\n<\/p>\n
Mortgage demand has fallen off a cliff<\/strong>, according to Black Knight\u2019s recent Mortgage Monitor Report<\/strong>. With affordability<\/a> hitting new lows and mortgage rates<\/a> still rising, home buyers have simply given up on buying a house any time soon. Mortgage applications <\/strong>are now forty-five percent below pre-pandemic levels, <\/strong>and something BIG will have to change for buyers to jump back into the market\u2014are lower home prices the answer?<\/p>\n To explain the Mortgage Monitor Report\u2019s most recent findings, we brought on Black Knight\u2019s Andy Walden<\/strong>. Andy has the most recent home buyer, mortgage rate, foreclosure, and delinquency data <\/strong>to share. We\u2019ll talk about the buying power that\u2019s been wiped <\/strong>out of the market, why mortgage applications fell off a cliff, rising unaffordability and whether or not it\u2019ll force foreclosures<\/strong>, and the real estate markets with the most potential for home price growth<\/strong>.<\/p>\n Andy even gives his 2024 housing market forecast<\/strong> with some eerie warnings about what could happen to home prices as we reach an \u201cinflection point<\/strong>\u201d in the market and enter the traditionally slower winter season.<\/p>\n Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: Andy: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey, everyone. Welcome to On The Market. I\u2019m your host, Dave Meyer. Today, I have an excellent interview on tap for you. Andy Walden, who is the vice president of enterprise research and strategy at ICE, is going to be joining us again on the show. Andy was first on On The Market, I think it was back in May or June, and he was working for a company that, at that point, was called the Black Knight. They have since been acquired by a company called ICE, or I-C-E, and so you might hear both of those during the course of our conversation. But Andy and his team are experts on all things in the housing market, but what they really focus on is what is going on in the lending market. As we all know, we are all subject to the whims of interest rates these days.
Andy has some insights for us about what is going on with foreclosures, purchase originations, where he thinks rates are going, how different parts of the country are going to be affected. He just released this amazing Mortgage Monitor report, which we\u2019ll put a link to in the show notes. I am super excited to talk to him about it, because there\u2019s just chock-full of insights that are extremely actionable for real estate investors just like you and I. With no further ado, we\u2019re going to welcome on Andy Walden from ICE.
Andy Walden, welcome back to On The Market. Thanks for joining us.<\/p>\n
You bet. Thank you for having me again.<\/p>\n
For those of our listeners who didn\u2019t listen to your first appearance on this show, can you tell us a little bit about yourself and what you do at ICE?<\/p>\n
Yeah. I am the vice president of enterprise research and strategy at ICE, and so effectively, what that means is I get my little hands in all of the data that we have available to us, whether it\u2019s housing market data, or mortgage performance, or anything around the mortgage life cycle, really getting to play into all those different data sets. Now, in being acquired by ICE, we have even more data at our fingertips. We\u2019re more heavily in the origination space. We\u2019ve got some rate lock data that can tell us what borrowers are doing out there in the market, so really excited to get to share some of that data today.<\/p>\n
Well, I\u2019m very excited. I was looking through your mortgage report, which we\u2019re going to be talking about a lot today, and I was very jealous that you have access to all this data. There\u2019s just so much information that\u2019s extremely pertinent to the housing market, and everything that\u2019s going on with housing right now. With that said, can you just tell us a little bit about the October \u201923 mortgage report and what\u2019s contained in it?<\/p>\n
Yeah. We did a little bit of everything, and we try every month to put, as you mentioned, the most pertinent data in there, so we\u2019ll go everywhere from mortgage performance to mortgage originations. We\u2019ll get into the housing market very specifically, and look what\u2019s going on at a macro level, and look into specific geographies in terms of what\u2019s going on. I think in terms of nuance, this month, we had some data around the Super Bowl mortgages. They\u2019re becoming a bigger and bigger topic of conversation. We looked at the market from a mortgage lender standpoint, obviously, a very challenging market right now. We gave some pointers around where we see the market going throughout 2023 and \u201924, how to best capitalize, how to understand who\u2019s transacting in the market, why are they transacting in the market, and then as I mentioned, a lot around the housing market, and the dynamics going on right now, which are very interesting.<\/p>\n
What are some of the most important takeaways that you think our audience of small to medium-sized real estate investors should know about?<\/p>\n
Yeah. I think a couple different things, right? One is when you look at the mortgage performance landscape, it remains extremely strong, right? Folks that are looking into that foreclosure arena, or looking for any distress coming out of the mortgage market, it\u2019s about as low as we\u2019ve ever seen it. That being said, we\u2019re nearing this inflection point. We\u2019re seeing some signals from the market that we may be reaching kind of a cycle low in terms of mortgage delinquencies, and mortgage performance. Just if you look at those annualized rates of improvement, they\u2019re starting to slow down, and flatten out a little bit.
