In this episode of the Top of Mind podcast, Mike Simonsen sits down with Selma Hepp, Chief Economist at CoreLogic, to get her take on what’s happening in the housing economy. Selma shares her views on inflation vs. recession risk, talks about how climate change and geopolitical dynamics are impacting the housing market, and looks at which drivers will finally help increase inventory for home buyers. She also highlights what surprised her about the economy in 2022, and what to watch for this year.
Selma Hepp is the Chief Economist for CoreLogic, America’s largest provider of advanced property and ownership information, analytics and data-enabled services. Selma leads the economics team, which is responsible for analyzing, interpreting and forecasting housing and economic trends in real estate, mortgage and insurance.
Prior to joining CoreLogic in 2020, Selma was Chief Economist and Vice President of Business Intelligence for Pacific Union International, later acquired by Compass, where she oversaw the vital economic and technology intelligence to drive the expanding brokerage’s success. Selma also held the role of Chief Economist for Trulia; Senior Economist for the California Association of Realtors; and Economist and Manager for Public Policy and Homeownership research for the National Association of Realtors, as well as a special research assistant at the U.S. Department of Housing and Urban Development.
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 such as National Mortgage News and HousingWire. Selma received the HousingWire Women of Influence Award in 2022. She has served as president of the Los Angeles chapter of the National Association for Business Economics (NABE), NABE Real Estate Roundtable co-chair, Board member of the International Student Exchange Program, Advisory Board member of the REALTOR® University Research Center Editorial Review and a Member of the Housing Policy Debate Editorial Advisory Board. Selma held a Real Estate Associate professional license in Florida and Virginia. Selma graduated from the State University of New York, Buffalo with an M.A. in Economics and holds a Ph.D. from the University of Maryland.
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Mike Simonsen (00:00):
Mike Simonson here. Thanks for joining me today. Welcome to the Top of Mind podcast. This is where I talk to the smartest leaders, thinkers, doers in the real estate industry. For a few years, we've been sharing the latest Altos research market data. Every week in our, in our weekly video series with the Top of Mind podcast, we're looking to add more context to, to the discussion about what's happening in the market, what's going to happen from the leaders in the industry every week. Of course, Altos research tracks every home for sale in the country, all the pricing, all the supply and demand, all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's happening right now in the housing market. The market was frozen, so solid last fall, and then suddenly the landscapes is changing again.
(00:51):
So everybody's worried about what might happen in 2023. So if you need to communicate about this market with your clients, your buyers and sellers, go to altos research.com and, and book a free consult with our team, and you can learn about how to use market data in your business. But speaking of data and informing the buyers and sellers and the participants in the real estate industry, I have a terrific guest today. Selma is the chief economist for CoreLogic, the largest provider of advanced property and ownership information, analytics and data enabled services. Selma leads the economics team, which is responsible for analyzing, interpreting, and forecasting housing and economic trends in real estate and mortgage and insurance. We're gonna talk about all of those things today. Selma has held, had senior economist roles at Pac Union at Trulia, the California Association of Realtors, and N Na R and was also a special assistant research assistant at US Department of Housing and Urban Development. She frequently appears in the media, I media commenting on housing, and she also re received the Housing Wire Women of Influence Award in 2022. Selma is one of the top experts on what's happening in the housing economy right now. CoreLogic has remarkable data to build on, and so I am very excited to talk to her. Selma welcome. Thank
Selma Hepp (02:21):
You, Mike. Thanks so much for having me.
Mike Simonsen (02:23):
It's, it's really great. We haven't met before. I've, I've you know, we've worked with friends at CoreLogic for a bunch of years, and, and truly in all the places you've been, but you and I haven't had spent any time yet, so this is really terrific for me.
Selma Hepp (02:35):
Yeah, I agree. I mean, I steal stuff on social media all the time, and so I'm glad that we are finally connecting here.
Mike Simonsen (02:41):
Great. And before we dive into like the data and forecasting and, and all those things, tell me a little bit about you and your background. Like, how did you develop your expertise and, and get to be a, like, as prominent as you are in the, in the industry?
Selma Hepp (02:59):
Yeah. You know, I mean, life sometimes takes you in funny directions, right? It was never my plan to, to be doing this, but my career in real estate actually started as a real estate agent. this was back in 2004. I was a real estate agent in Tampa, Florida. It was after I finished my master's degree in economics from SUNY Buffalo. And, you know, living in Buffalo, New York. I had to move down to Florida to warm up. and so I got a real estate license there, and, and I worked there for a little while. so that was my entry into the market, but then I decided I really actually wanted to get my PhD and I moved up back halfway to Washington dc I went to University of Maryland as a part of my studies. I did special research assistant position at, at hud.
(03:50):
And there I dwelled into a lot of housing data that, that really allowed me to see all the opportunities that there are. I mean, I always had passion for, you know, how cities grow and be what they are. You know, I, I, I come from Europe and, and I, you know, coming to us, I was trying to understand sort of why, you know, why there not more sidewalks, <laugh> in the US or, or why do people spend more time on the streets, for example, in, in, in Europe than they do in us? And, but then since then, a lot of things have changed. And as part of my dissertation, I sort of looked how, what's the spacial distribution of households within metropolitan areas? and that was something that was very relevant at the turn of the millennium in, in year 2000, because prior to that, a lot of people were wor moving to suburbs.
