CoreLogic’s Selma Hepp talks affordability, home prices
Today’s episode of HousingWire Daily features an interview with Selma Hepp, the deputy chief economist at CoreLogic. Selma joins us to discuss some of the data released from CoreLogic’s most recent Home Price Insights report, which looks at home price trends and economic forecasts.
During the interview, she discusses local and national home price growth acceleration and the factors behind affordability issues for first-time homebuyers. Additionally, she explains some of CoreLogic’s forecasted home price trends for the rest of 2021 and 2022 as the market starts to cool.
Here is a small preview of the interview, which has been lightly edited for length and clarity:
Elissa Branch: According to CoreLogic data, 59% of consumers looking to purchase a home reported a combined household earning of at least six figures. We compare that to 10% looking to purchase who earned less than $50,000. If affordability has become this very prominent concern for low to moderate income potential buyers, what do these numbers tell us about their actual buying potential?
Selma Hepp: Affordability is a very interesting debate because a lot of numbers get masked in the national aggregates. There’s so much difference between first time homebuyers and move up buyers because how much home price appreciation has helped move up buyers have more equity in their homes. So, they don’t have the same level of affordability challenge as first time buyers. Based on the figures from CoreLogic, it tells us that only really one in ten buyers can actually purchase a home and this is just among those who are actually looking for a purchase. Think about how many people just don’t even bother because the income is not sufficient in their local market to even compete. It’s really challenging for those folks to buy a home.
The other thing that’s important is this question of accumulated equity and having enough for a down payment. With first time buyers, they’ve had much harder challenges with this accelerated home prices to come up with that 20% down payment. New buyers coming into the market now have to come up with a larger chunk of cash and that’s very challenging, particularly if you’re making if your household makes less than $50,000 combined income. That’s incredibly difficult.
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Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:
Elissa Branch: Hello and welcome back to “HousingWire Daily”. I’m Elissa Branch and today I am joined by Selma Hepp, the Deputy Chief Economist at CoreLogic. Selma, welcome to the show.
Selma Hepp: Thank you. Thank you, Elissa, so much for having me.
Elissa Branch: Yeah, of course. Thank you so much for coming to the show. We really appreciate you coming on to talk to us today. And today we are going to be looking at CoreLogic’s most recent monthly home price insights report, which was released this past Tuesday, October 5th, and it looks at home price trends. But before we look at the report, and this is everybody’s most favorite question, can you tell me and our listeners a little bit, like, about yourself, the work that you do over at CoreLogic, you and your team do over at CoreLogic, and how you found yourself in the industry?
Selma Hepp: Sure. So, my title is Deputy Chief Economist. There’s a second part to my title that says that I’m an Executive, Research, and Insights. So that in itself says a lot, you know. A lot of my role is about analyzing, interpreting and forecasting economic trends and real-estate and mortgage and insurance. So, in other words, you know, our team…my team and I, we use the wealth of housing mortgage and insurance data that CoreLogic collects and try basically to make sense out of it. You know, maybe to identify some leading indicators of changes in the housing market. So, in some sense, we do consider ourselves as a canary in a mine. And then we developed actionable insights about housing market trends that are useful for you guys, for your audience, for our clients, for, you know, just broader consumer audience.
Elissa Branch: Yeah, there is definitely a lot of data you guys have to sort through and I’m sure…well, we over here at HousingWire are very appreciative of the work you do, and I’m sure our audience is as well.
Selma Hepp: I’m very glad to hear that.
Elissa Branch: So, let’s dive into the report. The report, which is titled the Home Price Insights Report, it looks at a couple of different factors on both the local and, like, metro scale and also the national scale. For example, the report looks at national home prices, economic forecasts, and market trends. So, can you share a little bit about the methodology behind the report and what kinds of numbers and factors do you guys analyze when compiling all the data?
Selma Hepp: Sure, sure. So, the first part of the report is our CoreLogic HPI, so this is our home price index. We actually, in house, have a couple indices. We also have Case-Shiller, but this one is solely CoreLogic index. And it basically…so in our release today…or on Tuesday, sorry, that we are covering today, we were looking at where August home prices were. And so, in developing this index, we use repeat sales transactions from our public records data, servicings and securities databases. And so, what’s important to distinguish about repeat sales transactions in developing this index is that they…you know, the idea is to control for the quality of housing. So unlike median home prices which can be affected by mix of sales…so if one year you have more higher price homes being sold, that median sales price is gonna show higher increase say than if you are tracking the change in price on a same quality of a home, right. So that’s how…that’s the important caveat about this home price index.
