Mixed Signals Put Markets on Edge - 8.22.24

by Ryan Schoen , Principal Market Analyst

Quick Hit

Considering that inflation has moderated and that the majority of consumers continue to hold down a job and spend their dollars, it appears that the reaction to the jobs report might have been overblown after all and potentially even turn into just a blip on the radar of an otherwise healthy, although slowing economy. That seems to be the market's thoughts as well, as it has moved from pricing in a 50-bps rate cut in September back to a 25-bps cut and from five 25-bps cuts to four by year-end. The days between now and a September 18th Fed meeting are likely to come with much volatility due to the Fed reiterating its data-dependent stance to arrive at its decisions and the markets attempting to read between the lines. On another note, declining mortgage rates have boosted existing home sales, which finally ended its fourth-month skid by posting sales gains in July. Additionally, we find ourselves at the front gates of a major FHA refinance streamline opportunity.?

Key Points & Stats

1. Retail sales soared 1% month-over-month in July, easily beating forecasts of a 0.3% gain and the biggest increase in 1.5 years.
2. Jobless claims rose by 4,000 to 232,000 for the week ending August 17th, but the four-week average of claims that smooths out the volatile series ticked down by 750 to 236,000. The number of people receiving benefits after an initial week of aid, or continuing claims, rose 4,000 to 1.863 million for the week ending August 10th.
3. The?Bureau of Labor Statistics?revised previously reported estimates of job creation in the United States, showing that about 818,000 fewer nonfarm jobs were created from April 2023 through March 2024 revealing that the labor market wasn't as hot as initially thought.
4. The market has moved from pricing in a 50-bps rate cut in September back to a 25-bps cut and from five 25-bps cuts to four by year-end.
5. Existing-home sales grew 1.3% in July to a seasonally adjusted annual rate of 3.95 million, stopping a four-month sales decline that began in March. However, sales slipped 2.5% from one year ago.
6. Between January 2022 and June 2024, $298B or 1,003,869 FHA loans were created carrying an interest rate of 5.5% or greater, which sets up a major streamline refinance opportunity ahead as rates drift lower (the current 30-year fixed FHA mortgage rate sits at 6.152%, according to Optimal Blue, as of August 22nd).

Economy Slowing, Not Deteriorating Rapidly

Another week has passed and with it more data to digest. This time around the picture appears to be more complicated than initially indicated by the August 2nd jobs data publication that seemed to hint at a rapidly deteriorating economy.

For starters retail sales soared 1% month-over-month in July easily beating forecasts of a 0.3% gain and the biggest increase in 1.5 years. The move suggests that consumers and therefore economic growth remains resilient with no evidence of a recession on the horizon.?

Further economic resilience can be seen in the weekly jobless claims data. Despite the unemployment rate ticking up, we have continued to see fairly stable, dare I say healthy levels of job losses, as both initial jobless claims and continuing jobless claims have plateaued on a four-week average. ?

Considering that inflation has moderated and that the majority of consumers continue to hold down a job and spend their dollars, it appears that the reaction to the jobs report might have been overblown after all and potentially even turn into just a blip on the radar of an otherwise healthy, although slowing economy. That seems to be the market's thoughts as well, as it has moved from pricing in a 50-bps rate cut in September back to a 25-bps cut and from five 25-bps cuts to four by year-end.?

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The days between now and a September 18th Fed meeting will likely come with much volatility due to the Fed reiterating its data-dependent stance to arrive at its decisions and the markets attempting to read between the lines. The next vital updates to be aware of are 8/30: PCE Inflation, 9/4: JOLTS, 9/6: Jobs Report. However, we may receive volatility as early as tomorrow 8/23 with Powell attempting to explain these mixed signals from his perspective when he speaks at the Jackson Hole Economic Symposium.

Existing Home Sales End Four-Month Losing Streak

Speaking of mixed signals, the housing market reversed its recent signals of declining sales when it rebounded 1.3% in July to a seasonally adjusted annual rate of 3.95 million, breaking a streak of four consecutive monthly declines. According to the National Association of Realtors, three out of four major U.S. regions registered sales increases, while the Midwest remained steady.?