But we\u2019re seeing delinquencies one percentage point below both their pre-pandemic, and their pre-great financial crisis era, which may not sound like a lot, but that\u2019s roughly 25% fewer delinquencies than they traditionally are even in good times. So performance overall is very, very strong. If you look at it from the housing market, I think that\u2019s probably where a lot of your listeners are focused in, it was an extremely hot August, right? We got our ICE Home Price Index data in for the month of August. Very strong numbers across the board, right? We saw the fourth consecutive month, where we\u2019ve hit a record high in terms of home prices in the US, home prices up two and a half percent from where they peaked out late last year. And then that headline annual home price growth rate that we all look at, where home prices versus where they were a year ago, we\u2019ve gone from 20% in 2021 to effectively flat in May, as the Fed raised rates and tried to compress that market.
But then we\u2019re seeing this reacceleration. We\u2019re back up to nearly 4% annualized home price growth again, and poised for some additional push based on some of the baked in home price growth that we\u2019ve already seen this year. That\u2019s what we\u2019re seeing through August. And then if you look at what\u2019s going on in the weeks since with mortgage rates, they\u2019re up to seven and a half percent according to our ICE conforming 30-year Fixed Rate Index, which has pulled 6% of the buying power out of the market, since those August closings went under contract, right? We\u2019re looking for maybe yet another inflection in the housing market, as we move late into this year. A lot going on in the report, a lot going on in the mortgage and housing markets right now.<\/p>\n
You actually beat me to one of my questions, Andy, which was about how much buying power has been removed from the market, because obviously, we see this dynamic in the housing market where supply has stayed really low, and even though demand has deteriorated over the course of the year. Since they\u2019ve both fell relatively proportionately, we see housing prices somewhat stable, as you said. In August, they were up a bit, but now seeing rates just skyrocketing even more than they had. Just curious, how do you come up with that number, and can you just tell us a little bit more about the implications of that, that 6% of the buying power has been removed just in the last few weeks?<\/p>\n
Yeah. Let\u2019s talk about the numbers in and of themselves, right? When we look at home affordability in general, we\u2019re really triangulating three things. We\u2019re triangulating income, we\u2019re triangulating home prices and interest rates, and we\u2019re looking at what share of income is needed at any given point in time for the median earner to buy the median home. That\u2019s how we assess affordability, and we do it at the national level. We do it across all of the major markets across the country as well. Nationally, we go all the way back into the 1970s to draw comparisons, because what we found was, during the pandemic, we were reaching outside of normal bounds. We were seeing the lowest levels of affordability that we had ever seen in more recent data sets, and so we were having to go all the way back into the \u201970s, into the Volcker era, to find something more comparable to what we\u2019re seeing today, right?