You know, as a part of this index, we do look at a type of housing, so whether it’s attached or detached. And what’s very interesting, since the pandemic started, we see this divergence in the appreciation among attached homes, being condos, and detached properties. And then we also do this at the ZIP code level, at the state level, CBSA level, and so on.
The other part of the report are the forecasts. These are also at, you know, local geographies but basically, you know, it’s a very intense econometric model that, you know, is used to develop this forecast. And it combines the equilibrium home price, which is a function of real disposable income per capita. And why I say that is because this is the product that also lends itself into the housing market conditions indicator and market risk indicator. So basically, it looks at whether home prices are growing at the same pace as real disposable income. And so, for example, when this forecast exceeds the long-term value of more than 10%, then this market is considered overvalued, right. And then when long-term values exceed the index level by less than 10%, then the markets are considered undervalued…it’s not exceed, but are lower than 10% than that long-term value.
So, you know, again, going back to what goes into this data. It’s real disposable income. It’s unemployment rate. It’s housing stock. It’s population changes. It’s of course changes in income. So, a whole lot of variables go into these forecasts.
And so, as I mentioned again, the two other products that come out of the forecast is the…one is the market risk indicator. And so, the market risk indicator gives us a likelihood of home prices falling. So, it is a good measure of likelihood of housing bubble and whether it’s going to burst. And we have that for 392 major metros in the country. And so basically, it gives us a likelihood of…in two scenarios. One is if there’s gonna be a likelihood of 10% or more price reduction or a likelihood of less than 10% of price reduction. And so, the higher the risk score, obviously, the higher the risk of price reduction.
Yeah, so I think that…you know, there’s a lot in this report obviously, but I think this generally covers all the variables that we include each month.
Elissa Branch: You used the word intense to describe the data, and I think after I’m listening to you kind of break down what all you guys factor in, I think intense is the most apt word to describe that. So, yeah.
Selma Hepp: Yes.
Elissa Branch: So now I kinda want to touch a little bit on affordability. You’ve kinda mentioned that a little bit in that answer. But it has been a pretty important topic in the industry over the past couple of months, as I’m sure you well know. So, I did want to discuss some national home price growth. According to the report, home prices have increased 18.1% year over year in August. This increase now marks the largest annual gain in the 45-year history of the data that you guys have been collecting at CoreLogic. What do you think drove this increase and how could it impact the home buying decisions of potential buyers?
Selma Hepp: Yeah, so, you know, this is…sort of the acceleration in home prices, you know, has taken a little while. So back, you know, before the pandemic or at the onset of the pandemic, home prices were sort of in, you know, that historical average of 4% or 5%, depending on the market. And then they actually slowed down for a couple of months because, you know, we all sort of stopped everything. But since then, it has been this gradual acceleration to get to this point of the fastest annual growth in the history of our data. But there is a number of drivers. You know, you can’t really just think of one thing that happened, but there were so many things that sort of combined, brought us to this point today.
The first one being is that, you know, even before the pandemic, we were in a decade long underproduction of new homes. So, we had inadequate supply of homes for sale and that was due to a number of reasons. You know, we all have talked about [inaudible 00:08:39] And then at state, level land use restrictions, zoning. Then there is the lack of construction labor, material shortages. You know, also consolidation among builders following the great recession. So, you know, when the spike in demand came up, some of them were actually not prepared or just were not expecting the demand to surge as much as it did.
The other variable is that the pandemic created a major jump in demand. So, you know, we had families that have been, you know…we’ve talking about millennials. When is it their time to come forward and start buying homes? Well, it did. You know, it’s been couple of years, but it really…their demand or their timeline really got put forward when the pandemic started because families wanted more space. They needed to work from home and have more space for the little babies they had running around that used to be in cities. And so, you know, that’s one part of the demand surge. The other one was that wealthier families accelerated their purchase of second homes. You know, we’ve heard about markets that, because of their outdoor amenity, whether that’s beaches, mountains, lakes, you know, really saw a surge this time because of the pandemic. So, you know, so that was another component to demand increase.