(04:42):
And then starting in early two thousands, they started coming back into the cities. And so that was a really interesting time to study housing. and now it's similar, interesting again, because people are now moving back out to suburban areas again. So but anyways, so, so that's sort of where my passion comes from for housing data. But then along the way, I had a number of positions where I further learned to appreciate how to think about housing markets. You know, you mentioned in my bio, I worked for the National Association of Realtors California Association of Realtors. I worked for Pacific Union, which is was a large brokerage in California. I worked for Trulia. And now I've been with CoreLogic for the last about three, I think it's three years losing track of time, but yeah, three years. And you know, I just really now appreciate having all this data at my fingertips to really dive deep and understand and sort of allows me to see turning points as soon as they're happening in the housing market. So when we saw housing market turning in spring of last year, we were able to see that very soon in our data. So it's, it's pretty, it's, I love what I do.
Mike Simonsen (05:59):
Yeah, that's great. Oh, that's a really terrific background, and I didn't know about that, that about you, but the, the having the experience as having sell sold real estate, like I've never sold real estate. I'm a, I'm a data guy. Like I'm a Silicon Valley's data software guy who happened to, you know, buy an overpriced Silicon Valley house with a giant mortgage when he was 30 years old, right? Like, it's, so I had to understand those things, but, but actually having, you know, done the transaction is a, is like a, that's a unique viewpoint for a lot of economists. Yeah. Does it, does it change how you, how you interpret data sometimes?
Selma Hepp (06:34):
I think it helps a lot. I mean, it's particular because I was in Florida in 2004, so leading up to the, you know, the big housing crash. And, and so, you know, I I, I love to say I saw it coming, but you know, all of us like to say that. but indeed, like, I feel like when I was in the middle of the, and when I saw how easy it was to get mortgages and just, you know, some of the games at the time that were being, being played and, and, and getting multiple mortgages for one person it, you know, it was just, there were a lot of signs out there that the market was you know, there was a lot of exuberance in the market and, and something was about to go wrong really soon.
Mike Simonsen (07:18):
Yeah. I mean, I could say very quite confidently that I saw it happening and coming. What I didn't know was what to do about it, right? Like, like you know, how do you act at that point? And, and that was the harder thing to do, is like, you can see like, this is nuts. And we could see it in our data. We could see it in a bunch of different places, but it was like but, but the actual acting on it was, was different. Like, do you sell your house, do you not? Like, all of those things were kind of interesting approach. And it actually turns into, you know, where we are right now. And the turning point we had last year, we had, so we had the pandemic boom, and we could see, we, we could, you could see in the beginning of the year a slowdown was coming. It hit really hard in the second half of the year. And now we're in a space where it's like, do we see it coming? Still do, and what do we do about it? What's, what's your view for like, what the market's doing right now?
Selma Hepp (08:16):
Well, you know, you mentioned earlier market is, is frozen <laugh> in many ways. I think, you know it's, it's very challenging out there. I I, I think it's very challenging for real estate agents, for mortgage lenders, you know, even for potential home buyers. but you know, as you mentioned, you know, there's some defrosting, there's some, there's some signs of defrosting. I think mortgage rates coming down was a huge sort of boost to confidence, or at least boost that we desperately needed. you know, unfortunately mortgage rates are moving in the wrong direction again. but, but know there is, there is two sides to the story, right? I mean, it just, you know, the persistence of inflation suggests that we as u us consumers are really strong. there is strong job creation out there. People have a lot of, you know, still have some savings.
(09:11):
They are the, they're debt service is really low compared to, we were even prior to the pandemic, or, you know, prior to even many, many, for many years when you look back. So use consumer is a really good position, but that makes it very difficult to de defrost this this current housing market situation. And then on the other hand, you know, I, I think with the big challenge is that the record low mortgage rates that we saw during the pandemic locked in a lot of potential home sellers. And so they're really contending with this fact of, you know, giving up that mortgage rate and, and moving somewhere with a high, you know, where they would have to use a higher mortgage rate and, and, but pay much higher a home price. And then, you know, for the, for home potential home buyers, it's the situation of, you know, do home prices go down further.
(10:03):
You know, there is a lot of negative headlines out there about where home prices are heading. and then, you know, expectations of recession, and then also just, you know, not not being able to afford for many. And then on the other hand, it's this like feeding, you know, the, this chicken and egg situation of inventory, you know, sellers don't want to sell, and buyers are waiting for more inventory because, you know, there's not much out there right now. So it's, it's a, it's a challenging environment, but but like I said, again, I, I think some signs of defrosting are there, and I, I, I think we're gonna see more of that as we come into spring home buying season.
Mike Simonsen (10:42):
Okay. So you think we're gonna see more defrosting as, as we, like, we, we do see we do see some activity, and we've talked about it. We talk about it a lot. Like we, there are definitely signs significantly improvement over, you know, November and December happening this year. And you think we're gonna continue that like, like that defrosting, so to speak, for, for maybe the next quarter?
