Has the Economy Locked in US Housing Market Price Stagnation?

A Conversation with Molly Boesel

The real estate market is one of the largest asset classes in the world. So, when economics shift in the sector, the larger economy feels the ripple effects. Recently, interest rates have been the highest in decades, annual home price growth reached its lowest level in more than a decade and nearly 60% of homes sold below list price in March 2023. However, zooming out and looking at the bigger picture reveals that some of these trends shouldn’t be as surprising as they seem, and maybe were even predictable.

In this episode, host Maiclaire Bolton Smith sits down with CoreLogic Principal Economist Molly Boesel to discuss what is really happening in the housing market and what that means for first-time homebuyers, repeat homebuyers, investors and banks.

In This Episode:

Up Next: Listen to Molly Boesel talk about myths in the housing market on Core Conversations.

Tune in Here

Maiclaire Bolton Smith:

So have there been any other surprises that have occurred as part of this whole market change?

Molly Boesel:

Some surprises, but then when you think about them, you shouldn’t be surprised. Right?

MBS:

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.

The housing market has shifted significantly over the past year. The U.S. was defined by frenzied overheated competition in 2021 and early 2022. Then homebuying demand collapsed in the second half of last year.

Now, both buyers and sellers are finding that it’s a bad time to be in an active market, which has created a standoff. While homeowners and potential buyers seek to weather the storm, prices have slowed significantly, and some states are even beginning to see decreases. So to talk about this rapid market adjustment and what the near future will look like for the housing market, we have CoreLogic Principle Economist, Molly Boesel.

Molly, welcome back to Core Conversations.

MB:

It’s great to be here today, Maiclaire.

MBS:

All right. So you’ve been on this podcast before, a couple times last season, and you were talking about trends in the housing market, and one of, I think my favorite episode of last season was housing myths that we talked about with you. So if you haven’t checked that one out, I definitely recommend you should go check it out. But do you want to just remind our listeners about yourself? Who are you? What do you do here at CoreLogic?

MB:

Sure. I am a principal economist in the Office of the Chief Economist. And basically what I do is analyze and forecast the housing and mortgage market. Sometimes it’s an easy task, sometimes it’s a little depressing, but we also do a lot on the single-family rental market, including a single-family rent index. It’s a lot like the home price index.

MBS:

Which also is quite depressing these days from a lot of things-

MB:

Exactly.

MBS:

[inaudible 00:02:00]

MB:

It depends on who you are actually, what side you’re looking at it from.

MBS:

It’s true. Okay, so last time we talked, the big topic was the impending market slowdown. So, we’ve seen some sluggishness in the market, but has it been as severe as we anticipated?

MB:

Yeah, I actually would have to say it was probably — if we were looking at this a year ago, it was probably more severe than we anticipated. And what we really did not anticipate a year ago was the jump in mortgage rates that we saw. So in 2022, mortgage interest rates rose the most since the 1980s. So it’s not they’re the highest since the 1980s, but that increase we saw was the most increase since the 1980s, and that’s really had a profound impact on the mortgage market and the housing market in general.

MBS:

Yeah, sure. I can understand first-hand because we’re in the process of buying a new home right now and mortgage rates are not what I want them to be, and I know I’m not alone. So that really is what’s driving a lot of the conversation today. So are there particular areas of the country that have been impacted more than others by this market correction?

MB:

Yeah, I’d say if we look at where sales have declined the most, and then also where prices have taken the biggest hit, it’s really in the West. So Washington State, Oregon, California, Arizona, Idaho, Utah, everywhere in the West. And then some parts of the country have just not really seen much of a decline at all. So think places that were really booming last before the downturn, they’ve seen some of the biggest declines.

MBS:

Yeah, I can understand that. So, have there been any other surprises that have occurred as part of this whole market change?

MB:

Some surprises, but then when you think about them, you shouldn’t be surprised. Right.

MBS:

Sure. Yeah.

