A Conversation With Thom Malone
Property is the world’s largest asset class, so any fluctuation within this market has far-reaching effects. Just consider how property values in countries like Australia, New Zealand, Canada, the U.K., and the U.S. have sent ripples throughout the global economy.
There are many factors that affect the housing market, and one is the amount of investment activity. Investors contributed to the dramatic home price growth seen in recent years. The surge in investor activity significantly impacted home prices, but the precise extent of this influence remains a subject of ongoing debate among economists.
Another factor affecting the property market is interest rates. When these rates plummeted several years ago, housing prices surged across the world. Then rates began to climb, and the substantial home price gains seen in the aforementioned countries began to correct. But home prices in the U.S. have remained above their 2020 peak, defying expectations.
That leaves the question: Why is the U.S. an outlier in the property market?
In this episode, host Maiclaire Bolton Smith sits down with CoreLogic Professional Economist Thom Malone to discuss the effect that the U.S. securitized mortgage system and investor activity has had on both the national and global property markets.
In This Episode:
2:04 – What has happened to housing prices since the pandemic and what makes 2023 such a pivotal year?
5:47 – Who are the investors that are participating in the market? Who are the mega investors and what role do they play?
8:33 – How has investor activity impacted home prices?
10:54 – Erika Stanley goes over the numbers in the housing market in The Sip.
12:05 – What is happening in the world of international housing prices?
14:16 – What are the advantages and disadvantages of the U.S.’s securitized mortgage system?
19:53 – Maiclaire Bolton Smith and Thom Malone talk about their experiences speaking with friends from their home countries about buying a house in the U.S.
Thom Malone:
Most investors are in the small category. Yeah.
Maiclaire Bolton Smith:
Yeah. You would expect so.
TM:
There are mega investors out there.
MBS:
Who are these people? Are these mega investors, people who invest in single family rentals, or what kinds of people are these investors?
Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policy, and technology affect everyday life. I am your host, Maiclaire Bolton Smith and I’m just as curious as you are about everything that happens in our industry.
The property market is the biggest asset class in the world, so when it experiences a boom or a bust, we feel the effects worldwide. Just look at how the world markets have responded to changing property values in Australia, New Zealand, Canada, the UK, and the U.S.
Central banks around the world have looked to slow runaway home price growth by raising interest rates. In the U.S., the Federal Reserve kicked off its rate hike campaign in March of 2022, but over the last year and a half, the housing market, which typically is interest rate sensitive, hasn’t exactly done what one would expect. Despite the U.S. market cooling slightly, home prices are above their 2020 peak.
But this phenomenon is largely unique to this country. Other markets like Canada, Australia, the UK, and New Zealand saw similar gains, but the market has course corrected much more dramatically. So to talk about why the U.S. is an outlier in the property market and what we can expect in the global housing markets, we have CoreLogic economist, Thom Malone here with us today. Thom, welcome to Core Conversations.
TM:
Hey, Maiclaire. Thanks for having me. It’s a pleasure to be here.
MBS:
All right, well, I’m super excited because we’ve talked about having you on the podcast for a long time. So let’s just jump in and with a bit of background on what’s been going on in the property market for the last several years. So can you just start by laying the ground, what’s happened with housing prices since the pandemic, and what about this year makes it so pivotal?
ES:
Before we talk about the international housing market, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle @CoreLogic on Facebook and LinkedIn. Or @CoreLogicInc on X, formerly known as Twitter, and Instagram. But now let’s get back to Maiclaire and Thom.
TM:
Okay. So well, we can kind of divide it into three periods since the start of the pandemic, I think. Year one, so mid 2020 to 2021, prices went up a lot then. They went up 15%, mostly driven by a big drop in interest rates when the pandemic started, and probably remote work became a thing, which also increased demand for housing.
MBS:
Right. And we’ve talked a lot about that part on the podcast. Yeah.
TM:
We want more space at home because we’re working at home, right?
MBS:
Yeah.
TM:
So then next year prices kept going up. They went mid 2021 to mid 2022, prices went up 21%. Same factors are at play, remote work, still very active. Interest rates are still super low, but there also a big increase in investor presence in the market during this time. As far as CoreLogic’s data goes back from 2011 to 2019, in the start of 2020, investors had never really been more than 20% of the market, even at that highest points.
MBS:
Interesting.
