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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Vital Statistics:

Stocks are higher this morning after the the Trump Administration announced a trade deal had been struck with China. Bonds and MBS are down small.

The Trump Administration announced a “signed” trade deal with China late last night, and Treasury Secretary Scott Bessent said that deals are “imminent” with 10 other trade partners. “We just signed with China yesterday,” Trump said during an unrelated event at the White House, though he did not provide further details. China said “both sides have confirmed further details on the framework.” The deal includes a commitment from China to sell rare earth metals to the US.

Here is an interesting graph of historical tariff rates in the US:

Kind of makes the whole thing look like a tempest in a teapot, doesn’t it?

Personal incomes fell 0.4% in May according to the BEA. The decrease was primarily attributable to a decrease in government social benefits. Personal outlays (i.e. spending) decreased 0.1%, which was primarily attributable to a decrease in spending on autos. The personal savings rate decreased a touch to 4.5%.

The all-important PCE Price Index rose 0.1% MOM and 2.3% YOY. This was in line with expectations. The core PCE Price Index rose 0.2% MOM and 2.7% YOY. The core index was a touch hotter than expectations, but it showed no major uptick due to tariffs.

Goods inflation (the area where you would most expect to see indications of tariff inflation) increased to 0.1% on a YOY basis, compared to the previous month where goods inflation fell 0.4%. Durable goods inflation rose 0.5% YOY while non-durable goods inflation fell 0.2%. Shelter inflation rose 0.3%, and appears to remain one of the bigger (albeit decreasing) drivers of inflation.

The increase in core PCE inflation was driven by services, which rose 3.4%, which was the same as April and has been on a general downtrend. Overall PCE inflation does not seem to have deviated from the overall trend we have seen for the past six months:

Bottom line: Still no sign of tariff-induced inflation. At some point, the Fed is going to have to admit that the economy is slowing and instead of stagflation, we are heading for stagnation.

Pending Home Sales rose 1.1% MOM and 1.8% YOY according to the National Association of Realtors. Contract signings increased in the Midwest and South, while they fell in the West and Northeast. “Consistent job gains and rising wages are modestly helping the housing market,” said NAR Chief Economist Lawrence Yun. “Hourly wages are increasing faster than home prices. However, mortgage rate fluctuations are the primary driver of homebuying decisions and impact housing affordability more than wage gains.”

Prices are rising smartly in the Northeast, boosted by limited inventory. Inventory is increasing however, with homes for sale rising 31.5% on a YOY basis. Inventory increased the most in the West (up 40%) and th

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Vital Statistics:

Stocks are flattish this morning as investors return from the Juneteenth holiday. Bonds and MBS are down.

As expected the Fed maintained interest rates at current levels, and cut its forecast for the number of rate cuts in 2025 again. If you look at the consensus dot plot, it seems there are two major groups: those that think the Fed won’t cut rates at all this year, and those that think the Fed will deliver two cuts:

In the table of economic projections, they took down their estimate for GDP growth from 1.7% to 1.4%, and bumped up their estimate for end-of-year core PCE growth from 2.8% to 3.1%. The estimate for unemployment was raised from 4.4% to 4.5%. In the press conference, Jerome Powell said the Fed expects a “meaningful” amount of inflation in the coming months.

Meanwhile Trump expressed his disappointment in Powell, saying: “What I’m going to do is, you know, he gets out in about nine months, he has to, he gets fortunately terminated … I would have never reappointed him, (President Joe) Biden reappointed him. I don’t know why that is, but I guess maybe he was a Democrat… he’s done a poor job,” Trump said. FHFA Director Bill Pulte said that Powell should resign.

Powell cites the strength of the labor market as his justification for keeping policy tight. Fair enough. That said, if you focus solely on one data point in the labor market – the unemployment rate – the labor market looks strong. But if you peek behind the curtain, the internals paint a different picture. Job growth has been driven by demographic statistical adjustments and not paychecks, while previous months have been quietly revised downward. The declining unemployment rate is being driven by a decrease in the labor force, which is not the way you want to do it. It isn’t job growth that is driving it – it is discouraged unemployed workers throwing in the towel.

I think the Fed has gone from its role of reacting to data to one where it is making bets, and that really isn’t their bailiwick. It would be one thing if the Fed Funds rate was at r* or the neutral rate, but it isn’t. The Fed is 100 basis points over r* when the current economic data says they should be neutral. At this point the Fed needs inflation to spike or else they will be making a major policy mistake. Powell is essentially drawing into an inside straight.

