Solutions

Debunked! Top Three Housing Myths Dispelled

INTRO:

It’s no secret that the property market has been out of the ordinary, but how far from the norm have things actually deviated? While a quick scan of recent headlines may lead to the assumption that the U.S. is facing a brewing housing bubble, the reality of the country’s economics and the future of the property market is far more complex.

In this episode, host Maiclaire Bolton Smith sits down with CoreLogic Principal Economist Molly Boesel to discuss the top three myths that are currently circulating within the property market, which of these claims are false and which ones have grown from a grain of truth into urban legend.

A Conversation with Molly Boesel

TRANSCRIPTION

Maiclaire Bolton Smith:

Welcome back to Core Conversations: a CoreLogic Podcast, where we dive into the heart of what makes the property market tick. I’m Maiclaire Bolton Smith, your host and curious observer of all things related to property — from affordable housing to market trends to the impacts of natural disasters to climate change — I want to converse about it all.

So today we’re going to investigate and debunk some of the myths that are currently circulating within the property market. You know the ones we’re talking about, the idea that we’re currently in a housing bubble and that the expiring governmental aid is going to throw millions of homeowners into foreclosure. We’ll start with why this is actually not the case, and then we’re all also going to talk about just how many of these claims are grounded in truth and which ones are pure myth.

Sensational headlines covering industry trends are designed to grab attention. In the process, they can also perpetuate a sense that today’s market is somehow abnormal. While it’s no secret that the property market can swing from one extreme to the next, most of the time the industry resides somewhere in the middle and it’s not perpetually on that cliff ready to fall off.

So, to help separate truth from legends, we have CoreLogic Principal Economist Molly Boesel with us today to speak about some of the popular myths in the housing market and how these tall tales intersect with the truths of industry trends. Welcome to Core Conversations, Molly.

Molly Boesel:

It’s really great to be here, Maiclaire.

MBS

So excited to talk to you today, and this is such a fun topic. So to get us started, why don’t you start by telling our listeners a little bit about your background and your role here at CoreLogic?

MB

I am a principal economist in the Office of the Chief Economist, and I’ve spent some time at both Fannie Mae and Freddie Mac, so I’ve been in this business a while. But at CoreLogic, I spend a lot of time looking at the housing market data and just seeing what the trends in the data are telling us about what’s happening in the market now and what might be happening in the future.

MBS

That is fantastic, and the reason we want to talk to you today. And our listeners are very familiar with our Chief Economist Frank Nothaft, so it’s great to have someone else from his office here with us today too.

So, before we get into some of the actual myths that are currently being passed off as truth, can you give us your view on why there’s so much misinformation circulating around about the property market?

MB

Sure. There’s really a couple different reasons. First of all, buying a home is really a big investment both financially and emotionally, so there’s so much wrapped up in that. So we think about it a lot. We’re really worried about this investment. And then, again, it’s just a big emotional investment as well.

MBS

Definitely.

MB

But there’s also this memory of the Great Recession and the housing crash, and that’s really just not that long ago, so we keep comparing a lot of what’s happening now to what happened back then, which is really an extraordinary time.

MBS

Yeah. It’s funny how it was just over a decade ago, but it still feels relatively recently, so I’m sure it haunts many people, especially those home buyers out there. So if we get into the specifics of one of the falsehoods we hear, that there’s going to be a tsunami of foreclosures resulting from the financial strains brought on by the pandemic. How true is this?

MB

So in short, it’s not true.

MBS

Okay, good.

MB

But I’ll give you some details of why that would be. You think about what happened after the pandemic, and a lot of borrowers really had a shock to their incomes. So we really did have a large increase in mortgage delinquencies in the early part of the pandemic, early 2020. But as we progressed through that and into 2021, the number of new delinquencies really went down, first of all. But then those borrowers that were in delinquency… So those delinquency numbers, they actually include borrowers that are in forbearance. So the borrowers that were in forbearance were behind on their payments, but they weren’t progressing into foreclosure, so they were being held in delinquency and not going into foreclosure. So as that forbearance comes off for a lot of borrowers, we’ve had fewer borrowers go into delinquency. And during that two-year time, incomes have really come back. Almost 90% of the jobs lost have come back during the last two years.

MBS

So a couple things in there. Last season we talked quite a bit about forbearance with Pete Carroll in our very first episode of this podcast, actually, and then again recapped in Episode 30, but I want to revisit a few things just because some people may not be familiar with it. Can we just start with what forbearance actually is and what’s the difference between forbearance and delinquency? And then kind of get into why so many people had loans in forbearance in the first place.

MB

Yeah, sure. Yeah, definitely. So forbearance is really a tool to help borrowers who can’t make their mortgage payments. So they’ll just be kept in later stages of delinquency and they won’t progress into foreclosure. So a lot of times it’s used during natural disasters when there’s a shock to borrowers’ income and they just can’t make their payments, or maybe they aren’t even in their house. They’ve been displaced so they can’t even physically make their payments. So that’s a tool that’s often used.

