Bond pricing and Treasury yields are relatively flat in early trading Tuesday. Oil remains the bigger story: crude has pushed global yields to fresh highs this week, and July's housing starts came in well below forecast, a sharp reversal from June.
01What's moving markets this morning
The 10-year Treasury yield is sitting around 4.74%, in line with this morning's open near 4.736% — a quiet start after global bond yields pushed to new highs yesterday on the back of rising crude oil prices, which are now hovering around $85 a barrel. Oil remains a persistent catalyst for higher yields as the U.S.-Iran conflict drags on.
July housing starts missed forecasts, dropping 12.4% to an annualized pace of roughly 1.24 million units, a sharp reversal from June. Broader inflationary pressures that have built up over the past several years continue to compound and weigh on affordability. Pending home sales data is due out at 10 a.m. ET, and the Fed's latest meeting minutes are due tomorrow — both could add color on where rates and housing head next.
02The supply-and-demand story behind resilient home values
Real estate values, especially in certain markets, have stayed remarkably resilient. Agents in tighter markets continue to report buyers paying well over asking price, with supply still historically tight.
Household formations — a rate-sensitive gauge of housing demand — are currently running at an annualized pace of roughly 1.4 million. Meanwhile, this morning's starts and permits data shows builders pulling back on new supply: starts fell 12% in July, with most of the decline concentrated in single-family construction, while permits, a more forward-looking indicator, rose 5%.
Active listings sit around 1.1 million, still short of 2019's pre-pandemic mark near 1.2 million, and existing-home supply nationally remains roughly 400,000 units below 2019 levels. That gap isn't even across the country — in tighter regional pockets, including parts of the Northeast, some metro markets are running 50% or more below pre-pandemic supply, and markets with the tightest supply are generally seeing the strongest appreciation.
Builders have pulled back in response to higher rates and softer demand — but if rates were to fall, demand from new households would likely respond faster than builders could ramp back up.
That mismatch is the opportunity some in the market are watching: buyers who can qualify today, particularly in supply-constrained markets, may be positioned for meaningful appreciation if and when rates ease and pent-up demand meets a supply pipeline that's slow to restart.
03Builder confidence ticks up, but stays weak — and the labor picture is mixed
Builder sentiment remains a soft spot. The NAHB Housing Market Index rose one point to 35 in August, an improvement, but still a weak level for this time of year — a reading below 50 signals contraction, and builders have been below that line for some time. The internal components were weak across the board: current sales conditions came in at 39, six-month sales expectations at 43, and prospective buyer traffic remained anemic at 23.
On the labor side, hiring has been soft for months. ADP's weekly data shows private employers adding an average of 9,500 jobs per week over the trailing four weeks — a pace that works out to roughly 40,000 jobs a month, historically weak. That figure did tick up from the prior week's reading, snapping a stretch of declines, but it doesn't change the broader trend: both ADP's and the BLS's most recent monthly readings have been soft, and the boost from World Cup-related hiring earlier this year is now behind us.
With inflation readings running tame and employment data soft, it will be worth watching whether the Fed's voting members shift their tone on a potential rate hike. A hike may not be the right call for an economy already showing cracks in employment — but bond markets would likely react favorably to one, since it would reinforce the Fed's inflation-fighting credibility.
Rates are steady for now, but oil and inflation remain the wildcards keeping yields elevated. Underneath that, the supply-and-demand fundamentals in housing continue to favor sellers in tight markets, even with builder confidence and affordability both under pressure. For buyers who can qualify at today's rates, particularly in supply-constrained areas, there may be a window worth discussing with a loan officer before demand catches up to a supply pipeline that's slow to restart. Watch for pending home sales at 10 a.m. and the Fed minutes tomorrow for the next signals.