Strong jobs report throws cold water on July rate cut
Despite falling mortgage rates and low unemployment, the combination of economic uncertainty and high home prices indicates the market slowdown will continue.
Key points:
- The U.S. added 147,000 jobs in June, and earlier job numbers from April and May were also revised upward.
- Mortgage rates fell for the fifth week in a row, with 30-year rates averaging 6.67% as of July 3.
- With the summer ushering in vacation season, economists are not anticipating any sudden surge in home sales activity — especially since prices and rates remain high.
The labor market's unexpected strength last month doesn't bring good news for those who want interest rate cuts soon, but it is a positive sign for home sales in the longer term.
Employers added 147,000 jobs in June, blowing past expectations by nearly 40,000, according to the U.S. Bureau of Labor Statistics. April and May numbers were also revised upward by 16,000, with the overall unemployment rate dropping to 4.1%.
This probably means that the Federal Reserve will be less likely to cut interest rates in July, and it lessens the odds of a rate cut in September, said Sam Williamson, senior economist at First American. Federal Reserve Chair Jerome Powell told members of Congress last week that if the labor market remains strong, the central bank will be less inclined to cut rates soon.
"The housing market has been waiting for a Fed rate-cutting cycle to light the fuse on the 2025 home-buying season, but the labor market's surprising resilience has extinguished some of that optimism for now," Williamson said.
Looking ahead, a stronger job market generally increases consumer confidence and purchasing power, something that is needed to overcome the economic uncertainty felt by many consumers.
Rates continue dropping
While interest rate cuts seem less likely in the wake of the latest jobs report, mortgage rates continue to drift lower. The 30-year fixed-rate mortgage averaged 6.67% this week, according to Freddie Mac, down from 6.77% last week. The 30-year rate has now dropped five weeks in a row and is at its lowest level since April.
Even so, the steady decline hasn't been enough to spark home sales. Purchase applications were nearly flat this week, an indication that economic uncertainty continues to keep buyers on the sidelines, according to Joel Kan, Mortgage Bankers Association's vice president and deputy chief economist.
Tariff worries persist
One point of concern is the upcoming trade deal deadline, according to Anthony Smith, a senior economist at Realtor.com. The 90-day pause on the tariffs that President Donald Trump introduced in April is slated to end next week.
"Any renewed volatility in trade policy could significantly impact market conditions during the second half of the year," Smith said. "For now, elevated borrowing costs are still limiting buyer activity, and homes are spending more time on the market, supporting the ongoing buildup of inventory and modestly shifting leverage back toward buyers."
Summer could stall the market further
Moving forward, seasonality will start working against home sales in the short term, according to Lisa Sturtevant, chief economist at Bright MLS. "The kick-off to summer usually means a slowdown in home shopping as some individuals and families are busier with vacations and traveling," Sturtevant said.
That means inventory should continue to climb and begin to approach pre-pandemic levels nationally. Several markets have already reached these levels, particularly in the South and in the West.
Meanwhile, home price growth continues to slow. In its latest monthly report released on July 1, Cotality estimated home prices increased 1.8% in May, the slowest year-over-over increase since the winter of 2012.
"With the annual growth rate now slower than the rate of inflation, real home prices are falling, which suggests improved affordability going forward," Cotality Chief Economist Selma Hepp wrote in the report.