Latest / Finance TL;DR Daily / Fed Punts to December as Housing Hits a 25-Year Low
Transcript
- Fed Punts to December as Housing Hits a 25-Year Low 2026-10-20 Alex: Welcome to Finance TL;DR Daily, the podcast where we break down the biggest stories in finance. Alex: It's Tuesday, October twentieth. And today it's all about rates — where they're headed next, and the damage they're already doing to housing. Riley: Here's what's moving today. Riley: So, start with the Fed. A Reuters poll of a hundred economists just landed, and the consensus has shifted hard. Alex: It really has. Ninety-four of those hundred economists expect the Fed to hold steady at its meeting next week, October twenty-seventh and twenty-eighth. But every single one of the hundred expects a hike in December. Riley: All hundred. That's not a consensus, that's practically unanimous. And worth saying — in the prior survey, less than half of economists saw a December move coming. So this is a sharp reversal in a short window. Alex: Futures markets agree too. Rate futures are now pricing an eighty-nine-point-five percent probability of that December hike. So this isn't just economists talking to each other, the market's leaning the same way. Riley: What's driving the shift? Because skipping October and then hiking in December feels like a strange two-step if inflation's the real worry. Alex: One economist put it pretty bluntly — Alex Pelle at Mizuho said you've got a strong economy and you've got inflation, so there's really no reason to avoid getting rates higher, calling it the easiest choice the Fed's going to make. The skip in October looks more like timing than doubt. Riley: The bit I'd flag is what this does to year-end positioning. If everyone now agrees December is locked in, that's priced in already to some degree — the real volatility risk is if the data between now and then surprises in either direction. Alex: Right, a skip now buys the Fed one more inflation print and one more jobs report before they commit. And after that, December rate decision sets the tone heading into next year. Riley: Which, handily, ties straight into the next story — because the market's already wrestling with what higher-for-longer rates are doing to valuations. Riley: The S&P 500 was actually up two-point-three percent in the third quarter, which on its face sounds fine. But look underneath that number and it's a much tighter story. Alex: Tighter how? Riley: The ten-year Treasury yield climbed to its highest level since 2002. The thirty-year topped five-point-four percent. And that pushed the S&P's forward price-to-earnings ratio — basically what investors are paying for a dollar of expected earnings — down from twenty-point-four times to nineteen-point-two times in a single quarter. Alex: So valuations got squeezed. What offset that? Riley: Earnings. Analysts estimate third-quarter earnings grew twenty-nine-point-one percent year-over-year. One analysis summed it up well — higher rates have already taken something away from valuations, and earnings have given it back. The question now is whether earnings can keep doing that. Alex: And a lot of that earnings strength is tied to AI spending, isn't it? That's been the engine. Riley: It has, and that's exactly where the risk sits. Capital spending by the big tech firms is expected to exceed their operating cash flow in both twenty twenty-six and twenty twenty-seven. So they're spending more than they're bringing in from operations, betting that spending pays off later. Alex: Which means if that AI investment doesn't produce the returns everyone's expecting, you've got rates staying high and the thing that was propping up earnings running out of road at the same time. Riley: That's the squeeze to watch. Rates aren't coming down fast, by the Fed story we just covered, so earnings genuinely have to keep carrying the market rather than just assisting it. Alex: And if you want to see what sustained high rates actually do to a sector in real time, you don't have to look far — housing's already there. Alex: September's housing data came in and it's bad across almost every measure. Pending home sales dropped seven-point-three percent from August alone, down eleven-point-three percent year-over-year, to the lowest reading since tracking began back in 2001. Riley: Twenty-five years of data and this is the floor. That's a striking way to put it. Alex: It is. And it's not isolated to one corner of the market — single-family housing starts fell four-point-five-six percent to an annualized rate of eight hundred fifty-nine thousand, the lowest since September of last year. Building permits dropped four percent for the month too. Riley: Permits matter because they're forward-looking — that's builders telling you what they plan to build in the months ahead, not what's already underway. A four percent drop there suggests this isn't a one-month blip. Alex: And homebuilder sentiment backs that up — it hit a fourteen-year low in October. The trigger is pretty straightforward: the average thirty-year fixed mortgage rate surged to seven-point-six percent by the end of September. Riley: NAR's chief economist, Lawrence Yun, called it plainly — market conditions weakened in September due to fast-rising mortgage rates. No mystery there. Alex: What I'd push on is the GDP angle, because this isn't just a housing story. Residential investment has subtracted from overall GDP in five of the last six quarters. Riley: Which means this freeze isn't contained to homebuilders and buyers sitting on their hands — it's actively dragging down growth figures the Fed itself is watching. So you've got high rates cooling housing, housing dragging on GDP, and the Fed weighing all of that against inflation that still isn't fully tamed. Alex: It's the same thread running through all three stories today, really — rates are the whole conversation right now. Riley: So to wrap it up — the Fed looks set to skip this month and hike in December, nearly every economist surveyed agrees on that now. Alex: Stocks are leaning on earnings growth to offset the valuation hit from multi-decade-high yields, with AI spending as the biggest swing factor. Riley: And housing is already showing what prolonged high rates do to an economy, with pending sales at a twenty-five-year low. Alex: This has been Finance TL;DR Daily. We'll see you tomorrow.