What the Real Estate Market Will Look Like in 2023

In this episode of the Top of Mind podcast, Mike Simonsen sits down with Mark Fleming, Chief Economist for First American Financial Corporation, to talk about the major market dynamics that will shape the real estate market in 2023. Mark discusses which economic factors may impact 2023, shares his take on inflation, mortgage rates, and the likelihood of recession, and talks about which leading indicators he’s watching for market shifts. He also provides some insights on affordability and home-buying power.

About Mark Fleming

Mark Fleming serves as the Chief Economist for First American Financial Corporation, a premier provider of title, settlement, and risk solutions for real estate transactions and the leader in the digital transformation of its industry. In this role, he leads an economics team responsible for analysis, commentary, and forecasting trends in the real estate and mortgage markets.

Mark's research expertise primarily includes real estate and urban economics, applied econometrics, and mortgage risk. As a trusted and influential voice with 20 years of experience in the mortgage and property information business, Mark is frequently quoted by national news outlets and industry trade publications, such as The Wall Street Journal, The New York Times, and HousingWire, and he is a regular guest on high-profile broadcast news channels, including CBS, CNBC, Fox Business News, and NPR.

 

Here’s a glimpse of what you’ll learn: 

• Which economic factors may impact 2023, and two of the leading indicators Mark Fleming’s watching
• Whether we should expect a recession in 2023
• How to analyze the inflation data (and why service sector inflation is key)
• Why rates might rise from here
• Why looking at when home prices will fall may be more important than by how much
• What the First American Real Home Price Index tells us about buying power 
• Why lower available inventory of homes is the new normal
• What’s likely to happen with the shortage of housing in the US
• Why affordability has improved so much over the decade, and how much affordability the pandemic boom “gave back”
• Mark’s long-term view for residential real estate in the US

Resources mentioned in this episode:

• Mark Fleming on LinkedIn
• Mark Fleming on Twitter
• First American Financial Corporation
• Mark Fleming | First American Financial Corporation
• First American Real House Price Index
• The REconomy Podcast
• Mike Simonsen on LinkedIn
• Altos Research

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript

Intro 0:02

Welcome to Top of Mind, the show where we talk to real estate industry insiders and experts about the biggest trends impacting the market today. Enjoy the show.

Mike Simonsen 0:13

Mike Simonsen here. Thanks for joining me today. Welcome to the Top of Mind podcast. This is where I talk to the smartest leaders, thinkers and doers in the real estate industry. For a few years now, we've been sharing the latest market data every week in our weekly video series at altos research. With the top of mind podcast, we're looking to add some context to the discussion about what's happening in the market, from the leaders of people who have real perspective on what's going on. Each week. Of course, altos research tracks every home for sale in the country, we analyse all the pricing of the supply and demand all those changes in that data, and we make it available to you before you see it in the traditional channels. So people desperately need to know what's going on right now. The market is so crazy, suddenly, the landscape is changing. Everybody is worried about what happens in 2023. So if you need to communicate about the market, to your clients. Go to altos research.com, just book a free consult with our team, we can talk about the local data for your team and for your area. And we can talk about how you communicate the market data to people who need to know buyers and sellers in the real estate market around the country right now. So speaking of real estate data, and informing your clients, I've got a terrific guest today. Mark Fleming is the chief economist for First American Financial Corporation. In this role, he leads an economics team responsible for analysis commentary forecasting trends in the real estate and mortgage markets. Mark is primarily focused on real estate and urban economics, applied econometrics and mortgage risk. And he's an influential voice in the housing industry. If you read the Wall Street Journal, or the New York Times or Housing Wire, if you watch broadcast business news, you have probably seen March or heard from him, Mark and I have actually known each other for a bunch of years, we've shared the stage at conferences. And so he's really one of the top experts on on what's happening in the housing economy right now. And so I'm thrilled to get to talk to him today get his take on 2023. So, Mark, welcome.

Mark Fleming 2:34

Hey, Mike, how are you? You know, I gotta say it, it has been a number of years. This is why the hair lines are receding. We've been doing this for too long, I suspect together.

Mike Simonsen 2:45

That's right. We have this and we have some good stories about like making making predictions on stage together. Maybe we'll get to those today. First, though, I want to hear I like to hear just a little bit about you know, your background and tell us about, you know, what's first American focused on and you're in your role there right now.

Mark Fleming 3:09

Yeah, so actually, I wasn't planning on participating or being a professional in the real estate industry at all. When I went to graduate school and got my PhD, I was sort of studying econometrics you mentioned which is basically the application of statistics to the discipline of econ. But when I was there, I sort of got stuck into building models to predict house prices and understand land use change. And that led me to Fannie Mae where I learned mortgage risk. And then where you and I have known each other through our careers, I've worked in some way shape or form in some sort of data and analytics sort of company related to the mortgage industry. And it's been a wild ride. I love it, in part because I like to say real estate and housing, you can't offshore it, and everybody needs it. And so while this might be the second go round of sort of dire times in the industry, because we've been around long enough to remember the global financial crisis. At the end of the day, it still matters. Everybody needs shelter, and we can't do it anywhere else in here. And so that's a solid underpinning for a professional career. Right?

Mike Simonsen 4:12

That's, that's a great way to look at it. Even if we get a big cycle. We're still like, the houses are gonna be here. Yeah. And so our and our being analyzing from being on the ground here helps.

Mark Fleming 4:28

Right? Yeah, you're in the thick of it in San Francisco. I mean, that's like ground zero right now.

Mike Simonsen 4:33

Yeah. Yeah. All kinds of stuff happening. Okay. So. So then you, you started a Fannie Mae?

Mark Fleming 4:41

Yeah, I spent four years there is really where I learned mortgage risk, honestly.

Mike Simonsen 4:45

Yep. And then I know you were at CoreLogic for a while and you've been a bad first American for a while.

