In the season finale of Core Conversations, host Maiclaire Bolton Smith and CoreLogic Chief Economist Selma Hepp dive into a discussion about the dynamic landscape of the U.S. housing market in 2023.

This year, mortgage rates surged by almost 500 basis points, home prices catapulted by 42% over three years and mortgage payments witnessed a staggering 60% hike. This episode peels back the layers of the housing market, exploring the sometimes-contrasting contexts of the real estate sector with the larger economy.

One of the major topics that this discussion covers is why some homeowners can navigate these economic shifts while others grapple with pressing affordability challenges. Although housing affordability is a crucial point for both homeowners and renters, according to Pete Carroll, executive of public policy for CoreLogic, the affordable housing crisis is a bit of a misnomer. At its core, the crisis is due to a lack of housing inventory with respect to demand.

So, how is it that the U.S. has arrived at a point where inventory is low, prices and interest rates are climbing, and rentals seem out of reach in some markets?

As 2023 comes to an end, join the conversation to reflect on what happened, where we are now, and what we can expect in the future of the U.S. housing economy.

In This Episode:

1:58 – What have the general trends been in the U.S. economy in 2023?

4:09 – Why was there a disconnect in how the housing market and the overall economy fared?

6:05 – How much of the Consumer Price Index (CPI) does housing represent? Did inflation dramatically effect this percentage?

7:47 – Discussing the housing market slowdown of 2023

10:35 – Erika Stanley reviews the number in the housing market in The Sip.

12:08 – How did the U.S. rental market do in 2023?

15:26 – What is the future for adjustable-rate mortgages (ARMs) with the current rates of inflation?

18:05 – How did the lock-in effect affect the overall housing market?

Links:

• Read CoreLogic Intelligence
• Register for INTRCONNECT 2024

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Find full episodes with all our guests in our podcast archive here: https://clgx.co/3zqhBZt

Selma Hepp:

You're buying it now at, well, it's 7%. This was the calculation at 7%. You're looking at 60% higher mortgage payment. And so, as a result of that, now we have half of the people that could afford last year that now cannot afford anymore.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies, 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.

For our guest today, we have none other than CoreLogic Chief Economist Selma Hepp. Selma, welcome back to Core Conversations.

SH:

Thank you. Thank you so much for having me back here again. I'm so happy to be here.

MBS:

Well, it's always great to chat with you and you really are the best person for us to kind of top off the year with.

Erika Stanley:

Before we jump into reviewing the U.S. housing economy this year, 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 Selma.

MBS:

Okay. I think the big story coming out of the U.S. housing market this year has been affordability. Selma, can you just set the stage for us today and talk a little bit about how affordability has become a concern in the property market, and also how does this compare, I guess, to the general trends in the U.S. economy? It's been a crazy year.

SH:

Yes, you're right. We started off the year pretty positive in many ways because mortgage rates started coming down. But unfortunately, at this point, we have a huge affordability challenge. The issue is that mortgage rates have gone up now almost 500 basis points, from 3%. And I've seen quotes over 8% at this point.

MBS:

Wow.

SH:

And at the same time, home prices, when you think about where we were at the onset of the pandemic till now, irrespective of what happened with mortgage rates, home prices are up some 42% over this 3-year period. And so that's really a huge affordability crunch for many people. As a result of the two, now you have a typical mortgage payment that's up some 60% just over this past year. That means on the same home that you would've bought at 3%, you're buying it now at, well it's 7% — this was the calculation at 7% — you're looking at 60% higher mortgage payment. And so, as a result of that, now we have half of the people that could afford last year that now cannot afford anymore.

MBS:

It's crazy. I know this firsthand because we bought a house this year and we are seeing that. And it is crazy, because we did walk away from a very low interest rate, but needed a bigger home. So it's something that, even though we moved to a different area and the home was comparable and priced to that last home we had, our mortgage payment is significantly higher. So yeah, it's something that — it's real. It's real. I think it's something to hear those numbers, people think, "Oh, well it's not really that bad." No, it is. It is really that bad.

SH:

But to circle it back to your question about comparing housing market versus overall U.S. economy, that's where the disconnect is happening. Because really the challenge is for folks that they're buying right now at these higher mortgage rates or even renting when rents are increasing, that's the part of the population that's challenged affordability-wise.

But on the other hand, U.S. home ownership is like 65-ish percent, depends on the quarter, but let's round it up. It's the two-thirds of U.S. households are homeowners. And basically over the last couple of years when mortgage rates fell to all-time lows, they were able to refi. And on average people saved $2,700 a year by refi-ing. And so these folks now have that $2,700 extra dollars plus they've had savings from the pandemic plus some extra money. We were all benefiting from the government stimulus that really has boosted the economy. And so that recession that we thought we were going to be having this year, and we talked about it at the beginning of the year, we didn't have it.

