Labor Market Trends Indicate Future Mortgage Rate Possibilities

High mortgage rates persist, linked to job market dynamics, with forecasts suggesting rates may only decline if labor conditions and economic growth soften in 2025.

Connection Between Jobless Claims and Mortgage Rates

Recent data on jobless claims shed light on why mortgage rates remain stubbornly high.

Although the labor market is showing signs of weakness, it hasn’t descended into the historical lows typically observed before recessions that followed World War II.

For almost two years now, mortgage rates have exhibited a surprising consistency, fluctuating within a 6% to 8% range.

Toward the end of 2022, the market experienced considerable instability amid fears of an economic downturn, prompting the 10-year yield to drop sharply to around 3.37%.

I recognized this dip as a significant turning point; further declines in yield could only occur with substantial changes in labor conditions.

The Impact of Labor Market Trends on Mortgage Rates

Throughout 2023, the Federal Reserve continued to raise interest rates, setting a new standard for 2024 with a crucial threshold at 3.80%.

This level remained pivotal as we approached the end of 2023.

As 2024 unfolded, evidence of a softening labor market caused the 10-year yield to briefly fall below 3.80%, reaching a low of 3.62% after several weaker job reports.

However, fears related to this decline diminished as jobless claims began to decrease once more.

Analyzing the current data reveals that jobless claims came in better than expected, leading to a slight uptick in the 10-year yield, which is now at 4.59%, rising by three basis points after the positive jobless claims report.

  • Mortgage rates are anticipated to range between 5.75% and 7.25.
  • The 10-year yield is expected to fluctuate between 3.80% and 4.70%.

The labor market is a critical factor influencing mortgage rates.

To see a decrease in these rates, we need to keep a keen eye on employment trends, particularly their impact on the residential construction and remodeling sectors.

Looking Ahead to 2025

Since June 16, 2022, the existing home sales market has struggled, entering a recession without any notable sales recovery.

This segment of the market operates mainly on commission, meaning fluctuations here do not significantly affect the broader economy.

On the other hand, housing construction plays a vital role in economic cycles.

A slowdown in job growth may push the unemployment rate past the Federal Reserve’s target of 4.3%.

Historically, the Fed often overlooks data from housing construction leading into periods of recession.

It’s crucial to note that a recession with widespread job losses isn’t necessarily needed to bring mortgage rates close to 6%.

The trends of 2023 and 2024 support this notion.

Instead, signs of economic weakness or better mortgage spreads can set the stage for lower rates.

Should these conditions persist into 2025, finding rates near 6% becomes a realistic possibility.

With the upcoming jobs report, all eyes will be on housing starts and job levels among construction workers.

A slight dip in job growth could easily trigger a surge in unemployment above the 4.3% mark.

Furthermore, improved mortgage spreads might facilitate lower interest rates in the long run.

To push mortgage rates below the projected 5.75%, several elements need to align: observable softening in labor data, overall economic growth remaining shy of 3%, enhanced mortgage spreads, or proactive support from the Federal Reserve for the housing market.

The Federal Reserve must take the declining construction labor market seriously.

The labor report from last year indicated troubling trends when mortgage rates hovered around 7.5%.

A subsequent decrease to around 6% reignited housing demand.

Historically, housing-related challenges are often neglected, but I hope the Fed takes decisive, proactive steps this time to address these issues.

Source: Housingwire