Why Mortgage Rates Aren’t Dropping (Yet)

Dave:The US economy shrank in the first quarter, but at the same time, the labor market is holding strong, but home builders are raising red flags today and on the market. We’re breaking down the most recent economic news and what it means for the real estate investing industry. Hey everyone, it’s Dave head of Real Estate Investing at BiggerPockets. This has been a week with a lot of interesting news and data, which as always means big implications for real estate investors. And while I would love to cover every news story, we don’t have time for that. So we’re gonna focus on three big stories you need to know about. The first story we’ll cover is that the economy contracted in the first quarter. The second thing is we’ve gotten a ton of labor data this week, which is probably the number one thing that’s gonna impact mortgage rates going forward.So it’s something we all should be paying attention to. And lastly, we’ll talk about some interesting news from home builders that could spill into the broader housing market. Alright, first story, like I said, GDP, which is just a measure of the entire economic output for the country. It stands for gross domestic product. This shrank in the first quarter of 2025. A very modest decline of just 0.3%. But this matters, right? It really, it is unusual for the economy to shrink in any given quarter. No one really wants total economic output to go down. So anytime we see the GDP decline, it is worth noting. Talking about and trying to dig into a little bit, the most common reason people talk about GDP is just trying to determine whether or not we’re in a recession. And now, I know I’ve explained this several times on the show, but I’m gonna say it again, that in the US we have this very weird system about recessions.There’s actually not any single objective measure of what’s a recession and what’s not. Recessions are actually in this country decided on afterward after they’re over by the National Bureau of Economic Research. And so the rest of us in real time are trying to figure out if we’re in a recession or not. It’s kind of hard, no one can do it officially, but a lot of people use this rule of thumb, which is two consecutive quarters of GDP declines. That is what most people consider a recession. And so we just had our first one, right? We just had in Q1, a single quarter of GDP decline. And so seeing this news rightfully brings up the question of whether we’re gonna see this rule of thumb definition of a recession takes place. And I’ve been saying this for a while, obviously no one knows, but I do think it is more likely than not that we are going to see this definition of recession to consecutive quarters of GDP decline.And of course we’ll have to see what happens. But my general feeling is that if GDP declined before the Liberation Day tariffs and before the trade war really started to accelerate, it is likely to go down in Q2. Even Trump himself and a lot of his advisors have said there will be at the minimum short term economic pain as he implements this new trade policy, this new economic priorities that he has, and the pain that he’s describing could come in the form of lower GDP. That wouldn’t surprise me at all. In fact, I think that is probably the most likely outcome from what is going on right now. Now is this going to be called a recession by the National Bureau of Economic Research? Who knows? But it’s probably going to meet this common definition. But I actually encourage all of you, I say this to people all the time, I encourage people to think less about what it’s called because this word recession has lost almost all of its meaning.I, I don’t really personally take too much stock on it because again, there’s only some subjective measure in it. People try and, you know, on both sides of the aisle politicize the idea of a recession. And I think what’s really important is instead to just focus on the actual things that are happening, the actual implications of conditions on the ground, right? Because whether or not they call it a recession doesn’t change the labor market, the labor market’s doing its own thing. Same thing with inflation, same thing with GDP. So what’s likely to happen with GDP declining? Well, I think that we are probably in the next couple of months gonna see business spending fall a little bit. You read the economic news like I do every day. You are all these businesses saying they’re scaling back on expansions. They’re sort of in wait and see mode to see where a lot of the tariffs come out.And so that doesn’t necessarily mean this will be a long-term protracted, you know, decline in business spending, but we’re talking about whether or not GDP is gonna decline in Q2. I think there’s a lot of people saying, yeah, we’re spending less money in Q2 and that is a major driver of GDP. We also are hearing a lot of things about consumer spending falling that hasn’t materialized in the data yet. So just keep that in mind. But you hear these businesses like credit card companies and McDonald’s are coming out and saying consumer spending is down. And so we haven’t gotten that data for the last couple of months yet, but there are some lead indicators that suggest consumer spending could be down. But what happens with the labor market still up in the air? And that’s our second story, we’ll still get into that in just a minute, but my general opinion is if labor holds up, even if we go into a recession, and that is an if, I think it will be a mild one, right?If people hold onto their jobs, they will get used to the new situation that we’re in and we’ll probably go through a short and mild recession. If the labor market quote unquote breaks, that’s could be a different, that could be a longer issue, especially if tariffs stay in place. Like I think the sort of the case for a bad recession is if the labor market really breaks and unemployment goes up and we still have a lot of restrictive trade policies through an aggressive trade war or heavy tariffs, both of those things are still up in the air. I’m just saying like what it would take in my mind to make a recession bad. Now normally I think what matters for real estate investors is that normally these types of things where we see lower GDP, the potential recession is going up that would spell lower interest rates.That is normally what happens in a recession if a recession happens and inflation stays low. But rates haven’t really come down even with this news of GDP, we’ll get into that more in a minute. But I think the bond market is generally waiting to see if we have inflation because most economists believe that tariffs are gonna lead to inflation, but that’s gonna take a few months. This, this stuff lags. And so even if there is gonna be some inflationary impact, it might not hit in the data until May or June or even July. Uh, and so we’re just gonna have to see, and I think this is sort of a hint for where I think things are going. I think the Fed is probably waiting on that data too and we shouldn’t hold our breath for any sort of rate cuts in the short run.Now before we move on to our next story and sort of dive into the labor market, which is the other critical piece on mortgage rates, I should just mention if you really wanna get nerdy about this, and you’re listening to this podcast, so I’m guessing you have some mild interest in this, is that there is something going on with what happened with GDP in the first quarter. And it might be a little bit distorted just with the way that GDP is calculated. Now people always say, oh, the government’s changing the way definitions happen. Sometimes that does happen. This is not like a change in the way GDP is calculated, it’s just kind of weird the way it’s calculated. Basically it measures a whole bunch of things. Consumption, which is just, you know how much consumers are spending on goods and services. We have business spending and investment, government spending and investment.These all go into GDP, but there’s also this calculation that matters, which is exports minus imports. And so we don’t need to get into the math of it, but basically what can happen is if you have a lot of imports in a given quarter, it can make GDP look negative. And that’s exactly what happened in Q1 because people, it seems businesses and individual consumers we’re concerned that tariffs were gonna raise prices and so they imported a lot of stuff before prices went out and meanwhile exports stayed relatively flat. And so that makes GDP look negative. Does that mean our total economic output was bad? I don’t necessarily think so. I think this is sort of a reflection of what’s going on with GDP. Obviously this is the way it’s calculated and so you sort of need to, if you’re looking historically at GDP, this is the way it’s always calculated.So I do think it’s worth noting that it went down in Q1 but also keep in mind that there are some extenuating circumstances that have made this happen and may not really be reflective of some inherent weakness in the economy. And I think that might be true because a lot of what Q1 was before the tariffs, I personally am much more interested in what happens in Q2 as we start see sort of the impact of the tariffs and the ongoing trade war that’s going on. All right, so that was our first story talking about the GDP decline. We do have to take a quick break, but when we come back we’re gonna dig into the labor market, the somewhat contradictory data we’re getting there and what it means for mortgage rates. We’ll be right back.Welcome back to on the Market. I’m here reviewing three really big economic news stories, all of which that really are going to impact real estate investors. We talked about GDP and how normally the decline that we saw would lead to lower interest rates and lower bond yields or mortgage rates, but that’s not really happening. And one of the main reasons that’s not happening is what’s going on in the labor market, what’s going on with unemployment and all that. So just in the past week we’ve gotten a lot of jobs data and I think it’s an important narrative to keep in mind as we’re talking about GDP ’cause remember before I was kind of saying the word recession is sort of meaningless. GDP, that’s not like really something that most Americans feel like GDP matters. Sure, but mostly to economists because what normal American really notices GDP going up and down in their daily lives, right?What matters are things like the labor market. Do you feel secure in your job? Are you and your loved ones gainfully employed? What’s going on with wages? What’s going on with inflation? This is the stuff that actually matters to most Americans and it’s why I encourage people to think less about the word