434: Declining Home Sales- What It Means for Investors and Renters with Selma Hepp

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It is my pleasure to welcome Selma Hepp. She is the Chief Economist with CoreLogic. We have quoted her on the show previously and I wanted to get her on so you can hear things firsthand and hear her thoughts on what is going on with this rather unusual real estate market we're in. Selma, welcome. How are you?

Good, good. Thank you so much for having me, Jason.

My pleasure. And you're coming to us from my hometown, Los Angeles, California.

Yes, yes, good stuff.

Well, give us some insight. I know you've got some visual aids to share as well. So for those watching on video, I think you'll be interested in these, but we'll try and explain them for our audio listener. You know, just kind of your overall take maybe. Let's start with that, Selma.

Yeah, so obviously very challenging market. You know, anywhere you look at it, it's been, it's, you know, challenging for everyone. I think the only group that's benefiting from all of this is existing homeowners because they have a very low mortgage rate and their equity is growing. But when you look at transactions, it's some of the historical lows. So we've seen home sales decline quite a bit this year again after decline last year, particularly in the last few months as mortgage rates started increasing. So mortgage rates are really being the, the major driver here of what's happening. Mortgage originations too are at some 40 year low. Affordability is at €40. I mean, you know, the, you know, any, any stat is, is just indicates a very challenging housing market. Yeah. So you know, that's really where we are at the moment and I don't think much is going to change through the remainder of the year because we are entering winter season.

And that's usually the slower time of the year and mortgage rates have been going up, so that's a double whammy there. So nothing really likely to change until spring of next year.

So Salma, you used the word challenging several times and I just want to define challenging because I think the CoreLogic perspective is the same as maybe the real estate brokerage industry and title industry perspective, which is challenging, means volume of transactions are down, volume of mortgage refinances are way down to almost nothing. So that means people that are in the business of brokerage or title insurance or mortgage, they are really noticing a very severe slowdown. How much is sales volume down? And I know that depends where, when, year over year. There's a lot of ways to slice that, but you know, from whatever your.

Take is, right, it's exactly true. I mean there's many ways to look at it. But if you look at for example, overall home sales activity in the US and you account for MLS sales and off MLS sales, we were down some 18% last year and we are likely to be down another 18% this year. Now if you look at MLS sales alone, we are likely to be down some 20ish, 23% overall for the year. If you look at mortgage originations, same situation count wise, we are likely to be down over 30, 35%. So yeah, challenging to me means declines.

Declines in volume in volume.

Right, right, right.

Okay, so talk to us about inventory and the effect of this decline in volume on inventory. And then of course prices, which is what most people think of as the real estate market. I think that's a little bit myopic, but you know, most people want to predict our prices going up or down. That's the big mindset out there, if you will. There's a lot more to it than that. But you know, that's, that's what most people are thinking about. Talk to us about volume and prices, if you would.

So yeah, I mean inventory too are at the lowest levels that they've been historically. To give you some context, going into the Great Recession, around the Great Recession times, we were almost at 4 million homes available for sale. Now we are at about less than a million homes available for sale. So a quarter of where we were at 4 million homes being available for sale. One thing it's due to increase in new construction, but in my opinion it was really the subprime crisis that led to, you know, huge declines and overall housing crash. So not to, not to equate the two, inventory being high with, with potential crash in home prices. But going back to where we are today, we are the lowest inventories that we've ever had and that's what's constrain in terms of potential home sales, especially in markets where we don't have new construction. And so there is this huge sort of divide or tale of two markets. Two markets that have, you know, reasonable number of new construction, they're having more transactions or less of a decline in transactions versus markets that been historically lacking new inventory and are less affordable. And, you know, lock in effect is playing much larger role. So now they have huger or larger decline in inventory. So almost no transaction, no possibility for transactions at all. But because of this lack of inventory, that's what's driving home prices now. I mean, it's having a huge impact on home prices coming into this year. We thought that home prices were going to decline as they were declining in second part of last year. But it turned out that as soon as we hit the spring home buying season and, you know, I mean, mortgage rates helped there too, because mortgage rates came down, we did see a home price pressure build up. And overall for this year, we are up about 5%.