Mark Fleming 4:54

Yeah, she says I just passed my eight year anniversary at First American so man, I like to stick around Good jobs, you know?

Mike Simonsen 5:01

Yeah. What's so? So first American Financial? I know I'm in title insurance. But what else do we what else does the company do?

Mark Fleming 5:10

Well, yeah, so that's our bread and butter is we're one of the largest title insurance and settlement service providers in the in the country. But we also have a large data analytics division, we collect public records data, much like other providers out there that I'm sure you know. And we use that data not only for our own purposes, obviously, the core of making a title underwriting examination is public records data, but sell it in bulk and build products on top of it, ABM is something I've been around for decades, are all sort of, in our wheelhouse, essentially, data and analytics for the real estate industry is also part of what we do.

Mike Simonsen 5:50

Yeah, for sure. The the, the, the insurance companies that were the origination of the real estate data world, right? Like, gotta we gotta, we're the ones who have to know what's going on out there. Terrific. Okay, so. So let's start with, let's start with a question on everybody's mind, which is like, what the hell's going to happen in 2023? What's your view of the next year? It's now mid December when we're recording this.

Mark Fleming 6:27

All right, no more dancing around the easy questions, just go straight to the straight. Yep. Well, I think to look at and understand 2023, we have to do two things. One is consider what's happened over the last few years, particularly sort of taking that historical perspective through the end of 2022. And then, of course, whatever happens in 2023, is absolutely foundationally, based on what happens to inflation, in 2023. So part one, we're sort of returning to a world of more normal when it comes to the housing finance and real estate industry, right? house price appreciation is slowing down. We can talk about why later. But it was not normal during the pandemic to have house price appreciation rates of 1015 20 or more percent per year. That's not normal. The reasons why, but not normal mortgage rates at 3%. Again, that was the anomaly and not the norm. And now the big shock that happened in 2022, was we went from a rate handle of somewhere around three to six and a half, or seven, or maybe back close to six, depending upon you know, exactly when we're actually as of today, you know, a little bit closer to six again. But you know, that's a doubling of mortgage rates, and the combination of increasing mortgage rates by double. And the amount of house price appreciation that has occurred, is basically reducing house buying power for consumers, by very significant amounts, the median price cost has gone up by over 60%, relative to just a year ago, during the pandemic, well, I'll ask a silly question. And it doesn't take a fancy economist to answer it. If the price of the good goes up by 60%, what happens? Demand has pretty much evaporated.

Mike Simonsen 8:27

Yeah. And when you say the cost of the good, you're really talking about the payment that people have to make. Is that Yeah, that's a great

Mark Fleming 8:33

distinction, because honestly, no one really cares. Well, I guess, if you're buying a home with cash, but that's not most people, you don't really care about the nominal price. It's the how much per month and so that's the cost to me to own a home is the how much per month and that's what's gone up by such a dramatic amount, essentially, we call that reduction in house buying power, if you will.

Mike Simonsen 8:55

Yeah, and I'm interested in a lot more diving into that topic. In particular, one of the things I observed in the, in the last 24 months, you know, we had the pandemic phenomenon, we had these bidding wars, and we had immediate sales. So house gets listed and goes into contract immediately with offers. And those bidding wars seemed nuts at the time, I'm going to over bid by $100,000 or, or $150,000. But in retrospect, you know, when rates are 2.8%, another 100,000 bucks, doesn't move my payment very much. That's right. That's right. And now rates at 6% or at seven, every dollar matters. And so all of that bidding premium evaporates. It's like the first thing that goes away.

Mark Fleming 9:54

If you I mean, I always like to go back and say remember 1981 mortgage rates were 18 percent right 18.1 They peaked at 18.1. It's actually probably a pretty similar comparison to today, obviously not the level, but in the rates of change and inflation, sort of sort of the qualitative fundamentals are very similar. First of all, people still bought homes. But if you think about this, and let's make it to make the math easy, let's round it up to 20. With a with a mortgage, right, like that, you're basically paying $20 for every $100 you borrow every year. Right? 20%. So the, for the privilege of borrowing 100 bucks from the bank for one year, I gotta pay you back. 20 I still gotta pay you back. 200 Yeah, I gotta pay it back to money. To your point that is vastly different than $3. Right. So the the opportunity cost of borrowing that marginal extra chunk of cash to sort of escalate that price and when the bid, you know, was de minimis compared to normal, normal times. And that's exactly right. That's why people did it. Not to mention, I think there was sort of an element of, well, house prices will keep going up, right? So, so even that it's like, maybe I'm over bidding now. But give it a little while, and the price will catch up to what I paid for it, which in many markets over the last couple of years was probably true.

Mike Simonsen 11:20

Yep. Yeah. And it was, yeah, it was, it was true, until, you know, February of this year, saying that, well, if I'm buying in November last year, I'm like, well, like that, you know, it's moving up in four months, it's going to get to be close to what I paid anyway. And even if it's not

Mark Fleming 11:39

a why I kind of look at this, well, yes, house prices are declining right now. And actually where you are in San Francisco, they're declining the most, we've lost roughly 10% Now in the last four or five months in San Francisco, according to some of the popular indices. But over the last three years, they've gained 4050 or 60%. So you, you know, you almost 150% more of what you paid three years ago, take away 10, you're still up

Mike Simonsen 12:07

a lot, and most of the countries in that case. So so so then that that really plays into the 2023. Outlook. So So rates are ended December, they're hopefully drifting back down closer to six. We had some positive inflation news this week. CPI is definitely ratcheting lower, even though it's still high. So. So based on those things, what what comes next, what do you see? You know, we we know, in many markets that that, you know, prices are down, but but in a lot that they're not yet. So what do you see, like, as we're setting up now, what comes next for us?