Selma Hepp (11:09):
Yeah, I mean, I think it a lot depends on mortgage rates. you know, I, I think we've seen how responsive buyers are to declining mortgage rates. So if there is, you know, if we can hopefully turn back <laugh> the trend now back to, you know, some decline again in mortgage rates I, I think it will be, it's very promising for the housing market. The other thing is, you know, I, I think the frosting naturally also comes as a, as there is seasonality is, is a function, is a function of seasonality right now, because we are entering spring home buying season. I think one unique opportunity right now for buyers is that there is not as much competition as it was at this time last year. So for potential home buyers out there, you know, they may be in fact able to lock in, you know, to, to lock in that contract where last year, you know, there was so many multiple biddings, there was home selling over exceedingly selling over the home asking price. and so it was a very, very challenging environment. I, I think it's a little bit less challenging for those who are able to buy. and I, I, I think, you know, I'm, I'm more an optimist when it comes to things <laugh>. and, and so I do think that there's, I do see opportunities there.
Mike Simonsen (12:33):
Great. Well, that, and that's a, I mean, there's so many things I want to tackle here, but, but the the home buyers having less competition now, I think is an interesting thing that to to note. And I've thought about it in terms of the first time home buyer where those folks have been just getting beaten up in the buying process over the last several years. And right now, because they're not selling another house with a 3% mortgage first, they're like, they're just, they're just buying the house they're buying. And so it's like maybe there's finally some opportunity there for those folks this year.
Selma Hepp (13:14):
No, absolutely. I, I agree with that. I, and we, you know, we already see that in our data. So in our mortgage application data, we see the share of first time home buyer increasing again, because those secondary or, or move up buyers are pulling out of the market. And, you know, potentially, you know, there's been a lot of discussion around inve investor activity. Some of the institutional investors may be pulling slightly back out of the market. And so I think the opportunities for first time buyers are there more now than they were last year.
Mike Simonsen (13:46):
I love that you can see that in your data. So it's not just, you know, Mike's hypothesis floating around <laugh>. and, and so is it a significant move in, in the percentage of first time home buyers that's happening this spring?
Selma Hepp (13:58):
It's a couple percentage points. Yeah. I mean, it's, it's, you know, it's the share of first time home buyers actually peaked at least over, you know, last few years in, in our early 2021 when mortgage rates hit record loss you know, but then has been declining since. So to see that increase again since last summer, I think that's a positive positive change in the trend.
Mike Simonsen (14:26):
That's the for sure. That's really great. And I'm glad that we can see it in the, in the data. That's really, that's really terrific. Let's talk about rates for a second. So, you know, it's now February, late February, we're recur when we're recording. I think this'll go up maybe March one when, when we get out. We but rates had been declining since like early November, I think. And then but then some strong economic data and, and then, you know, the 10 year started climbing and mortgage rates went from like six to almost seven. tell me about what you think about rates. let me just leave it there. Tell me what you think about rates and, and the market.
Selma Hepp (15:11):
Yeah, I mean, you know, honestly, forecasting mortgage rates is one of the most unfulfilling parts of my job because you're inevitably, you know, more than 50% I'm wrong, <laugh>, you know, you know, general direction, right? And, you know, general direction last year, we know mortgage rates were gonna go up, but, you know, I don't think a lot of folks were expecting mortgages to go beyond 7%, which at some points in time they did do too. so, you know, in general, expectation is for mortgage rates to do come down. And, you know, and this is despite of what the federal Reserves actions are, is because we, you know, there's been in increase in mortgage spread rate between treasuries and, and mortgage rates because of these uncertainties around what the impact of the federal reserve's actions are gonna be on the economy. and so we are now seeing, you know, maybe not, you know, recession yet some talk of soft landing at least over the next year, you know, and I think that will make investors feel a little bit more comfortable.
(16:18):
And so we do expect mortgage rates to normalize. And what that means is, you know, historically the spread is about 107, the basis points that spread went up to, you know, 250, 300 basis points at, at the end of last year. So, you know, potentially if we see that the normalization of spread coming back to 170 basis points, we'll see mortgage rates coming down. And I think that's generally what most folks that do forecast mortgage rates expect. you know, maybe not necessarily this quarter, but, you know, later down in the year, you know I think I was little bit more optimistic about mortgage rates coming to closer to five and a half percent before the last two economic reports came out, the job report and the inflation report. But I mean, I, I think still, you know, I think still even with you know, higher fives, fives, I, I, I think we could have better housing market than certainly what we had at the end of 2022.
Mike Simonsen (17:21):
Yeah, I mean, if we're in the fives, it sure seems like people are ready to buy pretty quickly there.
Selma Hepp (17:27):
Yeah, yeah.
Mike Simonsen (17:28):
it seems like the demand is there in the
Selma Hepp (17:29):
Fives, right? No, and, and I think, you know, peop there are buyers out there. You know, I, I think if a pro, what we also see in the data is the, if the property is price, right? And it shows well, you know, meaning that it's not, you know, a fixture opportunity needs a whole lot of work, and then it's overpriced. You know, buyers, buyers are, buyers are there, and buyer buyers will pay the asking price. Even in areas that have seen home prices decline, like, you know, bay Area bay Area, it's been one of the top metropolitan areas with largest declines in home prices since that peak of last year. But even in the Bay Area, we do see buyers, you know, lurking out there and certainly buying properties that are priced right.