You know, and then there were record low mortgage rates, you know. Rates were declining for a long time, but they really took a dip when the pandemic started, you know, and that’s because we just sort of weren’t even sure when are we gonna be able to get back on track with our economy. Well, fortunately, we did, but it was still, you know…record low rates definitely helped and made financing a home much cheaper. And then, you know, buyers who maybe were saving to buy a couple of years later were actually now able to get that home at their budget because monthly mortgage payment was now reduced because of the lower interest rates.
You know, and then I mentioned demographic, but that’s, you know, a very important component of this because it’s just contributed so much to the demand. And there’s the millennial buyers that were approaching their first-time home buying age. And that really accelerated during the…you know, when the pandemic started. So, a lot of these things taken together, you know, we are where we are today.
Elissa Branch: It definitely sounds like this whole lack of affordability and just a lot of problems in the past year is more so the culmination of the past decade on top of the pandemic, not just necessarily the pandemic itself. A longstanding issue with…and a lot of very complex factors in play here.
Selma Hepp: Right, right.
Elissa Branch: So, we kinda looked at this on a national level, but the report includes a state-by-state breakdown of home prices. And there were no states that reported a decline in home prices. In fact, there were a couple of states that were close to or a little bit above that 30% range for year-over-year increase. If we compare that to the national average of that 18.1%, it’s, you know, a little bit higher. Some states like Idaho, Arizona, Utah, I am very curious as to why these specific areas, maybe seemingly unexpected areas having such large increases compared to other states that you think you might typically see this in, like, New York or more states in the New England area.
Selma Hepp: Right, yeah. Yeah, that’s a really good question because, you know, it’s really…these mountain west states, just in southwest, Arizona being southwest state, you know, really did, you know, see a surge in demand and then as a result, in prices. And so again, there are a number of reasons here as well. You know, one is that…for example, if you looked at all these…Idaho, Arizona or Utah, these were relatively more affordable areas prior to the pandemic and home prices, and, you know, some of them were half of or more than half or less than half of what the home prices were in adjacent states. So, for example, Washington State or California. So, you know, pandemic enabled a lot of people to work from home now and they were able to move from these more expensive coastal regions to the areas that were, you know, rich in outdoor amenities and were much more affordable. So, the folks coming from the coastal areas had budgets that were 20%, 30%, 40% higher than the budgets of the local residents. And so, these migrants were able and willing to bid home prices at a much higher pace than…you know, and again because of lack of supply. So, none of this would’ve happened if there wasn’t lack of supply. But because of a lack of supply, they were willing to bid or they were bidding so much above the listing, asking price, you know, just to be able to get that home. And, you know, there was reports of 10, 20, 30 bids coming in within days of homes being listed for sale. So, you know, so that lends itself to a really strong home price acceleration.
But Arizona for example, and Utah as well, you know, they were already seeing population growth at the fastest pace nationally even prior to the pandemic. So, a lot of people were already moving there. You know, there were a lot of jobs being created and oftentimes these were higher wage jobs. They were tech jobs. And so they were, you know, ready for those folks maybe coming from other regions that are more expensive to take those jobs. And, you know, again, slow rate of new construction. And so, you have this imbalance in demand and supply. But in Arizona for example, in the latest Case-Shiller report…I mean, it’s in this report too, if you look at the, you know, past two years. But Arizona reported 25 months of strongest home price…I mean, Phoenix, Arizona of strongest home price appreciation among the 20 cities index in Case-Shiller. So, you know, some of this was already going on. It’s just that, you know, it got sort of ubered up during the recession.
And so just to give you a sense of, like, the difference in home prices in, you know, in those areas versus where people were coming from. In Phoenix, you know, average local price is, say, $450,000 where people that were coming from LA were paying one million, people from Seattle, 800, and people even from Chicago were paying more, closer to 500 than those folks in…than the prices were in Phoenix. So obviously, you know, when you have a much higher budget, you may be willing to spend more.
And then the third thing is there is…you know, in some states where we saw a lot of immigration and a lot of strong home price appreciation, those were also states that had no income taxes. You know, for example, Nevada being one of them and Nevada is adjacent to California. And it had one of the strongest state level home price growth…you know, obviously at the CBSA level as well. But, you know, just this ability to work from home and set up residence somewhere else and not pay income taxes could’ve been an incentive for some people as well.