Mark Fleming 12:59

Wow. So I like to dig a little bit deeper behind the headline number for inflation, because it's less about the overall, excuse me, as much as it is. In particular, the there are three primary categories. There's goods inflation, there's the service sector level of inflation, and the service sector is by far the largest overall chunk. And then within the service sector is where there's sheltering inflation. And this is sort of the combination of rent growth, as well as not house prices, but sort of the implied increase in rent, you'd have to pay to live in the house. It's called owners of equivalent, right. And that is the largest chunk of services, if you break it down into three parts. At the beginning of the pandemic, what started all of this in inflation was core goods. We had supply chain disruptions, we had all this fiscal stimulus, we decided we were all going to run out and, you know, buy lots of durable goods and home theatres and things like that for our houses. And the combination of the supply chain issues and the demand for goods spiked inflation. So inflation was primarily driven early by the goods sector. That's actually corrected in many, many goods and actually deflating, like prices are not just slowing down coming down. That's one thing that's happening sort of, regardless of what the Fed may or may not do, right, they don't have much control over that. But the service sector is still going gangbusters strong. In fact, that is the largest chunk in the recent release of of inflation that is causing continued inflation it is slowing down the pace of inflation is slowing down. But it's all coming from the service sector and within it mostly from shelter. Now the good news is that shelter inflation is lagging the real world by up to a year. And so what's happening on the ground today, which is actually deflation, rents are coming down and house studio owners agreement is reflection of declining prices is coming down isn't actually showing up in those headline numbers because it takes so long to work its way through going into 2023. You know, the Fed says, we'll look, core goods already deflating shelter, just give it time, what's left services at shelter, that's your restaurant meals, your barbershop visits, and things like that. There, it's also very labor intensive, the primary input into going out to a restaurant is labor. And there the inflation is still pretty strong. It is moderating, but it is that is sort of the core of what's left to be addressed in terms of inflationary pressure going into 2023. This is why the Fed is hyper focused on wages and the labor market mismatches because they need to see that cooling. To know that you've got all three components, quote, taken care of. Which, I don't know, I would be surprised if we don't get a point five and by the Fed because we want to slow down the pace a little given everything I just said, but still cut rates because the job is not yet done. And going into next year, sorry, raise raise the Fed Funds rates I apologize next year raised the Fed funds rate again. Now the question for 2023 is how many more times do you need to do it? And by 50 points or 25. basis point chunks, all depends on whether wage growth slows down for the service sector. And with a service sector, inflation decreases. So the joke I have right now, since it's the holidays, is the best gift we can give to the Fed is not to go out to dinner. So I don't know if the restaurants would be happy about that. But this is where the core of it lies. So to the housing market, yep. If the Fed has to keep raising the Fed funds rate a little bit more, that's putting upward pressure on the 10 year treasury. And we all know what happens to mortgage rates with the 10 year Treasury if there's there's a risk of upward pressure, potentially back above seven again, and maybe even a little bit further, as they sort of find that quote, terminal level of the Fed funds rate over the next six months.

Mike Simonsen 17:29

Interesting. So you see that there's a risk that mortgage rates climb up in the spring in the next few months over seven? Yeah. And

Mark Fleming 17:36

that sort of goes against many of the other prognosticators

Mike Simonsen 17:39

that by Well,

Mark Fleming 17:42

horrendously bad at forecasting. And

Mike Simonsen 17:45

what you know, when I talk about the forecasting in general, and like, I'm interested in your take, but but more more, I'm interested in how you got there. So the fact that that, okay, like, okay, so so we have all these, the signals of inflation coming down. And one of the things, though, that has been keeping mortgage rates high is the spread between the rates and the 10. Year, that spread has been higher due to all kinds of market dynamics, suddenly, as rates had been falling for years and years, mortgage market, buyers wanted to buy, buy mortgages, and then as rates spiked, they'd stopped wanting to buy them anymore. And so the spread went way up. So what's your take on the spread? Maybe over the next few months? Does that come back down?

Mark Fleming 18:42

Yeah. So let's see, I'm going to a little bit of a technical economics term here. Are you ready for it? Yes. Uncertainty sucks. And, yeah, if you're a buyer of mortgage backed securities, then you're saying, Well, I don't know what's going to happen with house prices. And I don't know, what's going to happen with rates going forward. And why would I care from a risk perspective or require a bigger premium, if you will, in that spread? Well, for two things, you know, we just talked about the fact that many home buyers have made a bunch of money in house price appreciation that, you know, some loss is not the end of the world. But the person who bought in San Francisco in September, you know, who is now being bundled into a mortgage backed security, they're the ones who are more likely than not going to be underwater or more of their equity will be be wiped away because they've had no benefit of the upside of growth in the first part. And so, for the new mortgage backed securities on new originations, this is a big deal. There's there's the risk of negative equity which elevates the possibility of foreclosure and foreclosure risks down down the line. So, investors are smart, they know this, that taking that into account, and then duration You know, we talked about like, how long will these mortgages stick around? Well, when rates stay up, or let's say another way, the easy way says, if rates are always coming down, durations get short, because you're always refinancing. Or you're always, you know, buying the next house at a lower rate, which means your purchasing power, even if nothing else has changed goes up. And so declining rates sort of speed up the turnover, and shorten the duration and prepay speeds of loans and pools. But now with rates either flat or possibly higher. Buyers stop buying refinancing stops happens happening. We already see it, I look at your altos inventory data every week, and I watch your video, what are you finding nobody's listening new anymore, why they've all got low mortgages. That all increases duration. And that creates more risk, it also increases the coupon speeds, but it creates a an uncertainty scenario for investors. And that's why the spread is high. The good news is that we might actually be able to have mortgage rates come down, even if the Fed and the Treasury sort of stay at this sort of maybe slightly higher level next year, as I was describing, because the uncertainty could go away. We really think inflation is linked, the Fed holds the line, the fact that they stop raising the Fed funds rate is an indication that they believe they've done their job and they just have to wait, that spread could come in and we could get a rate benefit of some declining mortgage rates by that fact

Mike Simonsen 21:33

by that factor. Well, that would be nice. And you know, I've said that I look at it as a, it's about five and a half percent when when rates were below that this summer, people were buying houses when they climbed up over six, six and a half. That's when it really stopped cold. So so. Okay, so there is some uncertainty rates, but hopefully they drift down. Do you have a view on the broader economy? Like, are we headed for a recession? And what's that going to do?