In terms of home prices from that bottom in February to where we are today. Now it's going to be hard to continue that increase in home prices because of mortgage rates where they are today.

Yeah. Okay, so the first thing I want to make a distinction of, Selma, if you would, is that when you quoted that during the Great Recession 2008 ish, 4 million homes were for sale, that was the inventory level you mentioned, and now we have less than a million. I am frequently quoting Alto's stats on the show, so I just want to make that distinction for the listener because it is important. And that's only active listings. If you're using the NAR data or maybe your own CoreLogic data. And I don't know how the CoreLogic data works, so you could tell us. But NAR data, when they call it inventory, they include active pending and contingent sales. I don't like the way they do it. But as long as that's your comparison at both points that you're comparing, it's fine because the only important thing is that you're making the comparison. Does CoreLogic do its own data on inventory levels or using NAR data?

No, no, no. We have our own data. We actually, we do track a lot of housing activity based on MLS data, and we have a number of products that are based on MLS data. So it is actually active listings that I'm looking at when I'm looking at these numbers. But I was also thinking of availability, not just of existing homes, but also new homes available, which are not necessarily all in mls. Right, right.

And the new homes are tricky because nowadays, you know, more and more builders, I think, are putting them in the mls. But here's the trick, folks. And this is why you have to listen to the show, okay? Because it's complicated. Like my favorite Facebook relationship status, it's complicated. Okay? So, you know, the builders will put a few properties in the MLS, for example, but they know they have 15 more properties that are not listed in the MLS, and they're using those few properties they list in the MLS to basically be the bait to bring people in for a discussion. And they'll say, well, you know, that one might not be the right home for you, but we've got this one that's coming up, right? Or it's under construction. So these things get kind of dicey, Right, right, right.

They do. You know, but in a way, you look at it, you know, we. We are sort of at historical lows, which is the main reason why the. The home prices are growing at this point. So, you know, that's really the main sort of takeaway from. From where the inventories are.

Okay? So that takeaway is so important. So, folks, we have one fourth per these. The CoreLogic data. We have one fourth of the properties we had for sale during the Great Recession. So just understand that if supply and demand is your thing, the most basic rule of economics, there is very little inventory. It is really, really constricted beyond comprehension. It really is. Anything more you want to say about that, Selma, or did you want to share some of your visuals with us, too?

Well, yes. So, okay, let me do this one. This one is interesting because I did actually compare new listings, right, because, you know, you have overall active inventory. But what's more important right now is the rate at which new listings are coming in. Because if, you know, if you see a surge, it's telling us, okay, well, maybe inventory is building up, which unfortunately, the fact is that it's not. But. So let me just get to that slide. But this particular slide is showing change in new listings between this summer, from May to July of this summer versus last summer. And the blue, the darker blue areas are larger decline, and pink areas are basically an increase. So if you look at the table on the right, these are really the only about dozen or a little more than a dozen metro areas that we've seen increase in new listings. Otherwise, everywhere has been a decline. And if you look at the top table, it's mostly all in California. So when I was mentioning the tale of two markets and then Madison in here, I'm actually getting ready to present in Madison, Wisconsin. So I sat in there. But a couple of things I was looking at here. One is obviously, what's happening to new listings and just this stark difference between sort of west coast markets or west west markets versus South Eastern markets. And then also the question of, you know, I'm sure we've talked about this on the show, but does lack of occupancy of Airbnb, a lack of utilization of vacation homes make any difference in terms of new inventories coming on market? And. And I'm not really seeing that. I mean, there is some indication, but not something that we can really generalize based on. So to two top areas are Flagstaff, which is Sedona, Arizona. That's a vacation. Right. And then Temple, Texas, which is like sort of north of Austin. I don't know that that's necessarily a vacation market. It may be a little bit more out of urban area, you know, sort of less density, but I don't know what to make out of that particular market. And then there's like a number of markets in north Midwest. So nothing is really telling me that anytime soon there's going to be improvement, although there is areas that are doing better than other areas.

