Bessent Focus on 10 Year UST Key for Real Estate Sales in Years Ahead
Treasury Secretary Scott Bessent is often asked about the administration’s pressure on the Federal Reserve to lower interest rates. But he quickly corrects the interviewer, saying that the administration is more focused on fiscal policy to pull down the US 10 Year Treasury Bond Rate.
The Federal Reserve controls overnight bank borrowing with its Effective Fed Funds Rate. It sets its rate in policy meetings, and it affects the cost of bank borrowing for short term debt. The Federal Reserve’s interest rate setting policy has a greater impact on short term debt like automotive, credit cards, etc. But longer-term types of borrowing for commercial and residential construction are tied more to the US Treasury and bond market.
Historically, when the Federal Reserve changed its interest rate policy, the bond market typically responded in-kind, and yield rates would follow. But this cycle has been unique because government debt concerns and worries over inflation have kept yield rates elevated until recently.
Yield rates have been bouncing but are generally lower. Since hitting their one-year yield peak of 4.788 on January 13th, they have eased to 4.29 of late. Mortgage rates typically run at a 1.7 point premium to the 10Y Treasury.
Treasury Secretary Bessent believes that the administration can get the rate down on the 10Y Treasury into the ‘high 3’s (currently 4.318%) with a combination of reductions in government spending, changing auction volumes on short term treasuries vs. longer-term issuances, keeping inflation under control (by getting energy prices lower), and other factors (some of which carry geopolitical implications).
If the administration’s estimates are correct, this should provide the market with a stronger second-half of 2025 for residential home sales, commercial project starts, and other real estate projects.
Source: CNBC
Home Builders Worry About DOGE – Highly Regionalized Fears
The National Association of Home Builders (NAHB) survey of home builder sentiment came in much weaker in February based on preliminary data. The top line measure was down 10.6% M/M between January and February coming off of strong January readings. It was also down 4.5% year-over-year. They reported that traffic was down 9.4% M/M but was unchanged compared to February of 2024.
More importantly there were significant regional differences. For instance, the northeast region is under a lot of pressure because of the Department of Government Efficiency (DOGE) labor trimming activity. Some studies show as many as 40,000 to 50,000 workers in the Washington DC area could be laid off, placing that market at risk of a housing surplus. Home builder sentiment was down 26.2% M/M and was down 12.7% Y/Y.
In contrast, Midwest builder sentiment was 22.9% higher Y/Y, despite trimming a bit by 2.3% M/M. The movement of potential manufacturing and industrial expansion in the Midwest would lead to new home construction demand. Markets in the south and west that have some additional exposure to government employees were down month-over-month by 10.6% and 16.7% respectively. In addition, they were both down 14.3% and 7.9% year-over-year also respectively.
Looking forward, home builders are worried about the next six months. Sentiment for the look ahead was down 22% M/M and 19.3% lower Y/Y against February of last year. As more information flows out of the Trump Administration concerning tariffs (and exclusions), actual DOGE impacts on local markets, and improvement in interest rates for mortgages, sentiment is likely to improve in the coming months.
Additional Reading: NAHB
