01/11/2025
FOOLS Make Predictions; PROFESSIONALS offer relevant market opinions.
“Predictions are hard; especially about the future.” – Yogi Berra
I always enjoy the start of a new year, as we fixate on the possibilities our future’s hold as we begin another annual measurement of the next 365 days. We give ourselves permission to dream about losing 25 pounds, or of finding that special one to love, or believe that Nebraska football really could win the national championship, or that you will sell $X millions in real estate. Human nature being what it is in wanting to know our futures before it happens, has created an industry of experts who get paid a handsome sum to predict the future, especially on the economy and interest rates. I follow a number of them, and I am trying to recall a year where the predictions were so divergent as they are this year, with predictions ranging from an extraordinary economic boom to the next depression in 2025.
I have received a number of questions form Realtors and clients wondering what I think will happen to mortgage rates this year. While I am not one for making predictions, here is my relative market opinion TODAY, that I reserve the right to change tomorrow😊
1. One of the two biggest components that impact interest rate movement is job growth. Case in point: mortgage rates shot up this morning to their May 2024 high’s this morning due to the unexpected increase in job growth of 256,000 for December, far above expectations of 160,000 jobs. The unemployment rate fell to 4.1%, which is below any of the Federal Reserve Presidents predictions from their meeting last month, as seen in the chart below. An unemployment rate of 4% or below, with core inflation still above 2.5% could actually trigger a rate hike from the Fed this year, despite the 1% in rate cuts from September through December. Despite a lot of people telling me they think the economy has been lousy, it has actually been pretty strong at the 2.5-3% rate of growth, and the job growth reflects this. In addition wages grew 4%+ in 2024 – which is really important to all of us to help tackle the HOME AFFORDABILITY issue
Conversely though, if the economy does slow down, it would not take much of an uptick in the unemployment rate to trigger a “Surprise” to the Fed, as none of them foresee unemployment going above 4.5%. If you want lower mortgage rates in 2025 then you are cheering for a 4.6% unemployment rate or higher, as that would be the level the Fed did not expect this year and they would cut rates in reaction.
2. The other big component of interest rate movement is the rate of inflation. We finished 2024 with the Core PCE at 2.8% (The Feds preferred gauge). Last year we saw the impact of rising insurance rates have a big impact on this number, as the insurance companies set their new rates in the first quarter of the calendar year. Will the same thing happen again this quarter as the insurance carriers access their losses from the major Fall hurricanes and now the LA fires. (HOME DEPOT is the only winner in all of this) And will 2025 finally be the year that the lagging Shelter component of PCE finally catches up to real time rents which have flattened out according to Corelogic and many others. The last PCE report had rents rising at 4.8% annually, while Corelogic reported 1.7% average for the year. If Corelogic’s rent gauge is plugged into the inflation formula, the core PCE would be at 2.3% versus 2.8%, which is much closer to the Fed’s target rate of 2%. Given how the inflation rate is calculated it certainly looks possible that inflation can come down, barring any surprises from the insurance industry. The Shelter numbers reported in PCE from January through May of 2024 will fall off this spring and if they are replaced with the real time numbers we are seeing currently this would pull inflation down, which would help lower interest rates!
3. We will see the rate spread between mortgage rates and the 10 year Treasury return to a more normal range FINALLY! Historically mortgage rates have been 1.6 – 2% above the 10 year Treasury yield. However beginning in 2022 with the Fed rate hikes, this spread grew to as high as 3.1% in October 2023, as mortgage bond investors kept anticipating that the much predicted recession was coming and that would usher in low rates and a refinance bubble, thus they demanded higher yield spreads for mortgages and this translated to the 8% mortgage rates we saw when the 10 year hit 5%. Another case in point today: the 10 year yield jumped to 4.77% today, yet the mortgage rate is running near 7.3% or only 2.53% in spread. Rick Santelli of CNBC has been looking for the 10 year yield to hit 5% again this year, but if the mortgage spread can stay closer to 2.5% it will not be as impactful on mortgage rates this time. Unfortunately that is a sign that the mortgage bond investors do not expect lower mortgage rates anytime soon to trigger early payoffs of the bonds through refinancing.
4. Global recessions. The US economy is the envy of the world right now with our economic growth rate. England, and Germany are in some degree of recession, while Japan is still in contraction mode. Plus many experts believe that China has entered into recession mode, but we won’t know for sure until the economic reports are released later. Historically, global recessions tend to spread to ALL countries. The unknown for 2025 is if our economy is strong enough to fend off an economic slowdown. Will the dollar maintain it’s current strength in this market?
5. What will the new administration implement and what impact is there to the Federal deficit? History shows that mortgage rates increased 1% from 2017-2018 after the tax cuts, and the deficit increased. Our deficit is at levels we have never seen before, and I don’t think anybody knows how much debt is too much, before bond investors demand higher yields. The Federal Reserve minutes released this week also show that they are uncertain as to what to expect with the new incoming President and what will be the actual policies put in place for trade, tariffs, immigration, and taxes. I believe all this uncertainty is what is contributing to the wide range of economic predictions and volatility.
So with these points in consideration, my relevant market opinion is that rates will be in the 6.75 – 7.5% range during the first quarter of 2025. If your clients have an opportunity to lock a rate at less than 6.75% in the next 3 months advise them to move quickly on it. Beyond March it is difficult to really know how these five factors will play out, but all of them will be important to mortgage rate movements. I am getting the sense from the prospects that I have been meeting with over the last month that they are resigned to the current rates being “what they are” and moving forward with home buying plans versus holding out for lower rates. The further we get away from the unicorn rates of 2021-2022 the more people who will come in to the market with acceptance of a more realistic rate expectations.
BEN BARRETT, LNK's Mortgage Dad
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