MB:

When you see the market slow down, one of the big reasons for a slowdown has been that sellers are really not wanting to sell. And they’ve got a couple of reasons for that. We can go to that more later. It’s just that they don’t want to give it their low mortgage rates. They’re not getting the prices they want or they thought they might get, compared to a year ago, and they’re pulling back from the market. So they’re not putting… they’re not listing their homes. So that’s creating even more of an inventory crunch than we’ve seen before. We’ve seen first-time home buyer activity pick up, so I was a little surprised about that.

MBS:

Interesting.

MB:

But if they’re the ones participating in the market, then their share is increasing part of the market. So surprising, but then when I kind of thought about it, you know, not so surprising.

MBS:

It makes sense when you put it all together, and it’s interesting, and I’m going to hold back with some of my frustrations with some of this because I’m one of those people that are buying a house with very low inventory and sellers pulling out and pulling back too. So it definitely is a stressful time to be a homebuyer, probably being a homeseller too, but being a home buyer in this market is really challenging.

Erika Stanley:

Speaking of low inventories, if you want to know more about what’s going on in the housing market, be sure to follow us on social media using the handle @CoreLogic on Facebook and LinkedIn or @CoreLogicInc on Twitter and Instagram. You can also leave a review on Apple Podcasts.

Now let’s jump into one of the big newsworthy topics of the year: interest rates.

MBS:

So you talked about this, you touched on this briefly, but can you talk a little bit about how the interest rates really are affecting the home prices?

MB:

Oh yeah. Interest rates are what’s really driving all this, and if you want to even back up even more to what’s driving that, it’s inflation. We can go on all day-

MBS:

Of course.

MB:

… about why we’re seeing inflation, but inflation has been persistent, and this persistent inflation has got the Fed just wanting to fight that persistent inflation. They’re dedicated to fighting inflation, so they’re raising the federal funds rate and sometimes they’re raising it in pretty large increments. So creating a little bit of uncertainty about what’s going to happen to interest rates in general. And that’s caused mortgage rates to really jump. So, we start with the inflation, we go to the Fed actions and we see this jump in mortgage rates. So the mortgage rates jumping has affected buyers, obviously. The buyers are seeing some of the worst affordability on record.

MBS:

Wow.

MB:

I looked at the affordability index. It’s the lowest affordability since the 1980s, another time when inflation was really high.

MBS:

Yeah. Wow.

MB:

So affordability issues, mostly. We’ve been seeing home prices rising for more than 10 years. So, with home prices rising, that was one issue, but mortgage rates had fallen to the lowest level on record, below 3%, well below 3%. So that kept monthly payments really low. That’s what allowed buyers to get in there. But then with mortgage rates jumping, we call that now the double-whammy of high prices and high mortgage rates, that’s causing an affordability crunch.

ES:

Okay. Let’s go deeper into the state of the economy. It’s that time again, grab a cup of coffee or your favorite beverage. We’re going through the numbers in the property market. Here’s what you need to know.

By February 2022, equity gains were the lowest recorded since 2019. Still, home prices nationwide increased year over year by 4.4% in February 2023 compared with February 2022 and forecasts indicate that on a year-over-year basis, prices will climb by 3.7% from February 2023 to February 2024. Price depreciation hit the western U.S. hard. Eight states out west that were previously considered relatively expensive, recorded annual home price losses, and tech company layoffs have likely affected housing demand on the West Coast. But workers going back to the office in other areas like the East Coast and southern U.S. are holding prices steady. And that’s the sip, see you next time.

MB:

Less fires causing a slow-down. So if you have less demand out there that’s going to cause prices, not necessarily to go down everywhere, but to a little air come out of the prices. So growth to lessen on home prices. And then as I mentioned briefly before, we’ve got sellers. They’re not really necessarily wanting to put their homes on the market. So I’m sitting here at my house with a less than 3% mortgage rate, right?

MBS:

Yeah.

MB:

If I wanted to go buy another house and sell the one I’m in, I’ll take out a new mortgage. What am I going to end up with today — 6.5%, maybe 7% mortgage rate? That’s a huge jump in my monthly payment. So, yeah, there’s a big disincentive for me to get out there and buy a new home and then, therefore, put my home on the market. So fewer homes on the market, less demand, that’s just creating fewer home sales and really just causing prices to start to, or at least growth to be weak. And in some areas of the country, like you said, prices are declining.