TM:
And then in mid 2021, it just jumped up and investors became roughly a quarter of the market, and this kind stayed like that since then. So that’s an additional group that’s bringing demand into the market that probably had some influence to increase prices even more along with the already existing factors we mentioned.
Then we hit mid-2022 and interest rates go up. Demand drops and prices start to stall and drop just a little bit in response. Prices went down about 3% from that 2022 peak to the trough in January this year.
MBS:
I actually have a question that I think we should do for our listeners. How do we define investors?
TM:
So how CoreLogic defines an investor is any buyer who owns more than three properties at the time of purchase.
MBS:
More than three properties at the time of purchase. Okay. Wow.
TM:
You’re not getting the super small investors like someone who just owns one investment property or maybe someone inherited their parents’ home or something when they passed away and they’re renting that out, you wouldn’t capture that investor in it. But on the plus side, you’re not capturing someone who’s just buying their second home.
MBS:
Yeah, that makes sense. I mean, I have a number of friends that own two properties, and one of them is either they have it as an Airbnb or something like that too. So it really is people that are legitimate investors versus somebody just having one additional property.
TM:
Yeah.
MBS:
Okay. That makes sense. I think also too, I also want to talk about levels of investors. So we’re looking at people who buy or own more than three homes. So can you talk about what are the different levels of investors? I know sometimes we refer to mega investors too, so can we just define that a little bit?
TM:
Yeah, so we’ve got several different categories of investors. There’s a small investor, since there’s someone who’s got three to nine properties. A medium-sized investor-
MBS:
Nine properties is small? Wow.
TM:
A medium-sized investor, that would be someone who’s got 10 to 99.
MBS:
Wow.
TM:
Yeah, 99 properties, maybe not that medium, but got a pretty big portfolio, but-
MBS:
My mind is blown.
TM:
Large would be 100 to 999, and then mega is mega, 1,000. People with 1,000 or more properties.
MBS:
My brain just exploded. Oh, my goodness. I can’t even wrap my brain around that. Wow, that’s crazy.
TM:
Most investors are in the small category. Yeah.
MBS:
Yeah. I would expect so.
TM:
There are mega investors out there.
MBS:
Who are these people? Are these mega investors, people who invest in single family rentals, or what kinds of people are these investors?
TM:
It’s a bit of a smorgasbord. So yeah, there’s companies that, their business is exclusively single-family rentals, a lot of whom have probably might have been recently bought by private equity funds. So they might have some kind of private equity backer who’s tapping capital markets directly to get the funds to go out and buy homes.
There’s international, there’s companies that are buying on behalf of international conglomerates. And then iBuyers are a category that definitely fits in there.
MBS:
Okay. That makes sense. Yeah, we’ve talked about iBuyers on the podcast.
TM:
iBuyers, they’re a special class of home flippers.
MBS:
Yeah, yeah. We’ve talked about iBuyers before on this podcast, and fascinating again too.
ES:
If you want to hear more about iBuyers, check out episode 52 from earlier this season. It was published on Feb. 8 and is called, “PropTech’s Convenience Will Cost You, But How Much?” You can find it wherever you get your podcasts.
MBS:
I guess another question it leads the question to is how many, do we know the percentage of these investors that are in other countries purchasing in the U.S.? Are there other investors abroad that purchased in the U.S. and I guess vice versa too. Are there investors in the U.S. that are purchasing properties in bulk abroad?
TM:
Yeah, there definitely are.
MBS:
Okay. So with all this investor buying activity — somebody buying 1,000 properties — how does the investor activity impact home prices?
TM:
It’s not totally clear. So an additional investor is an additional piece of demand in the market. It raises demand and that raises prices. How much it raises prices is another question and there’s not really a study that’s properly kind of quantified it.
There’s a chicken and the egg problem. Did investors come and stop buying because prices were going up and they saw an asset that they could get a good return on? Or did investors cause the price increase? It’s probably a bit of both, and there’s kind of like a perpetual motion thing going on there. Prices went up 41% in two years. Were investors responsible for 20% of that 41%, 15%, 10%, 5%? It’s unclear how much of the price increases we can attribute to them as opposed to low interest rates or remote work or first-time home buyers or something like.
MBS:
Interesting. So, really just a combination of a number of things that really come into play here.
TM:
Yeah. The reasons why prices went up are multifaceted, and assigning weightings to each reason is very complicated and economists will probably be working it out for years and years and years.
MBS:
A lot of fun for an economist.
