Stocks are higher this morning on no real news. Bonds and MBS are flat.
J.D. Vance yesterday admitted the Iran War was a big factor in the midterm losses (no kidding) and that admission sent oil down about 10%. This also pushed down global sovereign yields. Not sure how durable this move is, but it is certainly welcome.
There still isn’t a satisfying reason for why rates spiked so much in September and early October. It was a global move, not limited to the US. Regardless of the catalyst it didn’t last. The September sell-off in bonds has been largely re-couped.
It looks like the closing yield topped out around 5.33% on October 5. The Economist reliably marked the top of the market with this cover:
Despite the move down in yield, mortgage rates remain stubbornly high. MBS spreads have remained wide despite a marked downward move in bond market volatility which drives MBS spreads. Maybe it is just lagging more than usual. Regardless, falling Treasury rates and declining bond market volatility will lead to lower mortgage rates.
At the end of August, the difference between the 30 year fixed rate mortgage and the 10 year bond was 198 basis points. If we return to that spread with rates at these levels, we are looking at a 6.87% mortgage rate.
The Services PMI declined in October, driven by a decline in new orders. Employment increased and price appreciation decelerated from September. That said, the diffusion reading of 70 is still a historically high number.
“Tariffs and fuel cost impacts continued to be the most-cited issues impacting respondents’ supply chains, while many respondents indicated they are not yet seeing the full impact of these cost escalations or have not passed them through to customers. This indicates that more pricing pressure is on the way if oil and tariff cost impacts are not mitigated, even if they do not increase from current levels. Commentary on supply chain constraints increased significantly month over month, while the Backlog of Orders Index increased to 58 percent, its highest reading since it registered 58.3 percent in July 2022. The commodities identified as in short supply, however, decreased month over month, from seven to three. The Employment Index’s second consecutive reading above 50 percent may indicate help is on the way for slowing supplier deliveries and increasing order backlogs. While the Backlog of Orders index hit its highest level since July 2022, the Supplier Deliveries Index reading in October is the second highest in that timeframe, exceeded only by April 2026 (56.8 percent).”
Data center construction is going to slow down. The midterms demonstrated increasing political pressure on them and financing costs are rising. Decreasing data center construction will help improve the situation in commodities.
UWM reported earnings of 9 cents a share after suffering a MSR hedging loss in the the second quarter that dragged down earnings. Volume fell 20% YOY to $33 billion. Gain on sale margin also declined from 1.33% to 1.24% on a quarterly basis.
The results for the homebuilders were largely dismal for the third quarter as affordability issues, oversupply and rising costs depressed margins and volumes. Know who didn’t have issues in Q3? Champion Homes, who builds manufactured and modular homes.
Champion reported revenues rose 6.2% while margins remained strong at 25.5% Average selling prices rose 4.1% to $102,700. Modular homes are built to similar standards to sticks and bricks homes and are much more affordable.
“We delivered strong results in our second quarter that were in line with our expectations,” said Tim Larson, President and Chief Executive Officer of Champion Homes. “Our team’s focused execution against our strategic priorities enabled us to outperform the housing market in the quarter and build meaningful order momentum. From a product and regulatory perspective, our team flawlessly executed and delivered our two-story home, the New Horizon, to the National Mall for Homes on the Hill in September. This innovative home, which was built to the HUD Code, features a removed second-floor chassis and is designed for vertical construction in narrow urban infill lots offering a unique solution for attainable housing. In addition to delivering new and innovative products, we continue to drive long-term growth across our business, including in our retail channel through the recently announced planned acquisition of Timberline Homes.”
Modular homes will be a crucial part of addressing the affordabilitiy issue.
