Homebuilder sentiment fell to a nine-month low in October, the latest indication of the toll on residential real estate from soaring mortgage rates and declining affordability.

Inflation and economic growth…  Regardless of our thoughts on the underlying reasons, these two factors have played a key role in skyrocketing rates over the past few years.  The Fed won’t signal an end to its “higher for longer” rate policies until it sees lower inflation combined with a cooler economy. Today’s Retail Sales data, albeit for the month of September, says the economy is anything but cooler.  In fact, there were broad-based gains in all of the biggest sectors of the report.  It was also the 3rd month in a row that inflation-adjusted Retail Sales were in positive territory and each month has been stronger than the last in that regard. From an economic standpoint, stronger retail sales are good.  Unfortunately, that strength raises concerns about recent improvements in the inflation outlook.  Many at the Fed feel that it will be hard to tame inflation if the economy continues generating numbers like this. As such, the bond market’s response was no surprise.  Bond yields spiked immediately after the data came out.  MBS (the mortgage backed securities that directly dictate mortgage rates) were simply along for the ride.  Given that we were already fairly close to multidecade highs yesterday, that unpleasant ceiling was easily broken today.  The average lender is up to 7.92% for a top tier conventional 30yr fixed scenario.  That means many borrowers are already seeing 8% or higher.  Conversely, rates in the mid 7s are still a thing, but mainly for scenarios with substantial upfront discount points.

Strong Retail Sales Data and Logical Consequences

Today’s morning commentary may as well be the recap.  Very little happened that hadn’t already happened right out of the gate this morning.  In case you missed it, that involved sharply stronger Retail Sales data and a logical bond market reaction.  Not only did the most current data crush the forecast, but last month was revised another 0.2 higher as well.  Internal components were even stronger than the headline, and inflation-adjusted sales logged their third straight month in the black–each stronger than the last.  Yields shot higher immediately and stayed in the same, terrible range all day.  MBS tanked and mortgage rates hit new multidecade highs.  This too shall pass, but it didn’t start passing today.

Econ Data / Events

Retail Sales

0.7 vs 0.3 f’cast
last month revised up 0.8 vs 0.6

Excluding Autos

0.6 vs 0.2

Excluding Autos, Gas, Building Materials

0.6 vs 0.1 f’cast

NAHB Builder Confidence

40 vs 44 f’cast, 44 prev

Industrial Production

0.3 vs 0.0 f’cast, 0.0 prev (revised from 0.4)

Market Movement Recap

08:44 AM Steadily weaker overnight with additional selling after Retail Sales.  10yr up 9.6bps at 4.796.  MBS down half a point.

01:12 PM Broadly flat after additional weakness into the 10am hour.  MBS down just over half a point and 10yr up 13.4bps at 4.834

03:54 PM Little changed since the last update.  MBS still down half a point to 5/8ths depending on the coupon.  10yr up 13.4bps at 4.834 after a few ups and downs over the past 2 hours. 

In addition to looking at economic data, the Fed also gets an earful from their “contacts” in the community.  One would have to assume that those contacts weren’t sounding the alarm too much in the run up to the September Fed meeting (the one with the scary dot plot).  Markets quickly began repositioning for “higher for longer” after that.  In addition, the key economic reports that followed have corroborated that stance to an uncanny degree (much higher NFP, core services inflation at 0.6% m/m, etc).  Now today’s Retail Sales data adds itself to that list.
Sales came in at 0.7 vs 0.3 forecast with last month’s 0.6 being revised up to 0.8.  There aren’t really any great “yeah buts” to poke holes in the upbeat economic message.  The composition of spending indicates an upbeat consumer.  The top 5 spending categories were all substantially higher.

The market reacted logically with a quintessential “Fed implications” pattern.  Specifically, stronger data makes the Fed more likely to leave rates higher for longer, thus hurting both stocks and bonds (note: stocks subsequently bounced back).

Talk in the hallways here at the MBA Annual in Philly? How about the cost of insurance of all types. Case in point: “What Happens When the Flood Insurance Market Goes Underwater?” The NAR commission legal issues are a big, big deal, possibly impact real estate agents’ commission structure. The cost of credit will be going up, with the evening up of tiers: ask your CRA about it. Buybacks (repurchases) have been a problem for months. Several sales managers have told me that a new reason to touch base with previous clients, besides asking about outstanding 30 percent credit card debt, is LOs reminding previous borrowers about investing their money in a money market or Treasury Direct account and earning 5 percent. The CFPB’s attention, as well as that of other regulators, is on redlining, and we can expect to see fines and penalties due to that. (Today’s podcast can be found here: Sponsored by nCino, maker of the nCino Mortgage Suite, built for the modern mortgage lender. The nCino Mortgage Suite unites the people, systems, and stages of the mortgage process. Hear an interview with Better CEO Vishal Garg and CFO Kevin Ryan on the industry’s inexorable march toward technology, their company’s recent financials, and what they have learned in this market cycle.) Lender and Broker Software, Products, and Services Transactional lenders are being eclipsed by those offering better borrower experiences and an advisory approach to lending. Today’s nine-figure producers are topping the charts with modern, tailored experiences that resonate with clients on a deeper level. Are you ready to transform your mortgage lending game and achieve exceptional volume and profitability? Join TrustEngine on Wednesday, October 25 at 2 pm ET for Part 2 of our Path to Profitability webinar series, where Ben Miller, Ben Miller, EVP, U.S. Mortgage at nCino, and Dave Savage will delve into consultative selling and tech strategies that drive long-term success. Register now to grab a front row seat.

Stubbornly high mortgage rates further eroded home builders’ confidence in the new home market in October. Not only did the National Association of Home Builders (NAHB) report that the NAHB/Wells Fargo Housing Market Index (HMI) dropped 4 points this month , but the index for September was revised down an additional point. After its third consecutive monthly retreat, the HMI is now at 40, the lowest point since January 2023. Robert Dietz, NAHB’s chief economist said builders are encountering dual issues. Buyers, particularly younger ones, are being priced out of the market by interest rates that have remained above 7 percent for two months.  Additionally, elevated rates are also increasing the cost and decreasing the availability of builder development and construction loans, which harms supply and contributes to lower housing affordability. Derived from a monthly survey that NAHB has been conducting for more than 35 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. All three major HMI indices posted declines in October. The HMI index gauging current sales conditions fell 4 points to 46, the component charting sales expectations in the next six months dropped 5 points to 44 and the gauge measuring traffic of prospective buyers dipped 4 points to 26.

Expected income earned through rental of the units will be considered in underwriting for FHA-backed mortgages and rehabilitation loans.

While the latest change applies specifically to COVID forbearances, the agency is looking at more options for alternatives that can be offered on a regular basis, Director Sandra Thompson said.

The bank argues federal law preempts a New York state statute requiring at least 2% interest payments on borrowers’ accounts.

Federal Reserve Bank of Philadelphia President Patrick Harker said higher interest rates are making it more challenging for first-time home buyers by raising borrowing costs and limiting inventory, which is also leading to higher home prices