Mike Simonsen (18:13):
Yeah. I, I think that's a, that's a really interesting key. And we track, for example, the percentage of homes with price reductions around the country, and we can watch, we watched that skyrocket last summer when, when the market cooled, and this year it's been dropping pretty dramatically you know, as, as, as buyers are out there, as long as the home is priced right? So sellers have a little bit better expectations, and, and when they do, then the thing moves pretty more, much more quickly.
Selma Hepp (18:41):
Yeah. Yeah. I, I, exactly. And I, I think, you know, it's, right now it's sort of in the seller score to, you know, accept the realities of the current housing markets. You know, anecdotally, I hear that sellers still expect prices that, you know, were, were relevant in spring of last year, and maybe that's just not an, a, a realistic expectation anymore.
Mike Simonsen (19:03):
Right, right, right. Exactly. Interesting. Okay. So does, does your team at CoreLogic, we talked a little bit about interest rate, mortgage rate forecasting. Do you do you do recession and inflation kind of forecasting? Like do you have outlooks on, on, on what we should expect there?
Selma Hepp (19:20):
no, we don't do forecast for inflation or, or recession. We do I mean, we have a general stance on it. You know, what we, what we believe it's gonna happen, but we don't. Do we use outside sources for that?
Mike Simonsen (19:35):
And what, what is your general stance about inflation and recession for the rest of the year?
Selma Hepp (19:39):
Yeah, I think in terms of the inflation, I think, you know, clearly the more recent data showed it's very challenging. it's, you know, and I am in the camp of folks, maybe they think that recession may not come down as fast as we would like it to come. I think I'm seeing inflationary pressures penetrate in other types, you know, in, in larger number of services. And, and, you know, especially like, one thing that really brought it to my attention was when I had to renew my auto insurance <laugh>, and my auto insurance went up by some 30, 40%. And mind you, I, I didn't do anything wrong with, you know, I, I didn't get in a car accident or anything like that. Right? Right. That was a huge shock for me. you know, and, and so, so, you know, I I think inflation is gonna be really hard to reel back in as fast as we'd like it to.
(20:35):
which, you know, which suggests that you know, and, and cons continue continual spending, consumer spending is, is going to be helping that inflation pressure remain strong, which means that recession, I, I don't necessarily foresee recession in this quarter even despite all the job layoffs that we've been talking about. I mean, you know, we we follow very closely unemployment claims and just jobs in general. I mean, jobs lead to home housing demand. you know, it's certainly not been you know, represented in jobs, data, those, those losses, because we do have still so many job openings out there. So I think economic conditions remain relatively strong, which means inflation will be you know, will won't come down as fast as we'd like it to, to come down.
Mike Simonsen (21:29):
So, so to summarize your, you have more fears on the inflation side than on the recession side this year?
Selma Hepp (21:36):
Yes.
Mike Simonsen (21:36):
Mm-hmm. <affirmative>. Yeah. And, and that kind of implies that mortgage rates will probably stay higher this year.
Selma Hepp (21:46):
Right? Right. Yeah. You know, and this, I think my opinion on this has been sort of modified by most recent <laugh> reports. and, and another report that I looked at was consumer spending, credit card spending, and that jumped back up in January too. So you know, I, I think the, the pullback that we saw at the end of 2022, you know, maybe temporary and, and so that's kind of what led to my, my cha change of heart on inflation.
Mike Simonsen (22:16):
Yeah. I mean, it was real stark economic data with several days in a row of like, man, the, the economy's going strong, jobs are strong, spending is strong. Like all of those things. and, and mortgage rates responded very quickly to that.
Selma Hepp (22:31):
Absolutely. Yeah.
Mike Simonsen (22:31):
Yeah. That's great. we talked about the mortgage application data where you can see first time home buyers ticking in c Is there, are there other things in, in your, your unique CoreLogic universe that you can see that help us understand maybe like, mortgage rates today I think are like 6.8% for the third year fixed you know, and versus 6%, like, can, can we see thresholds? Have you noticed things like that? Or, or like do we, do you have, are there other things in the data in the CoreLogic data that we should know about?
Selma Hepp (23:08):
Well, you know, we have such a wealth of data that sometimes, even, even internally, we are, we, we can get overwhelmed with like what data source to focus to focus on. but you know, one data that's usually really telling you know, and, and you mentioned that data is, was it MLS data? You know, if you look at the weekly activity in m l s data, you can all oftentimes almost instantaneously see changes or responses to, to mortgage rate environment. I don't necessarily think that I can see a threshold yet because you, I, I think we didn't give us consumers enough credit coming into 2022. I think we were already thinking that housing demand is gonna weaken as mortgage rates go up. But they actually, in my opinion, remained the, the housing demand remained relatively strong for a relatively longer period of time in 2022 because of the strength of US consumers. So you know, so I, that's sort of roundabout <laugh> way of thinking about that. But, you know, we do have, you know, other data, you know, we, we have a lot of property record data. we have permit data, we have geospatial data, we have valuations data, we have leans data, we have you know, ownership data. So, you know, we have a really comprehensive view of a property that's, that's pretty unique for, for CoreLogic.
