The Daily Tearsheet

Stocks are higher this morning as investors anticipate a re-opening of the Strait of Hormuz. Bonds and MBS are up.

The US and Iran signaled that a deal was imminent to allow ships to transit the Strait of Hormuz without tolls. Iran apparently wants shipping routes changed for security reasons, but an agreement with Iran and Oman appears to be in the final stages. Iran said it is “ready to return to commitments” apparently referring to the temporary agreement reached with the US in mid-June.

United Wholesale reported originations of $39.7 billion in the second quarter, a 11.6% decrease compared to a year ago. Purchase activity increased to $23.8 billion while refis fell. Despite the lower YOY volume, gain on sale margins rose to 133 basis points compared to 123 a year ago. Earnings fell, due to a hedging charge related to the Two Harbors bidding war.

UWM also announced a $2.05 billion equity raise from Oaktree Capital Management and SFS Group Capital.

Mat Ishbia, Chairman, Chief Executive Officer and President of UWMC, said, “The second quarter was another quarter where we demonstrated the scale of our origination engine and industry leadership, as well as our continued commitment to serving the broker channel. I am also excited to announce our partnership with Oaktree. We’re taking decisive action to make UWM stronger, more liquid and better positioned to win for years to come. This is not just about capital. This is about bringing in a strategic partner that understands our business, understands MSRs, understands the mortgage industry and believes in the same long-term vision we have for UWM.”

UWMC has suspended its dividend. Previously the company had been paying a $0.10 quarterly dividend which implied a 20% dividend yield. The suspension versus a cut has spooked the Street, and the stock is down some 25% pre-open.

If there is one investing lesson out there as important as “buy low / sell high” it is Mortgage Banking Stocks Will Break Your Heart.

The ISM Services Index improved in July, driven by a 3.7 percentage point increase in the Business Activities Index. New Orders improved, however employment returned to contraction territory. The Prices Index also increased, which means firms are raising prices and seeing input inflation. Rising energy costs were the big driver here.

“Tariff impacts and the Middle East conflict continued to be mentioned by respondents, but much less frequently than in prior reports. The World Cup was again cited in the comments regarding increased business activity and new orders. Overall, the U.S. services economy continues to be resilient. Concerns still exist regarding mortgage and inflation rates, and we are still in the midst of pricing impacts due to the recent run-up in petroleum costs.”

Home price appreciation continued in July, according to the Clear Capital Home Data Index. Prices rose 2.1% on a quarterly basis and 1.9% annually. The hip-to-be-square trade continues, with Midwestern MSAs occupying a lot of the top spots (though Rochester NY continues to lead the pack), while Western MSAs dominate the lowest performers.

In the commentary, I talk about the homebuilders and why we new construction remains difficult despite strong demand from buyers. Sticks and bricks (i.e. building materials) aren’t the issue as much as land prices. Skilled labor remains in short supply.

Check out the Clear Capital blog for all sorts of good info.

Fed Governor Lisa Cook said she is “prepared to act” on a rate hike to address rising inflation. “Inflation is too high, and I consider the risks to the inflation side of the dual mandate higher than the risks to the employment side at this point,” Cook said during a speech in Anchorage, Alaska. “As such, I am prepared to act by raising rates, if necessary.”

Note she voted with the majority to maintain rates at the July meeting, so she would be an additional vote for a rate hike in September if things don’t change for the better.

“If I do not see signs of continued disinflation soon, I am prepared to act,” Cook said. “With five years of above-target inflation, the risk grows that higher inflation may become entrenched in price- and wage-setting behavior, leading to persistence that would be much harder for us to attack. The longer inflation is above target, the more likely this scenario becomes.”

The September Fed Funds futures see a 57% chance for a 25 basis point hike.

Stocks are higher this morning as oil and bond yields work their way lower. Bonds and MBS are up.

The private sector added 44.000 jobs in July, according to the ADP Employment Report. “Job-changers are highly sensitive to real-time economic conditions, and their rapid pay growth implies supply constraints in parts of the labor market. Typical hiring patterns, meanwhile, are changing as employers react to shifting macro-economic conditions.” FWIW, the Street is looking for 90,000 private payrolls in Friday’s jobs report.

