The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.
My 2025 real estate and mortgage forecast will take a look at inflation, the labor markets, and the Federal Reserve to help us better understand what we can expect in the coming year.
These 3 factors portend for potentially lower mortgage rates over the course of this year…while home values will continue to rise.
Right now, housing supply is still relatively low, and demand is growing – and that means home price appreciation.
On the mortgage side, will interest rates finally come back? Let’s take a look at the factors that will most impact real estate and mortgages in 2025…
Inflation
The single biggest driver of bond yields AND mortgage rates is inflation.
Mortgage rates are essentially determined by inflation, which erodes the buying power of the fixed return that a mortgage holder receives. When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of that buying power.
And that’s what we’ve been seeing over the last 3 years.
When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline.
When they lower rates, the Fed is trying to spur economic growth with more availability to less expensive capital.
As I’ve mentioned previously, the Federal Reserve botched their management of inflation in 2020 and 2021 and were forced to make severe changes to offset the damage. This brought market instability and increased mortgage rates.
Inflation has remained stubbornly high over the last year, but news on the horizon looks promising.
As a matter of fact, I believe that the current data (the Personal Consumption Index or PCE) is overstating inflation by about .4%
Once this is worked out, we should see the inflation numbers come down, leading the Fed to want to reduce the Federal Funds rate.
One of the largest components in the PCE is “shelter costs”, or rents. You can see in the chart below that these costs have been dropping regularly, and this trend will show up in the months ahead.
The trend in inflation is working in the borrower’s favor, and it means the Fed’s going to have to look at cutting the Federal Funds rate even more in 2025.
It looks like core inflation might be in the low 2% range by the middle of this year, which bodes well for lower mortgage rates.
One wild card, however, will be how the bond market views the ever-expanding federal deficit and debt. The level of government spending isn’t giving great comfort to those who regularly purchase government bonds, so this is something everyone needs to be watching. Increased debt loads could move bond yields higher, which will not help mortgage rates.
The Labor Market
There has been much discussion about the labor markets and employment data this year.
Estimates by the Federal Reserve Bank of Philadelphia indicate that the employment changes from March through June 2024 were significantly different compared with preliminary state estimates from the Bureau of Labor Statistics’ (BLS).
This year the BLS stated that the US economy added nearly 2.5 million new jobs…but the Quarterly Census of Employment and Wages (QCEW) done by the Philadelphia Fed showed growth of only 1.25 million jobs.
That’s a 50% discrepancy! One might even conclude that the BLS numbers were potentially inflated due to election posturing.
Nevertheless, here’s what’ currently happening regarding employment:
As you can see, unemployment is up nearly 1% over the last 18 months and is continuing to rise.
Secondly, the duration of an average unemployment stay (based on how long a laid-off employee receives unemployment benefits) is up 21% over the last 7 months and is continuing to rise:
This means that finding a job once you’ve been laid off is getting tougher, signaling a tightening labor market.
Next, there are few jobs available right now, per the Bureau of Labor Statistics:
There are 30% fewer job openings since January of 2023. So…the unemployment rate is moving higher, job openings are dropping, and people are collecting unemployment for a longer amount of time.
My thinking here is that the labor market isn’t in as good of shape as many in Washington think. This may bode well for mortgage rates if these trends continue
The Federal Reserve
For starters, the Federal Reserve’s “dual mandate” is to keep prices stable AND achieve maximum employment.
It does this by controlling the money supply, and raising or lowering interest rates when the economy is slowing down or growing too fast.
We’ve seen this in the last year, when the Fed reduced its Federal Funds rate by 100 basis points, as inflation started to wane.
When the Fed cut interest rates in September, many hoped it would kick-start the frozen housing market. Mortgage rates track the 10-year US Treasury yield, which was expected to fall in anticipation of further rate cuts. However, recent economic data has looked stronger than expected, which has shifted the market’s expectations, sending bond yields higher.
Today, most analysts believe that the Fed will continue to cut its lending rate…and that it might well spur mortgage rates to follow this time around.
Per the diagram below, the majority of Fed members believe that the Federal Funds rate (currently at 4.375%) will be lowered to 3.875% sometime in 2025.
However, with the labor markets numbers being potentially over inflated, many believe that many more Fed voting members will change their tune if/when unemployment numbers start to rise.