That\u2019s how we come up with those affordability numbers. When you look at that, what you see is that we\u2019re nearing 40%, right? It takes 40% of the median earner\u2019s gross, not net, we\u2019re not talking paycheck, we\u2019re talking gross monthly income to afford just the principal and the interest payment on the median home purchase. The worst that it\u2019s been since the early 1980s, obviously, very unaffordable. And the only time we\u2019ve seen affordability at these levels was when interest rates were above 12%, right? We\u2019re seeing those similar levels of affordability today at 7.5%, just because of how much home price growth has outpaced income growth in recent years, so a massive challenge out there in the market. When you look at how that\u2019s impacting demand and borrower behavior, we\u2019re now seeing, if you look at mortgage applications, they\u2019re 45% below pre-pandemic levels. That\u2019s the lowest that they\u2019ve been versus \u201cnormal,\u201d right? If there is ever a normal in the housing market, that\u2019s the lowest that we\u2019ve seen them so far. You\u2019re certainly seeing these rising interest rates start to impact how many borrowers are out there shopping in the market.<\/p>\n
All right, great. Well, thank you. That\u2019s extremely helpful. Do you have any thoughts on if mortgages go up to let\u2019s just say 8%, another 50 basis points, is that going to be another 6%? Does it get worse as the numbers get higher?<\/p>\n
Yeah. It\u2019s pretty even over time, right? The rule of thumb is kind of a 10 to 12% reduction in buying power for every percent rise in interest rates, and so you can cut that in half for a half a percent rise in rates. Again, our Conforming 30 or Fixed Rate Index was 7.5% yesterday, meaning that if you look at the market yesterday, the average rate locked in by a buyer using a conforming loan was 7.5%. Again, if you go up to 8%, another 6% reduction in buying power, and vice versa if rates were to fall, and so you are seeing it constrained. When we look at it in the light of the August data that\u2019s been most recently released, those ones went under contract in July, right? We\u2019ve already seen that 6% decline in buying power from when the latest housing market data is coming out, suggesting we could see further cooling here over the next couple of months, so certainly something that we\u2019ll be watching very, very closely.<\/p>\n
That talks a little bit about the demand side, but when you look at the supply side, to me at least, I have a hard time seeing how that moves a lot in the next couple of years, right? If this lock in effect is real and rates are going up, then it\u2019s going to only get worse. Construction is doing its thing, but it\u2019s not going to come in and save supply anytime soon. A lot of things people point to or ask about is foreclosures. But you said earlier that delinquency rates, at least according to the most recent Mortgage Monitor report, are lower than they were in 2019. Can you just tell us a little bit more about the state of delinquencies, and if you expect things to change anytime in the future?<\/p>\n
Yeah. We do expect them to go up, right? Current state of delinquencies, you hit it, right? They\u2019re extremely low right now. We talked about that a little bit earlier. If you look at serious delinquencies, and the risk of foreclosure, and typically, foreclosures account for roughly three to 5% of all home sales, they\u2019re well below that right now. Even in a normal market, you\u2019re talking about relatively slow, or relatively low volumes of inventory out there, but they\u2019re well below long-run averages. When you look at serious delinquencies, and look at remaining protections on those loans, you\u2019re still seeing a lot of servicers that are rolling some of those forbearance plans forward, or rolling those forbearance programs forward to help borrowers that are struggling in today\u2019s market. 70% of all serious delinquencies of the very low-level of serious delinquencies that are out there in the market right now are still protected from foreclosure by loss mitigation, forbearance, bankruptcy, those types of things, and so you\u2019re just seeing very, very little inflow into foreclosure, and serious delinquencies themselves are the lowest that they\u2019ve been since 2006.
