Mortgage rates could reach 9% in a severe scenario involving a sharp rise in Treasury yields, according to Cotality chief economist Selma Hepp.

The 30-year fixed mortgage rate had reached 7.5% on Tuesday, according to Mortgage News Daily, as Hepp discussed the outlook for mortgage rates during an interview on CNBC’s “Squawk on the Street.”

9% Is Not Base Case

Hepp said a 9% mortgage rate is possible if Treasury yields climb toward 6%-7%, but stressed that "it’s really not our base case scenario."

Such a move would require a severe combination of disruptions, including a debt-limit standoff, a more serious shock to confidence in the Treasury market and further deterioration in the dollar’s safe-haven status.

A temporary spike in Treasury yields combined with a mortgage spread of around 200 basis points could push mortgage rates toward 9%, she said.

But Hepp expects rates to remain closer to current levels. She said the housing market is increasingly being driven by the bond market rather than the Federal Reserve because mortgages are priced off longer-term Treasury yields.

"The most important story in the housing today is no longer Fed. It’s really the bond market," Hepp said.

With bonds in the upper-mid to upper-4% range and mortgage spreads around 200 basis points, she expects mortgage rates to remain around 7% for some time. "I think we’re going to stay there for a little while," she said.

Housing Market Stays Constrained

Hepp said U.S. home sales are currently around 4.7 million, roughly the level seen before the pandemic. Lower rates could support more activity, but affordability remains a major constraint.

Homebuilders have responded with rate buy-downs, seller concessions and products aimed at lower-income households, she said.

Existing homeowners face a different problem. Many are reluctant to move because higher prevailing mortgage rates make their current loans more valuable to keep. Hepp said the wide gap between outstanding mortgage rates and current rates is keeping the existing-home market stuck and turnover very low.

Mortgage purchase applications were recently reported at their lowest level since 1995, while typical monthly mortgage payments, including taxes and insurance, were at about $2,800.

Another recent housing-market assessment found activity was trending toward levels seen in 2023, when about 4 million housing units traded, as higher mortgage rates, inflation, and economic uncertainty weighed on demand.