When a $2 million median home area becomes an opportunity

Transcript:

Allie Barefoot: Welcome back to Data in Context. I'm Allie Barefoot with Cotality. This episode is a part of a mini-series where we break down Cotality's monthly Home Price Index report.The U.S. housing market is currently in a holding pattern. Mortgage rate volatility has cooled seasonal momentum, yet sellers are refusing to drop their prices. So instead of seeing a national trend, we're seeing a dramatic split in opportunity. Inventory-starved markets are seeing prices rise, while undervalued tech giants are quietly priming for a major rebound.

So to break down this data, we're going to be talking with Dr. Selma Hepp, Cotality's Chief Economist, to see what Cotality's May Home Price Index report is really telling us. Let's put the data into context. Welcome back to Data in Context, Selma.

Dr. Selma Hepp: Thanks, Allie. Thanks for having me back.

Allie Barefoot: Of course. We're talking about Cotality's May Home Price Index report, so we'll go ahead and start by setting the scene and looking at the big picture. The national number indicates a slowdown, with year-over-year price appreciation rising just moderately to 0.4%. And you've described this housing market as being in a holding pattern, per se. What exactly is keeping us stuck right now? What exactly is that holding pattern?

Selma Hepp: Yeah, that's a great question. You know, I think what's keeping the market stuck right now is is a combination of a few things. It's a combination of strained affordability, rate uncertainty—we've seen rates jump back up—and consumers who are really um, you know, unsure of what's going on. They're unsure of the rate environment, they're unsure of inflation, um, and they are now still waiting. Um, so, you know, really the national number that you mentioned says it all. So, annual home price appreciation was just 0.4% um in March, year-over-year. So that in essence is telling us that, you know, prices are essentially flat. I mean, they're rising, but barely, you know. And and then the other thing that really says it a lot is the consumer confidence data. You know, latest consumer confidence data show why buyers for, you know, remain hesitant in many ways. Nearby half of them expect mortgage rates or interest rates in general to move higher over the next year. Uh, even two-thirds of them uh said they are already cutting back on or delaying big purchases. So when you bring that back into the housing, the result is a market that's in limbo, you know. Buyers are still still interested, uh but many are waiting for the better financing option. And then on the seller side, you know, they are so sort of in a holding pattern as well. Uh, they have equity in their homes, uh and in many cases they don't need to leave. They don't need to move. Um, and, you know, there's a there's another point that's maybe less appreciated. It's that the, you know, the stickiness of the housing market at the moment is not any more just about the supply, the supply shortage story. Um, it's that growing number uh of markets are seeing activity that's being determined by price realism. And what I mean by that is that um, you know, homes that come to the market that are right-priced, uh they are moving, they are being sold; while overpriced listings just end up sitting still, still on the market. So that means that the market is not frozen everywhere. It is really selectively moving where price discovery is finally happening.

Allie Barefoot: Right, so it seems like neither side is really willing to move that needle to open up what we kind of need right now in the U.S. housing market. And let's stick with the seller side here for a minute because if sellers aren't budging, then we're seeing a stark divide across the map entirely. So, the pandemic-era darlings of the South and the Mountain West, we've seen a notable cooling because home prices simply outpaced local paychecks in those areas. But the Cotality May Home Price Index report reveals that some of these regions are already bouncing back. Can you take us through those numbers a little bit about where the areas are actually starting to see some movement?

