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:
