Mortgage rates are stable even as the economic outlook dims

Melissa Cohn, regional vice president at William Raveis Mortgage, said that while she expects the Fed to stand pat this week, “the surprise could be in the latest dot plot of future rate expectations.” In December, the central bank projected an additional 50 bps in cuts in 2025.

“If the dot plot reveals expectations for more rate cuts than previously expected, it is possible that the bond market could rally and rates move down,” Cohn said.

Recession fears rising

The recent downward movements in 10-year Treasury yields and 30-year mortgage rates may be tied to fears of a recession. According to a CNBC survey of market experts, the odds of a U.S. recession this year are at 36%, up from 23% in January. The average GDP growth forecast for 2025 among these respondents shrank from 2.4% to 1.7% during the same two-month period.

“The big unknown here is whether, at some point, the same economic uncertainty that is currently having a positive impact on interest rates will actually cause the U.S. economy to tip into recession. A recession, particularly one with significant job losses, could cause any housing recovery to fizzle fairly quickly,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green.

Tom Egan, chief financial officer at home equity investment provider Hometap, said this week that conflicting data points are expected to drive Fed policymakers “to wait for more clarity before acting.” He said that while gross domestic product (GDP) and employment numbers are strong, “volatile equity markets and lukewarm consumer sentiment” along with uncertainty driven by White House policies make it more difficult to project a path toward lower rates.

“With a patient Fed and a growing number of potential speed bumps on the horizon for the rest of the year — geopolitical conflict, a looming debt ceiling battle, volatile administrative directives, and seemingly plateaued inflation — we expect this same narrative to persist until the impacts of recent policy changes are clearer and the data paint a more consistent picture,” Egan told HousingWire via email.

Headline inflation slowed in February to 2.8% year over year and 0.3% month over month, according to the U.S. Bureau of Labor Statistics. But core inflation, which excludes volatile food and energy costs, was up 3.1% year over year and is still above the Fed’s 2% target. Prices could accelerate in the coming months due to the impact of President Donald Trump’s widespread tariffs against key trade partners.

How will homebuyers respond?

Green said that housing market activity at the start of the traditionally busy spring season appears “more normal” than in recent years due to higher inventory levels and lower mortgage rates. But like Egan, he acknowledged clouds on the horizon from the Trump administration’s policy path.

“The combination of prospective government cuts by DOGE and the disruptive impact of tariffs have made the mortgage bond market begin to price in additional cuts by the Fed later in 2025,” Green said in written commentary. “The wild card, however, is whether the tariffs reignite inflation, making further Fed cuts more complicated as it tries to balance its dual mandate of maximum employment and price stability.”

Home sales didn’t start the year on a positive note. January data from the National Association of Realtors shows that existing-home sales fell 4.9% from December to a seasonally adjusted annual rate of 4.08 million. New-home sales fared even worse as they dropped 10.5% on a monthly basis to an annual rate of 657,000, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development. That served as another blow to homebuilders who are particularly worried about the impact of tariffs on building materials.

CoreLogic Chief Economist Selma Hepp said that the spring home-purchase season should benefit from the recent declines in mortgage rates while adding that it’s “unclear how long the retreat will last.”

“American households are increasingly concerned with potential re-inflation, their job security and financial outlook, which is holding them back from making major expenditures,” Hepp said. “At the same time, many are still catching up with inflation in housing and related services of the last few years.”