ES:
It’s that time again, grab a cup of coffee or your favorite beverage, we’re going to do the numbers in the housing market. Here’s what you need to know. Home purchases and their corresponding mortgages are not the only real estate transactions that are squeezing affordability. When mortgage rates moved from 3% to 8%, it wiped out about 36% of homebuyers’ purchasing power.
Renters are also feeling the pinch. Annual U.S. rent growth continues to impact tenant budgets. Since February of 2022, single-family rents grew by 30%. However, recent months have indicated signs of relief.
Year-over-year rental cost for attached properties grew 3.5%. For detached properties rent growth was slightly lower, gaining only 2.3%. On the home price side persistent mortgage rate increases have put the U.S. housing market in a quagmire driving home sales activity to the lowest level in 15 years. Although home sales have slumped, prices have remained remarkably steady. Home prices are now up 0.4% compared with the June 2022 peak. When compared to the January 2023 lows, they’re up by 6.4% and that’s The Sip. See you next time.
MBS:
Okay. So normally when we talk about housing prices on this podcast, we pretty much are talking about the U.S., but this is something that’s not just in the U.S., right? We’ve seen this similar movement on a global scale. So is there anywhere in particular that is noteworthy that’s beyond the U.S.?
TM:
Well, it’s the whole world really. There’s plenty of places besides the U.S. where prices went up a lot during the same period. New Zealand, where I’m from, prices originally prices went up 46%, so that was actually higher than the U.S.
MBS:
Wow.
TM:
Yeah, the U.S. went up 41% over the two-year period.
MBS:
Wow.
TM:
Similarly, Canada, your home country, close behind 37%. And then Australia and the UK, they were in the high 20s as well. So it was not isolated at all.
MBS:
Wow. That’s remarkable. Wow.
TM:
But we had the same factors influencing demand in those places.
MBS:
Sure.
TM:
The pandemic was global. It dropped rates globally. It sent people home from the office globally as well.
MBS:
Yeah. Wow. It’s really remarkable how one event like that had such a profound impact on everything in the world, and when we look at the housing market, which we’ve talked about is the biggest asset class, how it really fundamentally changed how people live and how people are purchasing homes.
TM:
Yeah. There’s no doubt about it. Yeah.
MBS:
Okay. Well, I want to talk a little bit more about you. As we mentioned, you’re from New Zealand. I’m originally from Canada. I want to talk a little bit about how unique the U.S. market has been compared to some of those things, and something that your colleague, Molly Boesel, we’ve talked about a lot on this podcast too, is how the U.S. is very unique in how we have fixed-rate mortgages for 30 and 15 years, and in other countries they don’t have these fixed rate mortgages.
So advantages, disadvantages of the U.S. compared to other countries, both for a homeowner versus the economy at large. What are the advantages and disadvantages of the way we do this here in the U.S. with fixed-rate mortgages?
ES:
Before we shift gears to talk about mortgages, we’re going to take a break to tell you about an opportunity that you have in January to come meet some of our experts, including Maiclaire, in person.
Garret Gray:
I’m Garret Gray, and I’m standing here at the Fairmont in Austin, and I can’t wait to see you at INTRCONNECT 2024. INTRCONNECT is where the insurance restoration industry comes together to solve tomorrow’s problems today. So come on down to Austin, make sure you have a seat at the table because we need your voice. There’s not one group or company that can tackle these problems alone. It’s all of us coming together to focus on the lives beyond the buildings. Register today, and I’ll see you in Austin.
TM:
Okay. So well, the difference between us and these other countries and why we have mostly fixed rate mortgages. Some people might still have an ARM. It’s because we have securitization in the U.S. and other countries don’t have securitization. So I bought my first home earlier this year. I went to a mortgage broker. I got a loan for the home. I made one payment to that broker and then I get a letter in the mail saying, “Hey, your loan’s been sold on to a bank. You’re now making payments to this bank.” Then I get another letter a couple of months later from the bank saying, “Oh, hey, we’ve sold your loan on to Freddie Mac.” And what Freddie Mac does, they’re taking my loan with a bunch of other loans that bumbling them all up into a big mortgage-backed security, which has been sold on to a bunch of different investors. Or maybe held by Freddie themselves.
So that means that the risk of me either defaulting or paying off my whole loan early and the lender not collecting all the interest, isn’t borne by the person who actually made me the loan or the bank. It’s distributed amongst a bunch of different people. In most countries, the bank makes the loan and then the bank keeps the loan. So the bank is bearing this risk.
