A Conversation with Dr. Frank Nothaft
It’s been over a year since the beginning of the pandemic, and in that time, much has changed in the world of property. Home prices, rent prices and construction costs have skyrocketed, and housing inventory has only been getting slimmer.
Host Maiclaire Bolton Smith sits down with Chief Economist Dr. Frank Nothaft to get a status update on the situation. When will home prices come down? What will happen when the forbearance moratorium ends, and what’s in store in 2022?
MAICLAIRE BOLTON SMITH: Welcome back to Core Conversations, a CoreLogic Podcast. I am your host Maiclaire Bolton Smith, and I’m the senior leader of research and content strategy with CoreLogic. In this podcast we’ll have conversations with industry experts about key topics from housing affordability, to the impacts of natural disasters on property. It’s been well over a year since the beginning of the pandemic, and in that time, much has changed in the world of property, home prices have skyrocketed. The CoreLogic Home Price Insight, or HPI report, which covered analysis through July 2021, indicated that home prices nationwide increased year over year by 18%, an all-time high.
While existing homeowners have gained a lot in equity with mean equity in the U.S. at more than $100,000 first time home buyers had faced a daunting market. The combination of the lack of inventory as people become cell shy in the face of COVID-19 and low interest rates have made purchasing a home more unreachable. So as we blaze past a series of events, the availability of vaccines, the loosening of pandemic restrictions, the coming end of the forbearance moratorium, and more, the question remains, what does the future hold? So that’s why I’m excited to sit down again with our very own Dr. Frank Nothaft, chief economist at CoreLogic, to talk about the road ahead. So Frank, welcome back to Core Conversations.
FRANK NOTHAFT: Well, thank you so much Maiclaire. It’s a pleasure to be here with you today.
MBS: All right. So our listeners likely already know who you are, both from your prior appearances on this podcast, but also because well, your kind of famous. But in case people don’t know who you are, can you just tell a little bit about your background and maybe let share a fun fact about you today?
FN: Oh, sure. Yeah. Well, after I got my PhD in economics, I moved down to the Washington DC area and I joined the staff at the federal reserve, or so I worked on housing and mortgage real estate property issues for the U.S. Central Bank. I enjoyed that a great deal. Then from there I moved on to a Freddie Mac and I was chief economist at Freddie Mac. Now I’m in my seventh year as chief economist at CoreLogic and really enjoying working with all the data products and analytics that we have here at CoreLogic. A fun fact? Well, let’s see, I’ve gotten really into genealogy over the last several years.
FN: It kind of marries some of my interests. I like doing research and I like history. No better way to marry the two of them together but to do genealogy.
MBS: Wow. I love that. That’s great. You and I know each other very well and I did not know that about you, so thanks for sharing. Perfect. I got to ask though, have you found anything interesting? Are you related to somebody famous?
FN: I wouldn’t say anyone famous, I found some interesting knickknacks. But I can say I haven’t been able to link myself to any, a nobility, or kings, or queens, or anything like that.
MBS: Well, not yet, but keep up the research. You never know what you’ll find. All right. So let’s dive in. So it’s been a few months now since the start of the really busy part of the home buying season. Have we seen an increase in supply in that amount of time, and has any added supply resulted in any decrease in home prices? I know we’ve talked about this a ton on the podcast already about how there’s this shortage of properties, there’s not a lot on the market. It’s led to this increase in prices. Has that changed?
FN: Oh, I tell you it’s such a tight market right now. The inventory of homes on the market for sale, it’s some of the leanest inventory that we have seen ever. When we looked at our CoreLogic multiple listing service data for the month of July, we found that the months supply of inventory on the market was only two months. Typically, what we normally see is about four to five months inventory, so two months is just a crazy low level. It reflects in part some of the conditions in the pandemic, the median age of an owner occupant, homeowner, in the United States is 57 years of age. That’s the median. So that means roughly one half of all owner occupants are baby boomers or older. During the course of the pandemic many older homeowners have decided to postpone or delay listing their home for sale until after the pandemic is in the history books.