Bayview Asset Management is buying Guild Mortgage for an equity value of $1.3 billion. In the latest 10-Q, Guild is valuing the servicing portfolio for the same amount, so Bayview is paying little for the retail origination arm.

“Expanding the Guild relationship with Lakeview creates one of the strongest and most compelling mortgage origination and servicing ecosystems in the nation,” said Guild Chief Executive Terry Schmidt. “Our expertise in distributed retail origination, retained servicing, and the customer-for-life balanced business model makes this a complementary partnership that has powerful potential for growth and innovation.”

“We are pleased to forge a stronger strategic partnership between Lakeview and Guild through this transaction, and look forward to expanding opportunities and delivering exceptional service to our customers,” said Juan Gonzalez, Managing Director and CEO of Lakeview Originations. “With each company’s different strengths and areas of expertise, this collaboration will form one of the most dynamic mortgage origination and servicing platforms in the industry.”

“We are excited for this next chapter of the Guild story,” said Guild Holdings Chairman Patrick Duffy. “The entire board of directors is confident that Bayview will be an excellent steward of this exceptional company and a great platform for continued growth.”

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Vital Statistics:

Stocks are lower this morning after Israel attacked Iran. Bonds and MBS are up.

Oil is up big this morning after Israel attacked Iran‘s nuclear facilities and weapons factories. President Trump warned Iran to make a deal: “They should now come to the table to make a deal before it’s too late. It will be too late for them. You know the people I was dealing with are dead, the hardliners,” the president said. He would not specify which people he was referring to.

The attack on Iran is boosting the US dollar and putting a bid under oil and the 10 year bond. North Sea Brent futures are up about 7%, while WTI is up 8% in sympathy.

We had another successful bond auction yesterday, where Treasury auctioned off $22 billion of 30 year bonds. Demand was strong again, with a bid-t0-cover ratio of 2.43.

The MBA applauded the Senate’s bill to end abuses of trigger leads, which can cause a barrage of unsolicited calls to an unsuspecting borrower on a credit pull.

“The Senate passage of this important bill, following similar legislation advancing in the House Financial Services Committee earlier in the week, is an enormous step toward finally putting a stop to trigger lead abuses.

“We commend Senators Jack Reed (D-RI) and Bill Hagerty (R-TN), as well as the bill’s dozens of bipartisan cosponsors, for their continued leadership on this issue – a top MBA advocacy priority.  

“MBA looks forward to working with the sponsors and House and Senate leadership to reconcile the slight differences in the two bills so that one bill can be passed in both chambers and signed into law as quickly as possible.” 

Inputs for housing construction rose 0.2% MOM in May after falling 0.2% MOM in April, according to an analysis of yesterday’s producer price index from the NAHB. On a year-over-year basis they increased 1.9%. The goods component – i.e. sticks and bricks – rose 1.6% while the services component rose 2.3%.

If there is any sort of tariff-related increase in housing construction, it isn’t evident in the latest numbers or the graph below:

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are up.

Home prices rose 1.4% quarter-over-quarter and 4.2% year-over-year according to the Clear Capital Home Data Index. The Northeast performed the best on a YoY basis, increasing 1.8% QoQ and 7.3% YoY, while the South performed the worst, where prices rose 0.8% QoQ and 2.1% YoY.

The Clear Capital Home Data Index is based on a repeat-sales methodology and a price per square foot model. It is faster than the competing indices like Case-Shiller and FHFA.

In the accompanying commentary, I discuss a couple major trends that are affecting real estate prices. Check it out.

Economic activity declined from late April to early June, according to the latest Fed Beige Book. It looks like about half the districts reported a decline, while 3 reported no change and reported growth. Employment was weaker: “All Districts described lower labor demand, citing declining hours worked and overtime, hiring pauses, and staff reduction plans. Some Districts reported layoffs in certain sectors, but these layoffs were not pervasive”, while prices rose moderately. Most districts expected prices to accelerate upward due to tariffs.

Wells reported that the Fed has removed the cap on asset growth imposed in 2018. “The Federal Reserve’s decision to lift the asset cap marks a pivotal milestone in our journey to transform Wells Fargo. We are a different and far stronger company today because of the work we’ve done,” said Wells Fargo CEO Charlie Scharf. “In addition, we have changed and simplified our business mix, and we have transformed the management team and how we run the company. We have been methodically investing in the company’s future while improving our financial results and profile. We are excited to continue to move forward with plans to further increase returns and growth in a deliberate manner supported by the processes and cultural changes we have made.”

