Home Sales Slip

Mortgage markets were pulled in different directions this week. Rising tensions in the Middle East pushed oil prices higher, which raised concerns about future inflation. That pressure was offset by the Treasury's announcement that it plans to significantly increase its purchases of longer-term government debt. The economic data released this week had only a modest impact, and mortgage rates finished with little overall change.

One of the biggest developments was the continued growth of U.S. government debt, which topped $40 trillion this week, more than double the $19 trillion level from ten years ago. As investors have demanded more compensation to hold that debt, longer-term yields have moved higher. With an eye on this, the Treasury announced on Wednesday that it will at least double the maximum amount of its purchases of government debt over the next few months from the current $2 billion limit. According to the Treasury, the purchases will focus on maturities of ten to thirty years to provide greater liquidity to longer-term bond markets. This added demand for bonds caused yields to decline, including yields on mortgage-backed securities, which was positive for mortgage rates.

The latest home building data was not encouraging. After surging 19% in the prior month, overall housing starts in July plunged 13% from June, far more than expected. Single-family starts declined for the fourth straight month to the lowest level since November 2022 and are running 16% below last year's pace. On a more positive note, single-family building permits, a leading indicator of future construction, rose 3% from June and were up slightly from a year ago. 

A survey of home builder sentiment on housing market conditions from the NAHB unexpectedly rose slightly to 35 but has remained in negative territory below 50 for twenty-eight straight months. To help generate demand, 63% of builders offered sales incentives in July, while 35% reduced home prices. Builders continue to cite rising land, labor, and material costs as significant obstacles to increasing new home supply.

The big picture: For now, mortgage rates remain caught between competing forces. Inflation concerns and elevated government debt are putting upward pressure on longer-term yields, while Treasury bond purchases are providing some support. Meanwhile, the housing market continues to face a combination of limited inventory, affordability challenges, and cautious builders.

Looking ahead, attention will remain fixed on the conflict in the Middle East and the proposed deal to ease tensions. Investors also will monitor comments from Fed officials about future monetary policy. For economic data, Consumer Confidence and New Home Sales will come out on Tuesday. Personal Income and the PCE price index, the inflation indicator favored by the Fed, will be released on Wednesday. In addition, the Jackson Home economic summit will take place next week, and central bank officials sometimes make important announcements at this event.