And now when you say improvement, you mean more inventory.

More inventory, yeah. In my mind, inventory helps because there's more transactions.

You know, inventory allows title companies, mortgage companies, and real estate agents to increase their volume. When you have more inventory, you have more to sell. I mean, look, if you owned a shoe store and you didn't have any shoes to sell, business would not be good. Right. You need some inventory. Right. So, yeah, I completely get it. And, you know, you mentioned the Airbnb phenomenon, and there's been a lot of really fake news about that, especially one YouTuber that's a complete sensationalist. You know, he's a purveyor of doom and gloom. He's just always been wrong. But, you know, he's getting a lot of press out of it. The Airbnb thing definitely has a small effect, but it's. It's not very pronounced. It's not that big a deal. The Airbnb sellers that do sell, they don't all come on the market the same day. Okay. That this is a slow process of dropping inventory into a market that is very inventory constricted. So that is not enough to cause a crash. It's interesting that people make a big deal out of that. Okay, anything else to show us? This is interesting?

Sure. Let's see. Well, this is the variation in total home sales activity. Right. We were talking about inventory, but this is about home sales activity. And I single out on the right hand side, California Here, just because California has had such a huge drop relative to other areas. But again, I'm comparing first half of this year versus first half of 2019. And that is because I'm trying to avoid all the, you know, abnormalities that happen. Covid. Yeah, right.

Those are a lot of distortions. So you have to just take out Covid largely.

Right, right. And if we go back to 2019 levels, that would not by itself be that bad either, you know, so sort of the last normal anyways. But, but you can see also the, the continuation of that tale of two markets where the western part of the country is just not seeing as many transactions as southeast and you know, particularly southeast and south. So, you know, one reason that I attribute that I talked about was the inventory. The other is obviously affordability. Right. Because these markets on the western side of the country are also more expensive and have seen to some extent, some, a lot of them more appreciation during the pandemic, which made them more unaffordable at this point, particularly as we don't see as much out migration to some of them. You know, like when you think of Boise City, another, you know, pandemic, boomtown was sort of the poster child of immigration, so not doing so well at the moment.

Yeah, well, it just got, it's just got over hyped. You know, Boise was. Everybody from California moved to Boise and, and then, you know, you had to give some of that back. Okay. You know, it just, it just got overheated. But this is interesting because it shows that California has the lowest level of home sales volume. That's what we're talking about here. Sales volume since 2007. What is interesting about this too, Selma, is this sort of ripple effect of all of the realtors and all of the mortgage people and all of the title companies and all of the transaction, the people that make money off of transactions. Right. They're suffering greatly. Right. And so the way they tighten up and don't spend money into the economy so much unless they have a side hustle, which many of them do. That's an interesting knock on effect as well. Okay, good. We've only got a few minutes, so I just would like to have you, you know, maybe a question I didn't ask you or anything you want to talk about. And then the other thing though, Selma, is the rental market, if you'd like to talk about that a little bit, we'd love to hear more about that.

