Haunting trends in today’s housing market

Transcript:

Allie Barefoot: Welcome back to Data in Context. I'm Allie Barefoot with Cotality. It's late October, which means standard spooky season rules apply: costumes, candy, and ghost stories. But if we talk to prospective homebuyers, mortgage lenders, or institutional investors right now, the scariest stories aren't about the haunted houses; they're about the housing market itself.Between persistent inflation, volatile interest rates, zombie price momentum, creeping delinquencies, and a multi-trillion dollar cushion of equity that might not be as safe as it looks, the real estate landscape feels like a haunted maze. So today, we're going to be putting on our brave faces to examine scary trends in the housing market right now. And to do so, we're going to be talking with Cotality's Senior Principal Economist, Molly Boesel. Let's put the data into some spooky context. Molly, thank you so much for joining us on Data in Context again, this time to talk about some spooky trends in the housing market.

Molly Boesel: Yeah, thanks for having me again, Allie.

Allie Barefoot: Of course! And I know that we're talking of a couple scary things here today, but I also know that you went on our sister podcast, Beyond the Buildings, and discussed five other scary topics. So definitely want to make sure to go check that out as well so we get the whole scope of the spooky housing market right now.

Molly Boesel: Yeah, we have our annual Halloween edition of Beyond the Buildings.

Allie Barefoot: Absolutely. So let's go on ahead and jump in and talk about five other housing market monsters, and I'm going to kick off with our first one, which is the Inflation Phantom. We're talking about inflation because obviously rising costs of everyday goods and products, they keep haunting household budgets, quietly eroding buyers' purchasing power and pushing homeownership further out of reach, which in my opinion is very scary. So how is this persistent background inflation altering the financial math for first-time homebuyers trying to save for that down payment?

Molly Boesel: Yeah, you're right. We got some pretty scary numbers last week on the CPI. That headline CPI number showed that prices were up 3.7% in December, and that's over last year where prices were rising at a pretty good clip. But, you know, looking under that, gas was up 34%, you know? So those who are looking to move somewhere where they need to drive to work, you know, that's going to be a big bite out of their budget. And those that are renting as well, you know, they have to spend more on their essentials. Rents are still growing; they're up around 2% through this year. So the bottom line, you know, it already takes an entry-level buyer about 4.5 years to save for even a modest down payment. So rising costs which have not been balanced out by rising incomes will just make it that much harder.

Allie Barefoot: Which can definitely be a very daunting task for a lot of people to save up. You know, we talked about this before with Dr. Selma Hepp as well, is that while we're trying to save up for a house, inflation continues to rise and it cuts that personal spending in half. And I just think that ultimately understanding the borrowing cost is very crucial. And we're going to move on to our second housing monster here as we're seeing the Haunted Rate Rollercoaster. As you know, Molly, interest rates have been going up and down unpredictably, leaving buyers and sellers trapped in a state of this limbo as they try to time when is the right time for them to enter the market. So how are these volatile interest rate movements disrupting traditional buying cycles, and really, is there any reliable strategy for buyers to help navigate this haunted ride?

Molly Boesel: Yeah, rates have been up. So just recently in the last month, they're up a full percentage point over what they were a year ago, and they were already again, you know, rising. So let's put that in context, because this is Data in Context. So every 1/4 point increase in mortgage rates translates into about a 3% increase in monthly payments. So you've got that 1 percentage point up, that's about a 12% increase in monthly payments only on the interest rates. So, you know, we know that prices have been increasing, too. So what does this mean? It really eats into what buyers can afford. But you asked about strategies. You know, buyers need to work on what they can control, right? They can shop around for different financing, try to get the lowest rate from any lender they can find. If they're looking at a new home, builders often offer incentives, like they're buying down rates or they may have different incentives for new homes. And they need to look at that full cost of ownership. We've talked about that before. You know, their property tax, their insurance rates, all that. But, you know, one of the other things is maybe they can move a little further out, they can maybe buy a smaller home. But, you know, an important thing in here is that they need to make sure it supports their financial goals. They don't want to overstretch; they want to stay in that home. So that I think is the most important thing.

Allie Barefoot: Yeah, those are definitely some great strategies to keep in mind. And to stick here on the pricing subject, perhaps one of the spookiest phenomenons—at least in my opinion—that is haunting sellers is that Price Zombie. Sellers are clinging to peak market valuations from years past, and that's kind of creating a disconnect between listing prices and what buyers are actually willing to pay. So what is it going to take to finally lay these undead price expectations to rest so that transaction volume can can finally resume and kind of get the market going again?