Elissa Branch: With the idea of people with more income, more disposable income moving to more rural areas or areas with lower cost of living or no state income tax, I can’t say that I blame them. I gotta say I…if I had the money and the opportunity to move into a nice house on…you know, in a mountain somewhere in Colorado, can’t say I would pass it up. So, I definitely see the appeal. I definitely see the appeal.
We talked about affordability a little bit earlier, but I kinda wanted to talk about it in respect to wage inequality and wages and income. So according to CoreLogic’s data, 59% of consumers looking to purchase a home reported a combined household earning of at least six figures. We compare that to 10% looking to purchase who earn less than $50,000. If affordability has become this very prominent concern for low to moderate income potential buyers, what do these numbers tell us about their actual buying potential? And also, kind of in that same vein, what impact do you think that investor-buying activity has on affordability?
Selma Hepp: Sure. So yeah. I mean, affordability’s a very interesting debate because, you know, a lot of numbers get masked in the national aggregates and there’s so much difference in between first-time home buyers and move-up buyers because again remember, how much home appreciation has helped move-up buyers have more equity in their homes. So being able to…you know, so not having the same level affordability challenge as first-time buyers. But, you know, based on the figures you mentioned here, it tells us that only really 1 in 10 buyers can actually purchase a home. Well, this is just, you know…and this is just among those who are actually looking for purchase. I mean, think about how many people just don’t even bother to look because, you know, the income is not sufficient in their local market to even compete. So, you know, so it’s really challenging for those folks to buy a home.
But the other thing that’s important is again this question of accumulated equity and having enough for a down payment. So, you know, with first time buyers, they’ve had much harder challenge with this accelerated home prices to come up with that 20% down payment because, you know, mortgage rates have helped mortgage payment stay steady, but new buyers coming into the market now have to come up with a larger chunk of cash. You know, and for some folks, that’s very challenging, you know. Particularly if you’re making…if your household makes less than $50,000 combined income, that’s incredibly, you know, difficult. But again, affordability, as I mentioned, gets so masked in national aggregates because there are markets in the country that are affordable. You know, there are areas in Midwest, in the south where you can actually buy a $200,000 home, even a new home potentially. And, you know, the $50,000 is enough. So, you know, affordability really is a challenge in these coastal markets, in undersupplied markets, in markets where there’s been maybe much stronger income inequality dispersion that we’ve had. And so, folks that are competing in those markets have a much harder time getting in.
And again, like you mentioned, this gets even more…becomes even more challenging when investor buyers come in. Because in our recent data, we’ve sort of been tracking investor buyers and, you know, anecdotally, you know, everybody’s been talking so much more. Investor buyers are coming in since beginning of this year, and we are actually now seeing that in the data.
And these investor buyers are generally competing with entry-level buyers as well, so…you know, and they’re coming in with cash and they’re maybe oftentimes willing to waive any inspections. And that can be very dangerous for young buyers, you know. They don’t necessarily wanna waive the inspection because if something goes wrong and they don’t have that, you know, savings to fix the house, it’s just really a challenge. You know, so investor buyers can create a very difficult situation for first-time buyers.
Yeah, again, this affordability is very much…it’s not the same type of question depending on income level and depending on whether you’re a first-time buyer or a move-up buyer.
Elissa Branch: So, we’ve spent some time talking about 2021’s report and numbers, but the report also puts a pretty big emphasis on forecasted market numbers. It indicates that home prices will increase 0.3% month over month from August this year to September. And then 2.2% year over year from August 2021 to August 2022. So, with these numbers in mind, I’m curious on what you think it would take within the next year, within the next couple of months to see a real slowdown or a return to semi-normalcy.
Selma Hepp: Right. So, you know, what’s really important now with this anxiety around how much home price growth we’ve seen, that the return is…you know, it’s a gradual return so that we don’t see a sudden drop because, you know, that would just send people into a panic and that never ends well. But I think we are already seeing some signs of, what I would call, buyer fatigue, whether that’s because, you know, they’re reaching their affordability ceilings, you know, this is as much as they can afford and they can’t find anything else in that price range, or it’s a fatigue from facing the competition, you know, and just having put so many offers out there and not getting it, you know, just being sort of like, “I’m gonna wait this out, you know.” So, it could be a combination of both.