Mike Simonsen (24:46):
Yeah. Did you, can you see do you spend any time with the permit data?
Selma Hepp (24:50):
Yeah, I have spent some time on it. You know, I, I've been particularly interested in what's happening with ADUs in, in California, you know, as we think about sort of alternative supply sources of supply housing supply. And so any, I live in California and I'm going through a D U process, adding an A D U to my property. So I'm, I've been really interested in that. so I, I looked at that, but then also sort of the types of green features that are being added to homes and to what extent that is accounted for evaluation of homes. And so we've done some analysis using permit data. But I, I'll tell you, permit data is messy, messy data. <laugh>,
Mike Simonsen (25:36):
<laugh>. Yeah, for sure. do you have conclusions about ADUs? Do you have like other things that you've learned that we should know about ADUs and that alternative dwelling units? And I'm a fan, like, I, I, you know, I live in my in, in San Francisco, right. And I, like, I'm a fan of density. And so ADUs has a form of density, like as is something that I'm interested in. Have you, what, what have you learned along the way about adu?
Selma Hepp (26:01):
Well, you know, ADUs, there's been a significant increase in applications for a D U permits in California ever since the SB nine and SB 10 over the last few years. So people definitely want to add units, you know, and they're, they're open to it. I think one one challenge they're facing is, you know, understanding financing and really actually understanding the permitting per permitting process and, and also then getting the right contractor. I think, you know, the actual adding of ADUs seems to be taking much longer from the, from the permit to that, that period could sometimes take a long time because there is a lot of gray areas and, and, and just, you know, just average folks don't understand necessarily how to go through all of these steps. And, and so, and if they don't have financing readily available, you know, it may be challenging, may be, you know, kind of going in, in business spurs. so, so, so that's one thing.
Mike Simonsen (27:07):
Yeah. And do you, do you the, the financing and it, like, does the financing get harder this year? All of a sudden it's a lot more expensive to finance those, the, that construction, and what does that do to the permit level, and what does it do? To my view as a homeowner, like I want to, one reason we want to add the ADUs is to add income to my property. and so what does it do to my view of income? Like, do we, are the, was the ADU boom a function of 2.8% mortgage rates? or is does it persist even when we're sitting at seven?
Selma Hepp (27:46):
Yeah, I don't, I don't know that it's necessarily a function of the mortgage rates. I think it's a function, at least in California, of that potential income. And then also just lack of lack of supply. So lack of supply leading to, you know, ability to add the additional income to your household. but you know, the other thing to keep in mind is that households in California, households everywhere in the nation, but especially in these more pricier areas where we've seen a lot of home press appreciation, they have a lot of home equity. and so, you know, on average in California home equities at about, I, I think I wanna say around $500,000. and so, you know, tapping into that has been something that a lot of folks do do. we've seen an increase in HELOC authorization as a result of that, even through second part through of 2022 when mortgage rates were, or rates in general, were, were increasing. So I think the income part is driving that, that demand for, for ADUs.
Mike Simonsen (28:58):
Yeah. So we have actually seen HELOCs kick up the, we, we did see that keep increasing despite rising rates.
Selma Hepp (29:05):
Yeah, we did mm-hmm. <affirmative>. Absolutely.
Mike Simonsen (29:07):
That's, that's good data to know. That's good data. You mentioned some of the green features mm-hmm. <affirmative> are, have you seen impact of things like solar and what that does to home valuations?
Selma Hepp (29:19):
Right. Actually, that part has been a little bit more harder to put a number on simply because for a lot of folks adding solar panels, for example, may not be may not make financial sense because they may not be, you know, still adding solar is expensive, right? And so depending on your utilization of your electricity, you may, it, it may not just work out financially to add, or it may take too long of a time to pay for the solar panels to pay off, right? so we have not seen a significant what, when, say, significant impact on, on valuations in from solar panelists. There, there, there has been some impact, but it's still not as sign that significant. And I, I think it's just, it, there's also not a lot of consistency there. you know, and it's, it, you know, it depends on the areas that, you know, it's more concentrated in areas that have a lot of sunshine, you know, so, you know, other parts of the country don't necessarily have as much solar additions, so it's just the result hasn't been conclusive <laugh>.
Mike Simonsen (30:28):
Right, right, right. The sample size is too small and, and heterogeneous, I suppose. Okay. That's, that's interesting though. well, so here's one thing I, I'm interested in. So we, we talk a little bit about it and we'll talk more about where, what we, where you think we're going and what the year looks like and, and future. But what I'm, one thing I like to ask my guests is, last year at this time what did you think was coming and were there things that you got wrong or Right, last year at this time?