Mark Fleming 22:05

Yeah, this is, you know, rates are impossible to forecast and so are recession recession. What's the joke? Economists have predicted 11 of the last nine recessions, right? Yeah, this is really bad. And I feel like this time last year, everyone was so certain that a recession was going to happen in 2022. And now we're all so certain that is going to happen in 2023. By the way, the consensus among economists is more than ever before certainty that a recession will happen in 2023. And by the way, that doesn't mean like the global financial crisis, that could be a much milder recession. But the consensus argument is, yes, we're going to have a recession. I'll say two points. I'm a terrible forecaster. I don't know that we will. The labour market is still super strong. Even if we get what we want, which is a weakening of the labour market. We're all hoping that it's by closing open jobs and not necessarily laying off lots of people and you say, Wait, Mark, but we've been reading all the headlines about everyone being laid off in the tech sector, the amount of people employed in the tech sector is still a very small share of the overall economy. And the amount of people employed in housing is still a relative, they're bigger, but relatively small share, all the other sectors of the economy are kind of so far, have laughed off the tightening of monetary policy. And the unemployment rate is still below four. Yeah. So so

Mike Simonsen 23:39

in that said, the possibility of a soft landing here. Okay, you're you have you're like looking for some of the green shoots in there. Okay, that's great. Okay, so let's add those together. And and say, Okay, so, you know, home prices in general in some areas have coming down already. But they're coming down from nice and high. So actually, you know, year over year, home prices 2022 are up by our measure, it's up about 10% year over year over the end of 2021. Most of those gains happened in the first quarter anyway. So what's your view for home prices broadly? Next year, do they fall as what's your forecast this this first American have an official forecast?

Mark Fleming 24:23

We don't have an official forecast. But I would say you're absolutely right. I mean, the truth of the matter is house prices are falling already. Right. So it depends on what metric you look at. If you look at over from their peak, you know, there are markets that are already declining. When you look at the the analogy I've tried to use and we'll try it here again to see if it works is the roller coaster. You're absolutely right. We made a tonne of gain in the first half of the year. That was sort of as we did in a whole year of 2021 during the pandemic So we went up one side of the roller coaster of house prices. And we've gone over the top, we're now coming down. But it depends on where you sort of do that comparison comparison to a year ago, we could still be higher. In fact, we are still higher. Even though we're on the downside of the roller coaster, it's still at a higher point than it was a year ago, when we were just going up through roller coaster, right? That means we're going to end up the year probably at zero or close to zero, maybe a few percentage points. And, to your point, if you look at house prices in the way you do in your altos data, it's going to be higher. If you look at constant quality indices, like Case Shiller, and FHFA, is going to be closer to zero. But essentially, to say we ended the year at, say, nominally a couple of percent of growth, it just means that we didn't get all the way down the other side of the roller coaster to wipe away all that was gained. Right? Yeah. Then the question is between 23 Does this? Does the downside of the roller coaster keep going? And I think, to some extent, a little bit, yes. That I don't see any reason why house prices would stop correcting miraculously in January. So what is gonna happen though? We'll use the old stats term here, you're gonna get very unfavorable comparisons later next year. By right, by which I mean, now I'm in the year ahead, and I'm comparing to a downside.

Mike Simonsen 26:34

So April, May in 2023, are going to be really unfavorable comparisons.

Mark Fleming 26:40

Yes. So that your your number could in fact, actually get bigger. Even though house prices have actually stopped going down, say middle to late next year, we'll see. The same reason that we didn't see it going this way. It will, it'll it'll look worse than a year over year.

Mike Simonsen 26:55

The headlines will look worse. On the other hand, the year over year compatriot comparisons on inflation get more favourable by so he's, maybe that well, we'll have that back set. Okay. So, so, just to see if I can we can put a pin in it. Do you think you think home prices broadly? Decline? Let me let me put it in context. My

Mark Fleming 27:20

friend, my advisor said to me in school, when you forecast either forecasts the amount, or when but never both, haha, and in either case, don't look surprised if you get it right.

Mike Simonsen 27:35

Exactly, exactly.

Mark Fleming 27:37

You know, I'm gonna give you the one because I think that's actually the greatest.

Mike Simonsen 27:40

That's an interesting call. Let's let's talk about when

Mark Fleming 27:44

I think if we hit the path of inflation that that is currently expected. And the Fed stops raising rates, late spring, early summer, we sort of hit that terminal rate, the uncertainty becomes more certain inflation will be clearly showing trending downwards, all these good things will be happening from the from the rate perspective, and that means that spreads will come in and mortgage rates will begin to scale back a little bit again. And so the second half of the year, I think, is stabilization under that scenario, in which case house prices will also stabilize in the latter half.

Mike Simonsen 28:20

Okay, so your win call is that it's going to be most dramatic in the first half of the year. Yep. Okay,

Mark Fleming 28:27

and slow down dramatically stabilization in the second half of 2023. All right.

Mike Simonsen 28:31

That's, that's great. I love that insight. That's a, that's a great way to look at it. Okay, so let's switch gears a little bit. So So do you have? Do you have some metrics or things that we should be paying attention to, that don't get enough play in the headlines are the things Is there stuff that that you like? That, that we should, you know, teach our listeners to pay more attention to?