Job stayers saw a 4.4% increase in pay while job switchers saw a bump of 7%.

Job openings slipped to 7.4 million from 7.5 million the month before. On a YOY they increased from 7.2 million. Trade / Transportation / Utilities and the financial sector saw the biggest increases. The quits rate, which tends to predict wage increases, was flat at 2.2%.

Minneapolis Fed President Neel Kashkari said “now is the time to start moving rates up.” “Corporate earnings are through the roof. They’re doing great. The consumer is hanging in there. The labor market is hanging in there. I look at this constellation and I say, what evidence do I have that monetary policy is particularly restrictive right now?” he told CNBS’s Andrew Ross Sorkin in a live interview from the Aspen Ideas Festival in Colorado.

“So, I argued now is the time to start slowly moving up as we get more data in,” he said. “I’m not calling for a dramatic increase in interest rates,” he said. “I’m simply saying I don’t see evidence of monetary policy is marginally restrictive right now, and I think we have more work to do to get inflation back down. And I would rather get going now in small steps than wait till later, then we have a really entrenched inflation problem and have to raise rates aggressively then.”

Non-QM continues to grow as lenders are finding investor demand insatiable for non-QM paper . For evolving originators/lenders, are you ready to move from non-delegated to delegated / bulk delivery?
If you’re prepared to take the next step , hedge your production with Eris SOFR Swap futures (“Eris SOFR”). Eris SOFR is being used to hedge non-QM pipelines so that mortgage companies can accumulate loans
while reducing interest rate risk and selling bulk for greater pay-ups.

Eris SOFR is the most efficient, cost-effective, and liquid way to hedge non-QM loans. Trading volume in June topped $100bn for the month, averaging around
50,000 contracts ($5bn) per day. July 8th featured an Eris SOFR “Royal Flush,” with trades recorded in every actively-quoted tenor on the swap curve from 1-year to 30-years. 

CME Group launched Eris Options – Options on Eris SOFR Swap futures – for CFO’s and Capital Markets teams that want to address volatile pull-through expectations. 

Mortgage applications fell 2.9% last week as purchases fell 4% and refis dropped 2%. “In the wake of the July FOMC meeting, longer-term rates increased, with mortgage rates reaching their highest level in more than a year, with the 30-year fixed mortgage rate rising to 6.81 percent,” said Mike Fratantoni, MBA senior vice president and chief economist. “Application volume for both refinance and purchase loans declined for the week, and are now running behind last year’s pace, indicating that higher mortgage rates have weakened overall demand.”

Homebuilder LGI Homes reported second quarter earnings of $1.16 per share, a decrease of 15%. Revenues rose 5.6%, while gross margins decreased from 23% to 20%.

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up.

Treasury Secretary Scott Bessent said there may be an announcement of a deal in the Middle East to allow shipping in the Strait of Hormuz today or tomorrow. “We are in talks with the Iranians,” Bessent told CNBC’s “Squawk Box.” “There is a chance we may have a deal today or tomorrow to open the strait and move towards a more normalized position in this conflict.”

“It would be freedom of movement,” Bessent said. “Even though things are still a little dicey there over the past few days, we saw quite a few ships coming out even now.”

“There are hundreds if not 1,000 ships sitting in there and waiting to go out,” he said. “It’s not just energy. It’s fertilizer, it’s refined products, it is the various industrial gasses. We could see a big relief trade as those prices go down.”

The manufacturing economy is humming, with the ISM Manufacturing report rising 2.3 points in July to hit the highest point in 4 years. The production index shot up 6.3 points to the highest since 2021, while new order increased as well. Even employment, which had been in contraction territory for nearly 3 years, expanded. Prices rose as well, which is bad news for those who want the Fed to maintain current interest rates.