MBS:

It didn't happen, yeah.

SH:

In fact, third quarter we saw GDP grow at double the rate that is the potential. So that's the story of two markets. In many ways, there's a tale of two markets in the housing market or different industry where this is one being of housing versus the rest of the economy.

MBS:

That is so fascinating. It's so interesting because I think at the beginning of the year it looked pretty dismal and we kind of thought we knew it was going to happen and it kind of didn't unfold the way we thought it might happen. I guess the other thing too is the consumer price index, the CPI, how does that measure into things as well too? Because I know a lot of people measure things according to the CPI, and especially when we're talking about all these economic inflation, that comes into play a lot too. How does that relate to this?

SH:

There are two different inflation measures. There's CPI and PC, or personal consumption expenditures. And so housing component is anywhere between 20-40% depending on the measure you're looking at and what all you throw into the measure, because there's other housing services other than just your mortgage payment. But what's interesting about the housing component of inflation measure, it's that it's capturing changes with the delay — anywhere from 9 to 12 months. So all of these increases in home prices and rents that we saw over the last couple of years are now really filtering through this inflation measure. So it's a delayed reading, basically, on something that happened a year or plus ago.

MBS:

Wow. So interesting.

ES:

MBS:

Earlier in the year, your colleague Molly Boesel and I talked a lot, and Molly heard my woes of me purchasing this home and kind of what we went through with that. But when we talked about that, we talked a little bit about the housing market slowdown. Is that something that we're still seeing or has that recovered at all?

SH:

Yes, we didn't see the recovery. In fact, it's gotten worse.

MBS:

Wow.

SH:

Yeah. Earlier in the year, I started off mentioning how we were pretty optimistic about the housing market earlier in the year because mortgage rates started coming down and we thought, "Okay, that was the peak. Last November was the peak of mortgage rates and it's all better from here." Well, it didn't play out that way at all.

In fact, we kept seeing mortgage rates after that dip in March right before the banking crisis, it's now been nothing but going up. And so that's really put a damper on housing market activities. While you were one of the people that did manage to buy a home, a lot of people actually found themselves in a situation where there was no inventory because people don't want to give up that low mortgage rates that they re-fied into. And then on the other hand, there's no inventory, but also home prices have gone up so much and cost of home ownership has gone up, so home sales now have dropped to the lowest levels that we've seen in some 15 years. So really, there is not that much activity in the market right now. Unfortunately, we're really sitting on the bottom at this point.

MBS:

Wow. Wow. Yeah, I did fall into this and I did mention that we were in contract to buy a different home in the episode when I talked to Molly about this. And then that fell through and the reason it fell through is the people we were buying the home from couldn't find another home. So that basically is what made everything fall apart is because the inventory was so low.

SH:

Exactly.

MBS:

SH:

MBS:

Right. Yeah, that was a crazy time. That's right when I bought my house too. It's been a fun year.

ES:

Before Selma and Maiclaire get back into talking about the rental market, 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.

MBS:

Okay. I want to talk a little bit about rents as well, because I know over the past 18 months or so we've been talking about how the rental market has just been skyrocketed and just sky-high and there are people that are seeing 20% and 30% raises in their rental as well, which the rental market always seemed to be a little bit more not as volatile as the housing market. Can you talk a little bit about what we're seeing in rental market as well?

SH:

Yeah. The same thing that happened with home prices, with the roller coaster of home price growth going all the way up to 20%, very similar trend happened with rentals. Rentals sort of lagged a little bit after the onset of the pandemic and then it surged. And then by the middle of last year, single-family rents, at least, were up also some 15%. I think our index peaked at 14%. And then they have fallen off in a sense of a rate of growth.

And so what we are seeing right now is that rent is growing, but it's not growing at that double-digit pace. Basically, it's fallen back in line with historical 3% to 4% year-over-year changes in rents. But because of all these increases that we've had cumulatively since the beginning of the pandemic to now, rents are up or higher by some 30%. And in some markets like Miami, and Miami really sort was an outlier in that sense, rents are up 50%.

So obviously for one coming in, if you're moving from one place to another, you're looking at that much higher rent. Well, depends on if your rent was adjusted during this period. But nevertheless, still, whatever way you look at it, it's a huge challenge for a lot of people, especially people that have fixed incomes or have lower incomes that live paycheck to paycheck. And so we did this analysis that was published recently that showed that rent-to-income has reached 40%, and this is the highest that we've had. So yeah, it's hard.

ES:

Before we finish our episode, though, we wanted our listeners to know about an upcoming event in January where they can meet some of our experts, including Maiclaire, in person.