Selma Hepp (31:00):
Yeah. Well, so we certainly expected mortgages to go up. we certainly expected home price appreciation to slow. Well, I, I think we didn't home expect home sales to slow as much as they did right. So we didn't expect that collapse in housing demand. I think in terms of the mortgage rates increase, I think at the beginning of the year, we had a forecast for maybe a 5% mortgage rates by the end of the year. clearly much different than, than what what, what the outcome was. And I think we also didn't expect as much volatility in the, in the, in, in, in terms of rates. we didn't expect Ukraine, for example. I think we were expecting to come out of the pandemic with strong demand and a strong consumer outlook. But not as much of these, these, you know, black swan events you know, we can call, it was sometimes call them these unexpected events such as Ukraine, which then had an impact on, on gas prices and, and food prices, and sort of perpetuated that inflation pressure.
(32:12):
I think also in terms of the, the supply chains constraints that had an impact on inflation. So I think the outlook for inflation was also a little bit different at the beginning of last year than than would it, it ultimately ended up being, the other thing is, you know, coming into 2022, you know, I, I recall housing market being just super, super strong. at least, you know PR beating wars were really prominent. And I think, you know, at the time, federal Reserve was communicating that their intent to start tightening. And as a result of that, a lot of folks jumped into the market and maybe locked in that mortgage rates. And so were bidding home prices way over than that, what we would na naturally see in, in a typical spring home buying season. So in only, you know, first six months of the year, we saw 10, 12% cumulative home price appreciation. just in that short period of time, we're, you know, on average year, we don't even see 5%, you know, we do on average, see four to 5%, but you know, that's twice as, as higher. So, you know, there was a lot of in some way exuberance and, and unsustainable buying behavior that was happening in, in 20, at the beginning of 2022.
Mike Simonsen (33:36):
Yeah, there sure was. So now we're looking at 2023. and have you thought about black swans that might hit us this year that might do things that, that might like put a stop to the housing market, you know, as abrupt as it was last year? or have you thought about like are there risks on the horizon that, that you are thinking about?
Selma Hepp (34:09):
Yeah, I mean, I think Ukraine is still a huge risk. You know, I mean, I think day-to-day we are seeing things that maybe are not necessarily comfortable <laugh> you know, thinking long term of how the outcome of the situation is gonna be. so I, I do worry about Ukraine. I do worry about, you know, just geopolitical risks out there. you know, there is also weather related issues. You know, we are having, we're going through this new set of, of storms coming through the country, you know, that are gonna be very detrimental to a lot of markets you know, across the country. so, you know, you know, that brings me to climate change. You know, we've been spending a lot of time thinking about climate change and spending a lot of time developing datasets to allow us to understand climate change impacts. so, you know, I, I think every year we come across more and more events that are very you know, that destroy a lot of homes that make people lose their shelter. And, and so, you know, that's always one that you cannot you sort of know it's been getting worse, but you don't know, you know, what that catastrophic event may be, that Black Swan event, for example, you know? so, so that's, that's another one.
Mike Simonsen (35:31):
Well, let me ask you this. I'm, I'm, I'm interested, I'm definitely interested in your conclusions about climate change, but I'd have have a question on Ukraine and geopolitical geopolitical risk. How do you see that that translates into risk for the US housing market? What's the mechanism there?
Selma Hepp (35:49):
Right. So, well, you know, we could have persistent inflation pressures, right? Which then, you know, say, say if we have continued supply chain disruptions or even new supply chain disruptions or you know gas prices go back up or food prices increase again you know, or for some reason you know well, so, so, you know, that leads to inflation pressures. And so inflation pressures then, you know, leads to stronger tightening by Federal Reserve, and that leads to higher mortgage rates. so that's one of the ways of doing that. The other one is just general consumer confidence. You know, people, times of uncertainty tend to pull back and choose to sit, to wait out on the sidelines, you know, which is something we've seen over the last, at least six months. and, and so, you know, just, you know, consumers not having that confidence that, that things are gonna be all right you know, is is not good for the housing market. and, and consumers, you know, based on the University of Michigan consumer sentiment, you know the sentiment, whether it's a good time to buy or sell it has, is both went in a negative direction since mortgage rates went up last year. And, and so, you know, so consumers seem to be waiting for something, you know, and, and then, you know, if you add more uncertainty and these geopolitical risks to that, I, I don't think that bodes Well,
Mike Simonsen (37:25):
That makes a lot of sense. Thank you for, for that insight. so let's talk about your work with climate change, climate risk, and the impact. Any conclusions that you've been able to draw or themes that you're following in that, in relation to, to climate change?
Selma Hepp (37:44):
Yeah, you know, we're still at the beginning of this of this research. We're still developing sort of our research agenda. but we do think it's a very important research agenda. You know, we, we just came out with a climate risk analytics platform. And, and so that, that, you know, the, there's a, a model, a climate model that combines all of these data sets that we have, and then that helps us predict the climate impact on properties and, and regions. And, and so what we did find is that regions that do see have persistent hazard natural hazards like hurricanes wildfires, they do, there is a long-term impact on home prices. and so the re you know, some parts of Florida, for example, particularly not necessarily, you know, when you think about a hurricane per se, but then flash floods that result from hurricanes, you know, and areas that are in, you know, more low, lower lane areas, more exposed to the flash flood, we do see an impact on home prices similarly in, on the West coast. When you look at the Northern California and, you know, areas that have seen consistent or persistent wildfires we do see now a resultant impact on home price, a rate of home price appreciation being slower than what is, you know, say regionally or, or nationally. So, so there is already that impact on home prices being accounted for as a result of climate risks.
