Will mortgage rates go down in 2025? This is the key factor to watch

The US unemployment rate jumped to 4.3% in July, triggering recession indicators and causing financial markets to lower their economic outlooks, which briefly put downward pressure on long-term yields and mortgage rates. As a result, the average 30-year fixed mortgage rate hit a 16-month low of 6.11% on September 11, 2024. However, the unemployment rate slipped back down to 4.1% in September and October, causing long-term yields and rates to climb again, pushing the average 30-year fixed mortgage rate to 6.93% as of November 25. The labor market appears to be the key factor to watch moving forward, as a scenario in which the unemployment rate rises more than expected is also the scenario where mortgage rates are likely to decline the most. Long-term yields and mortgage rates are heavily influenced by investor expectations about future economic conditions, including the labor market, economic growth, inflation, and Fed policy. The US unemployment rate is within the Fed's Dual Mandate Bullseye, while the inflation rate is just slightly outside. Federal Reserve Governor Lisa Cook views the economy as being in a good position, with economic growth being robust and inflation moving sustainably toward the 2.0% objective. However, Cook noted that unemployment was an area to watch, as national job growth is solid but perhaps not quite strong enough to keep unemployment at the current low rate. If the labor market were to weaken further and unemployment were to rise, it could exert downward pressure on mortgage rates. Additionally, if volatility in financial markets eased and the spread between the 10-year Treasury yield and the 30-year fixed mortgage rate narrowed, mortgage rates could also decline.