FN: So a certain number of baby boomers and older owner-occupants ordinarily would their home for sale during the course of a year. But we’ve seen that really fall off over the last 18 months. That’s one of the factors contributing to this shortage of inventory on the marketplace. So, I am expecting that we’ll see increases in inventory as we get into spring of 2022, because I think by then a lot of the concerns about the pandemic will be behind us. Many of the older homeowners who had postponed listing their home for sale, I think as we get into the beginning of 2022, many of them will be ready to list their home for sale. That’ll add to increases in inventory. Also, this fall I think we’ll probably see some increases in inventory on the marketplace because that’s typically a time of year when we see a demand by homes, typically are moderate, or wane relative to the spring and summertime.
MBS: Yeah. So it’s interesting because I hear you say “When the pandemic is over, when the pandemic is behind us”, and I think all of us a year and a half ago never thought that we would be this far in and this would still be going on. It feels like this pandemic may never ever be behind us. But I feel like we are seeing something that’s cyclical. Everything in real estate and property is always cyclical. I think of us, like many of other people, I feel like we’ve outgrown our home during the pandemic because we realized we have less space than we thought that we needed. I know I struggle between should we sell because it’s kind of attractive because it’s a sellers market, but it’s terrifying because we could sell this house and never be able to find another one because there’s nothing available. So it just feels like it’s a vicious cycle and it’s just continuing to contribute to will people ever be able to enter the home buying process, or never be willing to take the leap, because of this kind of cyclical problem we’re seeing a shortage right now?
FN: Oh yeah. It’s a real challenge, especially with the home prices up so much. So I’ll just give you an example.
FN: Let’s say home prices in the area that you live in, let’s say they’re up 17% over the last year. If you’re a first time home buyer that means that the nest egg, the amount of savings that you need in order to buy a home is 17% bigger now than it was one year ago.
MBS: That’s a lot.
FN: You need the nest egg for the down payment, the closing costs, and the cash reserves after you settle on the house. So when you think about it in those perspectives, the double digit home price growth that we’ve seen in so many communities around the United States over the last year has increasingly made a challenging for first time home buyers to break in, and buy their first home, and transition into home ownership. You raised a really interesting comment Maiclaire, when you mentioned that during the pandemic so many of us are looking for more space. That’s absolutely true.
FN: What we’ve seen among families generally, as a result of the pandemic, they are looking for more living space inside their home because many of us need an office from home. For those of us with kids, we may need a schoolroom from home as well. So we’re looking for more space inside the home, but we’re also looking to social distance from our neighbors, so we’re looking for more space outside the home.
FN: So we’ve seen a distinct preference for single family detached houses over the last 18 months compared to single family attached or compared to multi-family residential structures. So it’s really an interesting change that we’ve seen in consumer preferences among residential structured type.
MBS: Yeah. I know, that’s exactly what we’re seeing, what we’re hearing from other friends and from us as well too. I feel like so many of us are tired of talking about the pandemic already now, but this pandemic has induced so many things in our daily lives, I think of the pandemic induced supply shortage. Just curious on how much it has impacted the housing supply gap. I know there’re some stats from Freddie Mac that’s projected $4.35 million under supply by 2022. Is this even worse now when we take everything into consideration from the past year and a half or so? The other thing too, we had a podcast on this about a month or two ago, construction prices. The cost of construction and labor and lumber in particular, how has that contributed to this supply chain?
FN: Yeah, that’s a great question and a great observation about the under supply of housing. Over the last decade we’ve had an under built housing market. What I mean by that is that the number of homes built really have been insufficient to keep up with the number of new families, the number of new households that are being formed in the United States over the last decade. Now we look back a few years ago, what we saw was that vacancy rates on housing gradually declined. That was good because 10 years ago, we had elevated vacancy rates in the housing market. That’s not the case any longer. The vacancy rates have come down and currently we have a generational low in vacancy rates.
FN: That’s really kind of underscored the under built nature of the housing market.
FN: Now it’s true that we’ve seen a pickup in construction, especially single family construction over the last year. But many of those newly built homes also come with a big price tag.
MBS: Sure, yeah.
FN: That ties in with what you asked about construction costs, we’ve seen increases in labor costs. We’ve seen increases in material costs, lumber in particular lumper costs, they have doubled. We see that in the CoreLogic, construction costs data. Lumber costs, it’s crazy, more double what it was just a year ago.
