Energy-led inflation keeps mortgage rates high for D.R. Horton

The September Consumer Price Index was released on October 14. Economists expected prices to rise 3.6% compared with a year earlier, and 0.6% in the month alone. Energy was the main driver, after Brent crude rose more than 14% in September. Higher inflation raises the odds of another Fed rate increase. The 10-year Treasury yield stood at 5.24% on October 9. The 30-year mortgage rate, which tends to follow it, reached 7.40% in the week of October 8, its seventh straight weekly rise. Higher mortgage rates reduce what buyers can afford to spend on a home. That weighs on D.R. Horton, which had already seen net income fall 12% to $904.9 million in the quarter to June 30.

In the five trading days to October 13, energy stocks rose, with Valero up 8.9% and Exxon Mobil up 5.8%, and airlines fell. D.R. Horton slipped only 1.0% in the same stretch, a much smaller move than the energy and airline shares.

The Fed may treat an energy-driven jump as temporary if core prices, which exclude food and energy, stay near the expected 2.5% on a year earlier. In that case long yields could ease. The clear sign would be the weekly Freddie Mac 30-year mortgage rate falling meaningfully below 7.40% over the rest of October.

Core inflation was expected near 2.5%, well below the headline rate. If the Fed looks past oil, a jump driven only by energy could even lower long-term yields, because high fuel prices slow spending and growth. Mortgage rates could then drift down and help homebuilders.