Weekend Talking Points - 'The Moody's Blues'

Not a great week for real estate, with disappointing existing home sales in April and higher mortgage rates thanks (in part) to the Moody’s downgrade of the USA’s sovereign credit rating.

Builder confidence battered. In May, the National Association of Homebuilders’ confidence index dropped 6 points to 34. The last time sentiment was this bad was November 2023 — when average 30-year mortgage rates were briefly above 8%! [NAHB]

TP: Why are builders so glum? In a word, tariffs. But as the NAHB pointed out, 90% of the respondents had turned in their surveys before the 90-day tariff reprieve announced on May 12.

Housing starts subdued. In April, new permits issued fell 5% month-over-month to an annualized pace of 1.41 million homes, 65% of which were single family homes (922K annualized). Starts were a bit lower, at 1.36 million annualized; but completions were higher at 1.46 million units. Big picture: we’re still not building enough homes to match the growth in the number of households. [Census Bureau]

TP: With so much uncertainty on tariffs (and therefore the bill of materials), it’s hard for builders to pencil out their profits. According to the NAHB, 78% of builders said that they were having a difficult time pricing homes because of this.

US credit rating downgraded. Moody’s Investor Services, one of the three major credit rating agencies, downgraded the sovereign debt of the USA from Aaa to Aa1 — citing rising debt levels and chronic fiscal deficits. The downgrade is both small (one notch) and significant (USA no longer has the highest available debt rating). There are now 10 countries with higher credit ratings than the USA. And to be honest, our credit rating should probably be even lower. [More on this later]

TP: Just as an individual’s credit score is an indicator of their trustworthiness as a borrower, and a company’s credit rating gauges their ability to make their interest and principal payments, sovereign credit ratings measure the financial strength of countries.

In response, US government bond yields rose. This is exactly what you would expect to happen. When a country’s credit rating is downgraded, its perceived riskiness rises, which means that investors should demand a greater return on its debt. The yield on the 10-year US Treasury bond rose as much as 12 basis points on the day (that’s 12/100 of a percent or 0.12%) to over 4.5%. [MBS Highway]

Wholesale inflation drops. The “headline” PPI (Producer Price Index = inflation for businesses) declined 0.5% month-over-month in April and the “core” PPI was 0.1% lower. That means that wholesale inflation is currently running at +2.4% annually. [BLS]

Existing home sales fell again. In April 2025, existing homes sold at an annualized pace of 4.0 million units. That’s 2% below April 2024, 5% below April 2023, and 28% below April 2022. The total inventory of homes for sale was up 21% year-over-year to 1.45 million, the highest it has been since early 2020. [NAR]

TP: The last time annual transaction volumes were this low was 1995, when the US population was 70 million smaller! Sales will inevitably rebound, but we could certainly use some help from lower rates.

Cooler competition. Competition always picks up in the spring (relative to winter), but so far things are a lot cooler this year than they were last year. For instance, in April 2025 there was an average of 2.4 offers for every home sold. In April 2024, that was 3.2. In April 2025, 18% of homes sold above their original list price. In April 2024, that was 27%. [Realtors Confidence Index]

US credit rating downgraded

Here’s what Moody’s had to say (the bolding is mine):

“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.

Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.

The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency.”

The 3 major credit rating agencies are Fitch, Standard & Poors, and Moody’s. S&P actually downgraded US debt from its highest credit rating way back in 2011! Fitch did the same in 2023. So the Moody’s downgrade is, in a sense, quite late.

Take a look at the table below. Even after the downgrade, the US is still an outlier. With huge debt levels (123% debt to GDP) and a massive budget deficit (7% of GDP), our credit rating should probably be even lower. If not for the US dollar’s role as the world’s “reserve currency”, the size of our economy, and the depth of our financial markets, we’d probably be rated more like France (or Spain).

Increasingly, we are paying for this lack of fiscal responsibility in the form of higher government bond yields. In the same way that banks require a higher interest rate from borrowers with lower credit scores, international bond investors demand higher yields from countries with weaker fiscal positions.

Realtors Confidence Index for April

Every month, the NAR surveys Realtors and asks them for a combination of hard and soft data. The results of this Realtors Confidence Index (“RCI”) are released on the same day as the existing home sales figure. I consider it a very useful gauge of competitive ferocity.

First-timers can’t wait any longer. Probably the most important datapoint from the April RCI was the continued rebound in first-time buyer participation (34% of purchases). This is actually the highest level we’ve seen since June 2020! In spite of all the affordability issues (prices, mortgage rates, insurance premiums), first-timers are finding a way.

Sales pace is accelerating, like it does every Spring. The median home sold in April 2025 was on the market for 29 days, a big contraction from 36 days in February 2025. The comparable figure in April 2024 was 26 days.

But there’s less buyer competition than last year. In April 2025 there was an average of 2.4 offers for every home sold (same as in March 2025). In April 2024, that was 3.2. In certain markets — mainly in the southeast and southwest — market power has shifted towards buyers.

Mortgage Market

Reminder: We’re now using Freddie Mac’s weekly PMMS for our average mortgage rates. The numbers are pretty similar to what we were using before (Mortgage News Daily), and have the benefit of being updated every Thursday morning.

This week, the key moves in bond yields (and mortgage rates) had very little to do with US inflation or jobs. The weekend downgrade of US debt by Moody’s saw the yield on 10-year US treasury bonds move well above 4.5%. We then saw further upward moves in sympathy with rising bond yields globally (especially in Japan and the UK).

Here’s what the Fed Funds Rate futures market is currently pricing in for rate cuts. Note that the current Fed Funds Rate policy range is 4.25–4.50%.

• June 18 FOMC Meeting: 95% probability that the policy rate will remain at 4.25–4.50% (no rate cut). This was 92% last week.
• July 30 FOMC Meeting: 73% probability that the policy rate will remain at 4.25–4.50% (up from 63% last week). 26% probability that rates will be 25 bps below current (implying one 25 bps rate cut at this meeting).
• September 17 FOMC Meeting: 51% probability that rates will be 25 bps below current (implying one 25 bps rate cut on either July 30 or Sept 17, but not both). 14% probability that rates will be 50 bps below current (implying a 25 bps rate cut at both the July 30 and Sept 17 meetings).

They Said It

“Policy uncertainty stemming in large part from the stop-and-start tariff issues has hurt builder confidence but the initial trade arrangements with the United Kingdom and China are a welcome development. Still, the overall actions on tariffs in recent weeks have had a negative impact on builders, as 78% reported difficulties pricing their homes recently due to uncertainty around material prices.” — Robert Dietz, NAHB’s Chief Economist