Mark Fleming 29:04

Yeah, I think we've touched on on the on the economic side of things, you know, it varies from time to time. But right now, if you're in housing and you want to focus on an economic barometer, it is inflation. And it's not the headline is how I described that breakdown. And, you know, there will everyone's sort of showing those breakdowns now. So that gives you the good insight, seeing shelter inflation coming back down, seeing service sector inflation slow if not actually declined. That is key to everything we've been talking about right. On the housing side. With house prices, again, be wary the headline right? You know, that doesn't really tell us about what's going on. Well delve into the from Peak numbers, not the year over years, because they're going to be misleading. And then your stuff. Listings. Yeah. There's something fascinating happening in listing Today, and that is, do you know the old adage that what is too hot, too cold just right, or just tight? I like to say get it just tight in terms of monetary policy, in terms of the amount of month supply relative to house price, appreciation and depreciation. What's the old adage?

Mike Simonsen 30:19

a month's supply adage. It's like, what did they talk about? Like three or four months or something like that? of supply?

Mark Fleming 30:26

What used to be six, the old adage was six months of supply was neither too cold nor too hot. Just right. And yes, Goldilocks, right. Yeah. And then under that scenario, you would usually neither have depreciation, depreciation occurs when month's supply goes above six. So there's more inventory, relative demand, and an appreciation of house prices when month's supply goes below six. Now, we've clearly seen in the last few years, some of the tightest inventory markets in modern data track housing market history, right, less than a month. Consequently, Gangbuster house prices, right. But now, your data and others are showing that month surprise, while up from their historic lows are now in the high to low three months supply range. Which by the old adage is well below six? Yeah, and therefore there shouldn't be house price depreciation. But there is three. That's right. And you can go back for like 30 years and show the scatterplot that where this sort of analogy or this conventional wisdom comes from, and it's a beautiful it lines right up?

Mike Simonsen 31:38

Yeah. Why do you think that is?

Mark Fleming 31:42

Well, I think in the old days, it took a long time, like the pace of the market was generally slower. You know, if you think about the housing market, housing is a, a perfectly heterogeneous, every house is different. Non movable good, right? It matters where it is, that's not like most goods. And so it mattered, the amount of supply trying to match the buyer to the seller, that was a complex process. And if you go back, you and I might be old enough to remember the pre internet days, that's why you hired a real estate agent, because they were the only ones who knew what was potentially for sale or out on the market. And they took you around to try and match you. So it was very labor intensive process to match buyer to seller for for heterogeneous, good, like housing. And that was also why that conventional wisdom sort of came about of, you know, typically 90 days for to sell a house. So remember that? Yeah. What are we at now? 17?

Mike Simonsen 32:44

Yeah, well, it's certainly climbing now. The time to sell is certainly climbing now. And, you know, it's like, the, it'll be really interesting, we're still lower than normal time to sell, because, like, anything that's, that was on the market longer sold. So we don't have anything that's been sitting around for, you know, 24 months on sold. Like, that stuff's all gone. And so, you know, the, like, you know, that that days on market has to build from here. And it'll be really fascinating to see where that changes in the spring, you know, we get fresh inventory of the spring, and if people are like, people will buy some, but how much and like, that's a that's going to be a good one to keep our eye on there.

Mark Fleming 33:29

But what I think has changed, right, what I think has changed fundamentally is we, for the for any given amount of demand, we need less active inventory today, because the matching process is so much more efficient. due to technology, right? The Zillow, Redfin all these platforms of the world where it's really easy, the cost of information is really low to be able to go and find houses that you think match your preferences. And so that sort of technological change, I think, is basically making you don't need as much for any given level of demand. And so maybe three becomes the new six interest in terms of the conventional wisdom, this is going to be something really interesting to watch the

Mike Simonsen 34:16

watch. So say that again. So for any given level of demand, we need less supply than we used to. Because before you had to wade through like you had to wade through it. Now you can now you can Bullseye right to the supple the one you want. Exactly. Interesting, okay. I like that.

Mark Fleming 34:34

Technology makes the matching process much more efficient,

Mike Simonsen 34:39

much more efficient. So, this is a theme that Clayton Collins, the CEO of HousingWire has been talking about lately. And you know, he and I have been discussing and the question is like, you know, is the, like the how does technology and the impact of velocity of the market and, and what is it It's what are those then downstream implications? So that's a really great quantification of it, that that I hadn't thought about before. And you know, we've had declining available inventory for a decade, as rates were low. And so and then there, the pandemic, they, the inventory dropped dramatically, as rates dropped dramatically. And so. So what we're saying is that climbing back inventory, you know, inventory is 500, and whatever it is 35,000 homes right now, single family homes on the market this moment. You know, were 2019, it was 850,000. So we're still, you know, 35 36%, below that time that, you know, just pre pandemic. So what you're saying is that we might get if we get back up to say, 700,000, that might be enough to balance the market out in a way that previously was 800 900 or a million.

Mark Fleming 36:06

Exactly. I mean, it depends, right? The amount of inventory is all, as I said, relative to any given level of demand. But assuming Well, our bigger problem right now is a lack of demand, right? Due to everything we talked about with rates and affordability and buying power, but you're absolutely right, you won't need as much for the same amount of demand going forward, as you did in the past.

Mike Simonsen 36:30

Great insight. That's a really that's really cool. Cool. Okay, so is there anything that that you've published and housing at first American recently that that you want us to want to call our attention to? Like, what's, what's the latest thinking that you like?

Mark Fleming 36:48

Sure. So a lot of what we've been talking about here today, we've written blog posts on our econ center, that you can find that our company website easily enough firstam.com we publish there, at least once a week, we do an analysis called our real house price index, which basically takes into account the cost of buying a home as a function of that buying power. And that is, it's an affordability measure directly, right, because it's not about the nominal amount, it's about the price per month, simple analogy, if house prices go up by 10%, but my buying power also goes up by 10%, because rates went down in real terms. You know, we're all familiar with real terms with inflation these days, in real terms, you're a wash. What's happened in the last year, though, is house prices have gone up, and buying power has gone down, which means in real terms, housing has gotten a lot more expensive. So that's something that's really focused on there.

