Mortgage Rates Hit 2025 Lows: What’s Next After the Fed Cuts Rates?

Last week, mortgage rates reached their lowest point for 2025, driven more by labor market dynamics than inflation concerns. With the Federal Reserve poised to cut rates this week, many are wondering: will we see a repeat of last year’s situation where mortgage rates surged dramatically after a Fed cut? Let’s delve into the implications with insights from the latest Housing Market Tracker data.

Understanding Mortgage Rates and the 10-Year Yield

Current Forecast Trends

In my 2025 outlook, I projected mortgage rates would vary between 5.75% and 7.25%, with the 10-year yield fluctuating between 3.80% and 4.70%. Thus far, the 10-year yield has adhered to this forecast. Notably, it hovered between 3.87% and 4.79%, briefly dipping below 4% last week.

The Importance of the Labor Market

I recently recorded two episodes of the HousingWire Daily podcast, focusing on the significant role the labor market plays in bond market behavior. This trend explains the decrease in mortgage rates last week, despite prevailing inflation worries. Key discussions included:

• The impact of tariffs on markets
• Analyzing jobless claims data

The labor market continues to push rates down in 2025, even with inflation above target levels and substantial government debt.

Will History Repeat Itself? The Fed’s Upcoming Rate Cut

Reflecting on last year, when the 10-year yield was at 3.63%, I identified it as pricing in a potential recession due to overly restrictive Fed policies. After a 0.50% rate cut, improvement in economic indicators caused bond yields to rise sharply.

Current Market Conditions

This year’s labor data appears softer, with mortgage spreads narrowing, creating a different environment from last year. Currently, with the 10-year yield at 4.07%, we don’t foresee a repeat of previous spikes unless labor data improves while inflation persists above targets. In that case, the yield could rise towards 4.35% to 4.50%, subsequently increasing mortgage rates.

On the other hand, if the Fed shifts from a restrictive policy and labor data weakens, rates may drop. However, the current signals from the Federal Reserve suggest a commitment to maintaining a somewhat restrictive stance, indicating that many rate cuts are already factored into mortgage rates.

Insight into Mortgage Spreads

The recent drop in mortgage rates would not have been possible without improved mortgage spreads. Historically, these spreads have ranged between 1.60% and 1.80%. If the current spreads reflected those at the peak of 2023, mortgage rates would be 0.81% higher. Conversely, if they aligned with typical spreads, we would see rates 0.49% to 0.69% lower than present levels.

Current Rate Scenarios

With optimal spread conditions, we could see mortgage rates between 5.60% and 5.80% today, well below current averages.

Growth in Purchase Applications

New data indicates a 7% week-over-week increase in purchase applications and a 23% rise year-over-year. When mortgage rates drop below 6.64%, demand generally grows; we’ve observed a positive six-week trend since rates fell below that benchmark.

So far this year, key data trends include:

• 17 positive readings
• 12 negative readings
• 32 weeks of year-over-year growth

Analyzing Total Pending Sales

The latest figures from HousingWire Data show pending sales at 363,763 for 2025, compared to 357,437 last year, indicating robust demand.

Weekly Inventory and New Listings

This past week saw a significant rise in inventory, attributed to post-holiday adjustments. We expect this trend to normalize soon as consumer behavior stabilizes.

Current metrics include:

• Total Inventory: Increased from 846,516 to 860,219.
• New Listings: Currently at 64,443 for 2025, slightly lower than last year’s 65,170.

Pricing Trends and Future Projections

Interestingly, the percentage of homes experiencing price cuts remained stable, despite expectations of an increase owing to seasonal trends. Currently, one-third of homes typically see price reductions, demonstrating a friendlier market for buyers in 2025.

Looking Ahead: Fed Meetings and Economic Data

Upcoming Fed meetings will shed light on the central bank’s stance regarding the labor market. Also, anticipate data concerning homebuilder confidence and housing starts; last year’s similar trends revealed increases in builder sentiment as mortgage rates approached 6%.

This week’s economic indicators are crucial. While recent increases in jobless claims have raised questions, I don’t foresee the Federal Reserve overreacting.

Conclusion

As we observe the housing market and the implications of rate cuts, the potential for continued growth and stability is promising. In the coming weeks, we will closely monitor how these dynamics unfold and influence purchasing behaviors.

For more insights into how mortgage rates might evolve and the broader housing market trends, stay updated with our weekly analyses.