Friday’s U.S. Bureau of Labor Statistics (BLS) jobs report showed that the labor market is getting softer, but it’s not breaking. This gives us a glimpse of what may happen over the next 10 months for mortgage rates, especially since Jan. 14, when we’ve seen them move lower. However, there is a limit to the downside on mortgage rates until the labor market breaks or we get more than 1% rate cuts from the Fed.  

So far, in the first two months of 2025, US companies and governments have created an average of 138,000 jobs each month. The most recent report barely changed the unemployment rate to 4.1%. Employment trended up in health care, financial activities, transportation and warehousing, and social assistance. Federal government employment declined. If the U.S. economy can withstand the current and anticipated job losses in the government sector and the associated reduction in consumer spending, then great.  If not, these factors might drive the unemployment rate above 4.3% — the red line for the Fed on lowering the federal funds rate. 

Since government jobs significantly contributed to job growth data last year, achieving similar results in 2025 will be challenging. It’s important to distinguish between federal workers and state and local government job hiring. However, many state governments are facing significant deficits; our state of Washington forecasts a $12-15 billion shortfall over the next four years.  Other states are also facing some of the same challenges, primarily due to not having COVID funding for expanded programs and hiring.  However, with reduced economic spending, expect government employment to be less of a growth factor in the employment data. This leads back to the private sector and residential construction jobs. This last BLS report didn’t highlight any real growth in this category. 

Builders face stress from consistently high mortgage rates and the threat of higher lumber tariffs, leading to a significant decline in their confidence data.  The question is whether the private sector can absorb some displaced government workers effectively.  Additionally, can mortgage rates decrease toward 6% to support builders? 

As we head into the rest of the year, keep the following in mind: If job growth slows below 133,000 jobs per month and labor force growth data remains elevated, unemployment will rise above 4.3%. The Fed has kept the target unemployment rate low so that the bond market can understand the limits of pain in the labor market before it decides to intervene.  

Additionally, the housing market tends to improve when mortgage rates decline from 6.64% to 6%, so we are approaching a critical point with interest rates. Mortgage buyer Freddie Mac said last Thursday that mortgage rates fell for a seventh consecutive week to the lowest level since December.  

In the past, mortgage rates have fallen to help homebuilders keep things intact, but 2025 is much different than the past few years, and supply and margin pressures are impacting their business model. Vibrant homebuilding markets would certainly help us sell more Alder, but the margin pressures will keep their eyes on any costs that can be trimmed, including solid Alder, if lumber, cabinet, door and trim prices rise too much.