Zillow Market Pulse: August 14, 2020

August 14, 2020

Retail sales increased for the third straight month, but the pace of their recovery has slowed noticeably. Unemployment claims achieved a milestone but remain elevated. And a new fee promises to make mortgage refinancing much more expensive.

July's retail sales figures offer a conflicting outlook for the economy

• Retail sales rose 1.2% in July from June, and core retail sales increased 1.4%
•  It was the third straight monthly increase for the series, but a marked slowdown from the previous two reports

Unemployment claims remain elevated but have begun to fall

• A seasonally adjusted 963,000 people filed for state unemployment benefits last week, the first time the figure has fallen below 1 million since the pandemic began
• The level remains well above previous records

A newly-announced fee will make mortgage refinances more expensive

• The Federal Housing Finance Agency announced a 0.5% price adjustment to mortgage refinance loans that are serviced by Fannie Mae and Freddie Mac
• Effective immediately, the fee applies to almost all loans that are already in process

So what? 

July's retail sales figures offered signs of hope and disappointment in equal measures. On the surface, the headlines were lackluster. Sales had surged in the past two months – rising 18.2% and 8.4% in May and June, respectively — as the economy looked to recoup losses experienced in the pandemic's initial months. A slowdown in that pace was expected, but the 1.2% overall growth was much less than most had anticipated. But separate measures of sales that omit volatile categories came in above expectations and suggested that the surge in coronavirus case counts across the country had a minimal effect on consumer behavior. Core retail sales rose 1.4% on the month, nearly double the growth that most thought was coming. Looking ahead though, the paradigm shifts. The deceleration in the consumer recovery sets the stage for August's report, which will be the first since federal programs such as enhanced unemployment benefits expired without extension. Indeed, the looming end to those programs could have influenced spending activity in July, as households began to brace for a potential reduction in their household income. Absent an extension, retail sales levels could easily slow, threatening the recovery of the U.S. economy, which depends in large part on a sustained improvement in consumer activity.

Initial claims for jobless benefits continued to slow last week but remain elevated compared to historic norms. While the weekly total of applicants for jobless benefits has fallen to its lowest level since the pandemic began, and is showing sustained signs of improvement after plateauing earlier in the summer, the fact remains that the levels of people seeking unemployment assistance are still far higher than any previous time in recorded history. Further stunting the optimism attached to this report is the fact that, unlike the beginning of the pandemic, it appears that most of the job losses in recent weeks are probably persistent, rather than temporary layoffs. More broadly, the unemployment rate remains in double digits and only half of the jobs lost during the initial months of the pandemic have since been recovered. So, while a decrease in jobless claims is welcome news, the labor market remains a pivotal issue for the economy.

The announcement by the Federal Housing Finance Agency (FHFA) to apply a 0.5% fee to all home mortgage refinances serviced by Fannie Mae and Freddie Mac – a program being called the Market Condition Credit Fee in Price – was one that caught many by surprise. The move – effective immediately, meaning that it will be applied to nearly all loans currently being processed – will likely constrain refinance activity that has exploded upward this year as mortgage rates have trended toward all-time lows. In a time of great uncertainty like this, refinancing  allows many homeowners to tap into the equity they've built in the home to free up money and keep their finances afloat. For others, refinancing simply offers a means to lower their monthly mortgage payment, letting them keep even a few more dollars in their bank account each month. This fee will make it more difficult for homeowners to benefit from these offerings at a time when many households are in desperate need of financial support.

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