Nightmare on Main Street: Unpacking 10 Scary Housing Trends

A Conversation With Molly Boesel

From soaring mortgage rates to climate risks, the economic landscape of buying a home is filled with uncertainties that could terrify even the most seasoned investor.

In This Episode:

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Molly Boesel:

Oh, that is a scary one. Well, with climate change, we do look at our climate risk analysis at CoreLogic, and we’ve been also comparing that with where people have been moving, and we’ve actually seen that some people are moving into those high climate risk areas.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies, and technology affect everyday life. I am your host Maiclaire Bolton Smith, and I’m just as curious as you are about everything that happens in our industry. It’s spooky season. Halloween is tomorrow. So for today’s episode, we’re going to discuss the scariest things about buying a house in today’s market. From housing price sticker shock to nightmares about interest rates and the fears of the acceleration of natural disaster events, A lot has changed in the housing market over the last couple of years. So to talk about the top 10 scariest topics in the housing market today, we welcome back one of our favorite guests, CoreLogic, senior principal economist, Molly Boesel. Molly, welcome back to Core Conversations for our spooky episode.

MB:

Oh, thanks for having me again, and I’m really excited to be here for the spooky season.

Erika Stanley:

Before we get too far into this episode, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle at CoreLogic on Facebook and LinkedIn or at CoreLogic Inc. On X, formerly known as Twitter and Instagram. But now let’s get back to May, Claire and Molly.

MBS:

Okay. I know you are all about tracking trends in the housing market, so I’m really glad that we have you here today to talk about, and I just love talking to you, so to talk about this. So let’s start with scary topic number one, mortgage interest rates. I know that that is literally one of the scariest things that’s been in the news for so long in Midgut. We did start to see that they’re coming down a little bit, but compared to the pandemic years, they’re still high. Regardless how you slice it, they’re still high compared to what people kind of got used to or appreciated during the pandemic. At this point in time, what can we expect these rates? Will they ever reach pandemic levels again, or where do we think this is going?

MB:

Yeah, well, that is a really great place to start because I agree that’s probably the scariest thing right now in the mortgage market, and it’s really just affecting every single thing in the mortgage market. And mortgage rates we’re under 3% during the pandemic. That was an all-time low, and they stayed there for quite a while, but even before that, the 30 year mortgage rate was in the mid 3% range, and now more than double that now. So even though they’ve come down a little bit, they’re still more than double where they were. And like you said, mortgage rates have come down from their recent highs. We are likely to see them to continue to come down this year, next year, but it’s really unlikely we’re going to see them in the 3% range again. But five percent’s not out of the question, but that 3% and plus the sub 3% is just not likely to happen again.

MBS:

And that’s sad for those of us who don’t have interest rates at that low level. And definitely does make it scary when thinking of making mortgage payments or even for people thinking of buying a new home and what that looks like.

MB:

Exactly, exactly. It’s keeping a lot of people where they are now because they don’t want to take on a new higher mortgage rate.

MBS:

For sure. Okay. Scary topic number two, rising debt to income ratio. So that’s one that people maybe don’t think about as much personally, but it is one of those classic measurements in the property industry. It’s also a number that no one really wants to see it elevated, and right now it is. So can you talk a little bit about what this is, why it reached the peak, and I guess just how this can affect home buyers?

MB:

Sure, sure. Yeah. So the debt income ratio when we’re mostly talking about now is this backend debt to income ratio, which means you take borrowers all their debt obligations and add ’em up and see what share that is of their income. Now, that’s their pre-tax income. You’re not even looking at taxes, but it has been going up a few years ago, that income ratio was around 35%. Now it’s closer to 40%. So it’s come up about five percentage points, and it makes sense that it’s gone up because the monthly mortgage payments are higher, home prices have grown, mortgage interest has increased. So all of that has helped DTIs come up. But the problem with it being so high, it’s like, well, maybe borrowers could qualify at those incomes, that’s fine, but because that’s all their debt obligations, let’s just share their income. What if they had some unexpected expenses? They’d be much less likely to be able to weather that.

MBS:

Yeah, no, it definitely makes it so much more difficult.

MB:

Right, right. And that’s, you talk about scary, that’s a scary situation.