MBS:
Gotcha.
TM:
So they can’t offer you as favorable terms as something like a 30-year, fixed rate mortgage. Or prepayment penalties are pretty common in New Zealand, for instance, and in most other countries, and you’re not going to end the opportunity to re-fi as well is not going to be as prevalent because you don’t have fixed-rate mortgages.
To get a sense of that, in New Zealand, for instance, pretty much everyone has some kind of what we would think of some of the ARMs for us, or adjustable rate mortgage. When you buy a house and you get a mortgage, the bank will offer you kind of a menu of interest rates for different terms. Your mortgage will still be 20, 25, 30 years, but your interest rate will be adjusting according to the market throughout that. So the bank might offer me, “Hey, you can take one year at 3%. Two years locked in at 4%. Three years locked in at 5%.” Et cetera, et cetera, up until five years probably, and most people generally go with two years. So advantages and disadvantages of basically having adjustable mortgages versus fixed-rate mortgages for… Well advantages, owners love it. Right?
MBS:
Sure. There’s a level of anxiety and uncertainty for a homeowner to not know what your mortgage payment or your home payment is going to be in five years’ time. That would cause a lot of uncertainty to people. Yeah.
TM:
Yeah, exactly. I know exactly what my mortgage payment is going to be for the entire course of the mortgage.
MBS:
Exactly. Yeah.
TM:
Similarly, I know if the market turns favorably for me, I’m going to be able to refinance my mortgage at a lower rate and have that locked in for the rest of the loan as well. In other countries, that option’s not there. So it’s definitely a really good deal for the buyers compared for the-
MBS:
Homeowner. Yeah, absolutely. Yeah. It’s interesting because you talk a lot about a lot of this stuff, and I think for the average homeowner, they have no idea about all of this stuff that happens in the background. All of the mortgage bank security — the mortgage backed securities, and Freddie Mac and Fannie Mae, the secondary markets, people receive that letter saying, your mortgage has been sold to so-and-so and does that even mean anything to them? So I think for the average homeowner, they don’t realize, right?
TM:
Yeah. You don’t necessarily make the connection that the reason I have the mortgage the way I do is because of the same reason that I got that letter saying that my mortgage is now owned by some government sponsored enterprise. Yeah.
MBS:
That it’s the reason our mortgage market is able to operate the way it does in this country.
TM:
Yeah. I mean, when I speak to… Either way people here or people at home, I don’t know about you with your family or friends back in Canada, but their minds are blown, people back home, when I explained the mortgage system here. And they’re like, “Oh no, my interest rate isn’t going to change. Yeah, no, and I can pay it off whenever I want and I won’t have to pay any fees or anything like that for it.”
MBS:
Yeah. Yeah. It’s exactly the same experience that I have with my family and with my friends, and they’re like, “No, no, no, you’re wrong.” And I’m like, “No, it works that way here.” Yeah.
TM:
And vice versa when I tell any of my American friends, it’s, “What? The rate change, you don’t just get a 30 year? You don’t have fixed-rate mortgages for that? You would’ve to pry my fixed rate mortgage out of my cold dead hands.”
MBS:
Yeah. It really is. It’s interesting. In all honesty, I didn’t really understand the differences until I bought a house here and I went through the process of refi’ing and my family being like, “Why are you doing that? Why do you get that opportunity and what are you doing?” And saying something, even when we bought this house, because we recently moved into a bigger home, and I said something about where we were with higher interest rates, and my dad’s like, “Well, that’s not forever. That’s just for the first few years, and it could even go higher.” And I’m like, “No, that’s not how it works here.” So yeah, it kind of is mind-blowing to people in other markets and other countries that don’t experience what we have here.
ES:
Maiclaire and Thom spent this episode talking about investors and their effects on the housing market both domestically and internationally. They also touched on what makes the U.S. mortgage market so unique. In next week’s episode, they’ll dive into why international housing prices have come down so dramatically, why the U.S. continues to see relatively stable prices, and what mortgages have to do with this. We’ll pick back up next week. See you there.
MBS:
All right. 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; our fact’s guru, Erika Stanley; and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.
ES:
You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? Well, Thom Malone is an economist in the office of the Chief Economist at CoreLogic. He is responsible for analyzing housing markets and home price trends with a particular focus on investors. He has an extensive background in urban and real estate economics and applied econometrics. You can read more of his analysis at corelogic.com/intelligence. The link is in the show notes.
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