And as shown earlier, there’s a very good chance that the unemployment rate might very well rise in the months ahead, forcing the Fed to cut their interbank lending rate even further.
Most Fed members believe that unemployment will stay between 4.2% and 4.3% – with a few thinking it could go as high as 4.5%:
But what if inflation moves higher? What if the recent corporate layoffs mentioned previously start to show more in those labor reports?
My guess is that the Fed will lower rates to stave off higher inflation…which should be good for mortgage rates.
Mortgage Rate Forecast
As mentioned previously, the 30-year mortgage rate generally follows the path of the 10-year treasury bond. Today, the 10-year yield is hovering right around 4.5%.
But how does that relate to mortgage rates?
Well, the historical spread between the 30-year fixed mortgage rate and the 10-year treasury is between 1.6% and 2% – or averaging around 1.8%. Meaning, that if the 10-year yield is at 4%, mortgage rates should be right around 5.8% (4% yield plus 1.8% spread).
However, today’s market is skewed…mostly due to the 2020/2021 event and it’s resulting hangover. Take a look:
As you can see, today’s spread is over 2.5% – far outside of historical norms. And, it’s declining, which is good news.
It September of 2024, the 10-year yield touched 3.6% (and it spurred a fair amount of refinance activity for about 3 weeks, before they rose to 4% in early October):
So, what if the current spread went from 2.5% to just 2.25% AND the 10-year treasury dropped to 3.5%? Rates could look like this:
And this absolutely could happen this year. Based on inflation and employment data – coupled with continued spread reduction, mortgage rates in the high 5% range is quite realistic.
As mentioned previously, the wild-card will be how the bond market views government spending a debt.
Real Estate Forecast
Let’s turn our attention to real estate and what we can expect in 2025.
The forecast for real estate centers once again on supply and demand, and the supply continues to be tight…more on that later.
First, though, let’s take a look at what’s happening with the home buying demographic. As you can see in the chart below, there are plenty of opportunities for buyers in the Millennial age category…and the Gen Z group isn’t too far behind:
We will see great homeowner growth in both Gen Z AND Millennials over the next few years.
At the same time, will new home construction keep up to fill this demand? Let’s take a look.
First, active listings have fallen significantly since pre-Covid. Listings are down 21% since 2018 AND the population has grown by over 12M people. Yes, listings are up year-over-year (which is good news, indeed), but nowhere near what’s required.
Household formations (or the amount of NEW households being created through cohabitation or marriage) tells the story of how many new homes are needed every year. Interestingly, the statistic has remained very constant at right around 1.9M per year:
On the other hand, new homes being built is remaining constant at 1.3M per year:
As you can see, there are far more households being formed than builders putting up new homes. This is why the real estate market has been so strong of late and why you we seeing prices increase due to a lack of inventory. It’s going to be a similar story for 2025 and more.
So, what does this mean?
Well, it means that home prices will continue to appreciate…and that will accelerate even faster when mortgage rates improve.
I see appreciation in 2025 at over 4% for the year AND appreciation over the next 5 years to be over 30%. This means real estate is a good buy right now and will help create great wealth in the future.
In Conclusion
Here’s what I think will happen in 2025:
It’s looking like 2025 will be an interesting year…and one that will have solid wreath-building opportunities available. Do reach out to me to discuss how you might be able to move forward in 2025 to take advantage of this changing market!
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
You’ve probably noticed one thing if you’re thinking about making a move: the housing market feels a bit unpredictable right now.
The truth is, from home prices to mortgage rates, we’re seeing more volatility – and it’s important to understand why.
At a high-level, let’s break down what’s happening and the best way to navigate it.
What’s Driving Today’s Market Volatility?
Factors like economic data, unemployment numbers, decisions coming out of the Federal Reserve (The Fed), and even the just concluded presidential election, are creating uncertainty right now – and uncertainty leads to market volatility.
You can see that when you look at what’s happening with mortgage rates. New economic reports and other geopolitical events have an impact and can cause sudden shifts up or down, even though experts still forecast rates will come down overall. We’ve seen that effect play out recently, like when employment and inflation data get released each month.
And as the markets react, these types of updates will continue to have an impact on rates moving forward. As Greg McBride, CFA, Chief Financial Analyst at Bankrate, says:
“After steadily declining throughout the summer months, I expect more ups and downs to mortgage rates . . . Job market data will be closely watched as well as any clues from the Fed about the extent of upcoming interest rate cuts.”