MBS:

Sure. If something bad happens. Yeah. Yeah. Okay. Number three, down payments. So a huge part of buying a house is a down payment. And given the current prices of homes and how the current prices are continuing to continuously increase, the bigger the price on the home, the bigger the down payment. I know too, over the past couple of years or maybe even decades or so, you start hearing about other options of down payments. I think back in the day, it seemed like 20% was your down payment regardless, and I know now there are other options of 10 or 5% even, or sometimes even lower down payments to accommodate some of the really large prices of homes. But the lower the down payment, the higher the loan value. So yeah. Can you just talk a little bit about the scariness of down payments and what people are doing with them these days?

MB:

Yeah, so down payments certainly up because like you said, home prices are up. So say everybody still puts down 20%, you got increasing home prices, that 20% is more dollar value. So I mean, that’s pretty obvious. And then even back a few years ago when interest rates were lower, those down payments were still growing as home prices increase.

MBS:

Sure, sure.

MB:

So that’s a pretty scary thing. But you said the LTV ratios, that loan to value ratios been declining, which means people are also just putting more money down in addition to the 20% on average. Now, we’ve got some other situations I’ll talk about in a minute, but why would people put more money down? It’s just to lower that loan amount, like you said, to keep that monthly payment a little bit lower.

MBS:

To help with that debt-to-income ratio.

MB:

And we’ve seen a lot of first time home buyers are actually putting a lot more down because they probably, we will talk about in a bit with inventories, but a lot of these first time home buyers have been sitting on the sidelines for quite a while, so they’ve been saving some money and they’ve had a little bit more to put down. But you talk about another situation with down payments is there, these piggyback loans are kind of making a little bit of a comeback, and that’s where someone might put down only say 10%, and they might get a loan for the other 10% if they want to have a 20% total

MBS:

Down payment. Oh, interesting.

MB:

Interesting. Yeah.

MBS:

So they get a loan for the down payment, which is different than their mortgage.

MB:

Yes, yes.

MBS:

Oh, interesting.

MB:

Yeah. So they can maybe avoid some mortgage interest, mortgage insurance rates and stuff like that. But a lot of times that second mortgage, that piggyback loan becomes at a higher mortgage rate. So that’s one issue. And then sometimes, and this again, talk scary, we’re seeing some loans coming in with higher than a hundred LTV, which means that they have zero equity to start. Oh, wow. So if prices were to come down, yes. Yes. So if prices were to come down for those mortgages or those borrowers would be in a bad situation,

MBS:

That would lead to negative equity then, which is something you and I talked off before,

MB:

Right?

MBS:

Yes.

ES:

What is negative equity, exactly. Negative equity is when someone owes more on a mortgage loan than the current value of a home. This is also known as being underwater on a mortgage.

MBS:

Number four, competition. And not just competition, but competition with investors. So I think people traditionally know that there’s going to be competition when buying a house and you need to have the best offer and you have to outbid other families. But especially in the last few, I mean the last decade or maybe even a little bit more than that, it seems like the investor market has really picked up and competition with investors has become really competitive, for lack of better words. Exactly. You talk a little bit about the growing number of investors and how the investor market has really kind of taken over. And in many cases, investors have a lot of capital and they can put a lot more money down, so it’s more appealing to a seller than a traditional family with getting a mortgage. And yeah, that’s changing the dynamic of the market,

MB:

Right? So one, not all investors use, I mean, a lot of investors use what we’ll call cash, but it’s different forms, forms of funding other than a mortgage. So that’s to a home seller that would look like a cash offer. So that is pretty attractive to some sellers because they don’t have any contingencies. They don’t have to worry about the buyer getting a mortgage.

So that’s an advantage they have, and that’s helped the investor market grow over the years. But during the last few years, it’s not only the large investors that have been growing, but it’s also the small investors. So we think a lot of times we think of investors, we think of these, what some people call institutional investors, those really big ones, but small investors, what some people call mom and pop, they make up about half of the investor market. So that might be someone who owns maybe three to nine, I think is our definition of the mom and pops, but that’s growing as well. And a problem for your regular owner occupied buyer is that these investors compete, and they also, for the first time home buyer, they compete on the lower price end of the market. So they might be competing a lot with the first time home buyers, so that could be a problem. But some good news, and our most recent investor report is showing that the share of investors is down. So if you look at all the purchases

In the beginning of, or the first half of 2024, the share of investors is down. So that’s great, which means that means the share of owner occupants is up because the number of investors is staying pretty constant. So you got more owner occupants coming into the market. So that’s pretty positive. But investors are really just still attracted to this kind of market where you have a strong rental demand, and if there’s a strong rental demand, they’re going to get a pretty high return on their investment because they can keep raising rents and make back their money for that.

