How Jobless Claims Are Keeping Mortgage Rates Sky-High!
Today, the latest jobless claims report has shed light on why mortgage rates are still holding steady at elevated levels. The labor market may be softening, but it hasn’t cracked under pressure, a tell-tale sign that many economists watch for when predicting a recession.
For the past two years, mortgage rates have danced between the 6% and 8% range. Back in late 2022, when global markets were in turmoil and economic signals pointed toward a downturn, the 10-year yield plummeted to around 3.37% before bouncing back. This was my “Gandalf line,” signaling that the yield wouldn’t fall further as long as the labor market remained resilient.
Fast forward to 2023, and the Federal Reserve continued its rate hikes. When they hit the brakes, it established another crucial threshold for 2024—a “hold the door” line at 3.80%. We managed to maintain that level late into 2023.
As we entered 2024, signs of weakness in the labor market pushed the 10-year yield below that 3.80% mark for a brief period, hitting a low of 3.62%. However, that worry quickly faded as jobless claims began to drop again.
Today’s jobless claims data exceeded expectations, prompting the 10-year yield to inch up a few basis points. As I write, the yield sits at 4.59%, having risen by three basis points following the positive claims news.
Looking ahead to 2025, I foresee mortgage rates ranging from 5.75% to 7.25%, with the 10-year yield hovering between 3.80% and 4.70%. It’s worth noting that with improved mortgage spreads in 2024, we’ve seen better pricing for mortgages.
- Expected mortgage rates: 5.75% – 7.25%
- Projected 10-year yield: 3.80% – 4.70%
For mortgage rates to dip lower, we must keep a close eye on the labor market—an essential player in every economic cycle. This is especially true for professionals in residential construction and remodeling.
The existing home sales market has been in a downturn since June 16, 2022, showing little sign of recovery. However, the workforce tied to this market isn’t large enough to significantly sway the economy, as it largely revolves around commission transfers.
On the flip side, housing construction is a key driver in economic cycles. As payroll growth slows and becomes more concentrated, this sector could cool the economy enough to push the unemployment rate above the Federal Reserve’s comfort zone of 4.3%. As indicated in the chart below, labor in housing construction and remodeling often declines before a recession, and history shows that the Fed tends to overlook this critical data point prior to economic downturns.
You don’t necessarily need to see a massive job loss recession for mortgage rates to trend down towards 6%, as we’ve seen throughout 2023 and 2024. What’s essential is a hint of softness in the economy or improved mortgage spreads—both of which were present in 2024. If this momentum carries into 2025, reaching rates around 6% will be far more feasible.
Next week is “jobs week,” culminating in the final report for 2024. A crucial area to watch in 2025 will be housing starts and the employment landscape for construction workers. Even a minor dip in job growth could push the unemployment rate past the Fed’s 4.3% threshold. Additionally, enhanced mortgage spreads could keep interest rates low for a more extended period.
For mortgage rates to plunge beneath 5.75%—the lower bracket of our Housing Market forecast—various factors must align. We need to observe a softening in labor data, overall economic growth to remain below 3%, improved mortgage spreads, or the Federal Reserve to recognize the need for supportive measures in the housing market.
The Fed should take a proactive stance on the declining construction labor situation as it emerges. Last year, we experienced a negative residential labor report when mortgage rates were at 7.5%, followed by a drop to around 6%, which helped rejuvenate housing demand. History has shown that housing challenges are often brushed aside, but I sincerely hope the Fed acknowledges the importance of addressing these issues actively this time around.