MBS:

Yeah. I guess it triggers the thought too, was with these high interest rates. Is it dictating or changing the kinds of mortgages that people are getting? Is there a greater probability of adjustable rate versus the 30-year fixed, which is pretty standard?

MB:

Oh yeah, definitely. So when we go into, prior to this jump in 30-year mortgage rate, ARMs were about, let’s see, 4%, let’s say, of the overall mortgage originations were adjustable rate. And that’s pretty low, but we head into now the end of 2022, they are more than a quarter of originations. So it makes sense for those who are rate-sensitive or at least payment-sensitive to want to get on the lowest mortgage rate they can.

MBS:

For sure. Yeah.

MB:

And they’re betting on, say they take out a five-year ARM, they’re betting that mortgage rates will be lower in five years. It’s probably not a bad bet to make.

MBS:

Wow. And you used a term: ARMs. That’s “adjustable rate mortgage?”

MB:

Adjustable rate mortgages. They can come from, I think a lot of people think of adjustable rate mortgages just being a one-year fixed period and then adjusting after that. But five-year ARMs are also very… five-year adjustable rate mortgages are also very popular.

MBS:

Which is really interesting cause I know there are other countries like Canada that that’s the way mortgages are written. Thirty-year fixed mortgages aren’t really the thing. What they do is you lock in for a five-year period and then you have to readjust to a new rate. So it’s something, I know we have listeners in other countries as well too, that we are talking about how things are typically here in the U.S. but other countries, this is the standard. And a lot of people are going to be faced with a much bigger payment now because interest rates are a lot higher than five years ago when they locked in their mortgage.

MB:

Yeah, that’s right. The U.S. mortgage market is really unique when we talk about this 30-year fixed period, and it does protect the buyer or the mortgage holder from those unexpected rate jumps, and that’s why when we do want to track adjustable rate mortgages. Because when we track risk in the mortgage market they’re like, “Why do you care how many adjustable rate mortgages are.” When we track the risk out there of default or payment shocks that could create default, we want to see what share of the mortgage market could be affected by that. Look back to the Great Recession or just prior to the 15-year-ago financial crisis. We’re not going to talk about what’s happening today. But the look back there to 2007, and a huge share of mortgages, probably more, I don’t have that number here, but a large share of mortgages were adjustable rate. And when rates were increasing then, there was that payment shock. And not only that, they were negatively amortizing adjustable rate mortgages, so they weren’t really paying any principal on their mortgages. And then they had a rate shock, and then got in a lot of trouble then.

ES:

Let’s touch on what negative amortization is. At its most basic negative amortization happens when the total loan payment is less than the interest charged. That means the amount a borrower owes continues to go up because they are not paying enough interest. During the 2008 housing crisis, the International Monetary Fund cited the prevalence of this type of loan as a contributor to the crisis. Such loans were marketed with their low monthly interest payments. However, this payment schedule would eventually change when borrowers would need to begin paying principal, leaving many owing more than the original value of the loan.

MB:

So the ARMs we’re talking about today are not those kind of mortgages. They are definitely — much better underwriting on the ones we’re talking about today.

MBS:

Got it.

MB:

I don’t want to send everybody into a panic about a repeat of what we saw in 2007.

MBS:

But yeah, so volatile and yes, we don’t want to scare anybody here, but I think of where we are currently in our state of the world and was just with the recent collapse of Silicon Valley Bank, we are seeing that the interest rates are starting to decrease, and we’re starting to see a little bit better rates than we did even a couple of weeks ago, a month ago for sure. Is that now changing the number of homebuyers that we’re seeing? Are there more people jumping in? Are people tracking it that closely that they’re like, “Oh, rates are down now, let me jump in and try and find a house now.”

MB:

Yeah, I think people are tracking it that closely.

ES:

What Maiclaire and Molly are talking about is about to be really interesting for first-time homebuyers and repeat homebuyers alike. However, we’ll pick up the conversation next week in Part 2. See you there.

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 podcasts to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life producer Jessi Devenyns, editor and sound engineer, Romie Aromin, our facts guru, Erika Stanley and social media duo, Sarah Buck and Makaila Brooks.

Tune in next time for another Core Conversation.