Weekend Talking Points - 'Forecasts'

What will 2025 hold for the housing market? Most forecasters are calling for a modest increase in transaction volumes and limited price growth (2–4%), but it all hinges on trends in mortgage rates.

Pending sales climbed again. Mortgage rates declined for 5 straight months (April-September) and that boosted pending sales (signed contracts) by 7.5% MoM in September and 2.0% MoM in October. Unfortunately, the rebound in mortgage rates in October is likely to presage a decline in pending sales in November. It’s all about mortgage rates.

Fed’s favorite inflation measure went the wrong way. October “headline” PCE (Private Consumption Expenditures = inflation for you and me) climbed from +2.1% YoY in September to +2.3% YoY in October, while “core” PCE rose from 2.7% → 2.8%. [BEA]

TP: When Jerome Powell talks about the Fed’s 2% target, he’s specifically referring to the “core” PCE. While “core” PCE has come down significantly from its +5.6% YoY peak in 2022, the final stretch to the 2% target has proven difficult indeed.

It’s jobs week again! And with the Fed set to meet on December 17–18, it’s a critically important jobs week. With limited recent progress on inflation (and post-election reflation concerns), all eyes are on the labor market.

JOLTs: Nothing shocking. The Job Openings and Labor Turnover Survey saw total job openings rise 5% month-over-month in October to 7.7 million. Yes, that’s a big number, BUT it’s much lower than the 10–11 million job openings seen in October 2021 and 2022. The hiring rate dropped from 3.5% → 3.3% (tied for lowest since 2013!) while the separation rate (quits + layoffs) was flat at 3.3%. [BLS]

TP: In a nutshell, companies aren’t firing, but they’re not hiring either. We’re basically back to pre-pandemic levels of job openings.

ADP: Lighter than expected, plus downward revisions. Private employers added 146K jobs in November (expectations were for 163K) and the October jobs number was revised down from +233K -> +184K. Notably, employment in the manufacturing space went backwards, and jobs growth in the Leisure & Hospitality industry (hotels, restaurants etc.) — which had been very strong over the last 1–2 years — was muted. [Source: ADP, Bureau of Labor Statistics]

TP: While the unemployment rate remains low, and the job gains are volatile from month to month, the graph below clearly shows that the labor market continues to cool.

BLS: Big monthly report out Friday morning. As a reminder, in October the US economy added just 12,000 jobs, according to the BLS (purple line in the graph above). That shockingly low figure was ascribed to the short-term impact from strikes and hurricanes. Current expectations are for a big recovery in jobs growth to +200K, and for the unemployment rate to rise slightly from 4.1% → 4.2%. [BLS, Trading Economics]

Market expecting another 25 bps rate cut on Dec 18. Will they or won’t they? Expectations around the Fed’s Dec 18 policy rate decision have swung wildly over the last month. At the moment, the Fed Funds Rates futures market is pricing in a 72% probability of a 25 bps cut. That would bring the total amount of cuts in this loosening cycle (so far) to 100 bps (50 + 25 + 25).

2025 Housing Market Forecasts

It’s December, so everyone is updating their forecasts for next year: new home sales, existing home sales, home prices, rental rates, etc. Ultimately, it all comes down to where they think mortgage rates will trend: the lower the mortgage rate forecast, the higher the existing home sales forecast.

ListReports’ parent company, MBS Highway, has one of the more aggressive forecasts out there, expecting mortgage rates to end 2025 below 6%, existing home sales to rise 12% YoY, and prices to rise 4.0% YoY. I feel pretty good about our forecasts, mainly because:

1. Existing home sales have been running at ~4 million per year in both 2023 and 2024. This is an unsustainably low figure, and should be closer to 5.0–5.5 million given our population growth.
2. Mortgage rates typically follow the Fed Funds Rate lower. So far they haven’t, but that doesn’t mean they won’t. As odd as it seems, it’s pretty normal for mortgage rates to rise during the initial stage of a Fed’s loosening cycle.
3. Home price declines have been limited to a few states/markets (Florida, Texas), but the recovery in California prices and ongoing strength in Midwestern and Northeastern markets should keep national price growth positive.

Mortgage Market

The bond market’s kneejerk reaction to Trump’s election win was to worry about the inflationary impacts of higher tariffs, deeper deficits, and stronger economic growth. Bond prices plunged and (mathematically) bond yields rose. In the last few weeks, however, that concern has abated and average 30-year mortgage rates have moved back below 7%.

Here’s what the Fed futures market is currently pricing in for future rate cuts. Note that the current Fed Funds Rate policy range (AFTER the 25 bps cut announced on November 7) is 4.50–4.75%.

• Dec 18 FOMC Meeting: 78% probability of another 25 bps cut. (About the same as last week). 22% probability that Fed will stay on hold.
• Jan 29 FOMC Meeting: 59% probability that the Fed will stay on hold. 20% probability of a further 25 bps cut (in which case the policy range would be 4.00–4.25%).
  

They Said It

“Growth is definitely stronger than we thought, and inflation is coming a little higher. The good news is that we can afford to be a little more cautious [with rate cuts] as we try to find neutral.” — Jerome Powell, Federal Reserve Chairman

“While overall growth for the month was healthy, industry performance was mixed. Manufacturing was the weakest we’ve seen since spring. Financial services and leisure and hospitality were also soft.” — Nela Richardson, ADP’s Chief Economist