“In July, U.S. manufacturing activity remained in expansion territory, growing at its fastest rate in more than four years. Of the five subindexes that make up the PMI^®, four grew faster compared to the previous month; the exception was the Inventories Index, which was down just 0.2 percentage point. Looking at the manufacturing economy, 20 percent of the sector’s gross domestic product (GDP) contracted in July, compared to 5 percent in June; however, no share of manufacturing GDP was in strong contraction (defined as a composite PMI^® of 45 percent or lower), compared to 3 percent in June. The share of sector GDP with a PMI^® at or below 45 percent is a good metric to gauge overall manufacturing weakness. Of the six largest manufacturing industries, four (Transportation Equipment; Machinery; Computer & Electronic Products; and Food, Beverage & Tobacco Products) expanded in July.”

Non-QM continues to grow as lenders are finding investor demand insatiable for non-QM paper . For evolving originators/lenders, are you ready to move from non-delegated to delegated / bulk delivery?
If you’re prepared to take the next step , hedge your production with Eris SOFR Swap futures (“Eris SOFR”). Eris SOFR is being used to hedge non-QM pipelines so that mortgage companies can accumulate loans
while reducing interest rate risk and selling bulk for greater pay-ups.

Eris SOFR is the most efficient, cost-effective, and liquid way to hedge non-QM loans. Trading volume in June topped $100bn for the month, averaging around
50,000 contracts ($5bn) per day. July 8th featured an Eris SOFR “Royal Flush,” with trades recorded in every actively-quoted tenor on the swap curve from 1-year to 30-years. 

CME Group launched Eris Options – Options on Eris SOFR Swap futures – for CFO’s and Capital Markets teams that want to address volatile pull-through expectations. 

Despite the massive boom in data centers, construction spending fell 0.1% MOM and 3.3% YOY in June. Residential construction was down 0.3% MOM and 4.7% YOY. As we saw from the homebuilder earnings reports, builders are concentrating on moving their inventory and buying back stock, not new construction.

JP Morgan announced a $750 billion commitment to affordable housing. This is through its American Dream Initiative, which was announced in March. This multi-year commitment hopes to build or preserve a million affordable housing units. They also intend to hire 850 new mortgage advisors and explore manufactured and modular homes as a new avenue.

“An affordable and resilient housing market is essential to driving economic growth and increasing opportunity,” said Michelle Herrick, Head of Commercial Real Estate for J.P. Morgan. “We’re focused on helping more people access quality housing they can afford—and we’re working across the real estate community, local governments, and nonprofits to scale housing solutions throughout the U.S.”

“Homeownership has always been at the heart of the American Dream. Owning a home can transform lives—providing stability, helping families build wealth, and creating a sense of community,” said Sean Grzebin, CEO of Chase Home Lending. “Our goal is to make the path to homeownership clearer and more accessible for more people, wherever they are in their financial journey.”

Stocks are higher this morning as talks resume in the Middle East. Bonds and MBS are up. Note that bonds are not taking the new talks too seriously. There is a Lucy and the football element to the whole thing.

The upcoming week will be dominated by the jobs report on Friday. We will also get ISM data, construction spending and productivity.

Next week is probably the biggest for earnings in general. In the real estate sector, we will get earnings from LGI Homes, Loan Depot, Zillow, MFA Financial, Rocket, Ellington Financial, United Wholesale, and Cherry Hill Mortgage.

We will also get comments from Lisa Cook, Alberto Musalem and Thomas Barkin.

Consumer sentiment improved in July according to the University of Michigan Consumer Sentiment Survey. The index improved 12% compared to June, however it is down 11% compared to a year ago. Pocketbook issues were more of an issue than the war.

Year-ahead inflation expectations decreased from 4.6% to 4.2%. Long run inflation expectations remained steady at 3.3%.

Minneapolis Fed President Neel Kashkari explained his dissent from last week’s FOMC meeting. He agrees that generally the Fed should “look through” supply shocks that temporarily trigger inflation. “But to manage against the risk that high inflation could become entrenched, I would rather tighten policy incrementally as we gather more data on the path of inflation and employment. If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary. On the other hand, if inflation durably fades, a strategy of small policy steps would allow the FOMC to slow or pause subsequent adjustments without unnecessary impact on the real economy.”

