Mounting Concerns
Updated: Track Home Value Changes in 400+ Metro Areas
February 28, 2025 -- Long-term yields moved lower this week, which should help mortgage rates retreat back to at least early December levels. Unfortunately, what drove yields and rates lower appears to be growing concern about the strength of the economy going forward. In recent weeks, there's already been evidence of uncertainty or unease regarding the impacts of changes to tariff and immigration policies, which have now been joined by headlines of many tens of thousands of federal workers being laid off. Headlines of mass firings can be unnerving and certainly add to the feeling of discomfort.
Many of these concerns were expressed in the February update to Consumer Confidence from the Conference Board. While the headline number only declined by seven points, the 98.3 for February was the lowest it has been since last June. Perhaps more significant is that the downturn was the largest monthly decline seen here since August 2021, so the shift was abrupt. Current conditions were assessed to be only somewhat less favorable and registered a 3.4-point slide. The outlook, however took a hit, as the expectations component slumped 9.3 points to 72.9 for the month. Worries about inflation remain foremost on the minds of consumers, and the forecast for price increases moved up from 5.2% in January to a full 6% this month. This is the highest figure since May 2023.
Consumer moods are souring despite fair income gains to start 2025. Overall personal incomes rose by 0.9% in January, with wage gains posting a 0.4% increase. The salary bump was joined by a 1.5% increase in proprietor's incomes, a 1.4% increase in rental receipts, a 1.1% lift from return on investment assets and even a 1.8% bump in direct government transfer payments. Although more money came in overall, consumers closed their wallets and then some, as personal spending for the month declined by 0.2%. This change was to the benefit of savings, and the nation's savings rate pushed up to a 4.6% rate, the highest since last June, up from a meager 3.5% in December. While such savings may be later spent on goods and services, the buildup here feels a little more like hunkering down, given the diminished outlook expressed in the Consumer Confidence report detailed above.
With the personal income report came the update for PCE prices, the Fed's favorite means of measuring inflation. Overall PCE came in with an as-expected 0.3% increase for January, helping the annual rate of PCE-tracked inflation to slip to 2.5%, a one notch decline from December's figure. For the month, goods prices continued on their firming trend, with the 0.5% increase the largest in about a year; service costs moved in the other direction, rising just 0.2%, half the December rate. All that said, core PCE is the metric the Fed closely track; this measure removes the most volatile components (like food and energy costs) and still rose by 0.3%, up a tenth-percent compared to December. However, with a high January 2024 falling out of the calculation, annualized core PCE dropped to just a 2.6% rate, three steps down and a return to where it was last June. The improvement may cheer the Fed, but since it was expected will not change the central bank's "wait and see" stance anytime soon.
The revision to fourth quarter GDP also didn't change the picture much. Originally estimated at an annualized 2.25%, growth was improved slightly to 2.35% for the period. This is still a fair downshift from the 3.07% pace of the third quarter. For the final stanza of 2024, PCE prices rose by 2.4%, up from 1.5% in the third quarter, and core PCE prices increased by 2.7%, up from 2.2% as summer gave way to fall.
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Economic growth also seems to have settled some to start 2025. The Federal Reserve Bank of Chicago's National Activity Index moved from a positive 0.18 in December to a negative 0.03 for January, a slightly below-potential reading. The NAI is an amalgam of 85 economic indicators, and seeks to show whether the economy is growing above or below it's "potential" or ability to grow without throwing off imbalances like inflation. While a moving target, "potential" is thought to be a GDP pace of perhaps 2.4% or so, and it would appear that the economy started this year at or below that pace.
The accumulating news makes it seem likely that "below that pace" will be the story for this quarter. The incoming data the populates the Federal Reserve Bank of Atlanta's GDPNow model caused a plummet in the February 28 update, as the model posted a running GDP rate for the quarter of -1.5%, down from an estimated 2.3% rate just 10 days prior. The note that accompanied the update said "the contribution of net exports to first-quarter real GDP growth fell from -0.41 percentage points to -3.70 percentage points while [...] first-quarter real personal consumption expenditures growth fell from 2.3 percent to 1.3 percent." Regardless of the reasons, the incoming data so far this quarter is on the weaker side, although it's mostly only comprised of January observations at this point.
Not all the news is poor, though. Orders for durable goods powered higher in January, rising by a solid 3.1%, a nice turnaround from back-to-back negative months to end 2024. While much of the lift came from a pick up in orders for transportation-related items, the proxy measure for business-related investment spending rose by 0.8%, not only a third consecutive gain but a fifth in the last six months. We learned earlier this month that manufacturing had turned positive for the first time in more than two years, and rising orders are at least one reason why.
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Three more regional reviews of factory activity in February were mixed. Reports from the Federal Reserve Banks of Dallas, Kansas City and Richmond showed two negatives and just one positive this month. The Dallas Fed's local update saw its barometer post a -8.3 for the month, a 20.5-point fall from January, with new orders and employment gauges both sliding. Not sliding was the "prices paid" indicator of inflation pressure; at a value of 35 for the month, it is the highest since September 2022.