More evidence of a weakening labor market: job cuts rose 47% compared to a year ago. They fell on a MOM basis compared to April however. “Tariffs, funding cuts, consumer spending, and overall economic pessimism are putting intense pressure on companies’ workforces. Companies are spending less, slowing hiring, and sending layoff notices,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas.

Government spending decreases (i.e. DOGE) remains the biggest reason for job cuts.

Separately, initial jobless claims rose to 247k last week, above expectations.

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Stocks are higher this morning after a court blocked Trump’s sweeping tariffs. Bonds and MBS are down small.

A Federal Court ruled that the President does not have the authority to impose such sweeping tariffs under the International Emergency Economic Powers Act of 1977. The Administration will appeal the decision, but it sounds like tariffs are dead in the water as of now. The Administration could instead re-impose tariffs under a different justification, the Section 301 of the Trade Act of 1974, which allows for tariffs that counter unfair foreign trade practices. He used the latter as justification for tariffs against China during his first administration, and it is thought to be on more solid legal ground.

Bonds are selling off on this news, which is counterintuitive, however it seems to be part of a global risk-on trade. Overall this news is good for bonds, and if this truly is the end of mass tariffs, the Fed is out of excuses to keep rates high. Overall this should be bond bullish and we should see rates work their way lower over the summer.

The FOMC minutes were released yesterday, and they confirmed the higher for longer story.

Participants observed that, even though swings in net exports had affected the data, the available data indicated that economic activity had continued to expand at a solid pace and labor market conditions continued to be solid, but inflation remained somewhat elevated. Participants assessed that the tariff increases announced so far had been significantly larger and broader than they had anticipated. Participants observed that there was considerable uncertainty surrounding the evolution of trade policy as well as about the scale, scope, timing, and persistence of associated economic effects. Significant uncertainties also surrounded changes in fiscal, regulatory, and immigration policies and their economic effects. Taken together, participants saw the uncertainty about their economic outlooks as unusually elevated. Overall, participants judged that downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases.

In other words, the -0.2% decrease in Q1 GDP is being dismissed as tariff-driven, and is not a consideration for cutting rates. They noted that inflation’s downtrend had been uneven, spiking a touch at the end of 2024. Trump’s shock and awe tariff announcement caught them by surprise, and therefore they are being cautious. The FOMC meeting was May 6 and 7, so this was prior to the May 12th delay on tariffs.

With respect to policy:

In considering the outlook for monetary policy, participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the Committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity. Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer.

Participants noted that monetary policy would be informed by a wide range of incoming data, the economic outlook, and the balance of risks. In discussing risk-management considerations that could bear on the outlook for monetary policy, participants agreed that the risks of higher inflation and higher unemployment had risen. Almost all participants commented on the risk that inflation could prove to be more persistent than expected.

Participants emphasized the importance of ensuring that longer term inflation expectations remained well anchored, with some noting that expectations might be particularly sensitive because inflation had been above the Committee’s target for an extended period. Participants noted that the Committee might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken.

Despite the pause in tariffs, the Fed remains resolute in its plan to hold off on getting to neutral policy as long as it can. The Fed is risking a recession and seems content to err on the side of being too tight for too long. This puts pressure on Trump to cut deals, as time is not on his side. The longer the Fed tightens, the greater the chance the economy slips into a recession. For those in the mortgage business, this means the famine might last a few more months, but the longer the Fed waits to ease, the more likely it will have to cut deeply and quickly.

I wonder if the Trade Court ruling, which enjoins Trump’s tariffs will factor into the Fed’s decision-making. Presumably, a suspension of tariffs would mean the Fed has the runway to get to r-star and lower rates by 100 basis points.

Q1 GDP was revised upward from -0.3% to -0.2% in the second revision. Investment was revised upward, while consumer spending was revised downward. In the graph below, you can see what the Fed was talking about when they characterize the number as “tariff-driven.”

The drag on GDP was the sharp increase in imports, which subtract from GDP. This was presumably consumers and businesses accelerating purchases to get in before price increases. Similarly, the big jump in investment (which added to GDP) was also tariff-driven as businesses were building inventory ahead of price increases.

The PCE Price Index was unchanged at 3.6%. Excluding food and energy, the PCE Price Index was revised downward to 3.4%.

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Vital Statistics:

Stocks are flattish this morning after the House narrowly passed the budget bill. Bonds and MBS are down.

Bonds got smacked yesterday after a disappointing 20 year bond auction, which caused more selling in the stock market. MBS spreads widened as well. Bond investors are also monitoring the progress of the latest budget bill and how much it is expected to add to the national debt. The bond vigilantes are back.