MBS:

Okay. Well, I’m glad you mentioned rental rates because that’s number five on my list, the rental rates. I guess to put it in context too, that maybe there are people out there that have a two and a half percent mortgage rate.

They are ready for a new home, but they don’t want to sell that house because they have such a good mortgage rate that maybe they want to rent it out instead of selling it, and they’re going to buy a new home regardless, but they want to rent out their first home. So how do these mortgage interest rates contribute to the price of the rental and how, I guess, and possibly the pool of renters that you might get.

MB:

So yeah, your first point was that higher mortgage rates are kind of making people want to be landlords, I guess, because they don’t want to sell their home. They’re in to buy a new one because they’re going to keep that low rate. So then they’re using their new rental, I guess the one they’ve just placed on the rental market to fund their new purchase. So that is one thing the higher mortgage rates are doing. And so that might make landlords raise rents a little bit because that could increase rents a little because they need to pay for that higher mortgage rate on their new home.

MBS:

Sure. Right. Yeah.

MB:

And so higher mortgage rates have affected rentals because you have this lock-in effect, where somebody who currently has a mortgage and has a home doesn’t necessarily want to move. So that inventory is not coming on the market, or it’s staying as a rental as they move somewhere else. And having less inventory increases rental demand because there’s nowhere for a family to move if they want to move into a bigger home or into a new neighborhood, maybe for a school district or something like that. So they might opt instead for a single family rental. So again, it just all starts to combine and increase demand, which would then also increase rent.

ES:

It’s that time again, grab a cup of coffee or your favorite beverage. We’re going to do the numbers in the housing market. Here’s what you need to know. The historical relationship between home sales and economic recessions is breaking down. The housing market stands in sharp contrast to many other facets of the US economy in this relationship is counter to historical patterns. Research shows that housing downturns preceded nearly every recession in the 20th century. Going back to the Great Depression in the new millennium, however, the relationship has been shakier CoreLogic research points in part to interest rates by borrower count, 30% of borrowers have a rate under 3%, and 60% have a rate below 4%. Theoretically, a drop in interest rates should result in more residential investment, and therefore more new home sales. However, low interest rates are keeping people in their homes and resulting in fewer inventory options. This changing relationship combined with the most recent housing downturn, not tipping into a recession begs the question of whether housing is now decoupled from the broader economy. If so, perhaps it is no longer appropriate to consider a housing market downturn as a leading indicator for recessions. And that’s the sip. See you next time.

MBS:

Well, I think it not only all combines, it all links to my next question because number six is lack of inventory. So you and I have talked about this many times on this podcast, Molly, about how the lack of new builds, the lack of inventory available. I mean, I ran into this when we were buying the house that we live in now and how that is affecting prices. But have we seen any movement on this in recent months or in the past year even on where are we in terms of new construction and number of properties on the market? Is inventory getting any better?

MB:

So it’s getting a little bit better, actually. So the inventory of resale homes is getting a little bit better as the year progresses. So owners or people with mortgages, they’re just realizing if they need to move, they’re just going to need to move. Mortgage rates are going to be high for a while. People just had to do, they’re just going to be high for a while. Mortgage rates are going to be high. So inventory is increasing a little bit, but we’re not really seeing a lot of new construction coming on the market. Home builders are affected by the thing everyone else is affected by, which is interest rates, so that they’re funding if they need to fund a construction loan, it’s more expensive, but they’re also affected by high materials costs, high labor costs, high land costs, all of that. So it’s making it hard for them to bring new projects online. But when we do see rates, mortgage interest rates and interest rates in general, easing, we should see construction start to pick up again.

MBS:

We also have seen inflation drop for the first time and quite a long time as well too. So potentially that could contribute to more building happening.

MB:

Oh yeah. Yeah. Inflation easing up is a really big factor here. So once those materials costs start to come down and when inflation is down, well, the Fed will continue to lower interest rates. Right? So sure, we will see that coming down as well.

MBS:

Yeah. Okay. Number seven. One of my favorite topics is climate change. So it’s one of those looming threats to the property industry, whether it’s more frequent events, hailstorms, hurricanes, greater intensity. There’s also, we’ve seen patterns changing. People always think of tornado alley that is moving. Different states are now more affected and impacted than they have being in the past. We’ve talked about migration, people moving out of these areas. What do we think from an economic perspective, how is climate change making an impact? Maybe even long-term on the housing market investments?