I mean, you\u2019re absolutely right. When we look at it from an inventory perspective, we\u2019re looking for all of these little nooks and crannies, right? New builds, how can they help? How can potentially, if we saw some rise in defaults, could that actually help the market from a housing market perspective? There just aren\u2019t a whole lot of answers right now to the supply problems. We\u2019re still, as we sit here, we\u2019ve been seeing inventory edge slightly higher the last couple of months. We\u2019re still at roughly half of what we should have, in terms of for-sale inventory out there in the market. As you mentioned, that\u2019s keeping prices very, very sticky.<\/p>\n
I have a question that might be stupid, so please bear with me right now. But I\u2019m curious if the relationship between delinquencies and foreclosures have changed over time, or if that\u2019s possible, because obviously everyone compares the current situation to what happened during the financial crisis, where a lot of people had negative equity, and if you were delinquent, then you were probably going to get foreclosed on, there was a short sales, all these negative outcomes. Right Now, all the data shows that people are equity rich, and so I\u2019m curious if there\u2019s any logic to this idea that even if delinquencies go up, foreclosures might not go up, because people could just sell on the open market. That could still help the inventory, but it wouldn\u2019t be through a foreclosure.<\/p>\n
I mean, you\u2019re absolutely right. It happens for a couple of different reasons. One of them you talked about is equity, and you\u2019re right, they are as equity rich as they\u2019ve ever been. We\u2019re nearing the levels of equity that we saw last summer, before housing prices began to correct, so homeowners are very, very strong from an equity standpoint. The other reason is, I look at servicers like Bachmann a little bit, right? Servicers have all these tools in their tool belt, or whatever you want to call it, to help homeowners, and they\u2019ve really built those over the last two decades, right? The first time was the great financial crisis, and we learned a lot about loan modifications, and what worked and what didn\u2019t work, and they\u2019ve got all of those programs set up, and ready to deploy when borrowers become delinquent. The second one was during the COVID pandemic, and forbearance became the big talking point, the big program that was rolled out there for folks that had short-term losses of income, right?
We have all of these programs, and all of these tools in our servicing tool belts now, that we\u2019re ready to deploy, right? They\u2019ve been battle-tested, they\u2019re ready to go, they\u2019re set up in servicing systems. We can roll out loss mitigation plans relatively easily, if folks have longer term loss of income. For short-term loss of income, forbearances have become very, very popular recently. We have a lot of tools there to help homeowners avoid foreclosure, and avoid that distressed inflow, even in the case that they become delinquent. It doesn\u2019t mean it\u2019ll be non-existent, but the roll rates from delinquency to foreclosure are certainly lower than they have been historically.<\/p>\n
Okay, great. Well, I\u2019m glad my hypothesis beared out. But yeah, I think it\u2019s important that\u2026 I was reading an article, I forget where it was, just talking about the banks learned their lesson from what happened during the great financial crisis, and how they lost a lot of money that they may not need to have lost, if they had these tools in their tool belt, as you said, because they were just foreclosing. Everyone was just panicking and just trying to like they wanted to get them off their books, whereas if they rolled out some of these forbearance programs, or loan modifications, they probably would\u2019ve done a lot better. I think this isn\u2019t just out of the kindness of their own heart, but the banks have a financial incentive to modify and work with borrowers, if there is some sort of delinquency.<\/p>\n
Yeah. We\u2019ve learned a lot on both sides, right? We\u2019ve been talking about servicing, and how we better service mortgages to reduce default, and that\u2019s ingrained in servicing systems. We certainly have it in our MSP platform, most certainly. But on the origination side of the house, we\u2019ve learned a lot of lessons there too, right? If you have an adjustable rate mortgage, make sure the borrower can pay their fully indexed rate, right? Same goes for buy downs that are taking place, same goes for credit quality. You\u2019re seeing extremely high credit quality mortgages being originated in recent years. When you look at the outstanding stock of mortgages, mortgage payments are very low.
Folks have locked in very low interest rates right now. They\u2019re very strong holistically from a DTI perspective, from an equity perspective, ARM share of active mortgages is a fifth of what it was back in 2006-07. in many ways, when you look at where we stand today versus the great financial crisis, the mortgage and housing market is structured very, very differently. It\u2019s much more solid, and I wouldn\u2019t expect to see anything near an outcome you saw from the great financial crisis era, just because of the improvements that were put in place across the board from origination all the way down through servicing systems.<\/p>\n
Well, that is encouraging. Hopefully, you are correct. You mentioned origination, and I just wanted to get a sense from you about what is going on in the origination market now, with rates continuing to climb, is volume just continuing to deteriorate or what\u2019s happening?<\/p>\n
Yeah. I wouldn\u2019t say deteriorate, because it\u2019s already been relatively low, and refinances have hit about as low as they can get, knock on wood. But, I mean, there is a small baseline level of refinance activity out there that\u2019s really cash-out lending, perhaps surprisingly, is what\u2019s really left out there in the refinance space. It\u2019s a very unique set of borrowers, right? It\u2019s odd, because the average borrower refinancing right now is raising their interest rate by 2.3%, which seems absurd. Why would somebody give up a 5% interest rate, refinance into a seven and a quarter? It\u2019s because those borrowers are really centered around getting the equity out of their home, withdrawing some of that equity, and so you\u2019re seeing these very low-balance borrowers that are willing to give up a historically low rate on a low sum to withdraw a large chunk of equity at a relatively reasonable rate compared to what you can get on second-lien products, right?
