A drop in bond yields could signal a long-awaited break for would-be homebuyers

The yield on long-term debt — to wit, the 10-year U.S. Treasury note — continued its slow march downward Tuesday.

Now, a fall in long-term market interest rates signals that investors think the Federal Reserve will cut short-term interest rates before long. And, with the recent favorable data on inflation and consumer spending, maybe sooner than later, like in September.

All this is likely to have a knock-on effect on another key rate that matters to a whole lot of people: interest on the 30-year fixed-rate mortgage, which has been hovering around 7% lately.

Relief on mortgage rates will be key to recovery in the housing market and to any hope of would-be first-time homebuyers catching a break in this economy. 

It’s not 100% certain — nothing is in this economy — but it is very likely that mortgage rates will fall in conjunction with long-term U.S. Treasury yields.

“Once the 10-year Treasury gets to 4% or below, I think you’re looking at closer to 6% mortgage rates in the not-so-distant future,” said Guy Cecala at Inside Mortgage Finance.

Even a moderate decline in mortgage rates would encourage some first-time and trade-up buyers — who’ve been priced out over the past year as mortgage rates spiked to nearly 8% — to jump back in, said Eric Freedman at U.S. Bank.

“If you see that first number go down to 6, that does have a psychological impact on potential buyers,” he said.

But there’s a limit to how much a slight drop in mortgage rates would help the housing market, said Curt Long, chief economist at America’s Credit Unions. He pointed out that a few years ago, rates were less than half what they are today.

“Every percentage point matters. But I think if there are prospective buyers out there waiting around for rates to drop to levels that we saw pre-COVID, I just don’t know that’s in the cards in the foreseeable future,” he said.

And rates have to fall a lot before current homeowners — locked in to their low, pre-2022 mortgages —will want to move, said Greg McBride, chief financial analyst at Bankrate.com.

“Homeowners that are carrying [2.5% or 3.5%] mortgage rates, they’re not real keen on putting their house on the market now, and then they have to go out and finance the next place,” he said.

As mortgage rates fall, there’s no guarantee home prices will. But at least price increases have slowed in recent months, said Chen Zhao, head of the economics team at Redfin.

“At some point, people just can’t afford these homes anymore, and home prices cannot continue to increase,” she said.

Anyone rooting for more homeownership in this economy has to hope she’s right.