So after the COVID-19 pandemic took hold in the U.S., the federal government directed lenders to make forbearance available to borrowers, and that kept them in delinquency and didn’t let them progress into foreclosure. Like I said, that gave borrowers time to recoup their income, maybe get a new job, get their old job back and become current on their payments. And new delinquencies have been much lower over the past two years than they were at the very beginning of the pandemic.

MBS

Yeah, I think that’s a very important part of the story. I want to also look… I think it’s worth mentioning the opposite side of that coin, that while many homeowners hit pause on their loan payments and may have gone into forbearance, home equity has been accumulating. So can that help stave off some of the foreclosures?

MB

Oh yeah, of course. I mean, home equity plays a large role in the health of the mortgage market right now. When we started off, I was talking about thinking about the Great Recession and the housing crash, so we’re in a really opposite situation right now. During the housing crash, about 26% of borrowers were in negative equity. That means they owed more on their mortgage than their home was worth.

MBS

That’s huge.

MB

Yeah, that is huge. Now, that rate is 2%. That’s really close to zero, so we’re not having a problem with negative equity anymore. In fact, years of home price appreciation has given us huge amounts of home equity accumulation, as you said. That’ll cushion borrowers. So a borrower… You really need what we’ll talk about: a double trigger. So a borrower needs to be behind on their payments, and they also need to have no equity in their house. Because if they have the equity and they’re behind on their payments, they can just sell their house. They’re not going to be foreclosed upon. They’re not going to have a short sale. I mean, it’s not an ideal situation for the borrower. I don’t want to make light of that at all. It’s a serious situation. But they’re going to make enough money selling their house to repay their mortgage.

MBS

Got it. Okay, that’s an important point. That’s a really important distinction that I’m glad that you brought up because I think that’s something that I don’t really hear people talk about that too much, that this is why it’s so important to talk about this accumulation of equity.

So most borrowers who want to gain access to any cash that they may have, equity built up in their home, would generally refinance their homes. However, another potential myth or untruth that’s circulating is the opinion that refinancing is going to dry up. I know Frank Nothaft talked many times about this historical high of interest rates being so low, refinance being so high. What’s really going on here?

MB

Oh yeah. Well, there was a really large refinance wave during 2020 and 2021. That was really driven by those historically low mortgage rates. In 2021, the annual average mortgage rate was the lowest it’s ever been, so think about that. So anybody that had a mortgage outstanding was really incented to refinance that to a lower rate.

So first of all… So mortgage rates are headed up. Let’s all agree on that. In fact, if you look at the numbers over the last few weeks, they’ve increased quite a bit, and that’s really due to the inflation we’ve been seeing in the U.S. It’s at nearly the same rate of inflation that we saw 50 years ago, so we haven’t seen this level of inflation for almost 50 years, so not many of us are going to remember that. So the Federal Reserve is committed to taming that inflation. So to do that, they’re going to increase interest rates, which will have an impact on mortgage rates and cause them to continue to go up. They’ll still be fairly low compared to 50 years ago. Mortgage rates were much higher than they are now. But all that means, again, is that mortgage rates are headed up.

Now, think about how low they were the past couple of years. Any new home purchases and any refinances were sitting with record low, low mortgage rates. Mortgage rates in 2021 averaged just below 3%. Think back to even 2006 and 2007. They were around 6% or 7%. So that’s not even –

MBS

[crosstalk] difference, yeah.

MB

Right. That’s not even that long ago. But so when we think about the mortgages that are out there, not many borrowers have high mortgage rates, so they don’t have an incentive to do a refinance for a new rate or even a new term. There have been a lot of borrowers lowering their terms to pay off their mortgages faster.

But you asked about the equity and cash-out refinances. So not all refinances are for rate or a term reduction. A lot of refinancing is for cash-out refinancing. We have borrowers who want to tap into that record level of equity. So cash-out refinancing has been actually pretty low. So about a year ago, early 2021, cash-out refinances made up about 14%-ish of total originations. Now they are about 25% of total originations. So we’ve seen an increase in that as borrowers tap into that. So all that is to say that refinancing, it isn’t going to dry up, but it is going to look a lot different than it did last year.

MBS

Right. Wow, that is really interesting. So, okay, the other thing I want to talk about… It’s probably the biggest tale du jour and the one thing that people talk about more than anything is that…

MB

[crosstalk] the cocktail party question here coming up, right?

MBS

Yes. That we’re in a housing bubble. And I mean, I would believe this. I live in the Bay Area in California. I would tell you we’re definitely in a housing bubble, but I don’t know if that bubble’s ever going to burst. So how true is that? And is it our reality? Why do so many people, and I imagine many of our listeners — including myself —believe that this is actually the case?

MB

Well, again, when you think back to what happened during the Great Recession, prices were going up, and there was a frenzy, and then they just crashed. You got a big difference now between then and now, and the difference is that we have an incredibly low supply of homes for sale on the market. In fact, right before the Great Recession and compared to now, we have about half the number of homes for sale as we did back then. So that’s that low supply and that’s meeting really high demand.

