384: High Mortgage Rates Does Not Equal Housing Crash

Buck:

Welcome back to the show, everyone, today. My guest on Wealth Formula podcast is Selma Hap. Selma is the chief economist for CoreLogic, America’s largest provider of advanced property and ownership information and analytics and data enabled services. She leads the economics team, which is responsible for analyzing, interpreting and forecasting housing and economic trends in real estate, mortgage and insurance.Selma. Welcome to Wealth Formula podcast.

Selma:

Yeah, thanks for having me.

Buck:

So let’s let’s kind of start with like, you know, some of the interesting things that have happened. You know, obviously the inflation and interest rates and all of that have created a little bit of a mess for real estate in general. But in the last month, we actually saw inflation down to lowest. It’s lowest in two years. Does inflation still pose a significant risk in the real estate market? And what do you what do you make of the new data?

Selma:

Well, so, I mean, we’ve seen some disinflation happening, right. And most of it is sort of leftover effects of, you know, supply chain disruptions and then also the core, the non-core. So headline inflation and gas prices and food prices. Right now we have this leftover services, inflation, that’s a little bit more stickier than the one I just talked about. And it’s making it difficult to, you know, to sort of expect mortgage rates at this point. So the impact we’re talking about here is mortgage rates rise. That’s what matters to us the most. And unfortunately, you know, we were all sort of thinking mortgage rates would start declining by this point in the year and reach some less than 6% levels by the end of the year.

Now, things are looking a little bit different at this point because the inflation persisted, because the Federal Reserve signaled that they will do two more hikes this year and naturally, sort of bond markets said, okay, well, I guess this is a longer higher for a longer ride and we are now going to see the cuts, that rate cuts that we were expecting by the end of this year. So, unfortunately, we are in this environment of elevated mortgage rates that are, you know, causing some constraint on the market. On one hand, they are definitely dampening the demand. So we’ve seen pretty strong demand coming into the first few months of this year. And then with the banking turmoil and mortgage rates going up, that demand has definitely shifted down.

And the sales activity at this point is trending anywhere from 20 to 30% below last year or even below 2019 levels. But the really the issue that’s the bigger issue, I think at this point is that high rates are keeping existing homeowners in their homes because they don’t want to give up their low mortgage rate that they locked themselves in or, you know, not mean that in a negative connotation.

I think it’s good because it’ll lower their mortgage payment. But but they really don’t have an incentive to give up the rate right now. And so we are in this quagmire of, you know, really, you know, nothing is moving that much, at least in terms of the existing housing market. So, you know, to circle back on your inflation question, I think it is posing a concern in the sense that, you know, Federal Reserve is laser focused on that 2%. It may take us a little bit longer to get to 2% and it may really be not well for the housing market going forward, which at this point we were already expecting it would it would sort of bounce back. So. So, yeah, so no one’s.

Buck:

Just unpacking a little bit of that. I think what I gathered and I’ve heard this idea before is, you know, if you look at prices nationally, based on based on what’s happened with interest rates, you would maybe expect that prices would have gone down a lot more. But because the fact that, you know, frankly, people a lot of people are locked into low interest homes, there’s really no incentive to get out of those. And so that’s creating a deep, significantly decreased inventory. And so so that is that is essentially, you know, sort of stabilizing prices there as well as that. Is that right?

Selma:

Right. Right. So I think, you know, to to give some silver lining on the situation is that it has provided these low inventories have provided a floor under home prices. So where we entered the year, expecting double digit decline in home prices nationally or some were expecting that not an accurate forecast. We were not there, but we were expecting some natural decline.

We’re not seeing that We actually as of the February of this year, we started seeing a very strong rebound in monthly gains in home prices well above what we were traditionally see in the spring homebuying season, because usually you do see some increase in home prices. It’s a seasonal effect. But but this time we again, so are much higher or much stronger gains than than than than historically.

And so what that means now that nationally CoreLogic forecast is for no longer to see any any any reporting off of a year over year decline in prices. But actually at this point, an inflection in an appreciation on a year over year increase, in appreciation on a year over year basis. So, you know, it’s a it’s a good and bad, right?

It’s good because it’s it’s provided our sort of a stability to the market, you know, which was much needed. I mean, I think stability, particularly when when you have consumers being concerned about the housing market and sitting on the sidelines, you know, giving them some sense that home prices are not going to fall through the, you know, fall off the cliff.

They do respond well to that. But I think the unfortunate thing at the moment that I keep thinking about more and more recently is that this reacceleration in home prices is not going to be good for for inflation, you know, because inflation has it. Housing inflation is about 40% of overall inflation measure of we see home prices going up again. You know, that’s not that doesn’t line up with the federal is part of the reserve policy you know so so we got you know, both sides of the coin here.

