Despite core inflation running at 3.1% year over year, according to this week's CPI report, mortgage rates hit a new 2025 low today. Any worries about inflation are now overshadowed by improving mortgage spreads and softening labor data. The scenario would be different if the jobs statistics exceeded estimates.
Mortgage rates have fallen to a record low of 6.53% for the year, according to Mortgage News Daily. With the most recent jobs data, Federal Reserve Chair Jerome Powell finally has the cover he needs to decrease the Fed funds rate, despite intense pressure to do so. But as usual, the bond market usually outpaces the Fed. These trends have previously reversed and rates have increased, but as of right now, 2025 marks a brand-new low.
Lower-rate housing data?
Why is it crucial that mortgage rates approach 6%? Well, historically, when mortgage rates were between 6.64% and 6%, the housing data tended to get better. I will now examine the data more closely to determine whether this will be the third time this has happened since late 2022.
The buy application data for existing house sales showed a 17% year-over-year growth and a 1% week-over-week increase, reflecting the recent strong performance of homebuilder stocks. For purchase applications, this represents consecutive weeks of positive weekly and year-over-year data. Additionally, data on purchase applications has demonstrated double-digit growth for 14 consecutive weeks compared to the previous year.
The fact that this year's new listing data is higher than last year's and that comps are so low has contributed significantly to that gain. In the past, nevertheless, the week-to-week data tended to improve when rates approached 6%.
The 10-year yield is currently at 4.24%, and aside from the Godzilla tariffs, it has not dropped below 4% this year. If labor data worsens and the inflation growth rate stays constant, it will be interesting to see how the bond market responds. We might be looking at close to 6% this year if mortgage spreads keep getting better and the 10-year yield hits 4% once more, as it did in recent years.
In conclusion
We will be able to determine whether the 10-year yield responds negatively to the PPI inflation report when it is released tomorrow. A rate drop at the next Fed meeting seems questionable, according to some Federal Reserve members who have adopted a rather hawkish position today. Given how awful the last employment report was, I question their position on this.
One thing is certain, though: in recent years, the 10-year yield has tended to fall whenever there has been a scarcity of economic growth in the data, which lowers mortgage rates. The difference currently is that mortgage spreads have improved a lot. As a result, mortgage pricing is not greatly impacted even when the 10-year yield rises, as it did last week, because spreads are rising in tandem with higher yields.
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