Weekend Talking Points - 'Contraction?'

Between the on-again-off-again tariffs, the weak ADP job growth in Feb 2025, and the Atlanta Fed’s GDPNow model calling for a contraction in 1Q 2025, there’s been a lot of bad news / uncertainty over the last week. But much of that was good news for mortgage rates.

PCE (inflation) eased in January. “Headline” PCE (inflation) eased from +2.6% YoY in December 2024 → +2.5% YoY in January 2025, while “core” PCE dropped from +2.9% YoY → +2.6% YoY. [BEA]

TP: This was a real relief for the market after the somewhat disappointing CPI figure earlier. As a reminder, PCE is the Fed’s preferred gauge of inflation. The 2% inflation target is for PCE.

Mortgage rates have moved lower. Since mid-January 2025, average 30-year mortgage rates have declined 50 basis points (half a percentage point) to ~6.75%. Most of the improvement, however, has come from the “risk-off” trade (selling stocks and buying bonds) rather than much lower inflation or much higher unemployment. [Mortgage News Daily]

The ‘R’ word is back. The Atlanta Federal Reserve’s “Nowcast” GDP model is currently forecasting a 2.8% annualized contraction for 1Q 2025, even worse than the 1.5% contraction forecast a week ago. As the blue range shows, Wall Street forecasts are much rosier.

TP: The Atlanta Fed’s GDPNow model immediately (and mechanically) incorporates the most recent data releases. That can make it quite volatile from week to week. Still, it’s been a while since we’ve seen any negative GDP forecasts.

ADP jobs growth came in very low. Private employers added just 77,000 jobs in February 2025, well below Wall Street expectations of 140,000 AND the December 2024 growth of +186,000.

TP: ADP is a giant payroll processing company. Since it ‘prints the checks’, you might think that their reported numbers are ironclad. Well, not exactly. In 2024, ADP’s reported job growth was revised down by 215,000 from the originally-reported numbers. And in 2023, the revision was -1,145,000 jobs!

Despite all this, the market expects no Fed action. The prices of Federal Funds Rate future contracts imply only a 7% chance that the Fed cuts rates at the next FOMC (Federal Open Markets Committee) meeting on March 19. [CME]

Rental rates keep trending (modestly) lower. The latest Apartment List data for February 2025 showed national rental rates were down 0.4% year-over-year, and 4.6% below their mid-2022 peak. The nationwide vacancy rate rose to 6.9% — the highest level since 2017.

“After a historic tightening in 2021, the multifamily occupancy rate has been slowly but consistently easing for over three years amid an influx of new inventory. 2024 saw the most new apartment completions since the mid-1980s, and with nearly 800 thousand units still in the construction pipeline, the supply boom has the runway to continue into 2025.” — Apartment List

TP: In other words, rental rates will remain under pressure in many parts of the US. And even if national rents did start to rise year-over-year, it would take 1.0–1.5 years before that showed up in the CPI and PCE figures due to the lags inherent in the data collection process.

Where is the Inventory?

I always have a lot of fun digging into the latest monthly numbers from Realtor.com’s Residential Listing Database. In February 2025, total active inventory (which excludes homes under contract) rose 2.2% month-over-month and 27.5% year-over-year to 848,000 units.

That figure is just 9% below February 2020 levels. BUT, the growth of COVID-19 was already starting to have an impact on inventory levels at that time. If we go back to February 2019, we’re still 23% below “clean” pre-pandemic levels.

But as I’ve noted previously, the inventory situation can be very different from state to state. Inventory is also concentrated in a few states. Florida and Texas alone represent 32.5% of the total active inventory in the country, despite only having 15.2% of the population. Both states’ inventory levels are well above February 2020 levels. It’s a totally different situation for New York State and Pennsylvania, where inventory levels are still ~40% below pre-pandemic levels.

Where are Prices Falling?

