Morning Report: Fed day

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Vital Statistics:

Stocks are flattish as we await the Fed decision at 2:00 pm. Bonds and MBS are up.

The FOMC decision will be released at noon. The markets don’t expect the Fed to make any changes to the Fed Funds rate, however most of the action will be in the economic projections, particularly the inflation rate and the dot plot. The March dot plot saw a total of 2 rate cuts this year, and that was pre-Liberation Day. They saw headline PCE inflation at 2.7% and core PCE inflation at 2.8%. The April numbers saw headline PCE inflation at 2.1% and core PCE inflation at 2.5%. It will be interesting to see how much the Fed changes this forecast.

The housing construction market continues to struggle as buyers are stuck with affordability issues. Housing starts came in at a 1.256 million annual pace last month, while building permits came in at a 1.39 million pace. These numbers were well below expectations.

The starts number was roughly flat on a MOM basis and down about 7.3% on a YOY basis. The MOM decrease was largely attributable to a big decline in multi-family construction, while the YOY decline was due to single family.

Unsurprisingly, homebuilder sentiment remains dour, with the NAHB Housing Market Index hitting the third lowest reading in 13 years. Homebuilders are increasingly using incentives (i.e. price cuts or upgrade freebies) to move the merchandise. Given this state of affairs, it is highly unlikely that any tariff impact will be passed on to consumers – builders will just have eat the increases and suffer lower margins. This is a big driver for the problems we are seeing in housing starts overall.

“Buyers are increasingly moving to the sidelines due to elevated mortgage rates and tariff and economic uncertainty,” said NAHB Chairman Buddy Hughes, a home builder and developer from Lexington, N.C. “To help address affordability concerns and bring hesitant buyers off the fence, a growing number of builders are moving to cut prices.”

“Rising inventory levels and prospective home buyers who are on hold waiting for affordability conditions to improve are resulting in weakening price growth in most markets and generating price declines for resales in a growing number of markets,” said NAHB Chief Economist Robert Dietz. “Given current market conditions, NAHB is forecasting a decline in single-family starts for 2025.”

Mortgage applications fell 2.6% last week as purchases fell 5% and refis fell 2%.

“Mortgage rates decreased last week, driven by financial market volatility caused by current geopolitical conflict and ongoing tariff uncertainties. The 30-year fixed rate decreased to 6.84 percent, its lowest level since April,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Even with lower average mortgage rates, applications declined over the week as ongoing economic uncertainty weighed on potential homebuyers’ purchase decisions.”

Added Kan, “Refinance activity declined for both conventional and government borrowers. VA applications, however, bucked the trend with a 2 percent increase in purchase applications and a slight increase in refinance applications. Additionally, the overall average loan size at $380,200, was the lowest since January 2025.”

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