Non-QM continues to grow as lenders are finding investor demand insatiable for non-QM paper . For evolving originators/lenders, are you ready to move from non-delegated to delegated / bulk delivery?
If you’re prepared to take the next step , hedge your production with Eris SOFR Swap futures (“Eris SOFR”). Eris SOFR is being used to hedge non-QM pipelines so that mortgage companies can accumulate loans
while reducing interest rate risk and selling bulk for greater pay-ups.

Eris SOFR is the most efficient, cost-effective, and liquid way to hedge non-QM loans. Trading volume in June topped $100bn for the month, averaging around
50,000 contracts ($5bn) per day. July 8th featured an Eris SOFR “Royal Flush,” with trades recorded in every actively-quoted tenor on the swap curve from 1-year to 30-years. 

CME Group launched Eris Options – Options on Eris SOFR Swap futures – for CFO’s and Capital Markets teams that want to address volatile pull-through expectations. 

Reach out to John Douglas, Eris innovations Sales Director, at john.douglas@erisfutures.com for more information.

New condo lending rules take effect today for loans guaranteed by Fannie and Freddie. The new rules require greater scrutiny for maintenance (especially deferred maintenance), the financial stability of the condo association, and reserves. The net effect will make condo loans harder to get and they may take more time to get through the process.

Stocks are higher this morning despite US strikes on Iran overnight. Bonds and MBS are down.

As expected, the Fed maintained interest rates at current levels, but there were three dissents – Hammack, Kashkari and Logan. The statement was much more terse than what we have become accustomed to post the residential real estate bubble. The 10 year bond yield moved higher after the meeting, ending at 4.7%. Currently, the Fed Funds futures are leaning 2:1 towards a 25 basis point hike in September.

The press conference seemed to put investors on edge, with many now questioning Warsh’s commitment to reducing inflation. Warsh pointed out that the long end of the curve has risen since the June meeting, which acts as a tightening. The 30 year bond yield rose 11 basis points in the aftermath of the Fed meeting. The December Fed Funds futures see 1 hike this year as the most likely outcome followed by two.

Note a 3 vote dissent is quite rare.

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Non-QM continues to grow as lenders are finding investor demand insatiable for non-QM paper . For evolving originators/lenders, are you ready to move from non-delegated to delegated / bulk delivery?
If you’re prepared to take the next step , hedge your production with Eris SOFR Swap futures (“Eris SOFR”). Eris SOFR is being used to hedge non-QM pipelines so that mortgage companies can accumulate loans
while reducing interest rate risk and selling bulk for greater pay-ups.

Eris SOFR is the most efficient, cost-effective, and liquid way to hedge non-QM loans. Trading volume in June topped $100bn for the month, averaging around
50,000 contracts ($5bn) per day. July 8th featured an Eris SOFR “Royal Flush,” with trades recorded in every actively-quoted tenor on the swap curve from 1-year to 30-years. 

CME Group launched Eris Options – Options on Eris SOFR Swap futures – for CFO’s and Capital Markets teams that want to address volatile pull-through expectations. 

Reach out to John Douglas, Eris innovations Sales Director, at john.douglas@erisfutures.com for more information.

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Personal incomes rose 0.2% MOM and personal consumption expenditures (spending) rose 0.3%. The spending and income numbers were a touch below expectations. The PCE Price Index fell 0.1% MOM and rose 3.7% YOY. The core rate rose 0.1% MOM and 3.3% YOY.

PennyMac reported second quarter earnings of $1.39 per share. Production volume fell 8% YOY to $34.9 billion. Correspondent volume decreased while direct-to-consumer increased. Margins increased from 55 basis points to 77 basis points.

Stocks are higher this morning as we await the Fed decision. Bonds and MBS are down.

The FOMC decision is due at 2:00 pm this afternoon. Be careful locking around that time.

Iran fired missiles at US forces in Jordan overnight. The missiles were intercepted in the desert and there were no casualties.

Home prices rose 1.1% YOY in May, according to the Case-Shiller Home Price Index. Chicago led the charge with a 6.9% increase in prices. New York and Cleveland were leaders as well. Lost Wages brought up the rear, declining 1.9%. Home price appreciation continues to lag inflation and wage growth, which means that home prices are declining in real terms.