Institutional Risk Analyst author Chris Whalen gave a good analysis of FHFA Chairman Bill Pulte’s address to the MBA. Pulte discussed how Democrats (especially Elizabeth Warren) were complaining about the removal of members of the Board of Directors for Fan and Fred. ““The boards of the GSEs don’t have a fiduciary duty to the Enterprises,” he noted. “They have a fiduciary duty to the conservatorship.” He then went on to say that the boards were “fake” and slowed the management of the Enterprises because they have no real function so long as the GSEs are under government control.”

The Biden Administration had added “layers of bureaucracy” in their management of the GSEs. Pulte said that FHFA intends to undo this. “If its not in the law, not in the actual statute, then it needs to go. We will do what Congress has told us to do, but if its not in the law, then we are not going to do it. What has happened in the last many years is that the FHA Director came up with these ideas and they would try to legislate from the bench, so to speak.”

Pulte also indicated that any move to release the GSEs from conservatorship would come from Trump. He also indicated that manufactured homes should have a bigger role in creating affordable housing, given their $100k – $150k cost to build. That said, manufactured homes are hard to finance because the land underneath them is usually leased and these homes depreciate about 3% – 5% a year.

Meanwhile, Trump has said he is giving “very serious consideration” to privatizing Fan and Fred. In a post on Truth Social, he said “Fannie Mae and Freddie Mac are doing very well, throwing off a lot of CASH, and the time would seem to be right,” Trump said, without providing further details. The equity of the GSEs is probably around $350 billion or so, which the government would love to access. Raising that amount of equity would dwarf by magnitudes the largest IPOs ever, so that might be a bridge too far.

FHFA Director Bill Pulte is jawboning FICO about rising costs to pull credit.

Economic activity slowed in April, according to the Chicago Fed National Activity Activity Index, which is a meta-index of some 80+ economic indicators. Production and income indices (think the Fed manufacturing indices and ISM numbers) fell, probably due to tariffs. Employment was flat, while sales and consumption indicators fell modestly. The baseline in the index is historical trend growth, so a negative number does not mean a decline, just that the index numbers is below historical 3% (or so) growth.

In other economic news, Initial Jobless Claims fell to 227k from 229k. So far we are seeing little-to-no impact of the tariff shock in the labor market numbers.

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down again.

The CPI report yesterday should have caused a rally in bond yields, but it didn’t. The business press is working overtime to associate the increase in inflation (from a 0.1% decrease in March to a 0.2% increase in April) to tariffs, but if you look at the detailed expenditure categories, you would be hard pressed to find evidence of tariffs in the expected categories:

• Apparel -0.2%
• New Vehicles 0.0%
• Toys 0.3%
• IT 0.3%
• Motor Vehicle Parts -0.1%
• Household furnishings and supplies 0.2%.
• Tools, hardware, outdoor equipment and supplies 0.1%

About half the increase in inflation last month was shelter, and that continues to moderate as the 20% increase in home prices in 2021 and 2022 fades into the background. Asking rents are also flatlining which means shelter’s days as a driver of inflation are largely over.

IMO the market is taking a wait-and-see approach to tariff-driven inflation, but so far the evidence of it is negligible-to-nonexistent, notwithstanding the wishcasting from the media.

Mortgage applications increased 1.1% last week as purchases rose 2% and refis fell .4%. “Last week saw steadier mortgage rates, as the FOMC meeting played as predicted, and market movements led to a small two-basis point increase in the 30-year conforming rate to 6.86 percent,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Refinance volume was little changed for the week, with a small increase in government refinances, and a decrease in conventional refinances. The news for the week was the growth in purchase applications, up 2.3 percent and almost 18 percent higher than last year’s pace. Despite the economic uncertainty, the increase in home inventory means there are additional properties to buy, unlike the last two years, and this supply is supporting more transactions.”

Mortgage delinquencies increased in the first quarter of 2025, according to the MBA. The delinquency rate of 4.04% increased 6 basis points from the fourth quarter and 10 basis points from a year ago. “There were mixed results for mortgage performance in the first quarter of 2025 compared to the end of 2024. Delinquencies on conventional loans increased slightly, while mortgage delinquencies on FHA and VA loans declined,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Foreclosure inventories increased across all three loan types, and particularly for VA loans. Despite certain segments of borrowers having difficulty making their mortgage payments, the overall national delinquency and foreclosure rates remain below historical averages for now.” 

Added Walsh, “The percentage of VA loans in the foreclosure process rose to 0.84 percent, the highest level since the fourth quarter of 2019. The increase from the previous quarter marks the largest quarterly change recorded for the VA foreclosure inventory rate since the inception of MBA’s survey in 1979.”

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