Weekend Talking Points – ‘Disinflate’

Inflation (CPI & PPI) continued to ease in July, and average 30-yr mortgage rates approached 6.5%. That’s already spurring a renaissance in refinancings; can a recovery in home buying activity be far behind?

(+) More progress on inflation! July CPI eases. “Headline” CPI (Consumer Price Index = inflation for you and me) fell to 2.9% YoY (from 3.0% in June), and “core” CPI eased to 3.2% YoY (from 3.3%). More than 90% of the 0.2% month-over-month growth in the CPI came from the (ridiculously lagging) “shelter” costs. Many of the other major items (energy, new/used car prices, airfares etc.) were flat to down. [Bureau of Labor Statistics]

(+) Wholesale prices rose less than expected. More good news on the inflation front. The July PPI (Producer Price Index = inflation for businesses) rose just 0.1% month-over-month and 2.2% year-over-year. [Bureau of Labor Statistics]

(-) Retail sales delivered an improbable surprise. July retail sales rose a whopping 1.0% month-over-month, MUCH higher than expectations. After so much good news for mortgage rates (falling inflation, looser job market), this was a bit of a gut punch. [Commerce Department]

July MBS Highway Housing Survey results. The MBS Highway National Housing Index dropped 2 points to 42 in August 2024. While this was the fourth straight MoM decrease for the overall index, it was a much smaller drop than we experienced in July. The reason for this is clear: a 37 basis point (0.37%) drop in average 30-year mortgage rates over the month, which lifted buyer demand in most regions. [MBS Highway]

Builders are still bearish, but getting more hopeful. Overall builder confidence declined for the fourth straight month to 39 (the lowest since December 2023), and last month’s figure was revised one point lower to 41. But digging deeper, the Future Sales Expectations component rose for the second straight month as mortgage rates dropped. [NAHB]

Realtor.com got it Really.wrong. They started the year forecasting housing inventory to fall 14.0% YoY and median home prices to drop 1.7% YoY in 2024. At their mid-year review, they revised these forecasts to 14.5% YoY inventory growth and 4.6% YoY median home price growth. [Realtor.com]

TP: If you’re a forecaster, you’re going to get some things wrong. So I’m not picking on Realtor.com here (their research is very good). I bring this up because Realtor.com was not alone in forecasting flat to negative growth for home prices in 2024. Instead, it’s shaping up to be another year of 4–6% median home price growth. The cost of waiting has been huge.

Prices are still rising in most cities. In Q2 2024, home prices grew in 89% of major metros. The median home price growth was 4.9% year-over-year (down slightly from +5.0% YoY in 1Q 2024). One city — San Jose — crested the $2 million mark! Like, no way, Jose. [NAR]

Homes have more pets than kids. Today, 39% of households have children under 18 living with them, down from 52% in 1950. 66% of households, meanwhile, have a pet today, up from 56% in 1988. [NAR]

Mortgage Market

Average 30-year mortgage rates moved as low as 6.34% on August 5 (the Monday after the weaker than expected July BLS jobs numbers game out). Since then, mortgage backed securities have given back some of their price gains, resulting in average mortgage rates drifting back above 6.5%.

Source: Mortgage News Daily

While we have yet to see these lower mortgage rates boost existing home sales, they have already caused a resurgence in refinancings (for people who bought in the last 2 years). According to data from the Mortgage Bankers Association, refi applications have surged 50% in the last two weeks alone, and are representing ~50% of total new loan applications.

Can a recovery in existing home sales be far behind? We’re moving into the slower season, but I’d still expect to see a bump up in pending sales. As a reminder, we’re currently selling homes at a 4 million unit annual pace. A normalized pace would be closer to 5.5 million units.

Here are the current odds on Fed rate cuts at upcoming FOMC meetings:

• Sept 18: 100% (same as last week); the probability of a 50 basis points cut dropped from 56% to 27%.
• Nov 5: US presidential election
• Nov 7: 100% (same as last week); 35% probability that rates will be 75 basis points lower than current
• Dec 18: 100% (same as last week); 42% probability that rates will be 100 basis points lower than current.

They Said It

“We are entering the slower season with lower activity levels and home price momentum than we had a year ago. However, the prospect of a new Fed rate cut cycle (and lower mortgage rates), combined with more balanced supply/demand in many markets, could deliver positive surprises this fall.” — Barry Habib, MBS Highway’s Founder and CEO.

“With current inflation data pointing to interest rate cuts from the Federal Reserve and mortgage rates down markedly in the second week of August, buyer interest and builder sentiment should improve in the months ahead.” — Robert Dietz, NAHB’s Chief Economist

‍