Buck:

Yeah. Well that’s yeah, it’s a strange thing to me because to a certain extent I would think that even with decreased inventory that there would be a cap to what people can actually afford in a in having, you know, the affordability being the, you know, sort of the last wall that prevents, you know, prices from going up further. But that’s not happening.

Selma:

Yeah, No, I mean, I think affordability is an issue. And, you know, in terms of where typical mortgage payment is historically speaking or just affordability levels, we are at the lowest affordability level on record or not on record, maybe going back some 40 years. So you know, in many ways it is or on our own in our lifetime record that we know. But, you know, I think what’s driving the demand in despite this affordability challenge is that people are moving across state lines. They’re going to areas that do have more that are more affordable to them and the other things, because home prices have gone up, you know, some 40% since the beginning of the pandemic. And on average, people have almost $300,000 in equity.

They have a lot of cash to work with. And I think because of that, we continue to see pressure on home prices, particularly in markets that are more, you know, like relatively speaking, more affordable. So, you know, it’s not the South, whatever. Florida, you know, that’s where you have a lot of migration to do. And and it’s holding prices prices high, you know, so it’s it’s not just about affordability of local residents, but it’s it’s you know, we’re having this new new new trend introduced to the housing market, which is migration patterns, the ability to work for many out of, you know, destinations that they didn’t they were not able to from before.

Buck:

Sure. You know, obviously, the paradigm is quite a bit different when it gets to commercial real estate or large multifamily or, you know, office or anything in that. What give give me sort of a similar outlook or not outlook, but sort of maybe just tell us where we are right now. First, with regard to the interest rates and mortgages that we were talking about before, when it comes to the commercial markets.

Selma:

Right. So, you know, I think the challenge with commercial market, well, there’s there’s a couple of things. One is office commercial that every segment seems to be performing a little bit differently at the moment, where multifamily housing, you know, it has slowed to the similar extent that residential has the single family residential or homeownership market. But apartments and multifamily are now actually performing well. Again, given the strong job market that we’ve had strong income growth, household formation, you know, when you think about our apartment market or rental market versus a homeownership market is a rental market is much more dependent on that job growth and household formation, you know, whereas, you know, homeownership, it’s it’s a couple of things. But but so so multifamily, in my opinion, is not doing as bad as we thought it was going to be doing.

You know, now commercial at least. Yeah. Yeah. I mean, you know, I think even with job A the forecast for unemployment rate of unemployed and going forward, I mean it looks like it’s only gradually going to increase and and you know that increase is expected to come to some 4.5% by like, you know, the end of 2024, which is really where we historically have been in terms of rate of unemployment, is sort of what a lot of people consider natural rate of unemployment, where where the job market is not putting additional pressure on inflation rate because of that wage growth.

Buck:

The only thing is, though, that like, you know, with regard to me, like one of the major things that’s different here is, first of all, when you look at larger assets, commercial assets, multifamily debt structures are often very different. And also like when you get into these situations where, you know, funds need to deploy capital or vice versa, they need to get out of of real estate because of the closing fund and that kind of thing. Or how how did those things affect what you see? You know, I guess maybe you just start with the interest rate and, you know, different mortgage structures there because, I mean, certainly most of the time, even if you’re fixtures fixed for, you know, five, maybe ten years max and in a lot of commercial is still floating as well.

Selma:

Well, right. I mean, I think what’s what’s what’s the challenge right now is is for a commercial is that you know, there are coming there’s this huge volume of commercial real estate that’s maturing. Right. And so now they’re maturing in this really high rate environment. And so what happens with with with those mortgages and those assets, you know, I think a lot of people are talking about, you know, a wave of default holds, particularly for office group. But we’re not really yet seeing that in many ways, you know. So I don’t know if people are working out, you know, they’re maybe getting some private funding, some equity of private funding to, you know, to help in this refi restructuring or maybe they are subleasing. I’m not exactly sure. But because, you know, we don’t track to perform the commercial performance that closely in our data.

You know, we’re mostly residential. You know, we were very strong on on all types of residential data, not so much on commercial. So but but at least what was expected, that would be happening at this point is not yet. I mean, we’re not seeing a wave of defaults. We’ve seen, you know, serious delinquency go up for a commercial and it has gone up, you know, maybe faster than you know. Then historically. Right. So but but but the actual default is not not happening yet.

Buck:

So how about delinquencies and, you know, defaults in in multifamily. So apartment buildings are do you have some data on, you know how distressed that market is currently.