Trying to Project Mortgage Rates
This is exactly why the projected decline in mortgage rates isn’t going to be a straight line down over the next year. As Hannah Jones, Senior Economic Research Analyst at Realtor.com, explains:
“Rates have shown considerable volatility lately, and may continue to do so . . . Overall, we still expect a downward long-term mortgage rate trend.”
Plus, home prices and the number of homes on the market vary dramatically depending on where you’re looking to buy or sell, which makes it even harder to get a clear picture.
In some areas, home prices are rising and inventory is tight, while in others, there are more homes available and it’s leading to more moderate pricing shifts.
Bottom Line
The housing market may be experiencing some shifts, but don’t let it stop you from making your move. With the support of an experienced real estate agent and a trusted lender, you’ll be ready to navigate the changes and make the most of the opportunities that come your way.
Let’s turn any uncertainty into your advantage, helping you move forward with confidence. Please do reach out to me to discuss today’s environment and how you might be able to take advantage!
The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.
I’m asked regularly about mortgage rates – and how they behave relative to the Federal Reserve and their Federal Funds rate.
While it might seem intuitive that changes in the federal funds rate should directly affect mortgage rates, the relationship between the two is more complex.
Mortgage rates do not move in lockstep with the federal funds rate due to multiple factors, including the role of longer-term bonds, overall market dynamics, and investor sentiment.
Let’s take a closer look…
The Role of the Federal Funds Rate
The federal funds rate is the interest rate at which banks lend reserves to each other overnight. It is set by the Federal Reserve as a tool to control monetary policy, with the goal of managing inflation and stimulating economic growth.
When the Federal Reserve raises or lowers this rate, it directly affects the short-term borrowing costs for banks, which can influence consumer rates for products like credit cards and auto loans.
However, it is much more indirect when it comes to mortgage rates, which are typically tied to other longer-term financial instruments. The federal funds rate is a short-term rate, while mortgages often span 15 to 30 years, leading to differing influences on these financial products.
Influence of Longer-Term Bonds on Mortgage Rates Mortgage rates are more directly influenced by the yields on long-term bonds, particularly the 10-year U.S. Treasury bond.
Investors use the yield on these bonds as a benchmark for determining mortgage rates, as they represent a relatively safe long-term investment. When the yield on 10-year Treasury bonds rises, mortgage rates often follow suit, and when it falls, mortgage rates tend to decrease.
This connection is much stronger than the relationship between mortgage rates and the federal funds rate because both mortgages and Treasury bonds are long-term financial commitments that reflect broader economic expectations over time.
Market Forces and Supply-Demand Dynamics
The supply and demand for mortgage-backed securities (MBS) also play a significant role in determining mortgage rates.
Banks and mortgage lenders often bundle mortgages into securities and sell them to investors, and the demand for these securities can influence the rates that lenders offer to consumers. When demand for MBS is high, lenders can offer lower mortgage rates, as they can sell the bundled mortgages more easily at favorable terms.
On the other hand, when demand for these securities fades, lenders must increase mortgage rates to make them more attractive to investors. This dynamic operates independently of changes in the federal funds rate, as it is more tied to market sentiment and investor appetite for longer-term fixed-income investments.
Impact of Inflation Expectations
Inflation expectations are another key factor that drives mortgage rates, often with minimal direct influence from the federal funds rate.
Mortgage lenders are keenly aware of inflation risks over the life of a loan, which can erode the real value of the fixed interest payments they receive. If inflation is expected to rise, lenders will demand higher mortgage rates to compensate for the anticipated decrease in purchasing power.
Alternatively, when inflation expectations are low, mortgage rates usually drop – or stay hover at a lower rate. The federal funds rate does influence inflation to some extent, but the relationship is not always immediate or proportional, resulting in instances where mortgage rates may not track movements in the federal funds rate.
Global Economic Factors and Risk Aversion
Mortgage rates are also influenced by global economic conditions and risk aversion among investors.
For example, during periods of global economic uncertainty, investors often flock to safe-haven assets like U.S. Treasury bonds, driving their yields down and potentially lowering mortgage rates in turn. This dynamic was particularly evident during the 2008 financial crisis and the COVID-19 pandemic, where mortgage rates fell despite significant volatility in the federal funds rate.
