Jobless claims keep mortgage rates high

Today, the unemployment claims data showed again why mortgage rates remain high, confirming that the labor market is not collapsing. The labor market is weakening, but not yet broken, as it was before every post-World War II recession.

Mortgage interest rates have largely remained within a bandwidth over the past two years, fluctuating between 6% and 8%. In late 2022, global markets faced turmoil and economic indicators pointed to a weakening economy, causing the 10-year yield to fall to around 3.37% before recovering. This was my “Gandalf line in the sand” because I believed that the 10-year yield could not go lower because labor was not breaking.

In 2023, the Fed continued to raise rates. When they finally stopped hiking, it created a new important level for me in 2024: the 3.80% “hold the door” line. We held that line very late into the year 2023.

In 2024, when the labor market was weak, the ten-year yield briefly fell below that level of 3.80%. This broke after three softer reports in the jobs week pushed the 10-year yield to 3.62%. However, those concerns disappeared when the number of applications for unemployment benefits started to decline again.

As we can see from today’s data, jobless claims came in better than expected, pushing 10-year yields up by several basis points. As I write this, the 10-year yield is at 4.59%, up three basis points after the positive claims data.

My forecast for 2025 includes these expected ranges for mortgage rates and 10-year rates. It is important to note that we have experienced better mortgage prices in 2024 due to improved mortgage spreads.

• Mortgage interest rates are expected to be between 5.75% and 7.25%.
• The 10-year interest rate is expected to be between 3.80% and 4.70%

If we want to lower mortgage rates, we must focus on the labor market, which has been critical to every economic cycle in recent history, and especially the home construction and remodeling labor market.

The existing home sales market has been in recession since June 16, 2022 and has not experienced significant sales growth for some time. However, the job market for those working in the existing home sales market is not substantial enough to impact an economy as it is an industry that revolves around a transfer of commissions.

Housing construction, on the other hand, plays a more crucial 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 4.3%, which is the Fed’s comfort level. As the chart below shows, home construction and renovation labor typically declines before a recession, and historically the Fed has tended to overlook this pre-recession data line. I wrote about this topic last week after the most recent report on new home sales.

You don’t necessarily have to experience a recession with job losses for mortgage rates to drop to 6%, as we saw in 2023 and 2024. However, some implied softness in the economy or improved mortgage spreads are essential, and both are essential. saw in 2024. If this trend continues in 2025, it will become easier to get rates near 6%.

Next week is jobs week and then we will see the final report for 2024. A sector to keep an eye on in 2025 is the start of housing construction and employment for construction workers. Even a slight decline in job growth rates could push the unemployment rate above 4.3%. Additionally, improved mortgage spreads can lead to lower interest rates for a longer period of time.

For mortgage rates to fall below 5.75% (the low end of our HousingWire 2025 housing market forecast), which would greatly benefit the housing market, several factors need to align. We need a weakening in labor numbers, overall economic growth to remain below 3%, better mortgage spreads, or for the Federal Reserve to recognize the situation and take action to support the housing market.

The Fed must proactively address the problem of declining construction labor as it arises. Last year we experienced one negative labor report in residential construction when the mortgage interest rate was 7.5%. This was followed by a decline to around 6%, which helped boost housing demand. History has shown that housing issues are often overlooked, but I hope this time the Fed recognizes the importance of being proactive.