What can the government do to lower mortgage rates?

Mortgage spreads fell to 1.96% and kept rates under 7%, but Iran conflict risk and Fed hawkishness left the 10-year yield near yearly highs. Mortgage spreads remain closer to normal and are preventing mortgage rates from breaking above 7% even as the 10-year yield stays elevated. The primary driver of the long end remains conflict related inflation risk, while housing data shows modest inventory gains and mild demand softness. AI Summary Last week Treasury Secretary Scott Bessent made a big announcement to try to calm the long end of the bond market — a larger debt buyback plan that will start on Sept. 9, which I see as a more defensive play. This follows the intervention on the Yen using euros, not dollars, which was another attempt. The Treasury can issue a lot of short-term debt, avoid long issuance and attempt yield curve control if needed. However, for now, the bond market isn’t budging and mortgage rates are close to yearly highs. After the Aug. 19 Treasury announcement, we did get a one-day rally in bond yields, but gave it all away the next day. Now it’s the weekend and the tariff deal with Canada fell apart Friday night , leading to the U. S. imposing 50% tariffs on Canadian goods, with Canada set to retaliate. Why hasn’t anything the Trump administration has done to bring rates down worked? Because the elephant in the room is still the Iran conflict ; we haven’t gotten a deal yet. If you look at how bond yields trade, when there is escalation or bad news on the Iran conflict, bond yields rise — and they rise with some kick.

And the one time recently when bond yields moved lower was when oil tankers were able to move through the Strait of Hormuz. The Fed doesn’t like this supply-shock conflict either, and some Fed members have used this to support their desire to raise rates. In the 2026 Housing Wire forecast , I anticipated the following ranges: We are six months into this conflict and now we are on the verge of doing some hardcore economic sanctions on Iran. If we want lower yields, we know what to do. Mortgage spreads once again have saved the day and kept mortgage rates under 7% for another week. Not that long ago, I wrote about why it will be hard to get rates above 7% . Crazy to think that with all the drama we have had in 2026, rates still haven’t broken over 7%, but spreads can only do so much. For rates to break over 7%, the Iran conflict would really need to get worse, sending oil and diesel prices higher for longer. Diesel prices have exploded again, but WTI crude is not above $100, so the mortgage spread is wide again. On top of everything else last week, the trade talks with Canada fell apart. Historically, mortgage spreads have ranged from 1.60% to 1.80%. Last week, spreads were at 1.96%, down from 1.99% the week before. Let’s compare last week’s mortgage rates to where they would have been over the last three years, given the 10-year yield’s current level: Our pending home sales data provides a week-to-week perspective, though holidays and short-term fluctuations can affect results. This weekly pending sales data typically takes 30-60 days to be reflected in the sales data. Now that we have spent some more time above my key mortgage rate level of 6.64%, the slowdown in sales is more apparent, it’s just not a big slowdown yet. For the past few years, when rates get near 6%, housing demand grows; then that growth fades when rates get over 6.64%.

However, it’s a small decline on a year-over-year decline, and comps are harder to show growth for the rest of the year because mortgage rates were falling at this time last year. This is because mortgage rates haven’t broken over 7% as they have done in the past three years. Also, price growth has slowed down over the past two years, making housing affordability a tad better. Here are the pending sales for last week over the last two years: Purchase application data, which looks out 30-90 days, has shown softness as mortgage rates have gotten above 6.64%. For a while, purchase applications grew every week this year compared to last year, but we’ve recently had four mild negative year-over-year prints. This is not abnormal with mortgage rates above 6.64%. However, unlike previous years, we haven’t seen a big decline in purchase apps, mostly because mortgage rates have still stayed under 7%. Last week saw 2% week-to-week growth, but apps were down 3% year over year. Here are the stats on purchase apps so far in 2026: Housing inventory is having a very mild year, but as mortgage rates move above 6.64%, inventory growth has picked up, and year-over-year comps will make it easier to show growth for the rest of the year. That’s because mortgage rates were heading lower last year at this time, and inventory growth started to slow a lot. Last week we saw mild week-to-week growth, and year-over-year growth is now 1.57%, even with elevated rates and easier comps to show growth. New listings are in their traditional seasonal decline. My take is that it’s been the best year for new listings since rates rose in 2022. Even though we aren’t back to normal new listings, we got a bit closer this year.

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