This illustrates that external economic factors and the global appetite for safe investments can decouple mortgage rates from domestic monetary policy changes, creating a gap between mortgage rates and the federal funds rate.
The Role of Mortgage Lender Pricing Strategies
Individual mortgage lenders also play a role in determining rates through their own pricing strategies, which can introduce further variations. Lenders adjust their rates based on competition, risk assessments, and internal profit targets.
These adjustments mean that even if the broader market conditions suggest a decrease or increase in rates, lenders may not always follow suit immediately.
For example, during times of economic stress or uncertainty, lenders may keep rates higher to offset increased risks of defaults. This autonomy in pricing further weakens the direct relationship between the federal funds rate and mortgage rates.
The Delayed Response of Mortgage Rates to Rate Changes
Even when changes in the federal funds rate indirectly influence mortgage rates, the response is often delayed.
When the Federal Reserve adjusts the federal funds rate, it can take months for the effects to filter through the economy and reach the mortgage market. This lag occurs because it takes time for banks to adjust their lending practices, for market expectations to shift, and for the impacts on inflation and economic growth to become clearer.
During this time, other factors, such as changes in the housing market, shifts in investor sentiment, or unexpected economic data, can alter the trajectory of mortgage rates independently of the federal funds rate.
In Conclusion
While the federal funds rate plays an important part in shaping broader economic conditions, it does not directly dictate mortgage rates due to the factors mentioned previously.
Mortgage rates respond more directly to the yields on longer-term bonds like the 10-year Treasury and are subject to a range of market forces that the federal funds rate cannot control.
If you’d like to find out more, or have a detailed conversation about mortgage rates and where they might be headed, don’t hesitate to reach out to me, as it would be my pleasure to help in any way I can!
The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.
Federal Reserve officials and most investors have long expected that borrowing costs would be reduced in 2024, at some point.
As of today, the Fed finally cut its federal funds rate (the inter-bank lending rate) by 50 basis points.
Why So Long?
At the end of last year, many were hopeful that the Fed would begin cutting rates early in 2024, easing pressure not just for consumers, but also for businesses. A spring rate cut seemed to be in the cards around the turn of the year and most prognosticators estimated the first cut would arrive sometime before the summer.
But for the first 8 ½ months, those rate cuts never materialized. Inflation was much, MUCH more stubborn than they anticipated and stayed above their target. The Fed was very cautious and wanted to see the numbers come down over the course of this year.
Interestingly, inflation has still remained over their 2% target…but unemployment has grown and is now over 4%.
However, all of that changed today, as the Federal Reserve cut their inter-bank lending rate by 50 basis points.
What Does That Mean for Mortgage Rates?
Interestingly, the Federal Funds rate does not directly control mortgage rates. And mortgage rates remained unchanged after the announcement.
Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.
A far better way to track mortgage interest rates is by looking at the yield on the 10-year Treasury bond. The 30-year fixed mortgage rate and 10-year treasury yield move together because investors who want a steady and safe return compare interest rates of all fixed-income products.
U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages.
How? When Treasury yields rise, so do mortgage interest rates.
That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.
Today’s Actions
We have seen a very nice move in the reduction of mortgage rates over the last 100 days, as the bond market has seen inflation slow a bit and unemployment rise. The bond and mortgage backed securities markets have been ahead of the curve on rates.
Rates have moved nearly .75% to the good for would-be buyers or refinancers.
I do believe we will continue to see rates move lower, but at an inconsistent pace. There will be bumps in the road…so locking in now might be a good idea.
Housing Pricing Pressure Ahead?
As rates move lower, more buyers will become eligible to purchase. In fact, the National Association of Realtors states that for every 1% decline in mortgage rates, 5 million more people can be eligible to buy.
Even if a small fraction of these eligible buyers decides to move forward, it will likely pressure prices higher and shrink the number of available home choices even further. More on that here…
The Bottom Line
Home price appreciation remains strong and inventory is slightly increasing. The fact that mortgage rates are coming down will only add to an increase in housing prices, as that’s basic supply and demand.
Home values continue to set new all-time highs, and housing still proves to be one of the best investments out there.
If you’ve been thinking about purchasing, now is a good time to do it! Reach out to meso we can strategize about your next purchase or refinance.
The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