There\u2019s some of that activity going on, and so if you\u2019re looking at this from a mortgage lender, you need to be very acutely understanding of what\u2019s going on in today\u2019s market, who\u2019s transacting, why they\u2019re transacting. But then it\u2019s very heavily centered around the purchase market, right? This is the most purchase-dominant mortgage lending has been in the last 30 years. We\u2019re seeing months where it\u2019s 88% purchase lending. That\u2019s really where lenders are focused is driving that remaining purchase volume out there in the market.<\/p>\n
What are the characteristics of the purchase loans? Is it home buyers?<\/p>\n
Yeah. Absolutely. Home buyers, it\u2019s higher credit score borrowers, right? There\u2019s a lot of economic uncertainty, there\u2019s uncertainty across the board, and so you\u2019re seeing lenders that are very risk-adverse right now, and so it\u2019s higher credit score mortgages, it\u2019s moving a little bit more towards the FHA space than it has been in recent years. When you look at how hot the market got in 2021, or in 2020, a lot of those would\u2019ve been FHA buyers, had to move into conventional mortgages, because there were 10 offers on the table, and the first ones that were getting swept onto the floor were FHA loans, and so you saw it more centered around GSE lending back then. Right now, I would say a little cooler, right, relatively speaking? You\u2019re seeing those FHA offers that are being accepted a little bit higher pace. You\u2019re seeing a relatively strong first-time home buyer population out there, and so it\u2019s a more FHA paper than what we\u2019ve seen in recent years.<\/p>\n
I think that\u2019s probably a relief to some people, right? Like you were saying, the FHA was just not really a viable option during the frenzy of the last couple of years. For a lot of people, that is the best or only lending option out there, so hopefully that is helping some people who weren\u2019t able to compete, even though it\u2019s less affordable, at least you can compete against, it\u2019s a less competitive environment for you to bid into for a home.<\/p>\n
Yeah. Blessing and a curse, right? The reason that it\u2019s less competitive is, because it\u2019s less affordable as well. You\u2019re dealing with affordability challenges, but less competition out there in the market, certainly.<\/p>\n
What we\u2019re talking about here, I should have done this at the top. Sorry, everyone. These are just residential mortgages, right? This doesn\u2019t include commercial loans.<\/p>\n
That\u2019s exactly right. Yeah. We\u2019re looking at folks buying single-family residences, buying condos out there, buying one to four unit properties across the US.<\/p>\n
Does any of your data indicate what is going on with investor behavior?<\/p>\n
It does, right? Investor is going to be a little bit more difficult to tease out, but when you look at investor activity, especially in recent years, they\u2019ve ebbed and flowed along with the market. You saw them move in, when we all knew that inflation was going to become strong, they were trying to put their money into assets rather than holding it into cash, because everyone knew cash was going to get devalued in an inflationary environment, and so you saw them push into the market in 2020, 2021. They\u2019ve backed off along with overall volumes declining in recent years, but they make up a larger share, because they\u2019re a little bit less affected by interest rate movement, because you have more cash behavior there in that investor space. They make up a little bit larger share, but they have been ebbing, and flowing in and out of the market similar to other folks, only to a little bit stronger degree early on, and a little bit lesser degree more lately.<\/p>\n
Got it. Thank you. You said earlier that assumable mortgages are one of the things that are growing in popularity. Can you tell us more about that?<\/p>\n
Yeah. For folks that aren\u2019t familiar with what an assumable mortgage is, it\u2019s effectively, if I sell you my home, not only can you have my home, but you can assume my mortgage along with it. Now, the reason that that\u2019s attractive is, if I have a three and a half to 4% interest rate on my home, you can get an interest rate three point half to 4% below what you could get out there in the market right now. At face value, they seem very, very attractive in today\u2019s market where folks have locked in very, very low interest rates and you\u2019re looking at getting a 7.5% interest rate if you just go directly to a lender today, right? Again, face value, these look like very attractive options, and they\u2019re relatively common. There are about 12 million assumable mortgages, so FHA, VA, USDA mortgages are assumable out there. It\u2019s about 12 million, so that means one in four, roughly, mortgaged homes in the US as an assumable mortgage-<\/p>\n
