Mortgage spreads are getting very tight

Since the end of last year, 10-year T-bond yields have been moving higher, while yields on MBS securities have been falling. As a result, the spread between the two is getting down to a level that is almost as low as we have seen in the past 20 years. That means that yields on conforming mortgages are unlikely to fall further (conforming rates are largely determined by the yield on FNMA current coupon mortgage-backed securities), unless the economy takes another turn for the worse and Treasury yields fall. As the second chart shows, conforming mortgage rates are now as low as they have ever been, and there is still plenty of room for Jumbo mortgage rates to fall, however, even if conforming rates rise. I don't see any thing in these charts that will hurt the housing market to any significant extent in the near future.

Message to potential homebuyers: housing prices have fallen significantly in many markets, and the cost of borrowing for the average house has never been so cheap; if you have been waiting for a good time to buy, now is as good a time as ever. For higher end markets, where price declines have generally lagged the declines in the heavily overbuilt markets, borrowing costs are likely to fall some more, so you might want to hold out for better bargains in coming months.

With fixed rates so low, both nominally and historically, I would recommend getting a fixed rate mortgage instead of a floating rate. Short-term interest rates could move sharply higher in coming years when the Fed reverses its currently super-accommodative policy stance.