Garret Gray:

MBS:

That's extreme. You don't need to fall into the low- to mid-income bracket to feel that. That's something. If something's going to increase by 50%, that is a huge hit on anyone. Something else that we talked about earlier in the year that I don't want to skip over as well, is, a lot of times when we're talking about it's 50% more or 60% more to buy a house now than it was before, what about people who might be locked in, but they're locked in with an adjustable rate mortgage? What is the impact they're seeing?

SH:

Well, yes. I don't know if you bought, you mentioned how you're buying this year you bought, I bought this year as well. And I bought, and I locked in my rate right before the banking crisis, the Silicon Valley banking crisis. So I actually locked in at 6.3%, but I have an adjustable rate mortgage that's fixed for 7 years. So obviously I'm going to be watching mortgage rates very, very closely over the next few years. But basically what we ended up seeing when mortgage rates started increasing last year is that we saw a pivot to more adjustable rate mortgages.

MBS:

Interesting.

SH:

And so, more people are using adjustable rate mortgages because lowering your monthly expense and then you're hoping that down the road you can refi before your fixed part expires. But what's going to happen?

Hopefully they're not having to refi right now or next year. Hopefully they're refining down the road when most experts expect mortgages to come down. But it's not the same problem as it was last time around. Last time, meaning when we were coming out of the Great Recession or going into the Great Recession, for that matter, because much higher share of those originations at a time were adjustable and they adjusted in a higher rate environment, part of it. And so some quarter of originations at the time were mortgages outstanding, were adjustable rate mortgages. Right now, even with this increase that we've had, it's like a single digits, low single digits, maybe 4% or 5% of total debt outstanding has adjustable rate mortgage. So it's not the same concern risk as we had last time.

MBS:

Okay. It's so interesting, so interesting. Okay. Something we've also talked about earlier this year was the lock-in effect. So that because so many people refied and there were, I can't even remember the Molly Boesel gave us some stats and it was something like 80% of people have an interest rate under 4% or something like that. It was just huge numbers. But because of that, so many people have low interest rates and they don't want to take a leap to a higher interest rate like you and I did this year, they aren't selling their property and they're staying locked in where they are. And that was really one of the biggest things that was affecting the inventory and the housing supply in this country.

Can we talk about that at all? Is that still happening? Are there other things that are affecting the housing supply? I know in the past we've talked a little bit too about construction, and because construction costs are so high, that's been impacting things. But overall, housing supply and lock-in effect and how is that all related?

SH:

Yeah, we still obviously have the lock-in and every time mortgage rates go higher, it has more of a chance of keeping people put, basically. But just to define lock-in effect, for those folks who are not familiar, basically it just refers to when homeowners who hold these low mortgage rates — 3%, 4% —are reluctant to sell in an environment of rising rates because that means that they have to give up the rate on a current property and take on a higher rate and potentially at a higher priced property. That's what lock-in effect means. So yes, we still have a huge share of our population that's locked in. As I said, with higher mortgages, that's actually leading to more of a lock-in effect.

But what's helping, in a sense, inventory, particularly as we move further away from that memory of 3%, is that 40% of homeowners own their home free and clear. So they're not tied to a low mortgage rate. They own it free and clear. And the reason they might not be selling is because there's no inventory. So it's almost like self-feeding mechanism. But they are there and they could sell. We are seeing markets that are more affordable and markets from where there are more baby boomers and retiring to other markets. We are seeing a little bit more inventory.

It's a huge, actually, again, tale of two markets because one market that's completely feels like it's locked in is California, because not only it's so much more expensive, but there's always been an inventory issue and now this high mortgage rate, it's even having a higher impact on affordability. But you have other markets like in Northeast, for example, where there are people retiring from and moving to more affordable markets in the South and Southeast. And so they are letting go of that inventory. They're selling. So there is that dynamic.

But because these markets had new construction coming into this year with all this mortgage rate turmoil, builders have come in and provided mortgage rate buydowns and use that as an incentive to bring people in. So the new home market has done much, much better than the existing home marketing. And if you had homes to sell at this discounted, basically, mortgage rate, builders were selling. So that's another tale of two markets: new home sales versus existing home sales. Yeah, so it's been interesting to observe how previous trends have impacted housing markets now that we came in this rising rate environment.

ES:

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; our facts 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, Selma Hepp is CoreLogic's Chief Economist. Selma leads the economics team, which is responsible for analyzing, interpreting, and forecasting housing and economic trends in real estate, mortgage, and insurance. Selma frequently appears on local and national radio and television programs, and has been widely quoted in the Wall Street Journal, the New York Times, and many industry trade publications. She also regularly contributes to the CoreLogic Intelligence blog where you can read her work at corelogic.com/intelligence.