Selma:

Yeah. Yeah. No it’s it’s a very similar story where we’ve seen some increase in delinquency so nonpayment but nothing that is yet, you know, significantly alarming. You know, so so that’s what I mean. I think there’s some workouts being done there or maybe we have presumed a much worse outcome than than it’s, in fact, happening.

Buck:

Yeah. Although I would argue that you know, one of the things that’s keeping this market afloat is right now is a lot of interest rate caps. Right. And those interest rate caps that were purchased or basically stabilizing a lot of, you know, floating rates. And the question is, you know, what happens when those caps start to expire and, you know, there’s either you’re going to buy more caps or are you going to develop. So the question is, I guess in part like what we’re trying to figure out in our group is in I guess what we’re presuming is that there’s a pretty significant wave of distress on the way. But it sounds like from the data that you’re seeing right now, that’s not clear.

Selma:

It’s not clear. Yeah, you know, I do. I but, you know, I followed that you know, maybe down the road. But I guess what I’m just saying is we’re not yet seeing that.

Buck:

What are some of the other, I guess, things that you’re looking at in terms of, say, longer term, you know, geographically, what markets are becoming increasingly strong, which markets are perhaps weakening? What kind of projections do you have in those types of things?

Selma:

Yeah. So, you know, it seems like things go up, things come down. Right. And so it’s it’s very much the trends. So what we’re following is the trend, you know, that pandemic started with is so markets that were really strong at the beginning of the pandemic were markets in the mountain west, markets that were second home markets, vacation markets, just areas that people could be outside, right?

I mean, natural extension of what was going on. And now these are the markets that are the coolest. You know, and particularly if they, you know, this affordability that we talked about has, you know, been really crushed. You know, crushed with with the rate of appreciation. But now, you know, fast forward to where we are today. Markets that over the last year were really hard and those were particular markets in the south and south east.

Now they are cooling really fast, you know, so so Florida to some extent is cooling faster. You know, some markets in Texas, some markets in in Nashville, in the Tennessee, Carolinas, those are the markets that are cooling relatively faster. And the markets that are rebounding are the markets. They were cooled throughout the pandemic. You know, for example, Chicago, Mount, Midwest markets, Boston for a long time was a very cool market during the pandemic. New York, too. These are the markets where we in terms of rents, are now seeing those markets sort of ranking on top of the list. So, you know, it’s sort of a, you know, shift. And again, it’s you know, it’s good.

Buck:

So it’s so it sounds to me like you’re you’re talking a little bit about is, you know, people are moving back into cities.

Selma:

Yeah. Yeah. I think we’re seeing that. I think we’re seeing that which I think why maybe I’m not so negative on the commercial real estate or, you know, office, government office here. You know, I think some markets will will will, you know, suffer more so than other markets. But there are many markets across the country where people are going back to the offices or they’ve already been they haven’t been away from their offices as much as we talked about.

We seem to emphasize a couple of markets and say that and then generalize that all the trends are the same as India’s couple of markets, where every market seems to be different. And so so so yeah, I would say that, you know, there is pressure, particularly from management for folks to come back into the office, is people want to go back to the offices and they want to go back to wherever they were from. Maybe, you know, I think in many ways, for some people, the migration was temporary during the pandemic. They didn’t permanently move to, I don’t know, you know, tenancy, you know, or natural tendency, because that was sort of one of the boom markets during the pandemic or Boise, Idaho, you know, But it was a temporary move. Right? So, you know, so I think we’re just seeing some, you know, readjustment.

Buck:

So in the cities and I don’t even know if this is really necessarily part of what something you would look at. But I know there are some government plans to, you know, going back to the idea of people moving to cities to convert urban commercial buildings potentially into some affordable housing. I don’t know if you’ve heard of that, but.

Selma:

Yeah, yeah, yeah. No, yeah, that’s a that’s a huge topic at the moment. And a lot of people are looking at, you know, potential, you know, build out, you know, sort of capacity. But what it seems to be, well at least from the research I’ve seen so far, it seems that the, the office building did provide most opportunity for such conversions are offices that are not located in downtown towns and urban centers, but are more suburban, older office building those, you know, spread out what do they call them, like office parks, right. Versus versus, you know, being downtown, I don’t know, San Francisco or downtown L.A. It’s those office buildings that are much harder and costlier to convert. So, you know, so I think I think the enthusiasm is there. I’m just not sure to what extent is very realistic in many of these markets. They definitely actually need affordable housing.

