings had seen a price cut, according to data from Parcl HQ, a provider of housing-market research. Those price cuts can be painful for sellers: About 6% of listings had a list price below the amount the owner purchased the home for.
Builders have also been slashing prices to boost sales. The median sale price of a newly built home fell 5.8% in August from a year ago, the biggest annual drop in 14 months, according to data released by the U.S. Census Bureau on Thursday. The median price of a new home was $393,700.
And in September, a larger share of builders reported price cuts in an effort to clear their existing inventories.
Related: More home builders cut prices as buyers get spooked
"The low level of consumers' confidence and renewed rise in mortgage rates suggest that homebuilders will need to continue lowering prices to keep a lid on inventory," Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note.
At the same time, buyers are "becoming increasingly desensitized to these discounts," Ali Wolf, chief economist at NewHomeSource and Zonda, said in a statement. "It's tough out there, but the new-home market continues to hold its ground."
(Realtor.com is operated by News Corp subsidiary Move Inc.; MarketWatch publisher Dow Jones is also a subsidiary of News Corp.)
-Aarthi Swaminathan
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