What Rising National Debt Could Mean for Housing

More Debt, More Expensive Borrowing

The recently passed One Big Beautiful Bill Act (OBBBA) is set to add trillions of dollars to the national debt over the next decade. With the government borrowing more, interest rates on U.S. debt are expected to climb. And when Treasury rates rise, borrowing costs across the economy—especially mortgages—tend to go up too.

Economists expect the law to raise the 10-year Treasury yield by about half a percentage point in the next few years, and possibly more than a full point over the long term. Since mortgage rates usually track Treasury yields, this puts more pressure on an already strained housing market.

A Housing Market Stuck in Neutral

Mortgage rates have already jumped from record lows of under 3% in 2020 to well over 7% by 2023. That spike froze the housing market, cutting existing home sales down to levels not seen since the 1990s. High prices and high rates have combined to keep many owners from selling and buyers from entering the market.

While OBBBA offers small tax perks—like a higher cap on state and local tax deductions—the bigger effect is higher long-term borrowing costs. For homebuyers, that likely means mortgage rates will stay elevated for years.

A Small Silver Lining

There is one potential bright spot. Recently, the gap between mortgage rates and 10-year Treasury yields (called the “spread”) has started to shrink. During the pandemic and its aftermath, that spread ballooned because lenders worried about borrowers refinancing if rates dropped. Now that rates look like they’ll stay “higher for longer,” lenders are less concerned about prepayment risk.

If this trend continues, mortgage rates might not fall back to 3%, but they could ease down closer to 6%, even as Treasury yields move higher.

Bottom Line

The U.S. is entering an era of permanently higher borrowing costs, and the new debt-heavy legislation only reinforces that. For the housing market, this is a double-edged sword: mortgages are likely to remain expensive, but the shrinking spread over Treasuries could provide a little relief.