How the tech sector & AI boom are reshaping US home values

Transcript:

Allie Barefoot: Welcome back to Data in Context. I’m Allie Barefoot. This episode is part of a series where we break down Cotality's monthly Home Price Index Report. The U.S. housing market has entered a high-stakes price discovery stage. While there was a widespread hope for a seasonal resurgence in the spring homebuying market, recent rate volatility has dampened that momentum. With sales and comparisons remaining limited, buyers and sellers are currently locked into a standoff, trying to find a new normal for home values in an uncertain economy. However, Cotality's data points to an intriguing emergence of the AI boom as a real estate catalyst. While 70% of the country remains overvalued, the massive concentration of wealth and job growth in this tech sector is turning expensive coastal hubs like San Francisco and San Jose into surprisingly undervalued opportunities. So today we’re going to be talking with Cotality's Chief Economist, Dr. Selma Hepp, to pull back the curtain to these trends and find out where the market is headed. Let's go ahead and jump into today's questions with Selma. Welcome back to Data in Context, Selma.

Dr. Selma Hepp: Hey, thanks so much for having me back.

Allie Barefoot: Of course! We’re here talking about Cotality's April HPI, but it does feature February data. So I wanted to start this off by noting that earlier this year, there was a real hope for a spring rebound in the housing market. But Cotality data has already seen that 13 states are recording negative growth. If rates remain high through the summer, do you anticipate that national HPI will turn negative for the first time in a couple of years? Or is the lack of inventory still providing a floor under those prices?

Dr. Selma Hepp: Yeah, you know, it’s been interesting coming into the spring homebuying season because again—similar to what we saw over the last couple of years—rates have been volatile, particularly during the spring homebuying season. Now, after the spike that we saw in, you know, in March at the onset of the conflict, mortgage rates are now back down to 6.2%, 6.3%, which we have seen as a pretty palatable rate for potential homebuyers. We do see homebuyers coming back in at this rate. And so our data has shown that monthly prices have already been moving up in line with seasonal expectations—usually you have more home price appreciation during the spring homebuying season—and our forecast suggests further increases. Now, you know, you could see a sudden increase in mortgage rates again that would put a damper on housing buying demand, but absent that additional volatility and rates staying where they are at the moment, we should expect to see a continued stabilization in home prices, so no decline—national decline on a year-over-year basis during the summer, in the summer.

Allie Barefoot: And kind of staying here on the first-time homebuyer mentality, are buyers waiting for rates to hit that 5.5% or 6%? Or does waiting for a better rate actually cost the consumer more in lost equity gains than they would save on interest?

Dr. Selma Hepp: You know, that’s a really great question and oftentimes one that potential buyers are struggling with because it can be a concern where, you know, in times when home prices are accelerating rapidly, waiting is actually detrimental to your overall accumulation of equity gains. Now, right now, you know, we don’t know when mortgage rates are going to come to that 5.5%. Mortgage rates have been very volatile, while at the same time we do continue to see home price appreciation in many markets. So I think what’s important for buyers to understand is their own amortization schedule. So, at their price, at their rate, what does that look like in terms of equity gains over time versus what local market dynamics are. The other thing that's also very important is buyers' readiness to enter the market. Irrespective of what's happening with mortgage rates or local housing market activity, what’s most important is that the buyer is ready, willing, and able to buy a home. And that’s really the most important thing they should keep in mind when thinking about entering the housing market, in my opinion.

Allie Barefoot: Right, I know, Selma, we've talked numerous times about how locally really depends on what is able to happen for that homebuyer. But I want to go a little bit further and look at it nationally. The HPI—April's HPI—noted that 70% of the nation is still overvalued, yet expensive hubs like San Francisco, San Jose, Los Angeles, they're now officially undervalued. How can a $2 million median home area be undervalued mathematically? And how is the AI boom creating such a unique homebuying window before they could become the nation's growth engines in 2027?

Dr. Selma Hepp: So, yes, let me first try to explain sort of what we mean when we say a housing market is undervalued or overvalued. Cotality has what we call market conditions indicators, which basically provides a benchmark for how fast home prices are growing versus what the long-term fundamental value should be. And this indicator starts with an assumption that home prices should generally move in line with incomes. And when prices are growing faster than incomes, then households are priced out of the market, and price growth has to slow down to catch up with income growth. So if you have a current home price index that is 10% above what this long-term fundamental value is, that’s when we consider a housing market overvalued. On the other hand, when you have a home price index that is 10% below that long-term fundamental value, that’s when the housing market is undervalued. In the case of the Bay Area—and strictly the San Francisco Bay Area—we now have a home price index that is lower than that long-term fundamental value because incomes have been rising faster than home prices. To give you an example, San Francisco actually cumulatively over the last five years has been the slowest appreciating market. It only appreciated from the beginning of the pandemic to now about 20%. To compare that to other markets—for example, in the Southeast, Knoxville, Tennessee—Knoxville has been the fastest appreciating market over this period, and it’s up over 70%. So, this is how we got to this point where San Francisco—which seemingly is a very, like I said, $2 million home typical home being priced—but it’s now undervalued because of that slow appreciation versus higher growth of incomes.

Allie Barefoot: And Selma, I want to stick here a little bit for the AI boom because you’ve linked that recovery to the AI boom. Specifically, how does the concentration of AI capital in places like San Francisco trickle down into suburban home prices?

Dr. Selma Hepp: Yeah, so the way that capital—any capital, in this case, AI capital—affects the housing market is that you have an influx of this capital that’s boosting both job growth, both spending in the industry, investment in AI. And that’s trickling down to higher incomes, higher wealth gains, and pressure on housing markets in a sense that people now have more of this wealth and they’re looking to move up, for example, buy bigger homes, have more space. And so, the trickling from downtown San Francisco goes out into these suburban areas where people now with more wealth are trying to buy homes. So that's sort of how capital impacts not just a local market, but adjacent suburban markets as well.

Allie Barefoot: No, that makes perfect sense. I’m very intrigued to see how the AI boom is going to affect other markets, if it will, down the line. But we’ll save that for another conversation with you, Selma. Thank you again for joining me to talk about Cotality's HPI.

Dr. Selma Hepp: Thank you so much for having me, Allie. It was such a pleasure.

Allie Barefoot: Thank you again to Dr. Selma Hepp for joining us here on Data in Context, and thank you guys so much for listening. Go ahead and hit that subscribe button on Cotality's YouTube channel. And if you want to find out more information, as always, head on over to cotality.com.