July report highlights to note per NAR:

1. Total housing inventory registered at the end of July was 1.33M units, up 0.8% from June and 19.8% from one year ago (1.11M).
2. Unsold inventory sits at a 4.0-month supply at the current sales pace, down from 4.1 months in June but up from 3.3 months in July 2023.?
3. The median existing home price for all housing types in July was $422,600, up 4.2% from one year ago ($405,600). All four U.S. regions posted price increases.
4. Properties typically remained on the market for 24 days in July, up from 22 days in June and 20 days in July 2023.
5. First-time buyers were responsible for 29% of sales in July, identical to June but down from 30% in July 2023.
6. All-cash sales accounted for 27% of transactions in July, down from 28% in June but up from 26% one year ago.
7. Individual investors or second-home buyers, who make up many cash sales, purchased 13% of homes in July, down from 16% in June 2024 and July 2023.
8. Distressed sales – foreclosures and short sales – represented 1% of sales in July, virtually unchanged from last month and the prior year.

We're at The Front Gates of a Major FHA Refi Opportunity

The good news on the existing home sales front, largely due to declining mortgage rates, is also creating good news on the refinance front. Below we look at a subset of the market and focus our attention on how recent trends have evolved in the FHA space.

Between Jan 2020 and Dec 2021?monthly FHA endorsement volume per HUD averaged $27B and 114K loans, of that refinance accounted for 37.3% of the total dollar volume. On the back of a rising interest rate environment the FHA market shrunk 30% in dollars and 42% in loans on a monthly average basis from Jan 2022 to June 2024, averaging $19B and 66K loans with the refinance share slipping to 18.2%.?

However, purchase business has remained fairly strong during the rising rate environment. Monthly loan counts dropped more than loan volumes. Rising home prices supported loan volumes as FHA is geared toward first-time homebuyers (~80% of FHA are FTHBs) who borrow close to what the home is valued at. At the same time, FHA loans have become more in demand for many due to home affordability constraints and looser guidelines allowing for higher debt-to-income ratios than other product options.

That January 2022 to June 2024 period of purchase loan production has now set the market up with a major FHA streamline refinance tailwind. While some borrowers will refinance out of an FHA loan to drop their lifetime mortgage insurance premium (dependent on original term and downpayment), or not satisfy the 210 days since closing requirement, or 6 month seasoning requirement since the first payment was due, or on time payment/no more than one 30-day late in the previous 7 to 12 months requirements. Many will opt for an FHA streamline refinance due to its many advantages such as no appraisal, no verification of job or income, and no credit check, setting up recent FTHBs with relief on their possibly over extended mortgage payment costs.

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Setting FHA streamline decisions, amortization, extra payments, and guideline requirements aside, the latest data tells us that there is potentially a $298B pool of 1,003,869 borrowers that were created with an interest rate of 5.5% or greater since January 2022. With the current market rate sitting at 6.152%,?according to Optimal Blue, the market is at the front gates to a major FHA streamline refinance opportunity.?

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While that opportunity is spread out across the country, some hotspots take precedence.?

1. From a dollar standpoint, the most populous states of TX, FL, and CA all dwarf the others with $30B+, the fourth state GA comes in at less than half that volume with $14B.?
2. From a region standpoint four of the top six states are found in the South region (based on dollars #1 TX, #3 FL, #4 GA, #6 NC).
3. If the focus is helping more borrowers, then Midwest markets with smaller loan amounts due to lower home prices start to pop to the top, (#5 OH, #6 IL, #10 IN, #11 MI).?

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To provide more local visual context, here is a map that highlights exactly where the recent borrowers that bought their homes with an FHA mortgage and had greater than a 5.5% interest rate reside at the county level.

More specific details on sizing and refining the top markets with the greatest opportunity by region and county can be seen in the tables below.