What’s really scary about buying a home in 2025?

Transcript:  

Molly Boesel:

But on average, prices are around $400,000. Medium price from home. I know not where you live, but not where I live. But on a national average mortgage rates around six and a quarter, let's say, depending on the week. So people right now are spending about 30% of their income on just the principal and interest, just those two things. So that's a pretty big proportion of their income because keep in mind, that's pre-tax income. So lean a little that down a little bit, but this isn't the worst we've seen.

Maiclaire Bolton Smith:

Welcome to Beyond the Buildings by Cotality. I am your host Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle, and look beyond the obvious. With every conversation we illuminate what is possible. We are at the height of spooky season. So today we're going to discuss the scariest thing about buying a house in today's market from the looming specter of a recession to nightmares about interest rates and fears about insurance access. There's a lot going on in the U.S. housing market, so we are going to get into the top scariest topics in the housing market today. But before I do, I want to welcome back one of our regular guests, Cotality's Senior Principal Economist, Molly Boesel. Molly, welcome back to Beyond the Buildings for spooky episode.

Molly Boesel:

Oh, thank you Maiclaire. I've got to say this is my favorite podcast of the year.

Maiclaire Bolton Smith:

It is mine too. I love that. We did this spooky episode last year and I've been waiting for spooky season to come back to do this again with you.

Erika Stanley:

Before we get too far into this episode, here's a friendly reminder about how to see what's coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online, find us using the handle at Cotality on all our social media channels. But now let's get back to the show.

Maiclaire Bolton Smith:

So let's jump right in. Number one, chances of a recession:

Okay, this has got to be one of the scariest thing that's been all over the news for a while now. The looming chance of a recession. We've been hearing for months that a recession is possible. At what point do we actually tip the scale and head to a recession, and what would that mean for the property industry?

Molly Boesel:

So while the US economy now is really showing signs of fragility, I guess we could say a full-blown recession really doesn't appear to be the base case for any of the economic forecasters out there. That's not to say that the risk isn't increasing, but that's not what anybody's forecasting. They are putting their forecasts at about one and a half to 2% GDP growth, and 2% is really what the potential of the US economy is for GDP growth.

So, no negative territory, but if you want to watch what might tip it in there, I think the labor market would be the one thing to watch. Labor market slows down less spending, and that could slow economic growth more.

Maiclaire Bolton Smith:

Okay, okay, so?

Molly Boesel:

So, what would that do to the housing or mortgage markets? In past recessions, we've seen a recession pushed delinquency rates up, and also foreclosures. So should we tip into a recession? We could see those go up. They're really, really low right now, so I think they wouldn't go up so much.

Maiclaire Bolton Smith:

Now, that doesn't sound too scary. I think the probability of it sounds scary, but where we currently are actually sounds pretty positive. Maybe even optimistic when we look back at the Great Recession, which was 2007 to 2011 or so? Around then, yeah. One of the big things that happened then is house values and house prices dropped significantly. Is that something that we think potentially could be on the rise?

Molly Boesel:

I don't think so because going into the great recession, we had a big oversupply of housing. Other than that, where we are now and we also just a big over supply. So I guess that just puts us in a different territory from where we are now.

Maiclaire Bolton Smith:

Okay, number two - weak job market: So Molly, you referred to the labor market. I want to dive in a little bit deeper. The news is constantly mentioning higher unemployment numbers, and we hear from a lot of people about how hard it is to find a job. Right now, how does the job market directly or indirectly affect the housing market?

Molly Boesel:

Oh, yeah, that's a great question. Because the job market really sets the tone for housing demand. When people feel good about their jobs, when they're employed and making money, stable, stable, they leap into homeownership. They may upgrade or even invest in another second home or an investment property. But if that slows down or they think they're going to get laid off, the people do tend to pull back a little. They get a little more cautious. So if it's someone that's not feeling financially stable, they don't want to make one of the biggest purchases of their life.

Maiclaire Bolton Smith:

And I guess aligned with that is the government shutdown and all of this uncertainty across the government of where we are with government jobs. That's got to be a huge part of this as well.

Molly Boesel:

So those places where government is a large part of the labor force, those areas are going to be affected a bit more. So it is just another thing to take into account for a housing demand.

