Elevated Mortgage Rates Pressure Sales and Builder Margins
Key Questions
Why did mortgage rates dip recently?
Mortgage rates fell to 6.28% following weaker-than-expected June jobs data, after holding steady near 6.49-6.59% for six weeks. The Fed kept rates at 3.50-3.75% and markets now expect the next hike in September.
How have new home sales performed amid higher rates?
New home sales dropped 7.3% month-over-month to an annualized 580K rate, with 10.3 months of supply. Permits also declined 0.9%, reflecting pressure from elevated mortgage rates.
What is the current level of builder sentiment and why?
Builder sentiment has remained stuck at 35 for 14 months due to high mortgage rates, rising construction costs, and the need for pervasive incentives that squeeze margins.
How are homebuilder stocks and earnings faring?
Homebuilder stocks have underperformed with earnings estimates revised down 18% year-to-date according to BofA. Construction costs rose 8% YTD, adding further margin pressure.
What does the data show about mortgage demand?
Purchase applications are up 3% year-over-year for three straight months while the ARM share has fallen to 7.6%. Overall mortgage demand has held steady despite affordability challenges.
Are there signs of improving housing affordability?
UHERO data shows modest affordability gains but conditions remain severe. First American estimates 5 million missing sales from the lock-in effect, with gradual recovery expected as rates ease.
What happened to U.S. construction spending in May?
Total construction spending edged up 0.1% month-over-month but fell 1.5% year-over-year. Single-family spending declined 0.1% MoM and 4% YoY.
How are specific markets like Houston affected by these trends?
Houston, a major homebuilding center, shows signs of cooling despite its strong activity levels. Broader national pressures from rates and costs are weighing on local sales and builder performance.
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.