Wow.<\/p>\n
\u2026 which also sounds like, hey, there\u2019s a ton of opportunity. A little over seven million of those have a rate of below 4%, so 14% of mortgage homes, you could assume the mortgage, and get a 4% rate or better, right? It seems like a ton of opportunity, and it\u2019s certainly a growing segment, and a growing opportunity out there in the market. There are a few reasons why it hasn\u2019t taken off as much as maybe you\u2019d expect in hearing those numbers. One of them is two thirds of those that are assumable below 4% have been taken out in the last three and a half years, meaning folks just bought their home recently, or they just refinanced, and they want to hold onto that low rate, right? They\u2019re expecting to live there for a while.
Reason number two is, it\u2019s attractive to a potential buyer. It\u2019s attractive to that existing homeowner as well, right? They don\u2019t want to give up a sub 4% interest rate for the same reason that you want a sub 4% interest rate as a buyer. And then the third reason is more around home prices, and home price growth, right? If you look at those 12 million assumable mortgages out there, average home value is about $375,000. The mortgage is only about $225,000, right? You\u2019re going to need to bring an extra $150,000 to assume the average home either in cash-<\/p>\n
Wow.<\/p>\n
\u2026 or via secondary financing at a higher interest rate. A lot of folks, assuming these mortgages, we\u2019re talking FHA, VA homes, they\u2019re in more first-time home buyer communities, folks shopping in those specific places don\u2019t have $150,000 in cash to bring to the table, or that secondary financing offset some of the savings you were going to get with that assumable loan. Certainly attractive out there in some situations, but there are some reasons why you\u2019re not seeing it completely take off, and everybody selling their mortgage, or turning over their mortgage along with their home.<\/p>\n
Just so everyone listening knows, because most of these people are investors who aren\u2019t owner-occupied, assumable mortgages really are only available for owner occupants. If you were considering house hacking in a duplex, or quadplex, this is a feasible option. But if you wanted a traditional rental property, you would have to go a different creative finance route, but you couldn\u2019t use an assumable mortgage. Andy, I got you here. Curious about, we\u2019re fresh into Q4, curious, we\u2019re seeing some seasonal declines, where do you think we\u2019re heading through the end of the year?<\/p>\n
I think you\u2019re going to have to watch housing metrics very, very closely for the tail end of this year, and here\u2019s why, right? If you look at how hot the housing market has been so far in 2023, and there have been months where we\u2019ve been 60% above normal growth in terms of housing, there\u2019s a lot of baked in reacceleration that\u2019s going to take place out there. If you\u2019re looking at annual home price growth rates, I mentioned nationally, they\u2019re up 3.8% through August. They were effectively flat in May. If we didn\u2019t see any more growth, and we just followed a traditional seasonal pattern, you\u2019re going to see that annual home price growth rate rise from 3.8 to 5%, through the tail end of this year.<\/p>\n
Wow.<\/p>\n
There\u2019s some baked in reacceleration out there in the market that\u2019s going to carry the housing market higher. The reason that I say you need to watch very closely, is that may be countered by some slowing out there in the market from the recent rise in interest rates, right? Keep in mind, and I think I may have mentioned this earlier, but the August home price numbers that you\u2019re seeing out there, those August closings went under contract in July. Interest rates were more than a half a percent below where they were today, and so you\u2019re seeing a different affordability environment, as we sit here in October, than when these latest housing market numbers when those homes were put under contract, right?
