Elevated Mortgage Rates Pressure Sales and Builder Margins
Key Questions
What caused mortgage rates to dip recently?
Mortgage rates fell to 6.28% following weaker-than-expected June jobs data, after holding between 6.49% and 6.59% for six weeks. The jobs miss shifted market expectations for the next Fed rate hike to September.
How did new home sales perform in the latest report?
New home sales declined 7.3% month-over-month to an annualized rate of 580K, resulting in 10.3 months of supply. This reflects pressure from elevated mortgage rates on buyer demand.
What is the current state of builder sentiment and margins?
Builder sentiment has remained stuck at 35 for 14 consecutive months amid rising construction costs and pervasive incentives. BofA reports show earnings estimates down 18% as costs rose 8% year-to-date.
Why are there an estimated 5 million missing home sales?
First American attributes the shortfall to the lock-in effect, where homeowners with low-rate mortgages are reluctant to sell. A gradual recovery is expected as rates stabilize near 6% by the end of 2026.
What do recent data show about mortgage demand?
Purchase applications rose 3% year-over-year for three straight months while the ARM share dropped to 7.6%. Overall mortgage demand remained steady despite higher rates.
How are listing prices and pending sales trending?
Listing prices posted record declines as sellers priced more realistically, which helped lift pending sales. This shift is easing some affordability pressures for buyers.
What does the BofA survey reveal about buyer sentiment?
53% of respondents now favor buying a home, yet 71% are still waiting for lower rates. This highlights a gap between improving sentiment and actual market behavior.
How did May construction spending change?
Total construction spending edged up 0.1% month-over-month but fell 1.5% year-over-year. Single-family spending declined 0.1% month-over-month and 4% year-over-year.
Fed held rates at 3.50-3.75% at Warsh's first FOMC; markets had priced in two rate hikes but weak June jobs (57K vs 115K) pushes next hike to September. Mortgage rates dipped to 6.28% after the jobs miss, after holding at 6.49-6.59% for six weeks. New home sales fell 7.3% MoM to 580K annualized (10.3 months' supply). Permits down 0.9%. Construction costs accelerating 9.6% YoY but RLB Q2 2026 East report shows stabilization (4-5% annual growth in major metros). Builder sentiment stuck at 35 for 14 months. Builder margins under pressure with pervasive incentives. BofA midyear report: homebuilder stocks underperforming, earnings estimates down 18%, construction costs up 8% YTD. Listing prices posting record declines, but pending sales up—sellers pricing realistically. Mortgage demand steady: purchase apps up 3% YoY for three consecutive months, ARM share dropping to 7.6%. First American: 5 million missing sales due to lock-in effect, gradual recovery thesis. NAHB's Dietz forecasts rates near 6% by end of 2026. BofA survey shows 53% now favor buying, but 71% still waiting for lower rates—tension between sentiment and reality. TransUnion report identifies mortgage-ready renters in small Midwest markets as hidden demand hotspots. Core PCE at 3.4% confirms sticky inflation. May construction spending up 0.1% MoM, down 1.5% YoY; single-family down 0.1% MoM, 4% YoY. Milliman Q1 2026: purchase apps up 11% YoY, new home sales down 3% YoY, starts down 9%, refinance surge 132%, lender profitability positive ($727/loan), delinquencies rising to 4.5% due to FHA policy change. UHERO affordability measure shows improvement but still severe.