FN: For builders, they pay those costs, but they’ve got to pass them on to the home buyers. That’s a reason why the price tag on newly built homes seems to be just so high.
MBS: Yeah, it really is. Any of us that have a home that’s a little bit older or the home that we live in is 50 years old and things go wrong and things break, and you’re like, “I just want new construction. I just want something brand new.” It is those properties that have those big price tags on it. Something else, when I think of big price tags there’s often a lot of blame on investors when we look at home prices. Especially I live in the Bay Area, there’s a lot of the investors that come in, they buy homes, they flip them. We hear this, I mean, there are HGTV shows about this, this is what people do. That’s often been the blame for what’s really driving prices, is investors come in and buy these properties and then just shoot the prices up. Is that warranted? Is that really what’s happening. How much of the investor activity has accounted for this explosion in home prices? Or is it really just because of the supply and demand because of the pandemic?
FN: Great question. Here at CoreLogic, we have just issued a report on the single family investor marketplace. What we’ve observed is actually the percent of homes bought by single family investors has actually declined a little bit over the last couple of years from 2018 to 2020. The overall number of homes investors have bought has held about the same, roughly about a million homes a year. But as a percent of all homes sold in the U.S. it’s actually down a little bit.
FN: So, it’s not to say that maybe in some neighborhoods, some communities, sure there’s more competition between investors and owner occupants to buy homes. But overall, looking back over the last couple of years investors are buying a smaller share of homes than they were back in 2018. I don’t think it’s fair to blame a lot of the home price rise on investors. Really what I think the home price gains are attributed to is just this real strong demand to buy driven by the record, low rock, bottom mortgage rates that we’ve seen over the last 12 months, and the fact that the inventory listed for sale the supply is so much lower compared to what it was pre-pandemic. That’s really what’s driving this double digit home price growth that we see in so many neighborhoods around the U.S.
MBS: So that triggers a thought. I want to go in a bit of a different direction because something else that is another important topic is foreclosures. We’ve talked with our colleague and good friend, [ete Carroll, a few times about forbearance, and what’s been going on with the pandemic. I guess now, if we begin to see people emerge from the forbearance moratorium, have people had enough time to get back on their feet gain income? I mean, I know there were a lot of people laid off during the pandemic. We’re starting to see the economy bounce back, but are people going to be able to contend with their loans or are we going to see a wave of foreclosures as a bounce-back impact of the pandemic?
FN: Oh yeah. You’re absolutely right, Maiclaire, the pandemic had a severe impact on so many workers throughout the U.S. economy. More than 20 million jobs were lost in the first two months of the pandemic. Incredible. We have never seen job loss at that great in such a short period of time. That’s been so challenging and difficult for so many families, especially if you layer on top of that, the illness, and in some cases death of a major breadwinner in the family because of the pandemic, it’s been really very, very hard for some families to kind of write their financial ship and be able to get back to making current payments on their mortgages. The forbearance program has been just a huge help for many of these families who’ve been going through a whole variety of financial distress, medical distress, mental distress during the course of the pandemic.
FN: Now many have been able to emerge from forbearance and they have been successful in writing their financial ship. Through the help of a loan modifications, they have been able to get back onto a monthly payment plan and be current on their mortgage, on their modified mortgage. So that’s been good news. However, undoubtedly, there will be some families who will not be in a position to be able to make payments once they emerge from the forbearance program. So we are likely to see an uptick in distress sales, as some families who’ve been really challenged by the pandemic emerge from a forbearance. However, I think it’s just an uptick. We’re not expecting a foreclosure title wave like we saw during the great recession back in 2008, 2009, nothing at all like that. There will be some neighborhoods that we’ll see an uptick in distressed sales, such as foreclosures, short sales, but not a tidal wave.
FN: I think most families will be able to emerge from forbearance and be able to handle the modified loan payments on their mortgage. The economy’s really bounced back quite strongly thanks in part to a very accommodative monetary policy, which is a fancy way of saying mortgage rates have been very, very low and interest rates have been very, very low. But also the significant amount of fiscal stimulus that’s been provided by Congress, that has really helped to drive economic growth, a reopening of many stores, restaurants, local economies, and that’s put people back to work. So as we get to the end of the 18 month forbearance period, we may very well see that by far, most, most borrowers will actually have been able to start to rebuild their financial wellbeing and be in a position on a modified loan to be able to make those payments and stay in their home.