recession and think more about these things and whether they’re going to impact you both on an individual and personal level or in your real estate investing. The other thing is that yes, GDP matters, but mortgage rates, which obviously matters to all of us real estate investors, are really impacted by the labor market. And I know it’s kind of a couple steps removed, but this is true because the Fed has repeatedly said that what they care about is inflation and the labor market. And so if the labor market is strong, then they’re less likely to lower rates until they see that inflation is really tamed.If the labor market starts to break and there’s mass unemployment, they might take down rates even if inflation risk is still high. And so that’s why we need to pay attention to the labor market. Now what’s going on in the labor market is super confusing and it has been for several years now. We get a lot of conflicting data. There are tons of different ways to measure the labor market. None of them are perfect, but the way I look at it at least is I just try and look at all the measures and see what direction they’re heading. And you can sort of get a general sense of the strength of the labor market by looking at a couple different ones. I’m gonna talk about three today. But overall the feeling I have is that the labor market has been really resilient over the last couple of years despite higher interest rates.I think it’s a real show of strength for the American economy. It is impressive to me that the labor market has stayed as strong as it has. Now this metrics that we’re talking about don’t show everything. There are areas of weakness. There are, you know, problems in certain sectors, but we got jobs data for April and the economy added 177,000 jobs. That is really pretty impressive. Unemployment’s at 4.2%, that might not make sense without context, it’s pretty low. Like it’s up from where it was a couple of months ago, a year or two ago. But 4.2% unemployment is still really, really good from a historical perspective. So biggest picture, look at the labor market doing pretty good. There were however, a couple other data points that are worth noting that point to maybe some weakness, but I wouldn’t get too concerned about it just yet.There’s something called continuing unemployment claims. That’s just basically how many people are continuing to look for work and haven’t been able to find a job that’s up to 1.9 million higher than it’s been recently. Not by that much, it’s just one week of data. It’s not really something I would take into account just yet unless it becomes a trend. So the same thing happened with initial unemployment claims, which basically a measure of recent layoffs, people filing for unemployment insurance for the first time, that is also up this week. But nothing outta the ordinary when you look at these things together that like we’re not seeing any crazy breaks in the labor market just yet. This is just another reason I believe that the Fed is going to be pretty patient on rate hikes. They probably will still cut rates at some point this year, but I don’t think they’re going to be in any particular rush.The reality is that the way the Fed thinks, and I’m not saying this is how I would think about it, maybe it is, but like the way they think is that right now they don’t need to cut rates. Their job, as we’ve talked about many times is to sort of balance these competing priorities of controlling inflation and maximizing employment. And if hiring is still going on, if they still feel that the labor market is strong, that means that they can focus their monetary policy more on the inflation picture. And inflation data has actually been quite encouraging recently it continues to go down, it’s still above that 2% target, but it’s in the two point a half percent range, which is pretty good considering where we were a couple of years ago. But most people expect that this lagging inflation data will come and will see an uptick in inflation from the trade war.And so if I were putting myself in the fed’s shoes, given their mandate and what they’re responsible for, they’re probably thinking, okay, we think that inflation may go up in the next couple of months, but the labor market is still strong. So why don’t we just wait and see what is going to happen with inflation before making any decisions on monetary policy. Because the main reason we’d lower rates is to boost employment, but employment’s doing good so they don’t have to do it. So that’s sort of my take. Maybe they’ll cut rates the June meeting, I don’t know, but I think they are going to be relatively patient just given the data that we’ve seen in the last couple of weeks. And this is one of the reasons why I keep saying that rates will stay higher as, as you know, the Fed doesn’t control mortgage rates, but they do influence it in ways.And I think the fact that they’re probably not gonna be super aggressive about rate cuts at this point in time, things could change second half of the year. But you know in Q2 I wouldn’t expect many rate cuts. Maybe there will be one, but I would be surprised if there’s anything lower than that. And I know that’s probably disappointing to people who are hoping for lower mortgage rates. I know everyone listening to this probably wants lower mortgage rates. I do too. But I think it’s important to remember that a strong