Mike Simonsen (39:18):
That's really fascinating. Do you guys use that in your insurance business? Like, is that data, is it going into the insurance business or it coming out of the insurance side of the
Selma Hepp (39:28):
Right. It's, it's a, it's both ways, right? It, they both feed each other, but yes.
Mike Simonsen (39:33):
Yeah. the flood and fire is like, it's, I I think about that a lot. and the, it feels to me like we are, we've under we're underpricing risk in much of the country underpricing climate risk.
Selma Hepp (39:51):
Yeah, no, absolutely. And you know, I, I started off talking about how I was looking at how metropolitan areas change and, you know, spatial distribution of metropolitan area and, and you know, where people move to and, and leave from. And, you know, I think certainly seeing how much home demand has gone into some of these very much higher risk areas, it's going to be interesting to observe going forward how the demand may potentially shift, you know, and, and people may be moving to areas that, you know, or maybe at least accounting for that risk in their, in their home bridges decision or in, in their, in the pricing of the, of the properties.
Mike Simonsen (40:33):
Right. Right, right, right. interesting. And, and on that spacial theme where people are moving, have you have you done any work or you done any thinking on the remote work and the work from home trend and where that goes next?
Selma Hepp (40:52):
Yeah, so that's a really interesting one, <laugh>, because, you know, a lot of the trends that happened during the pandemic actually were trends that started even prior to the pandemic, right? So people were already sort of seeking more affordable regions. they were already moving to some parts of the countries that were more affordable. And that trend just got exacerbated during the pandemic. But even now you know, sort of, if you think somewhat of a post pandemic, I mean, we are, you know, 2022 was, was not fully post pandemic, but, you know, at least it wasn't in, at the height of that, those closures. we continue to see same migration trends that we saw during the pandemic and even prior to the pandemic to some extent. And so, let, let me explain that a little bit better. So at least in, in terms of people moving to more affordable parts of the country like Southeast you know, Florida being one of them takes us Carolinas, Georgia, Tennessee, you know, we do continue to see immigration to those areas from more expensive mid, you know, northeast and, and, and some Midwest areas.
(42:05):
The situation on the west coast is a little bit different cuz we had an you know an elevated rate of immigration during the pandemic to more affordable mountain west states like Idaho Nevada, Arizona you know Wyoming. and that's where home price appreciation at the, in the, at the peak of the pandemic was the highest. But now these are the areas that see largest decline in home prices since the, since the peak of last year, because some of those folks are either coming back or we are not seeing as much migration in those areas. So the local folks that are in those areas are in no way able to afford the, the price levels that, that these in, that these folks that were coming in were able to bid up prices too. So so home prices in those areas are coming down, but that's not to say that people are not gonna stop moving, that they're now gonna stop moving there, it, they're just not moving at the same rate that they used to.
(43:08):
And then by the same token, you know like suburban, urban, you know relationship, we did see a lot of immigration to suburban areas during the pandemic, which was something also that we did see prior to the pandemic because of affordability, because of more space, because of millennials aging into those years where they want more space and have, you know, their own households with kids and, and, and so on and so forth. but, but now at this point we do see some of that reversal people or younger folks at least coming back into the urban area, central cities. and so it's, it's not, you know, that that, that, that whole immigration pattern, it's, it's a very complicated story. you know, there are some wider patterns or, you know wider regional patterns, but then it also depends very much locally as well.
Mike Simonsen (44:03):
Yeah. And so it's, it is the Boise boom in home prices was fundamentally different from the Tampa boom.
Selma Hepp (44:12):
Yes, exactly. Exactly.
Mike Simonsen (44:14):
Interesting. for sure they, if they if we could see a boom and, and bust much quicker in, in, in Boise that's, that's really cool. I guess a couple more thoughts as we approach an hour here. One thing I'm interested in is your view of the longer term future of housing. We have, there's some long-term trends like we have we under most folks thinks we underbuilt in the last decade, new construction. I don't know if you concur with that or if some folks have a different view that and then what happens next? So what happens in the next, you know, 4, 8, 6, 10 years? What's your view of the, of the big trends?
Selma Hepp (45:02):
Right. I I mean, I do definitely agree that we are under supply. You know, we would not see the rate of appreciation that we did see if we had more inventory. but on the other hand, I think that lack of inventory is helping, you know, keep prices you know, keep floor under prices at this point right now. But I do think that there's some interesting developments out there. We talked about ADUs, you know, I think there's been more space, more talk about like modular homes or even panel housing or space conversion of office spaces. You know, you, you mentioned demand for offices earlier and you know, we don't do forecasts for that, but I've read some analysis out there, there, there are projecting quite significant declines in domain for office space. And so now there is that opportunity door.