“The geographic dispersion of home price trends continues to persist,” Kaufman continued. “While major metropolitan areas in the Northeast and Midwest recorded year-over-year gains exceeding the national average, many metropolitan areas in the West and Sunbelt regions remain under pressure. This divergence may reflect shifting post-pandemic housing dynamics, including a growing return-to-office mandate that appears to be supporting traditional urban markets.

Affordability remains a significant headwind for the housing market,” Kaufman concluded. “Thirty-year mortgage rates increased to 6.5% in May, leaving the ultra-low 3% borrowing costs a distant memory. At the same time, stubbornly high inflation rates are keeping both the cost of home financing and the cost of living high for prospective buyers. Against this backdrop, housing demand remains constrained, elevated borrowing costs continue to discourage potential homebuyers, and housing values decline in real terms for existing homeowners.”

Separately, the FHFA House Price Index reported prices rose 2.2% on a YOY basis.

Consumer confidence edged down in July, according to the Conference Board. “Consumer confidence moderated slightly in July, continuing a general downward sloping trajectory since late 2021,” said Dana M Peterson, Chief Economist, The Conference Board. “The Present Situation Index was less positive for a third consecutive month while the Expectations Index remained in negative territory. Consumer appraisals of current business conditions and, to a lesser extent, perceptions of the current labor market both softened. Looking ahead, consumers anticipate little improvement in business conditions over the next six months, but expectations for the labor market were slightly less negative. Expectations for household incomes moderated but remained optimistic overall.”

Despite the decline in expectations, consumers are still increasing spending plans, particularly on durable goods and services / entertainment (like dining out). The only area they see declining is streaming, internet and mobile services.

Mortgage applications fell 6.4% last week as purchases fell 4% and refis fell 10%. Blame the spike in oil prices. “Following last week’s spike in oil prices, mortgage rates moved higher, with the 30-year fixed rate increasing to 6.76%, the highest rate since August 2025,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “This upward trajectory in rates continues to significantly impact refinance borrowers, with a 10 % decline in refinance applications, including a steeper drop in government refinances. Despite housing inventory increasing in certain markets, higher rates have added to ongoing affordability challenges for many homebuyers, which drove the decrease in purchase activity over the week.”

Rithm Capital reported earnings of $0.04 per share, a sizeable decline from the $0.12 it reported last year. New Rez originated $15.9 billion in volume during the quarter, which was a 3% decline from a year ago. Genesis, the residential transition loan arm, originated $1.9 billion. This was up 52% compared to a year ago. It looks like a negative mark-to-market hit on the MSR portfolio was a big driver of the negative YOY comparison.

Stocks are lower this morning as we begin the July FOMC meeting. Bonds and MBS are up small.

The FOMC meeting begins today and the Fed Funds futures have a 36% chance of a rate hike:

The uncertainty is wider than is typical before a Fed meeting, and that may be by design: Warsh is much more of a throwback to the days pre-2008 when the Fed said much less. The dot plot, the inflation target were all reactions to the persistent deflation we saw in the aftermath of the real estate bubble.

Prior to that, the Fed’s main experience was fighting inflation from the 1960s through the 1980s. Economic theory says that monetary policy will be more effective if the market doesn’t have a chance to pre-load its reaction to rate hikes or cuts. Elmer Fudd’s inscrutable answers that said absolutely nothing were legendary.

Warsh is taking a step back towards normalcy and away from the emergency measures put in place during the Bernanke / Yellen era and that is probably the right call. Deflation is not a risk any more.

Durable goods orders increased 0.3% MOM in June according to the Census Bureau. Computers and electronics (presumably associated with data centers) drove the increase. If you strip out transportation orders rose 0.6%. If you strip out transportation and defense they rose 0.3%.

Redwood Trust reported earnings of ($0.03) per share and earnings available for distribution of $0.15. Mortgage banking production topped $8 billion in volume which was more than double last year.

Aspire gain on sale (big part of the growth) came in at 101 basis points. Sequoia gain on sale was 92 bps.

Speaking of mortgage bankers, has anyone been paying attention to the swan dive in United Wholesale? The stock has been crushed over the past year, falling from $9.49 a share to $1.84. I guess the bidding war for Two Harbors took its toll.

