Today, the jobless claims data also showed why mortgage rates continue to rise, confirming that the labor market is not breaking. The labor market is softening but not broken, as it was before the entire post-World War II recession.
Mortgage rates have remained largely in range for the past two years, fluctuating between 6% and 8%. Towards the end of 2022, global markets experienced turmoil and economic indicators suggested a sluggish economy, resulting in the 10-year yield falling to around 3.37% before doubling. This was my “Gandalf’s line in the sand” because I believed that the 10-year yield could not go any lower since fertility was constant.
In 2023, the Fed continued to raise rates. When they finally stopped climbing it created another key level for me in 2024 – the 3.80% “hold the door” line. We hold that line by the end of 2023.
In 2024, as the labor market showed weakness, the 10-year yield fell, briefly, below that 3.80% level. This came after three soft reports in the week of jobs pushed the 10-year yield down to 3.62%. However, those concerns faded when jobless claims began to decline again.
As we can see in today’s data, jobless claims came in better than expected, causing the 10-year yield to rise a few points. As I write this, the 10-year yield is at 4.59%, up three basis points after positive claims data.
My forecast for 2025 includes these forecast ranges for mortgage rates and 10-year yields. It is important to note that with improved mortgage spreads in 2024, we experienced better mortgage rates.
- Mortgage rates are expected to be between 5.75% and 7.25%.
- The 10-year yield is expected to be between 3.80% and 4.70%
In order for mortgage rates to decrease, we need to focus on the labor market, which has been important in every economic cycle in recent history, and especially the labor market for residential construction and remodeling.
The existing home sales market is in a downward spiral as of June 16, 2022, and has not experienced significant sales growth for a long time. However, the labor market for those working in the existing real estate market is not strong enough to have an impact on the economy, as it is a sector that revolves around commission transfers.
In contrast, housing construction plays a very important role in economic cycles. As wage growth slows and becomes more concentrated, the sector could cool the economy enough to push the unemployment rate above 4.3%, the Fed’s comfort level. As shown in the chart below, housing construction and remodeling activity typically declines before any recession, and historically, the Fed has tended to ignore this data line prior to recessions. I wrote about this topic last week after a recent new home sales report.
You don’t have to have a recession of job losses for mortgage rates to drop to 6%, as we saw in 2023 and 2024. However, some softening in the economy or improved credit spreads is important, both of which we do. saw in 2024. If this trend continues until 2025, getting rates closer to 6% will be easy.
Jobs week is next week and we will see the final report for 2024. Another sector to focus on in 2025 is housing and the employment of construction workers. Even a slight drop in job growth data could push the unemployment rate above 4.3%. Additionally, improved mortgage spreads may result in lower interest rates for a longer period of time.
For mortgage rates to drop below 5.75% (the lower limit of our HousingWire 2025 Housing Market Forecast), which would greatly benefit the housing market, several factors must align. We need to see softening labor data, overall economic growth staying below 3%, improved mortgage spreads, or the Federal Reserve to recognize the situation and take action to support the housing market.
The Fed should address the issue of the construction slowdown head-on as it arises. Last year, we faced one negative report from the housing industry where mortgage rates were at 7.5%. This was followed by a decline to around 6%, which helped boost housing demand. History has shown that housing issues are often ignored, but I hope the Fed will see the importance of being proactive at this time.
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