And that high demand is coming from, first of all, the low mortgage rates we talked about. Low mortgage rates make for lower payments, and so there’s an incentive to get a mortgage with a lower payment. And also the demand is coming from the age structure of our population. We got a lot of people of prime home-buying age out there. So you got this low supply and this high demand meeting, and you really are having an increase in prices.

Not only that, there is… After the Great Recession, there was a real slowdown in home building, and that has really yet to recover. So to really get out of this low-supply situation, we need a massive increase in homebuilding. That has yet to recover for that.

And then on top of all that, we had the low supply going into the pandemic. We had the low home building going into the pandemic. In the early parts of the pandemic, a lot of homeowners didn’t feel safe putting their home on the market. They didn’t want people traipsing through their house. They thought that was dangerous. We all wanted to be away from people then. That since has recovered, but that played a role in the price increases in the early part of the pandemic as well.

MBS

So there’s a lot of things going on there, and I want to unpack some of the things that you just said. One thing is, there were very few properties on the market. I don’t think I had realized that that was still the case. And if we go back, compared to prior to the recession or different times, that there was a lot more inventory than there is available right now.

Our listeners will know that I often make comments about where I live here in the Bay Area, and when we bought our home — which was nearly four years ago now — there were bidding wars unbelievable at the time. And I’ve talked about how we bid $150,000 over a home and were outbid by $100,000 ourselves on that home. And now we’re seeing things in the Bay Area, which I know is a bit of an anomaly, where homes are selling for $1,000,000 over their asking price. It’s insane, and it feels to just keep getting worse and worse.

And I know part of that is driven by this low supply. But one other thing you mentioned is that construction is low, and something triggered a thought. We’ve talked about construction costs on this podcast in the past as well too, and that lumber shortages… So is that contributing to it as well too, is that lumber and housing supplies that you would use to build new construction are a lot more expensive?

MB

That’s also the supply chain delays we hear about. If you’re going to get started building a house, you need to know that you’re going to have the materials there to finish the house and sell it, so that definitely is going to play a role. And also the other “L,” which is the labor. Labor costs have also gone up. So it’s a lot of expense in building a new house as well. And the land. What’s that? What’s my third L? Think about where you live, Maiclaire. There’s not a lot of land available to build a house. You have a lot of natural restrictions for your building there. So yeah, you got a lot at play here. But again, it’s that new supply really needs to come into play to help us ease up the supply shortage.

You started on an interesting topic, the buyer competition. I mean, that now is… It’s eased a little bit compared to where it was last year, but last year it was at an all-time high.

MBS

Really?

MB

Yeah. CoreLogic, we have multiple listing service data, and we can go in there and we can look at the list price —the initial list price, not just one that’s been lowered or changed. We can look at the initial list price, and then we can compare that to what that home was sold for. So typically in our 25-year history of our multiple listing service data that we use for this analysis, between 15% and 25% of homes sell above initial list price. That’s historically. You see a theme here in this whole podcast of things are a little out of ordinary right now. In the middle of last year, that hit 55% of homes sold for more than initial list price. It’s eased a little bit. I looked at February’s number; it was 45%. We’re still way outside that 15% to 25%. So you just have, like you said, bidding wars. Short supply, bidding wars. The higher interest rates will probably calm that down a little bit as borrowers don’t feel like they need to rush to get that low interest rate they were chasing last year. That should help calm that down a little.

MBS

Do we foresee there being a change in the supply issue in particular with new construction? Do you see that changing? Do we have any intel into that?

MB

I think it’ll just be some gradual increases in new construction.

MBS

Okay. So this has been so great, Molly. Just to finish off, I want to look at one more comparison. We’ve talked about the Great Recession. How are the current circumstances of what we’ve experienced right now, which is a little bit abnormal, how is it different than what we experienced in the Great Recession? You’ve talked a little bit about this, but can we dive a little bit more there? Is there anything in terms of forecasting in terms of home prices and market supply for the year ahead?

MB

Yeah. So we were talking about the market supply. Going into the Great Recession, actually, we were oversupplied in housing. So we’ve switched now to an undersupply, so that will keep prices from falling. So prices aren’t expected to fall at all, but they really can’t keep going up at the rate they are. There are people behind these mortgages, and they need to be able to afford them, so we will get to a point where people just aren’t willing to take out these large mortgages to pay these high home prices. So we do expect while prices will continue to increase, they’re going to increase at a lower rate than they are now. So we do actually expect with our home price forecast that prices will continue to increase at double-digit rates through about the middle of this year but then begin to ease a little bit, maybe down to 5% or more by the end of the year. So, still increases in home prices.

And we do expect that the higher interest rates will play a role in that as well. So we talk about home prices, but to take out a mortgage, you need to worry about the interest rate. So as interest rates go up, payments get higher, so that should play a role in slowing down home price appreciation.

MBS

Got it. Okay. Well, that was a lot today, Molly, and I’m glad that you were able to debunk some of these myths that are out there and set the record straight on the housing market, so thank you so much for joining me today on Core Conversations: a CoreLogic Podcast.

MB

All right. Thanks a lot. That was great.

MBS

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 podcast 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, and our social media duo of Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.

© 2022 CoreLogic,Inc., All rights reserved.

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