In today’s jobless claims data, it was once again evident why mortgage rates remain elevated, indicating that the labor market is still holding up. While the labor market is showing signs of softening, it has not yet reached a breaking point, as seen before every post-World War II recession.
Over the past two years, mortgage rates have mostly remained in a range of 6% to 8%. In late 2022, amidst global market turmoil and signs of economic weakening, the 10-year yield dropped to around 3.37% before bouncing back. This highlighted the importance of the 10-year yield not falling further due to the resilience of the labor market.
In 2023, the Federal Reserve continued to raise rates until eventually halting, setting a key level at 3.80% in 2024. Despite challenges, this level held firm towards the end of 2023.
In 2024, as labor market indicators weakened, the 10-year yield briefly fell below the 3.80% mark. This was driven by softer job reports pushing the yield down to 3.62%. However, the concerns eased as jobless claims started to decrease once again.
Today’s data revealed better-than-expected jobless claims, causing the 10-year yield to rise slightly. Currently, the yield stands at 4.59%, increasing by three basis points following the positive claims data.
Looking ahead to 2025, my forecast includes projected ranges for mortgage rates and the 10-year yield. Improved mortgage spreads in 2024 led to better mortgage pricing.
- Mortgage rates are anticipated to range between 5.75% and 7.25%.
- The 10-year yield is expected to fall within the range of 3.80% to 4.70%.
To see mortgage rates decrease further, attention needs to be on the labor market, which has historically played a crucial role in economic cycles. Particularly, the labor market for housing construction and remodeling is significant.
While the existing home sales market has been stagnant, the construction sector’s performance can impact the economy, potentially pushing the unemployment rate above the Fed’s comfort level of 4.3%. Historical trends show that housing construction labor tends to decline before a recession, a factor often overlooked by the Fed.
While a job loss recession may not be necessary for mortgage rates to drop, some softness in the economy or improved mortgage spreads are essential. Monitoring these factors in 2025 could pave the way for rates to approach 6%.
With upcoming jobs data, the focus shifts to housing starts and construction employment in 2025. Any decline in job growth could impact the unemployment rate, while improved mortgage spreads may lead to lower interest rates for an extended period.
For mortgage rates to drop below 5.75%, several factors must align, including softening labor data, controlled economic growth, improved spreads, or proactive measures from the Federal Reserve to support the housing market.
Recognizing the importance of addressing declining construction labor, especially in the housing sector, is crucial. Historical patterns show the impact of such actions on boosting housing demand, underscoring the need for proactive measures from the Fed.
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