Assuming the company doesn’t cut its $0.10 quarterly dividend, it has a yield of over 20%. Mat Ishbia holds most of the stock, so the dividend is really him paying himself. But that chart is ugly.

Stocks are higher this morning as fighting pauses in the Middle East. Bonds and MBS are up.

The US and Iran have paused fighting to give peace talks “space.” Iran has been getting pressure from China to give diplomacy a chance. The Saudi military conducted strikes against Houthi rebels in Yemen after they started firing on Saudi tankers in the Red Sea.

The week ahead will be dominated by the FOMC decision on Wednesday. The markets are leaning towards no change in the Fed Funds rate, but that is no sure thing.

Aside from the rate decision we will get retail sales, and the personal incomes / outlays report which contains the PCE Price Index.

We will get earnings from Rithm Capital, Redwood Trust, Meta, Microsoft, Ares Capital, Apple, Amazon, Blue Owl, Exxon and Chevron.

New home sales fell 5.6% YOY to a seasonally adjusted annual rate of 628,000 units. This was up 1.8% from May. At the end of June there were 485,000 homes for sale, which represents 9.3 months worth of inventory. The median sales price was 398,300, a 3% decrease YOY. New homes remain cheaper than existing ones.

New default activity fell on a YOY basis, led by FHA loans. Overall delinquency rates rose modestly, in line with seasonal activity. Late stage delinquencies fell to a six-month low.

“Overall performance remained strong in June,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “Early-stage delinquencies remain subdued, and while serious delinquencies including foreclosures have reached pre-pandemic levels, new default activity has leveled off in recent months — a positive sign. New FHA defaults, which have been a focal point of market attention, were down 15% year over year in June. These trends are encouraging, even as the market continues to warrant close monitoring.”

“High levels of homeowner equity continue to strengthen the market and help many distressed borrowers avoid foreclosure,” said Bob Hart, President of Mortgage Technology at ICE. “Still, early foreclosure activity bears watching, making timely data and proven servicing tools more important than ever. ICE’s McDash loan-level performance data is relied upon by many of the industry’s leading participants to monitor portfolio performance and model default risk, while our Loss Mitigation solution helps servicers improve borrower outcomes by executing workout strategies more efficiently while supporting compliance.”

Business activity hit an 8-month high in July according to the S&P Flash PMI. This was led by services, where activity hit an 8-month high, partially driven by the World Cup activity. Manufacturing fell, as supply chain disruptions and higher input prices dampened sentiment.

Input price inflation rose to the highest level since May 2025, driven by the Middle East. Selling prices also increased.

US businesses reported a good start to the third quarter, the ‘flash’ PMI survey data broadly consistent with GDP growing at an annualized 2.0% against a 1.2% pace signalled for the second quarter. The month saw an encouraging return to hiring by companies, with employment rising for the first time in three months.

However, some of this improvement may prove short lived as July saw hospitality spend boosted by the FIFA World Cup and USA 250 anniversary activities. It was also worrying – though not unexpected – to see manufacturing growth weaken as some of the stock building seen in prior months showed signs of fading. Instead, July saw a concerning intensification of supply chain delays and accompanying renewed upturn in price pressures, constraining growth and subduing demand.

Events over recent days in the Middle East will have only further exacerbated these supply chain and price worries and raise downside risks to the near-term outlook for the economy, hinting that July’s upturn may not be the start of an improving trend.

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up small.

After the Supreme Court blocked Trump’s ability to impose tariffs without Congressional approval in February, the administration imposed new temporary tariffs under a different legal rubric. Those tariffs expire today, although it looks like the Admin will impose 10%-12% tariffs on everybody using the justification of cracking down on forced labor. Unfortunately, at least for those who want lower interest rates, this will probably withstand legal scrutiny.

The MBA released their latest mortgage forecast. They took down their estimate for 2026 origination from $2.17 trillion to $2.16 trillion. 2027 and 2028 estimates were unchanged. They still see mortgage rates at 6.5% through the forecast period.

