Jobless claims keep mortgage rates high
Today, it showed again why it continues to rise, confirming that the labor market is not broken. The labor market is softening, but not yet as broken as it has been before every recession since World War II.
Mortgage rates have mostly stayed in a certain range over the past two years, hovering between 6% and 8%. In late 2022, global markets experienced turbulence and economic indicators suggested a weakening economy, causing the 10-year yield to fall to around 3.37% before rising again. This was my “Gandalf's Line in the Sand” because I believed that the 10-year yield could not drop because labor was not disrupted.
In 2023, the Fed continued to increase the discount rate. When it finally stopped hiking, it created another key level for me in 2024 – the 3.80% “hold the door” line. We crossed this line very late in 2023.
In 2024, the 10-year yield briefly dipped below 3.80%. That broke after three softer reports in the business week pushed the 10-year yield down to 3.62%. However, that concern faded when jobless claims began to decline again.
As we can see from today's data, jobless claims came in better than expected, leading the 10-year yield to rise several basis points. As of this writing, the 10-year yield is up three basis points at 4.59% following positive claims data.
My mortgage rates and 10-year returns include these projected ranges. 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 projected to be between 3.80% and 4.70%.
For mortgage rates to drop, we need to focus on the labor market, which has been critical to every economic cycle in recent history, especially the labor market for residential construction and remodeling.
The current home sales market has been in a slump ever since and hasn't seen a significant increase in sales for some time. However, the labor market for those working in the current home sales market is not significant enough to affect the economy because it is a sector that revolves around commission shifting.
In contrast, housing construction plays a more important role in economic cycles. As wage growth slows and becomes more concentrated, this sector could cool the economy enough to push the unemployment rate above the Fed's comfort level of 4.3%. As the chart below shows, housing construction and remodeling typically decline before any recession, and historically the Fed has tended to ignore this data line before a recession. last week after the latest new home sales report.
As we saw in 2023 and 2024, we don't necessarily need to experience a job loss recession for mortgage rates to fall to 6%. However, some implied softness in the economy or improvement in mortgage spreads is important, both of which are important to us. Seen in 2024. If this trend continues through 2025, rates close to 6% will become easier to achieve.
Business week is next week and we will see the final report for 2024. One sector to watch in 2025 is housing starts and employment for construction workers. Even a slight drop in job growth data could push the unemployment rate above 4.3%. Additionally, improved mortgage spreads can result in lower interest rates over the long term.
For mortgage rates to fall below 5.75% (the bottom line of our loan) to benefit the housing market greatly, several factors must align. We need to see softening in labor data, overall economic growth staying below 3%, improving mortgage spreads, or the Federal Reserve recognizing the situation and acting to support the housing market.
The Fed should proactively address the construction labor shortage as it arises. Last year we experienced a negative housing labor report when mortgage rates were 7.5%. This was followed by a decline to around 6%, which helped boost housing demand. History shows that housing problems are often ignored, but I hope the Fed will recognize the importance of being proactive this time.
