Housing Sector Shines 

Increased expectations for additional government stimulus were modestly negative for mortgage markets this week, while strong housing data had little impact. Rates ended a little higher but remained near record low levels.

Inventory levels were down 19% from a year ago and remained the primary obstacle to even stronger sales activity. The number of homes for sale was at just a 2.7-month supply nationally, well below the 6.0-month supply which is considered a healthy balance between buyers and sellers. However, Tuesday's report on housing starts contained encouraging news in this area. In September, single-family housing starts rose 9% from August and were 22% higher than a year ago. Similarly, single-family building permits, a leading indicator of future construction, were 24% higher than a year ago.

Lawmakers continue to negotiate an additional government aid package, and most investors expect a deal either before or shortly after the election. Increased fiscal stimulus would be unfavorable for mortgage rates for two primary reasons. First, government spending boosts economic activity, which raises the outlook for future inflation. In addition, the supply of bonds increases to fund the spending, so yields must rise to entice investors to purchase more bonds.  

Investors will remain focused on medical advances to fight the coronavirus and negotiations for additional government stimulus measures. Beyond that, New Home Sales will be released on Monday. Third quarter gross domestic product (GDP), the broadest measure of economic activity, will come out on Thursday. The core PCE price index, the inflation indicator favored by the Fed, will be released on Friday.