Selma Hepp: Yeah, absolutely. So, you know, the areas where we're seeing the sharpest cooling happen um, those are the markets that uh prices went up too high uh compared to the local incomes during the pandemic. Um, and now we're seeing sort of splitting between uh into two paths of those markets. For example, in Austin, that's a good example, prices have reset. Um, they're still about 15% um below their mid-2022 peak, but since the start of this year, they have actually been on the rise and and have risen significantly. They're up about 2.5% since the start of the year. Um, Oakland, for example, that's one of the slowest markets uh that was uh appreciating during the pandemic, also showed a similar pattern coming into this year with prices almost up uh 2% year-to-date. Even, you know, a third one, for example, Boise, Idaho, that was, you know, it's total uh uh um uh what did you call it, the darling, the pandemic-era darling. Uh, it that market, you know, has surged uh significantly early in the pandemic and has been through several corrections since. Uh, but now that market has seen boost uh this year as well. Um, so, you know, this is all telling us that, you know, formerly overheated markets are starting to find a floor, even after this meaningful correction. Um, we also have, for example, Florida, that's, you know, we talked a lot about Florida over the last few years with its own correction uh story. But it's a little bit different. Um, you know, the state itself is down about 2.4% year-over-year, which does make it one of the weakest performing states nationally. Um, and it also reflects the fact that inventory has expanded faster, for example, than than some other areas, and also affordability was hit harder because home prices appreciated so much. But even in Florida, many markets are rebounding too uh now again. You know, so so the important takeaway is that correction is no longer broad or uniform. It depends on the market. You know, one-third of the top 100 markets are still posting year-over-year declines, um but that list is not meaningfully expanding. So it's in essence suggesting that this adjustment phase is maturing. And, you know, the other thing is sort of to the way to think about it is some markets that look weakest on a year-over-year basis may now actually be offering clearer signs of normalization because they're the ones where pricing has reset enough to bring buyers back.

Allie Barefoot: Right. So once again, it's just not that national trend, but really just closing your eyes, putting your finger on a map, and that area is going to tell you a drastically different story from perhaps close your eyes and pick another area on the map. And and I noticed that we continuously monitor this in our month-to-month Home Price Index report. But there was something that stuck out to me about May's report, and that was an eye-opening takeaway from the West region. Talking about like kind of the West Coast, those tech hubs like Seattle, San Jose, and you mentioned that, you know, year-over-year they might look a little bit different, but on paper they look like they're struggling year-over-year where those numbers are still in the negative. But you're also signaling that these markets are actually a massive opportunity right now. So what are the underlying fundamentals really telling us that just because those numbers look like they're in the red, they may not necessarily be struggling?

Selma Hepp: Yeah, exactly. This is a clear example where year-over-year numbers can be very misleading. Um, you know, Seattle and and and San Jose, as you mentioned, they're still soft on paper because we're comparing it to some higher levels of last year. But I think what's more important at the moment is to look at the story about valuation and momentum. So, for example, you know, after they've seen some correction since 2022, um, you know, only a small number of markets are now considered undervalued relative to their historical fundamentals, and San Jose, for example, one of them. Uh, and we are already seeing that that buyers are noticing that, you know, and coming back into the market. And so San Francisco, for example, saw uh home prices up 5% just in over just in the three first three months of this year. Um, and this type of quarterly increase in home prices can is only speaking to the demand that's returning faster than then these annual numbers are suggesting. Um, you know, what's important about this these markets and why they're on the on the up again is that, you know, they benefit from very high income, and also deep job concentration, which now favors AI. There's been a, you know, we talk a lot about this on every webinar, every story that you see about investment in AI, and, you know, job creation of uh AI-type jobs. Um, those markets also have a long-term long supply constraints. Um, and so, you know, taken together, it means that affordability has improved a little bit um, but it has brought demand back because of these other uh dynamics happening in the in the market. You know, and then again, another way to look at it is some of the best opportunities today are not necessarily in the hottest affordable markets, but are in these expensive markets that have corrected, you know. In other words, you know, weakness in this coastal tech hub may be less of a sign of structural decline and more a sign of repricing that was needed in order to bring back recovery.

Allie Barefoot: Right, right, right. You know, it really highlights a growing divide of of who can kind of participate in today's housing market and where they can participate. And as you noted in this report, we're seeing a real split in opportunity. Like we said, there's not really a national trend that we can follow, but in terms of that split opportunity, is there a winner or a loser in this type of opportunity, or is it more so just where you end up and what your area kind of looks like? You know, who's winning or losing, per se, in this environment, if there is one?