Molly Boesel: Yeah, so some sellers are sort of looking at where prices have been going, you know, over the past 10 years or so, which was, you know, up at a pretty fast rate. But really, ultimately the market's going to tell sellers whether their price expectations are realistic. So with the affordability constraint we talked about, you know, other prices rising, you know, buyers just might not be able to stretch enough to meet those expectations sellers are having. If a home is sitting on the market, if other homes are selling for less, eventually sellers are going to need to adjust. And, you know, when they can adjust, when buyers can afford their homes, that's when we might see transaction volumes pick up.

Allie Barefoot: No, that makes perfect sense. And as we move into our fourth haunted house monster here: the Delinquency Shadow. Beneath the surface of the market stability lies a growing threat as high living costs and elevated mortgage rates, they start to strain household budgets. And we're starting to see subtle upticks in missed payments across certain demographics. I know that you monitor that pretty closely here at Cotality. So how does Cotality track these early warning signs of default, and what risk does it pose for broader market economy and stability down the road?

Molly Boesel: Yeah, so we track, like you said, we track late payments. We do that with our partnership through servicers, so we have a lot of great data there. But let me, you know, point out first of all that delinquencies are really low overall. So any of those increases we're seeing are up from, you know, historically low levels. But, you know, we are seeing some subtle upticks like you said. So the serious delinquency rate—that's just what we call mortgages that are 90 days or more past due—that's at about 1% of all mortgages. That's up from 0.9% of all mortgages. Okay, not a big increase, but it's increasing across the country. 85% of metros saw an increase in serious delinquency rates, so it's widespread. For market stability, though, think about the flip side of that. If we're seeing 1% serious delinquency rate, we're seeing 99% of borrowers paying on time. So that shows us that mortgages overall are doing well. We do see a little more stress in the, you know, those with the low down payments, but that's always been there, but that's really definitely a market to watch.

Allie Barefoot: And my last housing market monster that I have for you here is the Equity Gargoyle. Home equity across the nation is sitting at historical highs, but for many homeowners that wealth is sitting like a gargoyle, like a statue locked away and it's unreachable due to that tight credit standard and high borrowing rates. So my last question here for you, Molly, is: can you kind of give us a lay of the land currently? How are investors and homeowners using hyper-local market signals to safely unlock that equity without taking on dangerous debt and really nailing that gargoyle on the head?

Molly Boesel: Yeah, so borrowers have a lot of equity. Cotality estimates homeowners that have mortgages have about $11.5 trillion in tappable equity. That's what they could tap into and still leave a substantial amount of equity in there. But again, having that equity and wanting to borrow against it are two different things, and being able to borrow against it are different things. We found that the homeowners sitting on the most equity often have very low first mortgage rates. So they're, you know, maybe sitting with a 3%, 4% mortgage rate. They also have pretty low housing costs, so they might not want to tap into that. And those that might want to tap into it might not want to give up that low rate. So refinancing that whole first mortgage and a cash-out might just not be very realistic for a lot of borrowers. You've got home equity lines of credit, you have home equity loans. They could just tap into part of their equity with that as well. So how do you do that safely? With our hyper-local data, you can look at home values, price trends, market conditions, all at the property level that gives homeowners, investors, mortgage bankers the information they need to understand how much equity is available for the borrower so it can be safely accessed, and they won't get in over their heads and pull out too much debt. So it's really just the power of the data can help them with that.

Allie Barefoot: Absolutely. And, you know, as we talk about these scary trends in the housing market, not necessarily that a lot of these will float away or disappear by the time the next late October rolls around, but it's great to hear that Cotality has these resources to help tackle this head-on at the current moment. While these are some scary trends, it's great to know there are resources and ways around it to help the homebuyer enter the market, a seller leave the market, vice versa. So it's making me feel a little bit more calm as we head into the Halloween season about these topics.

Molly Boesel: Yeah, data is power in this market.

Allie Barefoot: Thank you again to Molly Boesel for joining me here on Data in Context, and thank you so much for listening. If you haven't already, subscribe to Cotality's YouTube channel, and as always, if you want to find out more information, head on over to cotality.com.

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