MB:

That is a scary one. Well, with climate change, we do look at our climate risk analysis at CoreLogic, and we’ve been also comparing that with where people have been moving. And we’ve actually seen that some people are moving into those high climate risk areas and talk about economic, like Florida, for example. Yes, exactly. And talk about the economics of that is that the prices in those areas aren’t necessarily capturing the full cost of living in those areas. We’ve seen people moving to high wildfire risk areas that the people moving there has doubled in the past 20 years. Hurricane exposed states like Florida, South Carolina, Georgia has seen double digit growth over the past decade. Texas. So Texas, exactly. So it’s just that a lot of times, like I said, the price is not capturing the full cost. And in one thing that really distorts it is that insurance costs increase in some parts of the country, but they’re not allowed to increase in other parts of the country because Oh, interesting. Of state regulations. So the people who are moving to places where it’s more regulated have a relatively lower insurance cost than some places that are not highly regulated.

MBS:

Well, insurance is number eight on my list, Molly.

MB:

Oh my gosh. Look at that.

MBS:

Insurance is a big one too, because you’ve alluded to some of it, but we also are seeing some of these states that are prone to disasters. It’s becoming harder and harder to get insurance on your property as well. And I think in particular in California and high wildfire risk areas, this has kind of been a big topic in the news. How do you see this affecting home prices or even homes for sale? Are people going to want to buy homes that they can’t get insurance for?

MB:

Well, yeah. No, they won’t want to buy homes they can’t get insurance for, or if it’s too expensive, they’ll have to rethink how expensive a home they buy so that they can afford that insurance. So if somebody was looking to buy a million dollar home, they may need to scale that way back because their insurance is going to be higher, but insurance is going up for everyone across the country. And you’re talking about scary things. One of the scary things is that it’s not just the new home buyer that’s going to be seeing these higher costs, but it’s the current home buyer who don’t necessarily have that budgeted in their monthly budget. So when they see those increases in their premiums, that could cause real stress on their budget.

MBS:

We’re getting close to the end of our list here, Molly, but we got a big one right in front of us at number nine is taxes. So I mean, arguably this is just terrifying to think about in general, but I guess there’s two parts of this. There is both property taxes, which people pay on a regular basis, but there’s also capital gains taxes. And we haven’t really talked much about this before on the podcast, but I know your team did a study on this earlier in the year and found that 8% of homes sold in the US in 2023 exceeded the capital gains tax limit of $500,000. So I want to talk a little bit about a, what does that mean? And also then for new properties, the way property tax works, it’s different in every state, so it’s different across different parts of the country, but ultimately the higher the V value, the higher property taxes as well. So if you’re buying a home with a high value, inevitably you’re going to be paying a lot of property tax on that.

MB:

Exactly. Exactly.

MBS:

Yeah. Can you just talk about the spookiness of everything to do

MB:

With property tax? Oh, taxes. It’s like one of those things you can’t avoid, right? So yeah, first the capital gains portion of that. So since 1997, so that’s a while ago, homeowners could exclude a capital gain of up to $500,000. That’s for a couple or $250,000 for a single filer. So that’s when if they have a gain on their house when they sell it, they can exclude. That means they don’t even have to report that to the IRS, but go over that $500,000 deduction. That’s where they pay the capital gains.

ES:

A capital gains tax is the tax on profits realized on the sale of an investment or an asset for homeowners. This tax is triggered when the sale of a house nets a gain over $500,000 for joint filers or $250,000 for single filers in 2023. Almost 8% of US homes exceeded that limit according to CoreLogic research.

MBS:

And we are in a market where many of people who are selling a home, they’re selling a home that’s potentially doubled in cost. That’s right.

MB:

And they’ve been there a while. So that’s the issue. And that $500,000 deduction hasn’t changed since 1997. So it stayed exactly the same, even though as we were talking about the cost of living is up, and also home prices have more than tripled since then. So having that deduction stay the same is kind of what’s triggering this owing the capital gains. But it really means a lot to those longer term owners. So a lot of people stayed in their homes after the great recession because they had negative equity they needed to make back get backed up to where they had some equity in their homes. People just in general are staying put longer. So that’s causing those long-term owners to see these capital gains. And then, like I said, with the increases in home prices, you have a state, for example, like California, that’s actually the biggest share of those paying those capital gains. But a million dollar home is pretty common. So you’re likely to see that. And that’s something that these owners are not really anticipating. They go, I’m going to make a million dollar gain on my home. I’ve lived here for 30 years or something. So they budget that in when they’re looking to buy their next house, and they’re not going to have as much money then for the funds that they thought they would have,

MBS:

I guess. And then part two of that, Molly, is property taxes in general are just scary.