Maiclaire Bolton Smith:

Well, sticking with this whole topic of housing demand - demand is related to prices. So number three, home prices: everybody knows it regardless of where you live. Homes are expensive and everybody agrees with that. So I guess when we look at the proportion of housing costs relative to somebody's income and how that's changed over time. So I know there used to be formulas that you shouldn't spend more than 20% of your income on your home and your housing costs. And now, I mean, in many cases, people are spending 50, 60, 70, 80% of their income on their housing costs. So that has increased significantly. It's not just the price of the home, it's the relation of the home price to the income that people have.

Molly Boesel:

Yeah, how much it takes up of your monthly income. Right?

Maiclaire Bolton Smith:

Yeah! So, that is hugely scary. So let's talk about this one, Molly. Yeah. How scary is this?

Molly Boesel:

How is it? Where is it? Where are we at now? How has it changed? Okay, so caveat here, I'm going to give you some national numbers, knowing there's no national home and no national income, but on average prices are around $400,000. Medium price for a home. I know not where you live, but where I live, but on a national average mortgage rates around six and a quarter, let's say, depending on the week. So people right now are spending about 30% of their income on just the principal and interest, just those two things. So that's a pretty big proportion of their income because keep in mind that's income, so they can whittle that down a little bit. But this isn't the worst we've seen. So this is historically, it bounces around between 20 to 25% over the past 40, 50 years. But think about in the 1980s when mortgage rates were like, I don't know, 18% or something like that.

Maiclaire Bolton Smith:

Yeah, 18 to 20%?

Molly Boesel:

Yeah. Yeah. So that portion of the income I just talked about was about 50%. So that was a pretty unaffordable time in the housing markets. It's not the first time we've seen this problem. Good news. Can I say good news on my scary podcast? Yes. Alright. If home price growth keeps cooling as it has been, and incomes rise as we expect them to do a little bit, and we think mortgage rates are going to go down next year, we could see that share that the payment up of the income come down. So that's something to look forward to. And I think really a good news for a lot of people. But you're in California, I'm in the DC area, our proportion is going to be higher than 30% of our income of course.

Maiclaire Bolton Smith:

Definitely, Yeah. Number four, information: So Molly, this one, everyone knows it's been high for years, and while it's not as dramatic as where it has been in the past, we're still sitting around 2.9%, which is above the fed's target of two. So that means that a lot of purchasing power is depressed for nearly everyone in the us. So at the same time, home prices are still way up as we just talked about, but how are these two market forces interacting? So I guess what I mean by that is what do you think this will mean for people who want to buy their first home or upgrade their housing, whether it be upgrade to a bigger home or potentially do some, we've talked about HELOCs before on this podcast, taking equity out of their home to use that to do more to their home. We saw a boom of all of that when interest rates are super low, but now with inflation higher than normal and with interest rates higher than they have been, what do we think is going to happen?

Molly Boesel:

So it's a good point. Everything's more expensive right now, so that leaves a lot less room in your budget for your housing. And you mentioned house pricess haven't come down, so households are squeezed. And for first time buyers, that means they may delay their purchase, they may have to adjust their expectations, maybe move to a different area for move up buyers. It's a similar story. There's a little more on there because they may have equity, but if they want to trade up and they have a mortgage, they might not want to give up that mortgage rate and take on a new higher mortgage rate. So it's a squeeze all around.

Maiclaire Bolton Smith:

Yeah, no, absolutely. Number five, interest rates: So Molly, we've just alluded to it. We've just talked about it a little bit. A huge financial consideration when buying a home is interest rates. And because this can dramatically change the monthly payment and limit the amount of house that somebody can actually afford. So you and I personally have talked a lot about interest rates on this podcast over the years. So how have interest rates affected the market this year specifically, and how are we expecting them to change the remainder of 25 and into 26?

Molly Boesel:

Yeah, interest rates are causing a lot of slowness in the housing market. Let's just say. I think we say it's painfully slow the market, higher interest rates translate into higher monthly payments, so that's less home that someone can afford. And if someone's on the edge of being able to afford a home or not, they may be priced out completely just due to interest rates. So that's the first thing. Slower home price growth. Again, if there's less demand because people are priced out of the market, then that would slow home price growth. And we saw that happen. I know you're asking about now, but we saw that happen in 2022 when rates went up quite a bit and fewer transactions, obviously. So the thing is, this year when rates dipped down a little bit, we saw a lot of applications for mortgages immediately. Interesting. So the buyers are very rate sensitive, so even a small dip in interest rates is bringing them back into the market. So we'll keep seeing that as well. And also that'll help with some refinancing as well. When someone can refi, say somebody's sitting at a 7% mortgage rate, they can refi down maybe a six, hopefully they can. They'll have a lot more money to spend each month.

