Mortgage rates have had a wild ride since Fed Chair Jerome Powell started talking at the Fed press event Wednesday, rising 15 basis points today. However, I think the bond market responded appropriately after the Fed meeting, and on Thursday morning. Why? Even though the Fed lowered rates, the tone of the press conference was not overly dovish.
Additionally, economic data has shown improvement in several areas recently. Mortgage spreads got really good before the Fed meeting and then quickly reversed, making mortgage pricing wilder than usual to the upside. Typically, mortgage spreads have improved on days when bond yields rose, but that’s not what happened in the last 24 hours.
The economic data
While housing permits were again negative on Wednesday, retail sales, jobless claims and the Philly Fed manufacturing index all performed well, making it difficult for the 10-year yield to remain at 4%. In fact, I was a bit surprised that the 10-year yield didn’t rise toward 4.10% after the stronger-than-expected retail sales report this week. Currently, the 10-year yield is at 4.10%. I discussed this on today’s episode of the HousingWire Daily podcast. Sarah and I discussed the Fed meeting in today’s podcast.
So where do we go from here?
10-year yield and mortgage rates
In my 2025 forecast, I anticipated the following ranges:
- between 5.75% and 7.25%
- The 10-year yield fluctuating between 3.80% and 4.70%
So far in 2025, the 10-year yield has stayed in my range most of the time. If I account for some wild after-hours trading, the range has been between 4.79% and 3.87% this year, with most of the year being below 4.70%. We briefly dipped below 4% on Fed day, and then bond yields reversed when Powell started talking.
I like to describe the bond market and mortgage rates within waves and channels. So far this year, both the bond market and mortgage rates are trending correctly as long as mortgage spreads continue to improve year over year. This chart shows the improvement of mortgage spreads with last week’s data.
The labor market continues to soften
The labor market is becoming softer, not primarily due to population growth, but because specific job sectors of the economy are experiencing job losses. The chart below shows how manufacturing has been shedding jobs since late 2022.
Residential construction employment has been losing jobs for the last four months, but that’s not the only sector shedding jobs; specialty trade contractor jobs have been losing jobs for a longer period as well.
The mother of all jobs data is jobless claims, and as expected, after the one-time surge from Texas flood participants in last week’s report, the jobless claims data fell today and bond yields rose. The labor market is getting softer but not breaking.
What happens next?
Since we got near the lower end of my mortgage rate and bond yield forecast for 2025, for rates and bond yields to go lower from a 6.13% mortgage rate pricing and 4% 10-year yield, it will require these three things.
1. A more dovish-sounding Fed — we didn’t get that yesterday.
2. Worse economic and labor data — we didn’t get that today.
3. Improved mortgage spreads. While we have gotten significant improvement this year, it hasn’t taken another leg lower yet. It got a bit worse after the Fed meeting.
It’s been tough to get mortgage rates under 6% and that’s not by accident; the Federal Reserve policy makes that very difficult, especially with mortgage spreads not back to normal. Today, on Mortgage News Daily, mortgage rates rose again toward 6.375%.
Conclusion
Overall, it has been an excellent seven-week period for mortgage rates. What has that given us? We have seen the best seven-week performance of the year in purchase applications, with six positive weekly reports and seven consecutive weeks of double-digit growth. In the most recent week, we recorded a 3% increase from the previous week and a 20% increase compared to the same time last year.
But for mortgage rates the rest of the year, it’s still about the economic and labor data. Suppose we see better economic and labor data emerging. In that case, it will be harder to return to 6% again, especially given Powell’s statement that we could have no job growth and the labor market would still be okay. This is now the third time since late 2022 that mortgage rates haven’t been able to break under 6%, and that looks right to me, given where Fed policy and mortgage spreads are at.