The Kansas City Fed's report told a similar tale, but rather than a plummet, the overall measure simply held at -5 for a second month in a row. New orders did throttle back with 15 point fall to -7, as did the employment measure which landed at -14. Prices paid for raw materials surged 20 points to 38, and like its Dallas counterpart, moved to its highest point since September 2022, too.
The relative bright spot was the level of activity in the Fed's Fifth district. The Richmond Fed's thermometer managed a 10-point increase for February, rising from -4 to +6 for the month. It was the first positive reading here for 15 months and the highest reading since April 2022, so that's a pretty positive development. New orders were unchanged, but that was still good enough for the best mark since last April, and employment moved up from a positive 3 to a positive 9 for the month. Unlike the other two regions, this one saw inbound prices as fairly flat in February.
A national update on manufacturing activity for February comes from the Institute for Supply Management on Monday, so we'll see if the January improvement had enough momentum to carry into this month.
There is essentially no momentum to be seen in the housing market. We wrote about housing's winter chill and builder blues in last week's MarketTrends, but there was more coldness to be added to that this week. Sales of new homes in January slumped by 10.5%, falling from an upwardly-revised 734,000 annual pace to just a 657,000 one. The drop in sales saw inventory levels balloon back up to a nine month's supply at the present rate of sale, with the 495,000 units available the highest supplies have been since December 2007. More supply and less demand should have helped to temper prices but didn't, as the median price of a new home sold rose to $446,300, up 7.6% compared to December and 3.7% above year-ago levels. It's too soon to say, but the increase may be early signs of the impact of tariffs on the many goods that go into building a new house.
Perhaps the market for existing homes can be expected to improve? Probably not, at least not in the near term. The Pending Home Sales Index from the National Association of Realtors -- a measure of signed contracts to buy -- followed up a 4.1% decline in December with another 4.6% drop in January, leaving this index at its lowest level ever (the series began in 2021). The December drop was partly or mostly reflected in January's 4.9% decline in existing home sales to a 4.08 million annual pace, and this new PHSI decline makes it likely that a drop back to perhaps a 3.90 million rate will be seen when February sales are tallied. After that, we'll need to see if the recent decline in mortgage rates spurs any buyers into the market to start the spring homebuying season. Our guess is "some".
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Applications for mortgage credit certainly aren't improving, either. The Mortgage Bankers Association reported that requests for home loans eased another 1.2% in the week ending February 21. Applications for loans to finance home purchases rose by 0.2%, a bare improvement but the first increase since mid-January, while demand for loans to refinance existing mortgages slid by 3.6%. We may see a little increase in refinancing activity for the last week of February, goosed by slightly lower mortgage rates.
The effects of the tens of thousands of announced federal layoffs don't yet appear in the unemployment data, but no doubt they will before long. That said, there was a 22,000 increase in the number of first-time claimants for unemployment benefits in the week ending February 22, lifting the number to 242,000 -- the highest of new claims number since December 7. The increase may be a harbinger of things to come, but probably won't much affect the February employment report, due out at the end of next week.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Feb 21 | Jan 24 | Feb 23 | |
| 6-Mo. TCM | 4.33% | 4.27% | 5.32% |
| 1-Yr. TCM | 4.20% | 4.19% | 4.99% |
| 3-Yr. TCM | 4.27% | 4.34% | 4.44% |
| 10-Yr. TCM | 4.50% | 4.61% | 4.30% |
| Federal Cost of Funds |
3.673% | 3.719% | 3.876% |
| 30-day SOFR (daily value) | 4.35201% | 4.35098% | 5.32466% |
| Moving Treasury Average (MTA/12-MAT) |
4.635% | 4.686% | 5.089% |
| Freddie Mac 30-yr FRM |
6.85% | 6.95% | 6.94% |
| Historical ARM Index Data | |||
Despite the GDPNow plummet, it's not likely that the economy has fallen off a cliff. Rather, a combination of concern, fear and uncertainty seems to be setting in, and these aren't the kind of components that foster a robust economic environment. Inflation may be improving, at least as referenced by the Fed's core measure, but out in the real world where food prices and goods prices have again turned higher, inflation expectations have become rather less "well anchored" than they were. As well, it remains to be seen what effects of new tariffs on goods from Canada, Mexico and China will do to final costs.
It's always been the case that bad news brings lower interest rates. To be sure, we aren't seeing "bad" news of late per se, but rather news that's simply not as good as it was. The economy is growing, albeit likely at a slower pace. The labor market is still strong, and should remain so overall despite federal job cuts. Prices for certain items are still rising, but some of this may be offset in time with lower fuel costs, and lower interest rates can help ameliorate the effects of higher prices, too. Things may not seem great right now, but they certainly aren't bleak by any measure.
Still, disappointment in where things are and where they seem to be going does have some effect, and the decline in bond yields this week will help lower mortgage rates next week. That may spread a little cheer, at least among those inclined to obtain or refinance a mortgage, so that's something. We think that the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac will fall by about nine basis points next week, possibly a bit more. We'll know when the next update for rates comes out Thursday amid the first-week-of-the-month blitz of data.
Can mortgage rates find any space to decline meaningfully as we head into the spring housing season? See what we think in our latest Two-Month Forecast for mortgage rates covering late February through late April.
See our new 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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