Maiclaire Bolton Smith:

Yeah, no, that's a really good point. And it's crazy to think how a 1% or even could make a huge difference, especially especially with somebody with a big loan, how it could actually make a size.

Molly Boesel:

Exactly. That's because home prices are so high. A lot of places that 1% is a big deal.

Maiclaire Bolton Smith:

Yeah. Okay. This is a big one, Molly. Number six, rising taxes: So housing market is one thing. Property taxes often get overlooked, and I'm not sure why, because once that bill comes, it is jaw dropping to so many, but as home prices continue to increase, so do property taxes. So if we look even, I guess as a national average, how much have property taxes increased and how has that affected monthly payments for homeowners?

Molly Boesel:

Yeah, yeah, okay.

Maiclaire Bolton Smith:

This might be the scariest one.

Molly Boesel:

Yeah, yeah. You cannot avoid it. So yeah, taxes have gone up. You cannot have house prices more than double without the tax man taking notice. Right? So property taxes have gone up about 30% on average across the US, that's a thousand dollars a year. And some households can't afford that. It really throws off their monthly budgets. It's huge. Yeah, exactly. Yeah. Wow. Again, that's national average, right? So you're going to see some high tax areas in high price areas where it's going to have gone up quite a bit more.

Maiclaire Bolton Smith:

Yeah. And I mean, you alluded to this, but that we are hearing more and more that people can't afford to stay in their homes, not because they couldn't afford to pay the mortgage that they had locked in. And some of these people do have very low mortgage rates. It's because the taxes have increased so much that they can't afford the monthly payment because many people are paying their tax through an escrow, so it is part of their monthly payment.

Molly Boesel:

We've seen a colleague of mine has a nice piece on our insights page about how areas or states where escrows have increased the most are seeing the biggest increase in serious delinquency rates. Interesting. Yeah, that was my next question.

Maiclaire Bolton Smith:

Interesting. Yeah, that was my next question. Is there a link to that?

Molly Boesel:

There is. And that just shows that some households cannot absorb this increase in their taxes.

Maiclaire Bolton Smith:

Yeah. Well, on that theme of increased, aligned with taxes. Seven, insurance costs and availability: So insurance is also one of those things that is really going up in a lot of areas. I think that this one is causing a lot of stress and strain on a lot of homeowners, but it's not just that the cost of insurance is going up, it's that a lot of people are not, they're losing the insurance that they have because they may live in an area that has a high wildfire risk or a high flood risk, or a high hazard risk of some kind. And this has been a hot topic on this podcast with many other people as well too, over the years. But let's talk a little bit about this too. Do we see not just the cost, but the availability of insurance impacting home sales over the years, over the next year or two? And I guess where I think about this, I think from the perspective of if somebody actually can't get insurance for a home, 99% of those people just can't buy that home. They you won't be able to.

Molly Boesel:

It's required. Yeah. If you have a mortgage, you have to have it.

Maiclaire Bolton Smith:

This is a really spooky one.

Molly Boesel:

So, what we thought we said taxes was the spookiest one, but I think right now insurance is spookier, and because it is, well, maybe you could work something out with your locality on a tax payment plan. You really have to have this insurance to close a mortgage. So it is a deal breaker for originating a mortgage

Maiclaire Bolton Smith:

And to keep a mortgage

Molly Boesel:

And to keep it. Exactly, exactly. You are asking the impact it could have. We're already seeing an impact. First of all, it's affecting affordability and the supply of it. In some areas, the insurance carriers are leaving. That means someone has to go to the state as the last resort for their insurer. They have no choice then to pay an increased insurance rate. And it's, so in some areas like Florida, we've seen prices come down a bit. It's like it's being priced into now the price of buying, and that's how new buyers really need to think about it. They need to look at the insurance rate and the tax rate, obviously, and factor that into what they can afford, and then have enough reserves. So when that goes up over time, they can adjust that as well.