(45:51):
I understand there's a lot of you know, it's, it's not as, as easy as just converting the space, you know, it, it, the space was built differently and construct and and configured differently. that's not that easy to convert it to residential, but, you know, it's, it's something that we are now at least talking about. So, you know, I think there are more opportunities for new types of supply out there. and I, and I do think you know, that there is gonna be more inventory coming on the market. I think we're going, you know, through rough period, but, you know, inventory situation will slowly improve. the other thing is it, it's also regional story. Again, you know, not all markets are undersupplied markets in exits for example. they have a lot of new construction markets in Southeast do have also a lot of new constructions, but maybe not markets on the west coast markets in mountain West not as much so, right.
(46:48):
So there is a regional story there again, as well. The other thing is, you know, investor activity has been very interesting. You know, over the last couple of D years we've seen elevated rate of investor activity. And that was surprising to see you know, persistent investor activity even when mortgage rates went up, even though we know that they, you know, maybe purchasing with cash alternative store, you know, they're not so dependent mortgage rates per se, but you know, but share of small investors has actually increased and it has remained elevated. So that's the part that's interesting to me. And so then the question, it begs the question of what ha happens with home ownership opportunities for these younger folks or folks that don't necessarily have in a generational wealth transfer. right. So, so that's something that is, you know, on, on my radar for sure going forward.
(47:46):
you know, we talked about e equity, how much equity people have and just what, you know now, what are baby boomer boomers, for example? Cause those are the folks with a largest amount of accumulated home equity. What are they gonna do with that equity? How gonna, how are they going to extract that equity? And maybe to what degree they're going to be adding supply by adding these additional units. You know, maybe, you know, this is not just a case in California, but I had a conversation with somebody in, in Atlanta who has a large property and now doesn't want to give up the property because of the loan mortgage rate and, and you know, all these things that we've been discussing, but he's thinking about adding additional units to his property and maybe even you know, splitting up his lot because it's a large lot to add more new, new housing. So, you know, so, so there's some exciting things to look forward to going forward. I think
Mike Simonsen (48:39):
That's the, I love, there's a lot there about the long-term future. One thread I wanna pull on is you said you do anticipate greater inventory coming in the future. and tell me what the, the, the mechanisms you think are going to going to contribute to that greater inventory. And do you think that's like this year is that multi-year horizon on that?
Selma Hepp (49:07):
It's a multi-year horizon, you know, and I think, you know, we have to remember where we, where in terms of new construction, where we came from, right? We, you know, we had the great, you know, building boom prior to great recession. And then, you know, the new construction fell to, you know, historical laws and was trending at about 50% of what we would be needing, you know, looking at our population and household growth. and so it's been slowly inching up to what we need. And so we've now acce you know, we've now reached that level of new construction that at least we are adding some new units relative to how mu how many people, how much we do need, you know, population growth and household growth. So, you know, so I do hope that, you know, we do move in positive direction from here on out.
(50:03):
And one reason is, you know, we we're past the pandemic. So we do see a new increase in mi international immigration. International immigration is very helpful for the construction industry. You know, cuz we do have huge labor shortages in that industry. The other thing is, you know, we are talking about there's a lot of that new the administration is currently doing to these alternative sources of, of, of new construction such as modular homes or, you know, panel construction and things like that. There's a lot of innovation going on in that space. you know, and, and I think people, the other thing is people have all this equity that we talked about. So that is an, a new source of funding too. So I think all of these factors combined are telling me that, you know, we're going to see some relief in terms of the inventory.
Mike Simonsen (50:57):
Okay, that's good. So you think it, it comes from new construction. I like the, the innovation angle of it. I think there's, there's a lot to happen there too. I, that's exciting. and, and that we do have, we have financing to do it. We have, because we have equity there that those are, those are fundamentally optimistic. I like those. I like that view. okay. Well look, we're, we are right at the top of our hour, what's the best way for folks to follow your work? Like social media do you publish at, at CoreLogic? Where should they find you?
Selma Hepp (51:28):
Yeah, so we have our CoreLogic website, corelogic.com. in on our website, we do have an intelligence page. so if you go on the resources, there is a number of reports there. There is insights blogs. we, you know, I write and I share on my social media under sell my head. but there is a lot of really, really intelligent and very deep thinkers in CoreLogic do a lot of their own writing. So I would suggest to, you know, at least look at our webpage and, and look at some of those writings as well. But, you know, I do post a lot on LinkedIn. that's kind of my main source as of social media. I'm a little bit I have a little bit of live hate relationship with Twitter <laugh>,
Mike Simonsen (52:16):
But people can follow you on LinkedIn.
Selma Hepp (52:18):
Yes. LinkedIn
Mike Simonsen (52:19):
And, and watch your work there. And, and so that's terrific. And, and you know, the, the, the, the power of the CoreLogic data set and the reach in the industry that you have is really terrific. And, and con really congratulations on the new role as, as the chief economist for CoreLogic. That's a really neat position to be able to get. So congratulations on that. Thank
Selma Hepp (52:43):
You <laugh>.
Mike Simonsen (52:43):
All right, Selma, thank you so much for joining us today.
Selma Hepp (52:47):
I appreciate it. Thank you so much.
Mike Simonsen (52:48):
everybody, this is the top of mind podcast. I'm Mike Simonsen. I'm the founder of Altos Research. And thanks for joining us. This, this week. We'll be back. We'll have another guest next week