There\u2019s going to be a lot of tea-leaf reading here in housing market numbers over the next few months to say, what if this was baked in reacceleration that we already had caked in before we got to these latest home price rises, and how much actual shift are we seeing in the market from this rising interest rate environment that could slow us down over the tail end of this year? You have to watch those housing market numbers very, very closely, understand what month you\u2019re looking at, understand when they went under contract, because I do expect some inflection out there in the market, based on this latest interest rate increase. You\u2019re already seeing it in mortgage applications, right?
Even when you look at seasonally adjusted numbers, we\u2019re now at the deepest deficit that we\u2019ve seen so far in the pandemic in terms of buyer demand out there. That could cool off not only volumes, transaction volumes, but could cool off prices as well. You\u2019re just going to have to dissect that cooling from the already baked-in reacceleration that that\u2019s caked into some of these upcoming numbers.<\/p>\n
That\u2019s interesting. Just so make sure everyone understands this, we talked about on the show that year-over-year housing data is really important to look at versus month-over-month, because of the seasonality in the housing market. But to your point, Andy, there\u2019s something known as the base effect that goes on, sometimes, when you\u2019re looking at year-over-year data. Whereas if last year we had this anomalous high-growth, which is what happened last year, usually, the housing market doesn\u2019t grow in Q4, but it did last year, that it may look like, or excuse me, sorry, it shrunk last year in Q4. It\u2019s going to look like we had significant year-over-year growth in Q4, even if there is a loss of momentum, it might not necessarily be reflected in that data. I think that\u2019s really important and a good reason for everyone, as Andy said, to keep an eye on metrics very closely over this year.<\/p>\n
You\u2019re right. Traditionally you\u2019d want to look at year-over-year versus month-over-month. One way that we\u2019ve been looking at it, and I really like right now, is month-over-month seasonally adjusted numbers, right? They take that seasonal component out, because you\u2019ll get very confused if you look at the housing market, and look month-over-month and don\u2019t seasonally adjust.<\/p>\n
Right. Yeah.<\/p>\n
You\u2019re going to be seeing a different trend every six months, right? Look at the seasonally adjusted month-over-month numbers, and those will give you indications for where those annual growth rates are going to go, and then you can take out the downward effect, if you want to, last year, right? A seasonally adjusted month-over-month is really important in today\u2019s market, and that\u2019s going to be one of the key metrics to watch, as we move towards the tail end of this year.<\/p>\n
Awesome. Now, in your mortgage report, there is a lot of\u2026 In the Mortgage Monitor report, there\u2019s some great data about what\u2019s going on regionally. I\u2019m just curious, what are some of the big trends that you\u2019re seeing? Because over the last year, we\u2019ve seen, I guess, a return to somewhat normalcy, and that different markets are performing differently, whereas during the pandemic, everything was just straight up. Do you see that pattern continuing, or do you think mortgage rates are going to dictate the direction of every market, regardless of region?<\/p>\n
I think mortgage rates are going to dictate direction, but you\u2019re going to see some regional differences, undoubtedly, right? Maybe we just hop across the country, and talk about what we\u2019re seeing in region, from region to region. I mean, the Upper Midwest, and Northeast have been, and continue to be among the hottest markets in the country. The reason behind that is affordability well below long run averages, but still strong compared to the rest of the country. More importantly, you\u2019ve got massive inventory deficits in the Upper Midwest, and Northeast, so regardless of the metric, right? We were talking about which metric you should look at, earlier. Take any metric you want to, take month-over-month, take year-over-year, take where we\u2019re at today versus peak values next year.
The Northeastern part of the country, and Upper Midwest are going to be at the top of the list in terms of home price growth, right? Those are the strongest, and we expect to remain the strongest in the near term. When you get over into the West, it\u2019s really interesting, and again, this is where you see some differences, and you really have to be aware of which metric you\u2019re looking at. The West saw some of these strongest corrections, where we can lump pandemic boom towns in there, if you want to, Phoenix, and Boise, and Austin, and those guys. We saw some of these strongest corrections late last year, one, because those are the most unaffordable markets, not only compared to the rest of the country, those are the most unaffordable markets compared to their own long-run averages.
