Economist on what's next for the central bank – and whether the US housing and mortgage markets will post a recovery in the next 12 months
US employers rounded out 2024 with a flourish, adding 256,000 jobs in December and strengthening expectations that the Federal Reserve will hold interest rates where they are at the end of this month.
That marked a much stronger performance than economists had expected, with the unemployment rate also sliding (to 4.1%) and average hourly wages posting a mild increase.
A Fed move this month is now almost certainly off the table – and a flurry of rate cuts throughout the year seems a distant prospect, according to First American’s deputy chief economist Odeta Kushi (pictured top).
She told Mortgage Professional America that while the Fed will probably bring rates lower in 2025, it’s unlikely to move in big steps throughout the year. “I do believe that they’ll pause in January at their upcoming meeting and possibly at their March meeting as well,” she said.
“I think we’ll have a lot more data between now and then to make a better assessment. But certainly, it’s looking like the January meeting will be a pause. We’re still thinking that there will be rate cuts this year, just fewer than maybe we did just a couple of months ago.”
That’s a reflection of a resilient economy and labor market, although it also shows that inflation has been stickier than expected – and could help keep upward pressure on mortgage rates.
Is the mortgage lock-in effect set to continue this year?
During the COVID-19 pandemic, interest rates plunged and allowed scores of homebuyers to snag an ultra-low-rate mortgage, or owners to refinance their current deal.
Rates began to spike again in 2022, meaning many of those who secured cheap mortgages during the pandemic have been reluctant to sacrifice their rate – even if they might have moved in other circumstances.
The trend has caused further strain for the US housing supply crisis, meaning properties stay in the hands of their owners instead of moving to the market.
Growth in the US labor market shattered economists’ expectations in December, with the number of jobs added last month surpassing consensus estimates by more than 100,000.https://t.co/Z6mAYmSpGW
— Mortgage Professional America Magazine (@MPAMagazineUS) January 10, 2025
That so-called “lock-in” effect will remain a factor in 2025 with rates expected to continue hovering near their current levels, Kushi said, although she also noted that the share of outstanding mortgages with a sub-6% rate has slid in recent years.
Around 2022, about 93% of mortgages had a rate below 6%, with that figure slipping to 88% a year ago and 83% now. “We expect that share to continue to fall this year as more people lock into higher mortgage rates,” she said. “I think time is the healer of the rate lock-in effect – but it will still be a factor that really limits a full housing market recovery this year.”
A 2025 market recovery? That may depend on where you live
Unsurprisingly, the market outlook for 2025 varies from one region to the next. A jump in listings was especially evident in Florida and Texas, with further inventory expected to come online if rates moderate even slightly, although strained affordability will remain a challenge for many hopeful buyers across the country.
During the pandemic, almost every market experienced very strong growth – “whereas I think we’re back to a world where real estate is truly local again,” Kushi said. New supply in certain areas, particularly the Sun Belt, could help jolt some buyers off the sidelines and push prices slightly down.
Prospects for the new-home market, meanwhile, are reasonably strong as an area of the market where the lock-in effect doesn’t come into play. “I think it’ll still be a relative bright spot in the housing market this year, and there’s still a willingness on the part of homebuilders to offer incentives like interest rate buydowns to move their inventory,” Kushi said.
“They’ve been adapting, building smaller, more affordable homes, and they’re offering other upgrades to homes as well: not just rate buydowns, but upgrades on features in the home. And so I think they have the ability to do that, whereas the existing homeowner can just choose to stay put if it doesn’t make sense for them to sell.”
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