The National Association of Homebuilders (NAHB) along with Wells Fargo released the monthly builder confidence index this week, and it came out much weaker than expected. With tariff and immigration news rapidly evolving, it’s tempting to conclude that any major changes in homebuilder sentiment would be directly related.  For instance, if builders think that building materials could be harder to obtain or more expensive, it generally hits the confidence index.  This would be a particularly big problem with something like lumber as the U.S. imports roughly a third of its framing lumber from Canada. While it’s easier to agree with this narrative based purely on concepts and words, the actual numbers tell a different story when you see them on a chart.  Builder confidence has been strongly locked into what market watchers would call a “consolidation pattern.”  On charts, this takes the shape of converging lines marking recent highs and lows.   Some technical analysts (market watchers who infer significance or movement cues based on chart patterns) believe that momentum will continue in the direction of a breakout–something that inevitably must happen this year as far as this consolidation is concerned.  Just as often, however, a consolidation breakout can give way to broadly sideways momentum until underlying economic fundamentals change in a big way. In the current case, it would be hard to argue that elevated interest rates are anything but the key factor depressing home sales and builder confidence.

The Census Bureau released its New Residential Construction report this week, frequently referred to by its principal component “housing starts” (a term for the start of the first phase of new home construction). In addition to housing starts, the data also logs building permits as well as completions.  There’s not always a perfectly linear correlation between the various metrics for a variety of reasons. Some permits never turn into construction, for instance.  Sometimes there’s a backlog of permits waiting on materials, labor, or weather before construction can begin.  In general, building permits remain more even-keeled while housing starts gyrate.  The past three reports have been a good example of this.  During that time, building permits have barely budged at an annualized pace of 1.49m, 1.48m, and 1.48m in Nov, Dec, and Jan respectively. Meanwhile, housing starts have whipsawed from 1.305m to 1.515m and now back down to 1.366m.   Using “millions” as a unit number makes it easy to overlook the fact that we’re talking about a swing in this year’s national housing availability of a whopping 149k units.  But even then, such a swing doesn’t necessarily look too troubling in the bigger picture. Housing completions suggest an even lower cause for concern of the trajectory of construction. Regionally, the biggest decline in percentage terms was in the Northeast (-27.6%). But in terms of outright units, the South led the decline with a drop of 207k.  Contrast that to the Northeast’s unit count only declining by 40k.

Letitia James and 22 other attorneys general have filed an amicus brief in a Maryland case challenging the dissolution of the consumer protection agency.

The potential impacts of import tariffs cloud the outlook, though, and could lead mortgage rates to surge and fall throughout the coming year.

Potential policy changes, a growing product niche, new thinking about whether to outsource and technology innovations are transforming the industry.

President Donald Trump issued an executive order Wednesday night disbanding of three bank and credit union advisory groups.

The average 30-year fixed-rate mortgage of 6.85% is just five basis points lower than the same time last year, following wider swings in the past 12 months.

Very Low Volatility After Early Morning Rally

Bonds were sideways to slightly weaker in the overnight session, but bounced back at 7am ET.  The two most notable developments at the time were weak earnings from Wal-Mart and a comment from Bessent on the mix of Treasury issuance. While the former may be an easier thing to understand and write about, the latter served as the source of the bond rally. Bessent essentially said he wasn’t in a hurry to add more longer-term debt relative to short-term debt, and that’s good for things like mortgage rates, all other things being equal. It’s also evident in the obvious yield curve disparity with 2yr yields higher on the day and 10yr yields lower. 

Econ Data / Events

Jobless Claims

219k vs 215k f’cast, 214k prev

Continued Claims

1869k vs 1870k f’cast, 1845k prev

Philly Fed Index

18.1 vs 20.0 f’cast, 44.3 prev

Philly Fed Prices

40.5 vs 21.90 prev

Market Movement Recap

09:29 AM Stronger overnight and modestly weaker after the data.  MBS up 1 tick (.03) and 10yr down 1.9bps at 4.514

01:37 PM Very flat since the AM rally.  MBS up an eighth and 10yr down 3.4bps at 4.50

03:48 PM Near best levels amid very low volatility.  MBS up 5 ticks (.16) and 10yr down 3.2bps at 4.502

“Inflation is really getting out of hand… But that’s just my 5 cents.” Inflation impacts the prices of fixed-income securities, like the kind backed by mortgages. Inflation takes a while to move, but this week President Donald Trump this week admitted that prices are rising but insisted that it’s not his fault despite repeatedly claiming he would bring prices down on his first day in office. “Inflation is back,” he told Fox News host Sean Hannity in an interview. “I’m only here for two and a half weeks … I had nothing to do with it.” Regardless of promises, no one can control a drought in the Ivory Coast impacting cacao prices. Or flooding in Kentucky possibly impacting soybean or tobacco prices. Yes, U.S. inflation expectations have increased, with the two-year breakeven rate surpassing 3 percent for the first time in two years, driven by a rise in energy and core goods prices. The consumer price index for January showed headline inflation at 3 percent and core inflation at 3.3 percent, causing significant shifts in bond markets, although US equities remained relatively stable. (Today’s podcast can be found here and this week’s is sponsored by nCino. nCino Mortgage Suite’s three core products, nCino Mortgage, nCino Incentive Compensation, and nCino Mortgage Analytics, unite the people, systems, and stages of the mortgage process. Today’s has an interview with nCino’s Sean Desmond on how lenders can utilize data and technology to drive efficiencies in the origination process.)

There’s an interesting little case study in this morning’s market movement. Bonds had been sideway to very slightly weaker overnight, but began to rally at 7am ET.  The most notable market headline available at the time was news of Walmart’s disappointing earnings. Some market journalists credited the earnings as a catalyst for safe haven bond buying. At almost exactly the same time, Treasury’s Bessent said in a Bloomberg interview that Treasury is a long way from adding duration to the Treasury issuance profile–something some market participants had feared. “Adding duration” means issuing larger amounts of longer-term debt (like 5, 7, 10, and 30yr Treasuries). That would push longer-term rates higher, all other things being equal. A closer look at charts shows minimal reaction in stocks relative to bonds, thus making it a given that Bessent trumped Wal-Mart.