When interest rates rose last year, those are the markets where you saw inventory return back to pre-pandemic levels, and they were the few markets that did it. Anytime, we\u2019ve seen a market get anywhere close to those pre-pandemic levels, we\u2019ve seen prices start to correct, right? Those are markets that came down significantly last year, and they were the coolest markets, with the exception of Austin which continues to correct. If you look at what happened in August, the fastest month-over-month growth was in San Jose, Phoenix, Seattle, Las Vegas, which was really surprising to me, when we looked at those numbers. Those are markets that are still down 4% last year. But all of a sudden, sellers have somewhat backed away, inventory deficits are returning in those markets, and you\u2019re seeing the housing markets reheat again, right?
I think it tells us a couple of different things. One, as we\u2019ve move through the next couple of years, expect a lot of inflection going on in the housing market. You\u2019re going to see some ebbs, and flows. When you\u2019ve got a 50% deficit of inventory, and a 45% deficit right now in demand, if either one of those moves in any direction, you could see sharp upward, and downward swings in the housing market. Those pandemic-boom markets are extremely volatile right now. We saw the fastest 10% drops in prices we\u2019ve ever seen in the housing market last year, in some of those markets. And then now, you look at month-over-month seasonally adjusted, and they\u2019re seeing some of the sharpest rises. A lot of nuance going on around the country, when you look at it on a region by region, or market by market basis.<\/p>\n
Well, I\u2019m glad to hear. It gives people a reason to listen to this podcast, as long as there\u2019s a lot of economic volatility. Even though we don\u2019t like, it\u2019s good for my employment status. But, Andy, this has been super helpful, and very informative. Is there anything else you think from your Mortgage Monitor report, or anything else that you think our audience of investors should know right now?<\/p>\n
No. I mean, I think we\u2019ve covered most of it. I think that the key thing, and again, this goes back to your employment, right? I mean, it\u2019s really watching what\u2019s going on a month-over-month basis. I think there are some folks that you started to see the housing market bottom out, and start to pick up steam here this year, and it was, \u201cOh, we\u2019re back to normal, and the worst of it\u2019s over, and this is it, and we\u2019re ready to move forward.\u201d I don\u2019t think so, personally, right? If you look at the underlying numbers, and I touched on this a second ago, if you look at how unbalanced both sides are, you could still see a lot of volatility, and it\u2019s going to be years before we see what\u2019s \u201ca normal housing market\u201d ready for just normal, sustained three to 4% growth over the long run, so expect the unexpected, expect volatility out of the housing market.
We\u2019re still in a very unbalanced position, and you could see shifts in either direction, and a lot of it\u2019s going to be driven by, one, what happens with interest rates, and how sticky the broader economy and inflation is, and how that puts pressure on mortgage interest rates out there in the market. And then, two, that demand side, and we were talking about that earlier, right? Where does that\u2026 Sorry, I said demand, I meant supply side. Where does that inventory ultimately come from, right? Are builders able to eventually help us build out of this? When do sellers become willing to sell again, and do we see any distressed inventory? I mean, those are going to be the key components on that side.<\/p>\n
Awesome. Great. Well, that is an excellent advice for our listeners. Andy, if people want to check out your Mortgage Monitor report, which is awesome, everyone, if you have an interest in this type of stuff, definitely check it out, or anything else that you\u2019re doing at ICE, where should they check that out?<\/p>\n
Yeah. They can access that a few different ways. We\u2019ll add a link to the latest report in the show notes, where they can just click that, and go directly to that latest report. We also have a full archive on our website at blackknight.com that you can go out there, and access some of our historical reports as well. If there\u2019s anything you want to see beyond that, you want info on our home price index, or anything like that, you can email us at mor[email\u00a0protected]<\/a>, and we can communicate that way as well.<\/p>\n
Great. Thank you. Just again, everyone, it is in the show notes, or description, depending on where you\u2019re checking us out. Andy Walden, thank you so much. It is always a pleasure. We appreciate your time.<\/p>\n
You bet. Thank you for having me, appreciate it.<\/p>\n
On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.<\/p>\n