Maiclaire Bolton Smith:

Yeah. Yeah. It's the spooky feeling of when am I going to get that note from my mortgage company that my escrow payment is going up because my insurance is going up, or because my taxes are going up.

Molly Boesel:

Exactly.

Maiclaire Bolton Smith:

Exactly. That looming fear that is coming.

Molly Boesel:

Yeah, exactly.

Maiclaire Bolton Smith:

Yeah, definitely spooky.

Molly Boesel:

With the tax and insurance is that non-mortgage costs, that kind of gets glossed over sometimes when people just think of the principal and interest, but you get the T and the other I to make that full payment.

Maiclaire Bolton Smith:

Well, I feel like it was glossed over for so long because it was just a, oh, yeah, yeah, we got to do that. That's not a problem. But now that it's become such a difficult to get and the insurance side of things, and B, the lack of stability in it, that you don't know how it's going to increase over time. And just because home prices are so high and continuing to increase, it's just the level at which we're seeing the increases are just so much higher. So something that people just kind of took for granted is like, oh, I have to pay that now. It's becoming like, oh, I need to factor this in to my overall housing.

Molly Boesel:

Exactly. Exactly.

Maiclaire Bolton Smith:

Yeah. Okay. Really, you're at number 10 already. Molly, I know this is one of your favorite subjects, the rental market. Number eight, elevated rents: So Molly, you and I have talked about the rental market a lot, but I want to look at it from a specific context. So let's say somebody would like to buy a new home, but they're maybe not ready to sell their old home, probably because they have a two and a half percent interest rate or something, and they've got this great mortgage and they see it as an opportunity for them to be able to rent out the home. But what have high mortgage rates and high insurance rates and high home values, high taxes, increasing taxes, increasing insurance, what has that done to rental rates? So from a renter's perspective, part of the reason many people rent is because they don't need to worry about things like property taxes. But if you are somebody who is renting out a property that you're paying taxes on that property, you need to factor that into what your rents are. So that is now changing the rental market as well too. So how do we see things like high interest rates, the availability of insurance? How do we see that impacting rents?

Molly Boesel:

Right? So say you're someone who's got a really low mortgage rate and you want to move well, you may just want to rent out the current home you have and then buy something else. So sometimes I call that an accidental landlord. They didn't really want to become a landlord, but now they are. But then they have a high tax rate on that property. They got a high insurance rate, they have to raise the rent. So that's one thing. Another thing is they're not putting that home up on the for sale market. So they're limiting the supply of for sale homes. That makes homes more expensive because there's a limited supply. And then that keeps more renters renting. They stay in the rental market.

So they're almost kind of blocked out of buying because the supply is low and the prices are so high. So that's how it all works together. But then those higher rents, we talk about inflation and all that, that is more money each month for the renter that they can't then save for their down payment when they are able to afford their home. So it great low mortgage rates are great for the buyer or the borrower who wants to stay where they are and enjoy that low mortgage rate. But for everyone else, those who want to move or those who want to get into the market, they really make it difficult.

Maiclaire Bolton Smith:

No, definitely. Molly, it's been spooky having you here, but I mean, I love it. Actually, this podcast has not been as spooky as I thought it was going to be. The topics are definitely.

Molly Boesel:

I don't think it was as spooky as last year.

Maiclaire Bolton Smith:

I agree. I feel like we're kind of in an optimistic place where things, there's some spooky things, there's some things to be concerned about, but ultimately it's a pretty positive outlook on where we are with the housing market. But we do have some of these.

Molly Boesel:

Especially with mortgage rates starting to come down. The more they come down, the more things are going to pick up. skeleton and ghosts that are going to

Maiclaire Bolton Smith:

The skeleton and ghosts that are going to op out and be like, taxes, insurance. So still spooky. And Molly, you're still my favorite. Thank you so much for joining me today on Beyond The Buildings by Cotality.

Molly Boesel:

Yeah, it's been my pleasure.

Spooky Voice:

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, or else.

Erika Stanley:

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 Cotality. She is responsible for analyzing and forecasting housing and mortgage market trends, including the single family rental market. She has a depth of experience in mortgage market analysis, model development, and risk analysis in the housing finance industry. Her original research appears on the Cotality Insights blog, which can be found at Cotality.com/Insights. Ooh.

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