Mike Simonsen 37:47

Yeah. So that's it ask you about that real quick, that on that, that that real house price index. So, you know, my observation has been was was this five and a half percent threshold. So September, the first couple days of September, mortgage rates went from like, five 5.4. And they jumped over five and a half, to six, to six and a half to seven. And we could watch in that moment, some of the indicators like the price reductions, well, launched up inventory, late September, in October started climbing, you know, when rates went from five and a half to six or seven and a half, like in that range. And then after October rates started ticking down. So my so so my observation is five and a half is a threshold I'm looking for to see activity. Do you have a have a way to use that real house price index? That that, that Buying Power View to, to test my hypothesis to, to or to like see?

Mark Fleming 38:57

Like? Yeah, we could take a look. I mean, it basically takes three things into account the change in mortgage rates, and I believe you're right, qualitatively, I think that magic sort of psychological threshold is somewhere in that six mark. But is that it takes into account the change in mortgage rates, it actually takes into account income as well, because your buying power is a function of income. And that's not doing enough, but it is doing a little to offset the loss due to rising rates. But then it's the house price thing that was really, you know, for most of the last decade, buying power was going up faster than prices, but over the last couple of years, just couldn't keep up. Yeah. Because of what you're seeing happening is that magic sort of inflection that you observed in your data. I will point out on Anna you pointed out to that increase in inventory is not because lots of new inventory is showing up. We should talk about that right? That which is For Sale is hanging out longer. And that is definitely an indication of the buyer demand changing and being reflected by that change in purchasing power. A half point change in the mortgage rate can be the difference between 50 or 60 or $100,000. For some people, right? Yep. Yeah, that's there. But it all gets sorted out by prices. Here's the economist, right? If a markets out of whack, what's the thing that brings it back into into what we call equilibrium? prices? Prices are adjusting, that can be painful, but prices are adjusting to the new reality of less buying power today.

Mike Simonsen 40:42

Yeah. So you had a comment in there, you said most of the last decade, buying power, improved, affordability improved most of the last decade?

Mark Fleming 40:55

Affordability was yes, because your buying power was going up faster than house prices. So if house prices are coming down, then essentially the real price to you is less, which is what drove the particularly in the pandemic, you we cut rates dramatically. Another percent or two, we were right around five pre pandemic, afford change or to be cut down to three and below three, well, that that sort of juice to house buying power, made everybody go out. And as we talked about at the top of this, the podcast, you know, bid up, well, what does the bid up show ultimately, as it shows us increased house prices in our indices? And that was why house prices were going so fast. Because we were producing so much buying power. But that's turned now with falling buying power and continued house price appreciation. Yeah, yeah, for sure everything is going against you. But income right now.

Mike Simonsen 41:47

So. So the real home price index like that, that guy has been easing down over the years, a decade. And then last two years, there was an inflection point last couple of years. There's inflection point this year, when it started spiking. Must be steep. Right, a steep climb. Yeah. And so how far back have we gotten? Like,

Mark Fleming 42:16

we go back to 2000? So but so

Mike Simonsen 42:18

our is our affordability. Now at 2016? Level? Did we how much of that that improvement did we erase? I'm ready for this early 2000s. level? So we're not Yeah, we're not even anywhere there yet. Right? Yeah.

Mark Fleming 42:31

Because we've grow house buying power is up something like 350% Compared to 2000?

Mike Simonsen 42:39

Yeah. Even was raised six and a half.

Mark Fleming 42:43

I guess it's a little bit lower now, because rates are six and a half. But it's still multiples of where we were before. And you know, people sort of they get the correlation backwards, right? House prices are high. No, house prices are high. And that's causing something no house prices are a reflection of the fact that we've had since the pandemic since the global financial crisis, a big reduction in the rate environment to rock bottom right, you know, mortgage rates below 3% for a 30 year fixed, like that's unheard of, probably will be never heard of again. That's why house prices went up so much. We were juicing buying power ridiculously Yeah,

Mike Simonsen 43:22

I looked at it. And you know, people, people were saying, oh, people are nuts, doing the overbidding. And it's like, no, they were they were acting really rational. They were taking advantage of the best deal ever. And, and they were you know, there some timing, you know, if you bought in Boise in in, you know, January of this year and overbid. You still locked in low but you vitae, you know, that might be the window.

Mark Fleming 43:49

That's true. But like, and I'm sure if one were to think of it is purely a financial decision on buying an asset, I'm gonna time the buy and then a time the sell. By the way, what do all of your financial advisors tell you to do with regard to timing in the stock market? Don't do it. They'll do it. There's an added wrinkle to housing. I like living in that house in Boise. Or I like going there when it's winter time to ski. Yeah. So unlike your traditional asset that you buy for the pure financial hopeful game, you get this wonderful utility of shelter component out of housing. That means timing yet you may have timed it right, great. But will that reflect your decision? Are you going to run out and sell it and sort of capitalize all those gains? Probably not. In fact, your data shows not?

Mike Simonsen 44:43

Yeah, very rarely, right. Very rarely. That's, that's really interesting. And there's you know, there is a lot of talk that was on the odd the Bloomberg odd lots podcast a while ago, and we talked about the bullwhip effect where there's the pandemic has You know, lumber prices shot up and then dropped back down and, and shipping containers went shot up and went back down. It's like this bullwhip effect. And, and gasoline like gasoline is back down really low in a lot of the country. And and there was some there was indication of like, too much natural gas. And in Europe like there's like this bullwhip effect is like everywhere. And one of the things that we see is like, so this pandemic was through, you know, we have this crazy bubble in the pandemic, and then things are correcting back down and sort of, Okay, we're back down to 2020 levels, and then we resume on our way on our merry way, like with some of those markets, and I wonder, do you have a gut for whether it's is that, that when housing is going to do we're going to, like reverse that affordability stuff back down to, you know, 2020, we, we pretend that the pandemic never happened, and then we go on our merry way and people transact on houses. Is that is that a scenario?

