Is it possible that the reduction of government jobs and the decrease in funding from the economy could lead to a significant increase in the unemployment rate and a surge in jobless claims? If this scenario unfolds, could we expect lower mortgage rates this spring?
This is an interesting concept, especially in light of the White House officials’ strategy to boost labor supply, reduce aggregate demand, and potentially drive down the 10-year yield.
I have been exploring this topic for some time now, and I delved deeper into it in a recent episode of the HousingWire Daily podcast. The government’s decisions not only affect federal workers through layoffs but also impact the economy by cutting funding, leading to further job losses. It seems like there may be a larger strategy at play here, which is worth investigating as we navigate these economic shifts together.
10-year yield and mortgage rates
In my 2025 forecast, I predict the following ranges:
- Mortgage rates will range between 5.75% and 7.25%
- The 10-year yield will vary between 3.80% and 4.70%
So far in 2025, we have consistently been towards the upper end of the year’s forecast. However, there was a decline in mortgage rates last week due to softer economic data, leading to an increase in bond market activity as stocks saw a decline on Friday. Whenever mortgage rates have approached 6% since 2022, it has been due to concerns in the bond market about a slowing economy.
Currently, the 10-year yield and Fed policy seem to be in alignment based on the available economic data. However, if the unemployment rate rises, especially with jobless claims increasing due to government layoffs and the negative impacts of reduced money circulation in the economy, we might see more investment in bonds, resulting in lower yields and mortgage rates.
It is crucial to keep a close eye on labor data as we progress through 2025. While millions of people are laid off from the private sector each year, focusing on government workers and contractors could potentially lead to a rise in the unemployment rate this year. This increase could challenge the Federal Reserve’s target limit of 4.3%.
The White House aims for a lower 10-year yield, and historically, the bond market has anticipated economic growth concerns ahead of the Fed, causing the 10-year yield and mortgage rates to decline. As shown in the chart below, we are currently 36 basis points lower than the peak observed on Jan. 14.
Now, let’s examine the other data impacting the housing market.
Mortgage spreads
The housing market conversation would be vastly different today if mortgage spreads had not improved in 2024 and continued to do so in 2025.
Historically, these spreads typically range between 1.60% and 1.80%. If we were experiencing the worst mortgage spreads of 2023, mortgage rates would be 0.77% higher today. Conversely, if spreads were normal, current mortgage rates would be 0.73% to 0.83% lower. With historically normal spreads, we would have 6% mortgage rates today, indicating that we may not need significant help from the 10-year yield in that scenario.
For 2025, I anticipate a 0.27%-0.41% improvement in mortgage spreads compared to the 2.54% average level from 2024. We are not far from reaching this forecast, but the challenge lies in maintaining these levels throughout the year.
Purchase application data
So far this year, the purchase application data has shown some negative trends:
- 2 positive readings
- 1 flat reading
- 3 negative readings
Last week, the weekly data saw a 6% decline, but year-over-year, it was up by 7%. Despite some negative weekly reports, we have seen better year-over-year data in the previous weeks. In comparison, when mortgage rates ranged between 6.75% and 7.50% last year, the purchase application data showed 14 negative readings, two positive readings, and two flat readings.
We will closely monitor the data in February and discuss these housing economic topics and more at the Housing Economic Summit on Feb. 26 in Dallas.
Weekly pending sales
The latest weekly pending contract data from Altos Research provides valuable insights into current housing demand trends. This dataset has shown significant improvement since the summer of 2024, with year-over-year growth towards the end of the year.
However, as mortgage rates began to rise towards the end of 2024 and remained elevated in 2025, there has been a slight decline in pending sales compared to the growth we had been experiencing. While we still see higher growth compared to 2023 levels, it is not by a significant margin. The housing market typically performs better when mortgage rates are around 6%, which we have not reached yet in 2025 as spring approaches.
Weekly pending contracts for the past week over several years:
- 2025: 312,742
- 2024: 325,054
- 2023: 310,134
Weekly housing inventory data
The most positive aspect for housing has been the growth in housing inventory from the historically low levels seen in 2022. We are anticipating a seasonal increase in inventory soon, with hopes of reaching historically normal levels nationwide in the coming years. Last week showed a mild increase in inventory.
- Weekly inventory change (Feb. 14-Feb. 21): Inventory rose from 637,991 to 640,221
- The same week last year (Feb. 16-Feb. 23): Inventory rose from 493,987 to 497,657
- The all-time inventory bottom was in 2022 at 240,497
- The inventory peak for 2024 was 739,434
- For context, active listings for the same week in 2015 were 958,304
New listings data
The new listing data from Altos Research reflects homes entering the market without an immediate contract, offering real-time insights into selling pressure in the market. The past two years have seen historically low new listings data, indicating unhealthy market conditions.
Last year, I projected that we would see at least 80,000 new listings per week during the peak months, but that target was not met. This year, I believe we can achieve that goal. During the housing bubble crash years, this data line ranged between 250,000 and 400,000 per week.
National new listing data for last week over recent years:
- 2025: 53,861
- 2024: 51,387
- 2023: 44,864
Price-cut percentage
In an average year, about one-third of all homes typically undergo price cuts, reflecting the usual dynamics of the housing market. As inventory increases and mortgage rates remain elevated, the price cut percentage data has been higher compared to periods of lower rates.
For 2025, I am anticipating home-price growth of 1.77%, indicating another year of negative real home-price growth. With increasing inventory and elevated mortgage rates, negative real home-price growth is likely for this year. The price cut percentage data has shown an earlier increase this year compared to previous years, reinforcing my current forecast. If rates decrease in the future, we may need to reassess the weekly data.
Price-cut percentages for last week over recent years:
- 2025: 33%
- 2024: 30%
- 2023: 31%
The week ahead: Fed speeches, PCE inflation report, home price data, and more
This week, we anticipate several Fed presidents delivering speeches, with Logan from the Dallas Fed speaking on Tuesday, offering potentially insightful quotes. Additionally, there are bond auctions, home price data releases, and durable goods reports scheduled. We will be closely monitoring jobless claims throughout the year to gauge the impact of government layoffs and reduced economic funding on jobless claims data. Last week, we saw an increase above estimates.
This week, the Federal Reserve’s main inflation report, PCE, will be released. The report has been adjusted to show slightly lower inflation levels than initially feared earlier in the month. Monitoring the bond market’s response to this report will be crucial, especially given the latest labor market developments.