The Realtor.com data also looks at the median listing price on a monthly basis. I was curious which cities were seeing the largest declines. Remember: the listing price can be seriously skewed by the mix of properties on sale from month to month — so this is a far-from-perfect measure of appreciation or depreciation. Still, here’s what I found:

• Of the Top 100 cities by household size, 59 (59%) had YoY declines in their median listing prices in February 2025. But most of those YoY declines were small (almost flat).
• The biggest decreases among the Top 100 were: Urban Honolulu HI (-14% YoY), Bridgeport CT (-12%), Kansas City (-10%) MO, San Francisco CA (-9%), and Oxnard CA (-9%).
• The largest increases among the Top 100 were: Toledo OH (+24% YoY), Harrisburg PA (+18%), Syracuse NY (+14%), and Cleveland OH (+14%)
• Taking a look at the next 100 (101–200), 49 (49%) had YoY declines. Flint MI (-23% YoY) and Boulder CO (-13%) had the biggest drops among this cohort; Huntington-Ashland WV/KY/OH (+20% Yo) and Santa Maria-Santa Barbara (+18%) the biggest gains.

We’ve got to be careful here, because more accurate measures of home price appreciation (Case-Shiller, FHFA etc.) are saying that home prices are still trending up in all the bigger cities except Tampa. And even Tampa is only down slightly after rising by ~70% over the previous 5 years.

The 5 Ls for Home Builders

NAHB Chairman Buddy Hughes just testified before Congress about the “fever-pitched housing affordability crisis” exacerbated by the “5 Ls” — lending, labor, lumber, lots and laws — each of which raises the cost of building a home:

• Lending — Credit is tightening for development and construction loans, and builders also rely on several federal programs administered by federal agencies to help them supply new homes and apartments.
• Labor — The construction sector faces a persistent labor shortage, with more than 200,000 unfilled industry jobs.
• Lumber — Due primarily to supply chain disruptions, construction material costs are up 34% since December of 2020, ultimately resulting in higher rents and home prices.
• Lots — Low lot supplies are due in large part to tighter rules regarding land use and zoning for housing and land development.
• Laws — Regulatory costs account for about a quarter of the purchase price of a new single-family home and even more for apartment buildings due to construction delay costs and zoning issues, and these regulatory burdens have made it very difficult to build entry-level housing for first-time home buyers.

Separately, NAHB’s Chief Economist Robert Dietz said that the new tariffs alone (on China, Canada and Mexico) could add $7,500–10,000 to the price of a new home.

Mortgage Market

Between the on-again-off-again tariffs, the weak ADP job growth in Feb 2025, and the Atlanta Fed’s GDPNow model calling for a contraction in 1Q 2025, there’s been a lot of bad news / uncertainty over the last week. But much of that was good news for mortgage rates.

As a result, the “risk-off” trade has continued, with money piling out of stocks and into “safe haven” assets like bonds and gold. Higher bond prices (mathematically) mean lower yields, and lower MBS (Mortgage Backed Securities) yields have helped average mortgage rates move lower.

Here’s what the Fed Funds Rate futures market is currently pricing in for rate cuts. Basically, the market expects the Fed to stay on hold on March 19, but the odds of rate cuts on May 7 AND June 18 have risen significantly over the last few weeks.

Note that the current Fed Funds Rate policy range is 4.25–4.50%.

• March 19 FOMC Meeting: 93% probability that the policy rate will remain at 4.25–4.50% (down from 95% last week). In other words, that the Fed will stay on pause.
• May 7 FOMC Meeting: 54% probability that the policy rate will remain at 4.25–4.50% (way down from 73% last week). 42% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• June 18 FOMC Meeting: 16% probability that the policy rate will remain at 4.25–4.50% (down from 30% last week). 51% probability that the policy rate will be 25 bps below current (which implies one rate cut on either May 7 or June 18). 31% probability that rates will be 50 bps below current (was 16%) last week.

They Said It

“The United States is facing a fever-pitched housing affordability crisis. Nearly 77% of U.S. households cannot afford a median-priced new home.” — Buddy Hughes, NAHB’s Chairman

“Policy uncertainty and a slowdown in consumer spending might have led to layoffs or a slowdown in hiring last month. Our data, combined with other recent indicators, suggests a hiring hesitancy among employers as they assess the economic climate ahead.” — Nela Richardson, ADP’s Chief Economist

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