All Things in Moderation

Vital Statistics:

Stocks are higher this morning on optimism over trade deals. Bonds and MBS are down.

Following on the heels of a deal with Japan, the EU and the US appear to be close to a framework as well. This should help prevent the tit-for-tat trade spats, which add to uncertainty in the markets.

Existing home sales fell 2.7% to a seasonally adjusted annual rate of 3.93 million units. On an annual basis, existing home sales were flat.

“The record high median home price highlights how American homeowners’ wealth continues to grow—a benefit of homeownership. The average homeowner’s wealth has expanded by $140,900 over the past five years,” said NAR Chief Economist Lawrence Yun.

“Multiple years of undersupply are driving the record high home price. Home construction continues to lag population growth. This is holding back first-time home buyers from entering the market. More supply is needed to increase the share of first-time homebuyers in the coming years even though some markets appear to have a temporary oversupply at the moment.”

“High mortgage rates are causing home sales to remain stuck at cyclical lows. If the average mortgage rates were to decline to 6%, our scenario analysis suggests an additional 160,000 renters becoming first-time homeowners and elevated sales activity from existing homeowners,” Dr. Yun continued.

“Expanding participation in the housing market will increase the mobility of the workforce and drive economic growth. If mortgage rates decrease in the second half of this year, expect home sales to increase across the country due to strong income growth, healthy inventory, and a record-high number of jobs.”

The supply situation has improved, and the market is more in balance. Inventory hit 1.36 million units, the highest since 2019. That said, inventory is still roughly 21% below pre-pandemic levels. “The shift to a ‘neutral’ market is significant, but it shouldn’t be mistaken for a universally cool or easy market for buyers,” Zillow Senior Economist Kara Ng said. “While negotiating power is more balanced, the affordability crisis remains a high barrier to entry, especially for first-time buyers. Until we see a more meaningful improvement in purchasing power, this newfound balance will primarily benefit more well-off buyers.”

The Trump Administration is considering reducing or eliminating capital gains taxes on home sales in order to boost the housing market. Currently, people selling their primary residence can exclude the first $250,000 from capital gains taxes ($500,000 for couples) but this number is not tied to inflation and hasn’t been updated since introduced in 1997.

Note this would only affect primary residences – investors will still pay the tax.

The Trump Administration has a long list of candidates to replace Jerome Powell. Treasury Secretary Scott Bessent said that the Administration is in no hurry to announce a replacement. Some of the names being considered are Kevin Warsh, Chris Waller, and Kevin Hassett.

In an interview, Scott Bessent reiterated the statement that Trump has no intentions of firing Jerome Powell.

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Vital Statistics:

Stocks are higher as earnings continue to come in. Bonds and MBS are up.

Housing starts increased to a seasonally-adjusted annual rate of 1.32 million, which was above the consensus estimate. This was a 4.5% increase from May, however it was a 0.5% decline from a year ago. Building Permits rose 0.2% MOM to 1.39 million, however this was a 4.4% decrease from a year ago.

Housing completions fell markedly – decreasing 14.7% MOM and 24.1% YOY to 1.31 million.

Multifamily starts jumped 26% YOY, while single family starts fell 10%. Builders had prioritized multifamily for years, and this trend had been reversing in the past year. It looks like June was a lurch back to the post-COVID trend of more multi construction.

CRE investors had been waiting for a pullback in multifamily performance (we had a deluge of supply post-pandemic), but performance has held up. Perhaps more investment dollars are flowing back into the multi space.

Builder confidence improved in July, according to the NAHB. We are still plumbing the depths we saw in the post-COVD era however. Builders are going to be impacted by tariffs, although the cost is expected to be in the 1% – 2% range.

Affordability constraints prevent them from being able to pass these on to buyers, so we are seeing gross margins fall.

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Vital Statistics:

Stocks are higher this morning despite trade tensions. Bonds and MBS are down small.

We have a $39 billion 10-year auction this afternoon, along with the Fed minutes at 2:00 pm. We could see some movement in rates surrounding these events.

Donald Trump is threatening to impose 50% tariffs on copper and a potential 200% tariff on pharmaceuticals if several countries don’t agree to a deal. “We will be releasing a minimum of 7 Countries having to do with trade, tomorrow morning, with an additional number of Countries being released in the afternoon,” he posted on Truth Social late Tuesday. That said, these tariffs won’t go into effect for a year, in order to give companies time to re-shore their businesses in the US. Copper futures soared on the news, however they are giving back some of these gains.

The tariffs on Japan and South Korea won’t be as impactful as feared since they exempt electronics. Overall, market sentiment seems to be taking the issue in stride, and is confident that some sort of deal will be reached.

Of course this isn’t going to be great for the mortgage and real estate market since it gives the Fed the excuse to maintain an inappropriately tight monetary policy given the current economic numbers.

Inflationary expectations remain well-anchored, according to the New York Fed’s Survey of Consumer Expectations. The one-year ahead estimate fell 0.2% to 3%, while the 3 year estimate was unchanged at 3%. The 5 year remained at 2.6%. If you look at a long-term graph, we are pretty close to historical averages:

When the Fed talks about “inflationary expectations remaining well-anchored” the above graph is what they are talking about.

Lost in all of the current inflation discussion is that the real Fed Funds rate has been increasing since Trump took office. This is because the Fed Funds rate has been static, while inflation has fallen. The chart below shows that the real Fed Funds rate (FF effective rate minus core CPI) has risen from 1.04% to 1.56% since January.

Mortgage applications rose 9.4% last week as purchases and refis rose by the same amount. Last week included an adjustment for the 4th of July. “Mortgage rates moved lower last week, with the 30-year fixed rate decreasing to 6.77 percent, its lowest level in three months. After adjusting for the July 4th holiday, purchase applications increased to the highest level of activity since February 2023 and remained above year-ago levels,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Homebuyer demand is being fueled by increasing housing inventory and moderating home-price growth. The average loan size on a purchase application, at $432,600, was at its lowest since January 2025. The refinance index also increased over the week, with VA refinances in particular up 32 percent.”

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