Okay. So basically we're tracking single family rents here. This is out of the mls, right. So if it's trans. Transacting in mls. It would be captured here. Not, not all single family rentals transact in mls, but we have pretty good sample of transactions. Right. And so, so you can see the surge in rent growth through last summer when it peaked at 20%, and then that precipitous decline. I mean, this very much mirrors what happened with home prices. Right? Almost identical. Now we do break the data down to four different tiers of single family rentals. And so I'm showing low tier and high tier. And we've seen a little bit more slowing of rent growth in high tier versus low tier. And I think that's a reflection of. Of inventory differences. Right. Low inventory has already been so constrained to begin with. And then high tier sort of saw more appreciation earlier in Pandemic because those were the folks who could move around and drive that growth. But in terms of rent growth at the moment, so are monthly data in terms of month over month changes in rents. And we are now the. Or the red line, the darker red, the Burgundy line, is year 2023. And through most of this year, it's been moving in line with historical averages. If you look at blue, gray and purple line, those are 20, 17, 18, 19. So 2023 is moving in line of those, and then it falls off in August of this year or, you know, at least declines. And that's not necessarily sort of season in line with the seasonal patterns we're showing. But. Okay, so I'm comparing here rent growth on a year over year basis in August of last year versus August of this year. And the darker green bar is this August. And you can see on the bottom four metro areas that sort of have been standing out in terms of more negative impacts or more declines in terms of home prices and multifamily rents and single family rents over the last last six months as.

But are those declines in rents or are they just decelerations in rents? There's a big difference. Yeah.

Right. So here we're looking at the darker blue lines. We were actually looking at the declines.

Oh, yeah. So, yeah, on four of the markets. So. And these are such obvious markets, by the way, right? Miami, which got totally overheated. Not a market you would want to invest in. Austin, which got massively overheated. Las Vegas, also overheated. And of course Scottsdale, with, you know that. That has maybe one of the biggest Airbnb busts in the country in Scottsdale. So I can see why rents would definitely have gone a little bit negative in those markets, but everything Else is positive even though the rent growth is slower. Still positive though.

The other thing that's really interesting to me too is the strongest rent growth right now remains in Midwest. You know, and Midwest sort of was a laggard during the pandemic. People were leaving places like chic, so St. Louis, I mean it's never been like a top ranking city for when you think of in migration or price growth or anything like that. But now it's, you know, now we do see relatively more growth in area like that, like St. Louis, Chicago, Boston and New York. And Boston, New York, Chicago were the three areas that were actually declining earlier in the pandemic as people were leaving. So in many ways it's, you know, the rents are catching up. You know, if they didn't grow before, now they're catching up to rate of growth that other areas were experienced. Which has been really interesting to me because I don't know necessarily that we were expecting this at this point. You know, the other one, for example.

Chicago has performed really well. That's amazing. I mean it performed really well in 2022 and it's the number three best performer in 2023.

Right, right. I mean it's, it's. But, but when you look at 2020 or 2021, it was the declining or it was one of the lowest.

Yeah.

So.

Seems like, you know, people seek that, you know, now more the, the trend is affordability versus I think during the pandemic the trend was more technomads or like, you know, people with higher incomes seeking cool places to go. Right. And that drove that higher segment of the market. That's not what's happening right now. I think now it's more about markets that are affordable.

Right. Yeah, very interesting. So overall, Selma, what is your takeaway on rents? In other words, where are they going? It seems to me because sales volume is down so much that there's a lot of pressure kind of building in the, in the single family rental market. I know that apart the apartment market is oversaturated. That's going to take a few years to work itself out. But the single family market, where do you see the rents going there?

Yeah, I mean, I agree with you. I think because of the lack of inventory and repurchase market, we'll continue to see folks staying in the single family, you know, either longer or shifting from multifamily apartments to single family renters because of changes in their lives. I don't necessarily think that single family and multifamily are going to mirror each other. I think, you know, we've seen a lot of new construction going on in multifamily, which is why red growth has decelerated a little bit more.

Multifamily is very much oversupplied right now.

Right, right.

You know, it'll work itself out in a few years. It's just.

Yeah, yeah, absolutely. So, yeah, I think on a single family rental side, I think the demand is, is pretty strong. Yeah.