Mark Fleming 46:04

So will there be a bullwhip effect? In housing? Yeah, no. Okay. So here's why. And, yeah, like, not, I don't believe in the real fancy forecasts, because they generally don't get it right. But the basic premise is, like, if we take a long run average growth rate and house price appreciation, that's somewhere between three and 5%. And you compound that for, say, three years, pandemic years, 2122. And let's go into 23, you could start halfway through 2020 and go halfway through transit, take three years of it. Three years at a normal rate of price appreciation is going to get you cumulatively somewhere around maybe 20%. Total. I'm doing totally back of the envelope math, right. So if we say that, then and house prices actually went up over that same three year period of say, 30 35 40, then there will be a correction down to where we would have ended up had we not had the bullwhip in the first place. Right. So I think I think there is an element of, I guess a bullwhip in the sense that we there was over appreciation in the asset during the pandemic. That's true. Driven by an increased demand and the desire to own homes. Yep. And the cheapest money ever to buy them. Those two things. Yeah. But so we're gonna, we're gonna work out or unwind some of that excess, like in other bullwhip markets, but I don't think there's this big sort of rebound whip with big house price declines. I mean, there's still not enough inventory to buy. And even if you forget the pandemic altogether, as a general statement, over the last 10 years, we've not been building enough housing, to shelter all the households that want it. And remember what we said at the beginning, you can't move it, you can't offshore it. I need to provide here, there's not enough that puts a lot of sort of underpinning on house prices, because a scarce good which housing is today, you know, keeps prices from collapsing.

Mike Simonsen 48:21

That's interesting. So let's let's pull on that for a second. The the not enough housing.

Mark Fleming 48:28

There is not my backyard. Yeah,

Mike Simonsen 48:31

exactly. So So tell me about how you your view of what you mean by not enough housing?

Mark Fleming 48:38

Well, so it's not it's not what we focus generally on in the housing market, which is the flow of things available for sale. And when I talk about not of housing, I'm talking about the stock, right? How many housing units do we have in the United States, versus how many households? Because all households generally want to live in housing, much shelter, right? Yep. I'll make that general assumption. I think most people would agree with me. And so we've had very steady household formation. In fact, accelerated household formation over the last decade, as millennials aged into forming households, it's now fading, but a big boom from demographics of lots of households being formed, looking for shelter. Shelter can come in the form of rental housing or owned relative to after the pandemic home builders. You know, they shut down in the pandemic, and they've spent the last decade really struggling to sort of ramp up on their ability to add more housing to the stock. Not only do you need to literally grow the stock, but you also have to replace a little bit of it every year that sort of gets demolished or becomes dilapidated. So when you sort of measure how much do I have to grow the housing stock by versus demand for housing we've been under building for a decade. Yeah, to the tune of millions of units.

Mike Simonsen 49:58

Listen to It's, uh, yeah, so So okay, so that's I buy that that logic. And in this moment, though, we have like record numbers of new homes under construction, don't we?

Mark Fleming 50:14

Yes, they're all stuck. And they're not being well, they're about to be delivered in the early part of next year.

Mike Simonsen 50:20

So how does that play in? How does that play into the we don't have enough? You know, we have record under construction? We don't have enough. And how does that play into, you know, the supply and demand equation for the next year? How do you look at that, and and even into your the real house price index, like the affordability scenario?

Mark Fleming 50:39

Well, so the challenge here is you would think, yeah, I mean, all houses are created equal, right? And so if I just deliver more houses, we'll just solve the problem. Yeah, right. No, one, it matters where, and two, prices come in all different sizes and shapes and prices. And the new home market is not typically built for the first time homebuyer. It's built for the existing homeowner who would move up but those existing homeowners all have 3% mortgages. So it's a more complex challenge. And like, well, all this inventory shows up, even the scale of it, typically, new homes are about 10% of the total market. So you would have to really bring a lot of new homes to market to influence the overall supply of stock, which is somewhere in the well above 100 million housing units in the United States today, right. So the sheer scale of the new home market is not enough. And then the bigger problem is that it doesn't necessarily match the demand in terms of pricing, and or location. Will it help? Of course, will it solve the problem?

Mike Simonsen 51:52

No. Got it. And and I think it's interesting that, you know, if we have, normally you have a million homes on the market, and normally in the last decade, call it a million homes on the market, and then you have, you know, a million new homes get built. So you have like 100,000 at any given time, maybe come in. So. So maybe it's 10% of the of the market is new home.

Mark Fleming 52:20

So that's something like that's a rough a very good rough and rough estimate 10%.

Mike Simonsen 52:24

Now, though, we have 500,000. And we have maybe 150,000, or more of those 200,000 of those getting completed. So all of a sudden, the new home construction is 40% of the mark.

Mark Fleming 52:40

That's a great point, that share definitely goes up. You're right. And so it becomes a more dominant hand thought of that that's a really good point, it becomes a more dominant part. But then you still have the problem. Is it priced right? For those who are demanding? What we expect to happen is because this glut will all show up, that will put even more downward pressure on new home prices. Right? In a way, you kind of need to make that thing attractive enough to cause that existing homeowner to want to give up his 3% mortgage and move.

Mike Simonsen 53:14

Yeah.