But, you know, affordability is a real issue for many buyers, and they do end up eventually stepping away from buying a home as home prices continue to rise. So, you know, as these home buyers step away, that takes away some pressure from home prices and immediately if you have fewer buyers bidding for a home, then the bidding price over the asking price…because this is another thing that came out as a result of this, is that a lot of homes are selling above the asking price. I think 7 in 10 homes were selling over the asking price. So that becomes less of an issue and fewer homes are selling over the asking price.
You know, so that’s one step in that right direction of slowing down or returning to some level of normalcy. The other is mortgage rates. You know, when mortgage rates increase, that can cause buyers to pause and, you know, even just completely leave the market. And we’ve seen some increase in mortgage rates last…ever since July, I think mortgage rates have been steadily kind of going up, or over the last few weeks. I’m trying to think. I know the release last week was for highest rates since July, but then today I think Freddie Mac came with…down a little bit on below 3% again. So, but, you know, on average, the forecast is for about 3.4% through 2022. You know, and that’s favorable and it’s still, you know, in historical terms, a very affordable rate. I mean, particularly comparing to, you know, say in the midst of the great recession it was 4.5% rates. So, this is, you know, almost a percentage point and a half now still lower.
So, but I think as rates go up that…you know, as I said, that does make some buyers step away. We are also…the third thing is we’re also expecting more inventory. You know, I know we’ve been expecting it for a while now, but, you know, since the lows in winter of this year, like, in, you know, February, March and then coming into the spring…you know, on a month-to-month basis we’ve seen some increases and that has helped. Unfortunately, we had more buyers than new homes on the market. But, you know, I think, you know, now going into winter, you know, that’s not gonna be so much of a favorable contributor, but in the spring of next year I think we are likely to see much more listings, new listings on the market and that will also help take pressure off of the home price acceleration.
And then the other thing is, you know, some people will…who are exiting forbearance right now. So, three in four borrowers in forbearance plans are due to expire over the next few months. And so, you know, with all the equity they have generated in their home, they could decide to sell their home instead of, you know, going through some type of modification or whatever the case may be. Hopefully, maybe to void a foreclosure as well.
So, you know, so I think longer term, all these things will contribute. You know, as you said, our forecast for home price appreciation in August of next year is only 2%. So that’s, you know, significant deceleration from 18% growth that we’re seeing today. So, you know, I think slowly all these things are gonna come together and bring this appreciation down.
Elissa Branch: I wanna ask a follow-up question to that in that same vein. Mortgage rates, they’re back down to 2.99% according to Freddie Mac and, like, buyer fatigue and all that stuff. So, with that only 2% forecast for next year, do you think we’re already over, like, the hump, so to speak? Like, we’re already on the return or do you foresee there being more hurdles in the road? Like, how do you think that’s gonna go down over the next year with that forecast?
Selma Hepp: Yeah. So, we do think we are at the peak of home price acceleration. So, what that means is each month, since the onset of the pandemic, home prices were growing at a faster pace. Looking over next few months, we will see slower, so less than 18%, you know. And so, it goes down 17, 16, 15 and so forth until we reach that 2% in August of this year. So, I think we are at that peak right now.
Elissa Branch: Interesting. Yeah. Well, Selma, is there anything else you’d like to say about the report, CoreLogic, or the market in general, or is there anything you and your team wanna plug?
Selma Hepp: Well, let’s see. I mean, there’s so many things. Because we have so many data, we can talk all day long about, you know, what our data is showing. But, you know, I think we covered quite a bit. I mean, I could talk more, but it depends on how much time you…you know, I think in terms of home prices, this is probably the, you know, most important part of it.
Elissa Branch: And I just wanted to mention that we are going to put this report on the HousingWire article. We will link it so if you guys want to take a look for yourself, that is where it’ll be. And that report has some great information. CoreLogic has some great info and research on their website, so be sure to check that out. And Selma, thank you so much for coming on the show. It was wonderful talking to you today.
Selma Hepp: Thank you so much. Thank you for having me. It was such a pleasure talking to you as well.
Elissa Branch: Of course. Listeners, if you guys liked this episode and the content that we put out, please feel free to leave us a rating or a review on whatever platform you listen on. Thank you for listening and be sure to tune in tomorrow for more “HousingWire Daily”.