And you know, most people would say that just flies in the face of, I mean, rent is so expensive, it's so expensive to rent. Well, with that statement, what's kind of interesting about it too is we talked earlier about the lock in effect. I mean it's much cheaper to just stay in your existing house with your existing ultra cheap mortgage than it is to go out and rent something, which is why that house probably won't go on the market and the inventory shortage will continue. But rents are so high, how can they go up more? That's what people would think. Right, But I don't know, I think they're probably too low actually.

Yeah, I mean, you know, right now we're two and a half percent year over year growth for single family rent overall. You know, I mean that's, you know, depends on what market you in, but that's not a significant difference. Change in, you know, that's not going to break your budget if it didn't already break your budget. When I say the demand for rentals are going to, is going to remain, it doesn't mean that rent growth is going to re, accelerate again. You know, I don't see that happening soon, but I don't think it also will see a significant decline. It may just plateau at this point.

Yeah, interesting, interesting stuff. Selma, any other takeaways you want to share or any other thoughts or things that you're working on that our listeners should know about, about?

Oh goodness. We're always working on a lot of different things, you know, I mean, one big one right now is climate change. You know, we, we look at that and that's going to be interesting to see how it plays out in terms of the markets that, you know, where for example, you can't get insurance right now, you know, I mean, Florida and California, like, like what happens with these two markets long term. I mean that's, that's particular of interest to me. The other thing is, you know, what I've been spending a lot of time thinking about is, is, you know, we've had a lot of migration during the pandemic, more long Distance migration than short distance migration, long distance migration. Folks tend to have higher incomes than the local residents that they're moving into. Right. So that impacts incomes of local residents. And so I've been thinking about, you know, how income inequality plays out longer term or do we get more equality as a result of that? Because we may not have the top, top five superstar cities like New York, Chicago, San Francisco, you know, we may have more smaller cities with that, you know, knowledge economy.

So, you know, that, by the way, SOMA is a really, I think, a very positive thing about the pandemic, because with the post pandemic, well, I'll call it post lockdown migration trend, which was huge. I mean, that was, I called it the modern grapes of wrath because it was like the biggest migration probably in American history since the Dust bowl, you know, in the Great Depression era. And with all of these people, a lot of these, you know, really highly paid, highly educated people moved to a lot of kind of nondescript places, you know, and that, I think will have an effect of raising the incomes in those areas and raising the housing prices too, and causing them to decline in the areas where they used to live. That is San Francisco is a, a perfect example. It's kind of like a flattening of the talent pool, kind of a redistribution of income, I think, in a very positive way, actually.

Yeah, yeah. I mean, I, I do see it as positive. I mean, people worry about, you know, gentrification or, you know, home prices in those smaller towns going up at a faster pace and, you know, that lack of affordability that results at the end of this. But, but I think the income impact is an important thing to think about. And also, how does teleworking allow people to have access to jobs that they didn't otherwise have that will lift their incomes? So, yeah, I, I think overall this, the outcome of the pandemic, I, I see a lot of positives.

Yeah, yeah, no, it really is. No question about it. And, you know, everybody has kind of accepted remote work, even though there's a little bit of a backlash now with employers. And I don't blame them. But, you know, ultimately I think we're going to settle into this nice sort of medium compromise where there's a lot more remote work than there used to be. And the only people that are really suffering from that are the, the office owners. They're having a tough time for sure, but that's a, that's a whole different discussion. Okay, great. Give out your website or anything you want to share with people you know, if you have any data that they should check out or whatever, feel free.

Yeah, all of our press releases, a lot of this data that I talked about is available on our website. It's CoreLogic.com and under the BL section, which is intelligent. It's the title of the section is Intelligent. You can see a lot of this data analyzed and reported on a monthly basis. I am active on social media only on LinkedIn. Actually, I sort of stay away from Twitter, but LinkedIn, I'm @selma Hebb and I also myself post a lot of this information on the LinkedIn as well.

Excellent. Selma Hebb, chief economist for CoreLogic. Thank you for joining us.

Thank you for having me, Jason.

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