I’m in the camp where the labor market is more important than the Fed’s inflation, so let’s focus on this statement: “The labor market is strong. It doesn’t come up. It does not fall.”
I feel like the character in the movie “The Notebook” when he asks his love interest, “What do you want?” Residential construction workers are at risk of facing job losses for the first time in this recovery but the Fed tends to take a hawkish stance in its statements on key areas, which tends to raise mortgage rates. Now, it seems the Fed is suggesting we may need more rate cuts.
Last year, when mortgage rates approached 7.5%, we saw our first negative jobs report for the housing industry since the start of the correction. As you can see below, this is a prime industry at risk of a labor recession. Mortgage rates then moved back to 6% which removed these concerns, but rates returned to above 7%.
I recently wrote that 2025 could be a wildcard for the Fed and the economy as we see builders’ completed units piling up, and housing starts and permits already at recession levels.
On Twitter today, the Minneapolis Fed tweeted a quote from one of their recent articles: “Apartment construction in the 9th District is expected to decline sharply as the number of building permits sought by developers falls. The Twin Cities saw the worst decline while other cities in Greater MN, MT, and SD fared better. ”
As we can see from all of the above, some members of the Fed get “Hello, Mcfly!” the message.
As I write this article, the 10-year yield stands at 4.62%, down from a recent high of 4.81% earlier this week on Tuesday. My forecast for this year is that the 10-year yield will be between 4.70% and 3.80%, with mortgage rates expected to fall between 7.25% and 5.75%. Therefore, it is not surprising that the Federal Reserve is trying to calm the markets, as mortgage rates have risen rapidly. However, their policies and their sentences contribute to this important change in the market.
As for the labor market, let’s keep it straight: private wage growth is slowing, and manufacturing employment saw job losses in 2024. If domestic workers also lose their jobs, government jobs will need to grow even faster by 2025 to offset these losses. . However, we know that this is not possible.
Therefore, expect mortgage rates to drop if we see weakness in the residential workforce to add to the softness we’ve already experienced in manufacturing activity. Already today mortgage rates are down because I believe the Fed is showing its concern about the housing market.
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