Lenders Build Mortgage Rate Buffer Amid Economic Uncertainty

The average 30-year fixed-rate mortgage (FRM) stood at 6.69% as of December 6, 2024, while the 15-year FRM averaged 5.96% during the same period [1]. These figures reflect a slight decline in rates compared to the prior month and the previous year, as the Federal Reserve continues its efforts to stabilize inflation and employment post-pandemic. Observers are closely monitoring these trends, as historical data indicate that FRM rates are closely aligned with the 10-year U.S. Treasury note rate, typically adding a risk premium of between 1.5% and 3.0% to the Treasury yield [2].

As of December 6, 2024, the 10-year Treasury note rate was reported at 4.17%, yielding a risk premium spread of 2.52% over the 10-year FRM rate. This spread is above the historical average of 1.5%, signaling lenders' continued caution amid perceived risks of future interest rate hikes and potential mortgage defaults [1]. This widening spread is viewed as a buffer for lenders, who remain wary of economic conditions that could lead to higher delinquency rates.

The average adjustable-rate mortgage (ARM) rate, which is more volatile than fixed-rate alternatives, stood at 6.33% on December 7, 2024, following a recent peak of 6.57% at the end of November [1]. This rate is 0.36 percentage points below the 30-year FRM rate and 0.63 points above the 15-year FRM rate. The ARM rate inversion over the fixed-rate options has diminished their appeal for most homebuyers, particularly those seeking to improve borrowing capacity in low- to mid-tier housing markets. ARMs are now primarily attractive in high-tier residential and commercial property transactions [1].

Market observers highlight the ARM rate's sensitivity to short-term benchmarks, such as the 3-month Treasury bill and the SOFR (Secured Overnight Financing Rate), which historically influence the direction of ARM adjustments. As of December 9, 2024, the SOFR stood at 4.6%, up from 4.82% the month prior [1]. These adjustments are typically compounded with a lender’s profit margin, meaning that ARM rates are not only influenced by macroeconomic conditions but also by lender-specific factors.

The broader economic environment continues to impact mortgage markets, with buyers and sellers adapting to the shifting landscape. Higher mortgage rates have constrained purchasing power, leading to a reduction in buyer demand and prompting some sellers to lower prices or withdraw from the market. Inventory levels are expected to grow in the coming months, increasing pressure on sellers to adjust pricing to meet market realities [1].

Analysts note that the long-term trajectory of mortgage rates may be influenced by the Federal Reserve’s ability to manage inflation and the broader economic outlook. While short-term fluctuations are expected, the overall trend of rising rates since 2013 remains a structural factor in mortgage markets. This backdrop suggests a cautious approach for both buyers and sellers as they navigate the evolving housing landscape.

Source: [1] Trending mortgage rates (https://journal.firsttuesday.us/current-market-rates/3832/)