Selma Hepp: Well, you know, I would definitely say that there are households that are on on, you know, benefiting from uh uh have greater opportunity. Um, and the households that are winning in this environments are the ones that have more flexibility, you know. They have substantial equity from the home they were already in, they have higher incomes, or they have enough cash to reduce the dependence on, you know, volatility in mortgage rates. Um, and so, we are even seeing, you know, talking about consumer confidence earlier, we're seeing stronger confidence among these uh higher-income households hold up better, you know. While lower-income households are feeling the greatest pressure now from the inflation and and just rising everyday costs. And so that divide matters in housing because affordability is no longer just about whether somebody can buy, you know, it's whether they can absorb that monthly payment, you know. And so these buyers with with equity from previous home or significant savings that they they they that allows them to compete and negotiate and and take advantage of the markets that are correcting. Um, you know, on the flip side, unfortunately, there are households that are losing ground uh in this environment, and those are first-time homebuyers and they're moderate-income families that uh remain very uh highly payment-sensitive, you know. And markets where national prices are up, even even as little as 0.4%, you know, increase in mortgage rate makes uh entry into homeownership really hard to get, not easier, you know. Um, so, you know, this is why it is such a split opportunity. Markets, you know, the markets are still functioning, but they're functioning better for households that already own um own assets.

Allie Barefoot: Right. And looking forward, Cotality's forecasting data points toward a broader market rebound by March of 2027. Between now and then, you know, what is kind of the ultimate wild card that buyers and sellers need to watch out for? Of course, there's always several when you look a year ahead into the future, but something that might be on your mind right now as we look month-to-month.

Selma Hepp: Yeah, you know, there's really a lot of wild cards out out there at the moment, you know. [laughs] And you know, and they actually, in many ways, will determine how wide or broad market rebound we in fact see, you know. Which a lot of folks are now wondering, you know, the rise in mortgage rates has been uh a detriment to the spring home buying market, and we have not seen a rebound as much as we anticipated, and that's going to play out in future home prices as well. Um, so, you know, naturally one, um, one wild card we gravitate toward is still mortgage rates. Um, but the fact that we're contending with these inflationary pressures, that everything is more expensive, um, you know, that we are not sure exactly how consumers are going to respond to that in in terms of uh wanting being willing able and able to buy these bigger bigger purchase bigger items. Um, you know, the other thing is what does it mean for inventory. Maybe some people are going to feel more stuck or remain in their home because of the uncertainties around them and these wild cards. You know, and then the last thing is on new construction. You know, we can have new construction activity being impacted by by these higher rates too. So, you know, there's a lot of, again, a lot of a lot of wild cards to to work with. Um, you know, one thing we do know, if it's if we do see even a modest decline in mortgage rates, there does remain a lot of pent-up demand there that's really ready to come back into the market. And, you know, with inventory still being so tight in many regions, that could quickly translate into faster home price gains and more home sales, you know. We don't know, but, you know, if if mortgage rates do remain elevated or even, you know, as volatile as they've been, the market could stay sluggish for longer than we expected, you know. So, you know, the way I think about the next phase of the housing market, it's maybe less driven by dramatic drop in rates and more by life events and and gradual affordability repair through wage growth, combination of wage growth and slower rate of home price appreciation. Uh, you know, we're already seeing the evidence that those um sellers that have been locked in, um that lock-in effect is slowly weakening, um with more sellers now willing to list despite giving up a lower mortgage rates, low mortgage rates that they had they they had. Um, so, you know, so for buyers and sellers, the key thing to watch is not just rates and if rates fall sharply, but whether enough households decide they can no longer wait, you know. They retire, they move, they get a new job. These are three things that still continue to determine the housing market, and that may be what ultimately gets the market moving again.

Allie Barefoot: Absolutely. Almost like it's not a national trend, we're looking at different regions, we also have to look at different households. Everybody kind of has a different story here in this housing market and while May 2027 is a long way away, thankfully Cotality does have a monthly Home Price Index report where we get to dive deeper just like this into what that data is actually telling us. So thank you so much, Selma, for breaking down what May has really shown us here in the last couple of months, and I'm very excited to talk with you next month to see what that data is showing us as well.

Selma Hepp: I am anxiously looking forward to it as well.

Allie Barefoot: Thank you again to Dr. Selma Hepp for joining us on Data in Context, and thank you for listening. If you haven't already, subscribe to Cotality's YouTube channel, and if you want to find out more information, as always, head over to Cotality.com