labor market is good for the country. It is good for the economy. And personally I am never going to root for people to lose their jobs. I think rates will trend down even without the labor market breaking. And my hope is that we have a more gradual approach to rates coming down because the economy is still doing well.Like that’s the best case scenario to me where we don’t go into a huge recession or we don’t have people lose a lot of jobs, but we still have some other forces like the spread going down and maybe some slowing growth, not full recession, but some slowing growth that pulls mortgage rates down. To me, that’s sort of the best possible blend of things. You might think differently. But I personally don’t want to see the labor market break. I think that could lead to a lot of economic pain that hopefully none of us have to go through. So I, I think we just need to sort of like circle back here for a minute about why I just think this word recession is kind of meaningless because we just had one quarter of GDP losses. I think it’s more likely than not that we’ll have a second quarter.I could be wrong about that, but I think it’s more probable than not that we’ll have two in a row. Like does that matter to the average person if the labor market stays strong, if wages keep going up, which they have, if inflation stays low, like does it matter if we call it a recession if the labor market’s good inflation is low? I don’t think so, right? That’s the stuff that really matters to us. And just to be clear, I’m not saying that that’s the outcome that will arrive. I think the labor market’s really anyone’s guess. I think we will see some modest increases in inflation. But I’m just kind of trying to make the point not to dwell on this word recession. ’cause you’re gonna hear it a lot in the media right now. Do not dwell on it that much and think more about the actual conditions that matter to you, your family, your investing portfolio. All right, that is my rant about the word recession. I promise I will move on from this right after this break when we’re gonna talk about some interesting construction trends and news that we’re hearing from home builders that could spill over into the rest of the housing market. We’ll be right back.Welcome back to On the Market. I’m here recapping some important economic news that will matter to real estate investors. We’ve talked about GDP declines, we’ve talked about resilience in the labor market. Now let’s talk about construction trends. ’cause this has been in the news a lot over the last couple of weeks and a few things have happened recently with builders. The main thing I actually track a lot is sentiment. And we’ll talk a little bit more about permit data, but builder sentiment actually matters a lot because this is a business that lags for a while. And so when builders aren’t feeling great about things, it usually means construction’s going to decline in the future. And so this is something in data analysis we call a lead indicator, right? It’s something that helps us predict what might happen in the future. And so builder sentiment is sort of a good lead indicator for what’s happening with construction, but also a lot of the rest of the housing market.And so what we’re seeing right now is that builder confidence in the US housing market is low as of April. It did go up a little bit in April, but it’s still low. And I think that’s what actually matters. There’s this index basically that’s put out by the National Associate of Home Builders and Wells Fargo and 50 is the normal level that’s like neutral and it’s at a 40. So it’s not like they’re super, super negative but they’re not feeling particularly great about building conditions. And I think the more important thing is that this index has remained negative for a year now. And so I think these sort of ongoing negative sentiment coupled with what most economists are projecting to be higher construction costs because of the tariff situation might lead to declines in construction, which we’ll talk about the implications of in just a minute.But I just wanted to share like why is builder sentiment low first when this survey asks why builders aren’t building as much or why they don’t feel good about it, the majority say because of tariffs and material costs, 60% of builders have reported that suppliers have already raised prices for building materials due to tariffs. So that happened really quickly. Real estate always tends to get hit first. And we’re seeing that right here. It’s not great, but this is kind of what happens. Average material costs are up about 6.3% already, which is a lot just in like a month or so. And that is estimated to add approximately $11,000 per new home built. So that really matters, especially in an environment where consumer sentiment is down because you know, if things were going great in the economy, maybe builders could pass that 11 grand off to consumers to home buyers, but that might not be possible.So that is the main thing. Driving down sentiment. The other things that were mentioned were policy and economic uncertainty, labor and land shortages and of course mortgage rates as a result of these conditions, builders are increasingly having to turn to price cuts and to sales incentives or concessions, right? We’re seeing now basically 30% of builders cut prices in April, which is not that crazy