Today's Scoop:

Hey friends, here’s what you need to know today…

1. Policymakers think the economy is doing fine, not great.

2. Mortgages are the most expensive they’ve been in over 20 years.

3. New home construction picked up a bit but isn’t solving the shortage.

S&P 500: 4,314.60
1Mo: -3% | 1Yr: +17% | 5Yr: +56%

The market slumped today as investors worried about interest rates and the escalating war in Israel. Interest rates on US treasury bonds, the bellwether for most other bonds and debt, rose to the highest level in 15+ years.

Policymakers think the economy is doing fine but not great. The Federal Reserve's bi-quarterly Beige Book report indicated that living costs aren’t rising as quickly anymore, consumer spending is losing some willpower, and hiring has slowed. Policymakers predict stable to slightly weaker growth of the overall economy for the next few months.

Home affordability keeps sinking, deterring buyers. The average 30-year fixed-rate mortgage rate rose to 20+ year highs for the sixth consecutive week, inching closer to 8%. The Mortgage Bankers Association said 6% fewer people applied for a mortgage last week, down 21% from last year. This is the lowest demand for home loans in nearly 30 years, with many prospective borrowers unable to afford the current rates and high home prices. [🤓]

New home construction picked up last month, but it’s far from solving the housing shortage. The Commerce Department reported a 7% jump in new home construction for September after a significant drop in August. Both single-family and multi-family housing starts rose. Permits to build homes, however, dropped, in line with waning homebuilder confidence. Low affordability has stalled the market, and available home supply is way lower than usual. New homes are a fraction of the market, though, so the real supply issue is current owners wanting to hang on to their cheaper mortgage rates.

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How do mortgage rates work?

A mortgage is a loan you take out to buy a home. The collateral, the thing you lose if you don’t pay back the money, is the home itself. The collateral reduces the risk for the lender. Credit cards have much higher rates because there’s no collateral.

Mortgage rates can be fixed or floating. A fixed rate means you've locked in that percentage of the loan you need to pay back in interest each month, and it won't increase. A floating rate is usually tied to the movement of a benchmark interest rate. So, as broader interest rates rise, your rate increases, and you pay more each month.

Whether fixed or floating, banks determine their mortgage rates by taking a baseline low-risk lending rate like US Treasury bonds, then marking it up based on how risky you are as a borrower. So banks say, OK, we can lend to the US Government (considered no default risk) for ten years at 4% interest. You're more likely to default than the US Government, so you must pay us higher interest to make it worth the risk, maybe 7%. As baseline rates rise, your rates will rise.

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