Mortgage Market & Affordability - Mortgage rates in 2025 slipped to the lowest level of the year, but affordability remains stretched, reaching levels not seen since the early 1980s when mortgage rates were in the double digits [1][2][3] - Despite lower mortgage rates, consumers still face challenges in qualifying for loans, compounded by headwinds such as student loan repayments, impacting around 10% in July [7] - Builders are offering rate buy-downs as low as 399% for 30-year mortgages on new homes to offset affordability challenges [7] Housing Supply & Demand - A July home building survey indicated a 7% pullback in starts, but starts are still about 5% above historical norms relative to orders [4] - Spec home levels are elevated, rated at a six on a scale of 0 to 10, the highest in several years, indicating inventory that needs to be worked through before pricing pressure eases [5] - The Covid winners in the Southeast, like Southwest Florida (Fort Myers, Naples) and Texas (Austin, Dallas), are now facing the most pressure due to prevalence of builders, second homeowners, and investors taking chips off the table [9] Homebuilder Performance & Outlook - Homebuilders are trading at 18 times book value and 14 times forward earnings, the highest multiple seen in a long time, reflecting optimism due to a 2% sequential increase in volume in July and a 3% year-over-year increase in orders [14][15] - Small-cap homebuilders are trading at a 47% discount to large-cap builders, compared to a historical discount of about 25% [16] - The company likes some small-cap names like Meritage and Taylor Morrison, and upgraded Schottenstein Macho due to its depressed valuation and strong returns outlook [17]