a number, but it is, it is notable. And at the same time, the number of builders who had to offer these are things like buying rate downs or paying for some of your closing costs that ticked up from 59 to 61%. So nothing crazy in one month, but it does show continued deterioration of at least the new home market. And it’s important to remember here that the dynamics of the new home market and existing home sales are different, right?If you are reselling a home, you know, you’ve lived in, it’s different than new home sales. They just have different business models, sellers who are selling their home, just think about this differently than the way builders do who have to move inventory and have cashflow problems. A lot of them are publicly traded companies that need to, you know, maintain earnings for their investors. So keep in mind that those things are different, but it is important to know that the new home sales market is really seeing some considerable weakness. So what does this all mean? Well, as of right now, we haven’t seen huge changes in construction. Data permits for building are actually up from February, but they’re about flat year over year. Housing starts are up a little bit year over year, but they’re down from February. So we don’t have a clear reading on what’s going on.But the question to me is, will this spill over into the bigger market? Because as I said, new home sales, existing home sales, they’re kind of different. Normally in normal times, new home sales are only about 10, 12% of all home sales. So it’s like this kind of a smaller thing, but because there’s been such low existing home inventory, it makes up a bigger percentage now than it does. So the question is, is it going to impact the housing market? I think the answer is sort of yes. I think it’s going to continue to help contribute to softness in the overall housing market, right? If builders are lowering their price for new builds and consumers who are looking for homes and they’re, you know, we’re entering a buyer’s market. So buyers are gonna be able to be discerning if they have the option of buying a new home for the same price, in some cases actually cheaper than existing homes with concessions, they’re probably going to do that.And so I do think this will, until this inventory issue with new homes get sorted out, it’s probably gonna spill over into the existing home markets depending on the market and the southeast. I think this is a lot of what we’re seeing. ’cause that’s where a lot of the construction has been over the last couple of years. Meanwhile, I think probably one of the main reasons why the Northeast and the Midwest still have strong housing markets right now is because there hasn’t been a lot of building there and it’s not really spilling over. So that’s, that’s one implication I think to keep in mind. The second thing is that a lot of what has happened in the housing market in really the last 15 years or so is impacted by what happened with construction after the 2008 crash. A lot of builders went outta business and we saw this huge lull in construction for years.It took a decade basically for this to recover. And we are a long way from that. We’re not even close to that. But I am curious if tariffs stay, which is a big question, but if tariffs stay and permanently change the economics of building new homes, who knows what could happen? It could lead to sort of like a significant decline in construction. And I don’t want to be alarmist, that isn’t happening yet, but it’s on my mind, right? Because if you’re thinking about it, builders are already not feeling great and if rates stay high and their costs go up, that could really dissuade them from taking on new projects, which would be probably not great for the country long term. We need more construction, we need more units, but for people who own existing homes, it could contribute to less total supply and that would put a long term upward pressure on housing prices.So just to be clear, I’m thinking short term, what’s happening is new home construction softening the market, but if builders stop building because of tariffs, and that’s a big but, but it’s something I think we should watch given what they’re saying in their earnings reports. Given what these sentiment, uh, surveys are saying, if we start to see a real pullback in construction that will alter the existing home market, it’s too early to call. I just wanted to mention that. So it’s something if you all are like me and like following the stuff, it’s another sort of like data point news story that you may wanna follow. That’s it for today, guys. Those are the three stories I wanted to share. GDP went down, but the labor market luckily is holding strong. Meanwhile, builder confidence is falling. All this is going to impact real estate investors for now.I think these sort of like counterbalancing ideas that GDP went down, but the labor market is doing okay, is gonna keep rates relatively steady. Again, i I keep saying this, I don’t think rates are gonna fall. I wouldn’t hold my breath in the next couple of months. What happens towards the end, middle of the summer, end of the summer? That’s a different question, but I’m not expecting any big changes May or June and I personally am basing my own investing decisions around that. So that’s it. Thank you all so much for listening. We’ll see you next time.