The Chicago Fed National Activity Index improved in June, rising from -0.19 to -0.02. Consumption and sales growth were positive contributors while employment and production indicators were a drag. The CFNAI is sort of a meta-index of some 79 different economic indicators.

One of the most visible issues with housing affordability has been the paucity of starter homes. Realtor.com estimates that there are about 300,000 fewer starter homes on the market than there were pre-pandemic. Over the past 7 years, the typical starter home price has risen from $256,000 to $344,000. The Northeast has the biggest shortage of starter homes, while the South is in better shape.

As we heard from D.R. Horton, starter homes are where the action is for the builders. Typically an existing home trades at a discount to a new home given depreciation, etc. The median price of a new home is more or less the same as an existing home these days which is a rarity. Much of this represents product mix as builders deemphasize luxury and focus on smaller, more affordable homes. Historically, a new home has had a 20% premium.

One thing to keep in mind is that many of the big builders have mortgage origination arms which can offer a much lower mortgage rate than a typical banker. Builders have been “promotional” in order to sell inventory and promotion means price cuts. Builders are loath to cut sales prices because that feeds into the comps which will lower the value of the other homes in the same development. Instead, they offer free upgrades (better appliances etc) or they can offer a sub-market rate mortgage to sweeten the deal. First time homebuyers should take this into account as it can make a big difference in the monthly payment.

Homebuilder NVR reported earnings per share decreased 23% on a YOY basis. Revenues declined 16%. That said new orders increased. NVR has more exposure to luxury than most publicly-traded builders, so this area is struggling. The rate lock-in effect is probably playing a big part here, as move-up buyers are not only trading up for a more expensive home, they are swapping a 3.5% rate for one much higher.

The homebuilders have been trading in a range as we await lower interest rates:

Stocks are lower this morning after the Houthis attack shipping in the Red Sea. Bonds and MBS are down. Market bellwethers Tesla and Google are weighing on the market.

The European Central Bank decided to keep rates unchanged but signaled a September rate hike is a possibility.

The Houthis are claiming they attacked two Saudi tankers in the Red Sea, although this hasn’t been confirmed. The UK reported that a projectile hit one of the tankers, causing a fire but no casualties. Meanwhile the US continued to hit targets in Iran and Trump is threatening to hit Iranian power plants and bridges if Iran continues to attack shipping in the Strait of Hormuz.

The increase in oil prices has the Fed Funds futures bumping up their forecast for a rate hike next week. The futures are now predicting a 36% chance of a 25 basis point increase. The December futures now see 2 rate hikes as the most likely outcome this year.

Homebuilder Pulte reported second quarter earnings of $2.48 per share compared to $3.03 in the same quarter a year ago. Revenues fell 11% due to a 8% drop in unit volumes and a 3% decline in ASPs. “Overall, market conditions remain highly competitive as macroeconomic uncertainty, volatile interest rates and strained affordability weigh on housing demand, but there are early signs that conditions may be stabilizing in select geographies around the country. Within this operating environment, we continue to execute focused, tactical adjustments as we work to balance price and pace within each community in support of delivering high returns across the enterprise.”

Gross margins increased 60 basis points sequentially but fell 200 on a YOY basis. New orders increased 6% overall and 5% for the first time homebuyer. On the earnings conference call, the company said that we are seeing stabilization and improvement in many MSAs that had been struggling:

Yes, John, we highlighted some of it in the prepared remarks. In all of our 5 regions that we report on, we saw positive year-over-year growth in 4 of them, the West being the one that I think is probably still the softest. Specific to the 4 where we saw some stabilization and I think some positive signs, I would definitely call out some of the Midwest markets. We continue to see strength there. We’re also seeing some favorable trends out of the Southeast markets.

We particularly like what’s going on in the coastal Carolinas markets in Greenville. And then look, I’ve got to highlight Florida again. Florida was up 19% year-over-year and a continuation of a theme that we’ve talked about for the last couple of calls, we’ve got great operating teams there and good assets, and we’re seeing nice performance there. I’m also encouraged by what we’re starting to see in Texas. I’m not ready to declare victory there, but the fact that we saw positive year-over-year orders, I think, is a good sign.