MBS: Well, that’s really positive because I think at the start of what you started to walk through was really staggering at the impact that this pandemic has had on our economy. So it is good to see that so many people are back on their feet and should be able to continue because some of this help that has been available combined with the lower interest rates, and lower mortgage rates as well too. So I’m glad to hear that it doesn’t look like it will be pushing us into another great recession like we had a little over a decade ago.
MBS: So I guess on that topic, just to close, a lot of times, we like to say, “If you had a crystal ball look into your crystal ball” which none of us have but we wish we did have. But what will recovery look like in the coming months, and even years ahead? I mean, a year ago, I don’t think we thought we would still be in this pandemic state that we are right now, even with the rollout of vaccines and here we are. So if we look forward to the coming months and year ahead, what do you think recovery looks like?
FN: Well, in short, I think 2022 will actually look like a really good year. Now, again, we are expecting that the pandemic wanes and doesn’t have impact on the economy in 2022, a negative impact on the economy in 2022. So what we’re expecting is that a lot of the stimulus from the federal government, as well as the reopening of companies, new jobs, and industries will lead to further declines in the unemployment rates with pretty robust job growth. So by the end of 2022, we may actually see the unemployment rate nationwide be down to about 4% or maybe a little bit lower, which will be close to what it was pre pandemic. So in February 2020, right prior to the pandemic, the unemployment rate nationwide was 3.5%. We could get possibly close to that by either the end of 2022 or the beginning of 2023.
FN: So that’s a really bright sign. That means, but that much job growth, that there’ll be a lot more income flowing into the pockets of American workers, which is a really good sign. So I think the overall economy will actually perform quite, quite well. For the housing market, we are expecting a slowdown in a home price growth, and CoreLogic does have a Home Price Index Forecast that we update and release each and every single month. Our forecast is for moderation and home price growth. We’re not expecting home prices to decline. We’re not expecting our national home price index to the client at all over the next couple of years, but we are expecting it to slow. So right now and for the last several months, we’ve been posting double digit annual price growth in the CoreLogic Home Price Index.
FN: Once we get to 2022, I think it will slow. We’re expecting as an annual average for 2020 to about 5% growth in home prices and moderating to about 4% home price growth in 2023. So again, no crash in home prices, but a significant moderation from where we are today. That moderation comes because I do think we’ll see more inventory come on the market for sale, especially from those older owner occupants who were postponing, who were delaying listing their home for sale because of the pandemic. I think we’ll see that come on the market. Might see a little bit of additional supply coming from those of borrowers who come out of forbearance programs, so that could add a little bit to supply for sale as well.
FN: Then on the demand side, I do think we’ll see some moderation in home buying demand, just because of the affordability pinch. The lack of affordability is really going to be affecting the pocketbooks of potential home buyers. It’s affecting many of them today. I think it’ll affect even more as we get into 2022. So between a moderation and demand because of the affordability pinch on their pocket books and some increase in inventory for sale on the supply side, that translates into a moderation of home price growth. Our HPI, our Home Price Index Forecast as an annual average for 2022 shows about 5% home price growth, much, much less than what we’re experiencing right now.
MBS: Well, that’s definitely a bright note to end on. I like that, that it looks like the future is bright 2022 and ’23 and beyond look like they will be a lot different than we’ve seen now. So thank you for that perspective and you and our listeners can be guaranteed that Dr. Frank Nothaft will be back with us again on this podcast, as we continue to just monitor what’s going on in the state of the world, as we look at different economic trends. So thank you so much, Frank again for joining us and being a part of Core Conversations at CoreLogic Podcast today.
FN: Oh yeah. I always enjoy speaking with you, Maiclaire. So thanks so much for getting together with me today.MBS: Anytime, so. For more information on the property market and the housing economy please visit us at corelogic.com/intelligence. Thanks 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 podcast to be notified when new episodes are released. Thanks to the team for helping bring this podcast to life, producer Rhea Turakhia and editor and sound engineer Romie Aromin. Tune in next time for another Core Conversation.
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