Mark Fleming 53:18

When rates are six, right, somehow, that difference in purchasing power, actually, theoretically would end up being a price big be fixed by a price reduction on the part of the builder

Mike Simonsen 53:32

on the builder. So it's almost like the new home market is going to be more price. Volatile, price sensitive price volatile this year than the existing market. Yep, that'd be an interesting, that'd be an interesting outcome, wouldn't it for the year. Really fascinating. Are there things that you have in the first American world other data points that we don't get to see elsewhere? Are there like, you know, mortgage things or insights that we should that you have that you like, you know, you can give us the

Mark Fleming 54:13

Do I have any special sauce? No. I mean, I'm lucky because as we mentioned, at the top of the podcast, I have access to all of that rich data that we collect in our in our data and analytics division. And so there we have the public records data that everyone is very familiar with, we have we collect public records data in a variety of different ways that gives us insights. So we collect were called Title plants. And without getting into the details of title plants. It's a more rich feature set of what's in the public record. So you get a lot more details on off the deeds and the deeds of trust and things like that. So we have access to all of that. We buy data, like the listing stuff and other sources so we buy some data assets, we have access, obviously to our own business data. And right now, actually, it's really interesting to study. So what are the leading indicators, right? We're talking about forecasting in this in this episode, like, what what is what are leading in a mortgage applications are leading indicators of things to come. Our own business data is leading indicators of things to come. So we do get a sense because the title process starts relatively early on opening that order with us starts around the same time as the application. So we do have access to sort of that leading indicator view of the market. And it's telling us what you would expect right more soften, you know, this is absent saying the same thing. More softening to come until rates are stabilized wherever they may stabilize.

Mike Simonsen 55:52

Got it? Well, that's great. That's a great insight to know. You know, that like those those leading indicators, or if they're all kind of pointing in the same direction right now and and rates and like seeing if rates settle in. And hopefully that spread compresses a little bit. So you know, we have so even if the tenure doesn't come down, our mortgage rate can come down a little bit and get us maybe into the fives, I think we could probably have a few transactions, at least in the spring.

Mark Fleming 56:27

And look, I mean, it could look pretty dire, depending upon what seats you sit in. But if you take the longer view, a mortgage rate of five and a half, or 6%, with house prices, finally growing at a more nominal rate, maybe a little bit above inflation, like they always historically used to, with a sufficient amount of supply, maybe to wrap this all up around a Goldilocks three months of supply for the given velocity of the market today. Yeah, you mean, a healthy and normal market? Like, we haven't had one of those in like 20 years?

Mike Simonsen 57:05

Yeah. I love it. So So then let's do this. Let's kind of wrap it up with this one. The The thing I like to ask a lot of my guests is longer term future. What do you think about the housing market in 510 years? And what do you think you're like, where do you think it's going? And what should we pay attention to?

Mark Fleming 57:27

I'm always bullish, because you can't outsource as an outsource it and everybody needs it fundamentally, as a good that's great for us. I think the big thing that is there are two long term drivers over the next five years, 10 years, even the trends in demographics, because we've got a few more years of millennials aging in but after that, Generation Z is much smaller. Right? And we will also begin to see how do I put it nicely, baby boomers aging out of homeownership, and so are the Democrats, the demographic underpinnings are have which had been favorable for to us for the last decade, are going to sort of change to being a little less favorable, although our other problem is lack of inventory. So how can we build can we build our way out of it? Possibly, that'll take some time. But remember, the demographic aging out will also supply housing back into the market that hasn't been there historically, in the last few years, right? Yeah. The over 65 homeownership rate is something like 75%. Right. So there is a lot of housing essentially sort of locked up in in bait with baby boomers right now. And they will eventually put those houses back on to the market. So those are the two things supply of stock in the long run, and the demographic trends and how those two things work together with each other.

Mike Simonsen 59:00

But generally, you're broadly bullish, because you know, we got to live in these houses in the US.

Mark Fleming 59:06

Well, as long as we don't have another one of these things before I retire, I will be happy.

Mike Simonsen 59:11

Just one more bubble. I won't screw this one up. Just one more. Exactly. Yeah. Okay. Mark, terrific. compensated really appreciate your time. I should mention that, that I love your podcast, The REconomy Podcast that you and Odetta do. How often does that come out? Every two weeks, two weeks. And it's YouTube. It's mostly just YouTube talking about here's the latest stuff that we should know about. Yeah.

Mark Fleming 59:40

Yeah, we try and not not unlike what we just did here. We'll take one specific topic, try and boil it down in a conversation to so everyone can understand it. Nine to 12 minutes. Yeah, there's a way to work. If you go to work on your way to Starbucks. If you're getting a latte. They're really

Mike Simonsen 59:56

great. I knew and Odetta and those are the two Vic, I really appreciate that. So that's The REconomy Podcast. Yeah, definitely look for that. And you and you guys publish on the first American blog, what's, what's that?

Mark Fleming 1:00:12

It's firstam.com/economics. So

Mike Simonsen 1:00:16

that you can you can check out Mark's work there. All right. And other places like follow you on LinkedIn or Twitter or those kind of places. Yeah.

Mark Fleming 1:00:26

I'm on LinkedIn as me. And Twitter is M Fleming, the letters DC. I live in Washington, DC, and plumbing, DC. And yeah, we often post we have a little more fun on Twitter in particular. Yeah. And often also post up there much of the content that we're producing and putting on those other platforms.

Mike Simonsen 1:00:46

Terrific. Great. Mark, thank you so much for your time. I really appreciate it.

Mark Fleming 1:00:50

My pleasure. Always good, Mike. All right. Thanks, everybody.

Mike Simonsen 1:00:54

This is the Top of Mind podcast. Thanks for joining me, as always go to altosresearch.com To get your data to help you communicate like all of this stuff, to your clients, to your buyers and sellers right now, because they need to know what's going on and they need to hear from you. So that's what we do. Thanks, everybody, for next week.

Outro 1:01:15

Thanks for listening to Top of Mind. See you again next time and be sure to click Subscribe to get future episodes.