MB:

Right? Right. They are. Right. So you can’t have a 50% increase in home prices and not have the tax man take notice. So home prices, like I said, increased 50% since 2019. And in most areas, tax assessments have followed. So not everywhere in the country do you see the home reassessed as often as every year, but at least I know where I live. We got a new assessment every year.

MBS:

Yeah, I always have as

MB:

Well. They keep up. Yeah. And on average, that’s been about a $600 increase per month. So that’s pretty sizable for the homeowners.

MBS:

But again, that is not standard across the country. Some

MB:

States are locked in, not at all.

MBS:

Right. So some states it works different in every taxable state or county.

MB:

It really does. Right.

MBS:

So some people are locked in from the time of the purchase

MB:

Until they sell. Exactly. Exactly.

MBS:

Yeah. But still, yeah, it’s scary.

ES:

Before we end this episode, let’s take a break and talk about what’s happening in the world of natural disasters. CoreLogic’s Hazard HQ command, central reports on natural catastrophes and extreme weather events across the world. A link to their coverage is in the show notes. Early September saw Typhoon Yagi soak the Philippines in the us Hurricane Francine hit Southern Louisiana. CoreLogic estimated the storm surge flooding put over 125,000 residential properties at risk. In that insured wind and storm surge losses could be up to $1.5 billion. And then there’s wildfire. August marked the one year anniversary of the 2023 Maui wildfires. These wildfires claimed over a hundred lives burned approximately 6,500 acres of land across Maui and caused more than 5.5 billion in damages. To read more about why these wildfires spread so quickly, go to hazard hq.com. The link is in the show

MBS:

Notes. Okay. We’ve made it to the end of our list, Molly. Number 10, houses may have a ceiling, but the market does not. So I guess the question is how much further can we go? We’ve got the trifecta, elevated prices, high interest rates, not enough units. Affordability is insane. Nothing is affordable.

MB:

Yeah.

MBS:

Nothing is affordable. The question is where do you think we’ll go from here? Where can you go when we’re at this

MB:

State? Yeah, I think this is, the good news in this is that affordability is at an all time low,

But mortgage rates are coming down. And when we see mortgage rates coming down, we’re going to see that affordability ease. So that’s going to stuff is going to become more affordable. And even though we do expect prices to keep going up, they’re going to go up at a really moderate pace. So that moderate pace shouldn’t worsen affordability much from where it’s, so really the mortgage rate’s down is really going to help things out before mortgage rates popped up, actually, the monthly payments were pretty affordable. So it’s really that doubling in some point, tripling of mortgage rates that causes affordability crisis. And once we see mortgage rates come down and we still have buyer demand really outpacing supply, but you’re going to see some of that supply come on onto the market and it’ll get picked up pretty quickly. But we’re going to start seeing that supply come on. So that’s really a positive in all this.

MBS:

Okay. Well, Molly, that’s such a positive way to end our scary episode that that’s good. Yeah. Does not look like doom and gloom for the foreseeable future. Hopefully we continue to see things changing in the way that the direction they look like they are going, and we don’t need to worry about spooky season continuing in the housing market.

MB:

That’s right. Exactly.

MBS:

Well, Molly, it’s always great chatting with you. I look forward to you joining us again next year and next season. But thank you so much for being a part of our special spooky episode here on Core Conversations today.

MB:

Yeah, I always look forward to it. Thank you.

MBS:

And thank you for listening. I hope you’ve enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life producer Jesse Devons, editor and sound engineer Romero Roman are facts guru Erica Stanley and Social media duo, Sarah Buck and Mikala Brooks. Tune in next time for another core conversation.

ES:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? Molly Boesel is a senior principal economist in the office of the Chief Economist at CoreLogic. She is responsible for analyzing and forecasting housing and mortgage market trends, and has a particular interest in home prices in single family rents. She has a depth of expertise in mortgage market analysis, model development, and risk analysis in the housing finance industry. Find more of her work at corelogic.com/intelligence.

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