Buck:

Yeah, sure. So in going back to the Fed and interest rates and inflation, I mean, I guess from your as an economist, what are your projections? What do you think’s going to happen? You know, obviously we’ve got you know, we’ve got the Fed talking about two more rate hikes, but in nothing so far has really, I guess, been there’s been some bank failures. Obviously, there’s been some distress the market, but not as much as you want or not as much as you would expect, I guess the question is, you know, do you think that there’s just I mean, at what point do they stop raising rates? You know, as an economist, when you look at that, like what? I mean, is it just you’re looking for a solid 2% inflation rate and then you’ve got is that is that the only thing that we’re looking at there? I mean, what if a lot of things start breaking.

Selma:

Right? Yeah. I mean, I think, you know, there’s a couple of things going on here. I think one is our Federal Reserve’s Federal Reserve’s what is the word? No confidence imperative, like their their reputation or that’s not the right word. But, you know, trying to maintain a confidence in their actions right. By markets. So so, you know, they have been very persistent on saying that 2% is the goal and target and that they’re not going to give up until.

You know, I think in one of the recent commentaries it said if went, inflation is coming down really significantly is I think how they worded it. And we have not seen the really significantly part yet, but I do believe that if things started breaking much more than they have, that we would see things change. I think we would see, you know, but, you know, I mean, you saw that basically after a you know, after the March situation with banks, you know, and then the June meeting came along and they stopped, you know, and then well in advance of that meeting, they were communicated intent to to stop or to pause it.

Actually, I think given they were accumulating a full stop, but it left it a little bit open. I mean, you know, people spend much more time going like word by word by what the Federal Reserve is saying. But, I mean, you know, really, if you look at what they’ve been saying and what they’ve been doing, it’s been very consistent.

So I think you know, they want to be taken seriously in their intent. And if their intent is to bring it down to 2% with maybe some average age band around it, you know, because prior to the pandemic, you know, there was a target range, wasn’t it? Right. So so if we come into that range, I think I think they would stop, you know, so again, I think the something breaking would make them stop otherwise, you know, coming into that range or seeing significant, which I think at this point we may see significant disinflation because at this point we are comparing year over year numbers that peaked last summer. So gas prices peaked in July. Right. And so because of the base effects, we are going to see inflation coming down pretty significantly in the coming months.

Buck:

Why do you think we’re not in a recession? Or maybe we’re headed toward towards one, But it seems with this kind of rate increase, you would expect you know, you would expect I, I mean, I’m not an economist, but I’m wondering why we haven’t gotten to recessionary numbers yet. Yeah. And employment, by the way, and employment still going up just doesn’t make sense to me.

Selma:

Right. Well, I think what we you know, the economists brought this up, you know, years ago that we are we don’t have enough labor out there. You know, our labor has been shrinking. There are many more people that retired during the pandemic than we were expecting given the trend line. And the other thing we saw was a huge drop in immigration during the pandemic, which is now rebounding. So I think what’s you know, what really we have going on is not enough labor. And, you know, and so everybody’s employed. And when you’re employed, you spend money, you know, And so I think that’s what’s keeping what’s keeping us going at this point.

Buck:

Yeah. Do you see any pressures on I mean, what is your anticipation? Do you guys you’re is your as an economist, do you see us avoiding in a recession with all of this?

Selma:

Well, I think the recession calls have been, you know, revised down in many ways. A lot of folks now don’t have, you know, call a recession in their forecasts. They’re calling from a, you know, growth recession, which basically means growth below potential but not a decline. So I think yeah, I think I think we can weather this out and maybe maybe actually indeed come out of this with a soft landing.

Buck:

Yeah, well, that would be interesting. Yeah, that would be a that would be interesting, certainly from our perspective and you know, from my perspective and looking at what’s going on in the multifamily real estate, it’s hard to imagine that there’ll be a complete soft landing in terms of real estate. But but who knows, right? So some tell us a little bit about CoreLogic.

Selma:

Well, yeah, CoreLogic, you know, as I mentioned at the beginning, you know, we were premier provider of data residential housing. There is most residential data and solutions in. And so we you know, we collect, you know, thousands of data sets across the housing ecosystem, including property records, data, MLS data, mortgage performance, mortgage servicing, mortgage originations, appraisal data tax recording data, you know, permits data. And now the latest data, you know, that we use in all of that. We the latest data said are analytics solution that we developed using all of this data is climate change our hazard risk scoring by properties. So basically you can go property by property and there is a is a risk score of potential hazards. And we do hope that with that consumers well and you know others asset managers as well will be better informed about potential risks in geographically, right.

Because there are areas that are continually I mean there’s this issue with with insurance in California, right? There’s the same issue in Florida. And so this is something that we all need to be better educated. So so the idea of this solution is of our climate change solution is to help with that.

Buck:

The website is core logic dot com. Some are. Thank you very much for joining us and well from your podcast.

Selma:

Thank you thanks so much for having me.

Buck:

We’ll be right back.