The Growing Housing Affordability Problem


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 

 


Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew.

If you’ve listened to me at all over the past several years, you’ll know that I am pretty passionate about one subject: housing affordability. And, given the significant price growth that we’ve seen over the past decade, as well as the recent spike in mortgage rates, I wanted to talk a little bit about what might be done to address this very serious issue.

The Growing Housing Affordability Problem

Now, when we think about housing affordability and how it might be solved, a lot of people get tied up in the minutiae when, quite frankly, it really isn’t that hard a problem to solve. You see, there’s one very simple way to address this: to build more housing units. But, as easy as that may sound, there are a lot of obstacles that are holding new supply back. But before I get to that, I want to share some data with you that might help to demonstrate how serious an issue we all face.

Every quarter, the National Association of Homebuilders puts out its affordability numbers for metro areas across the country. An analysis of sales and incomes allows them to show the number of homes—both new and existing—sold in a quarter that were affordable to households making median income.

Housing is Increasingly Unaffordable

Here you will see numbers from just a few of the 240 metropolitan areas across the country and the share of sales in the first quarter of this year that were “technically” affordable. I think you’ll agree that it’s eye opening.

 

Although I am only showing you a few of the U.S. markets I will tell you that the ten least affordable US housing markets were all in California. The Golden State is also home to 21 of the top 25 least affordable markets in the country. But what you might also find interesting is that our primary cities aren’t the only ones that are suffering from affordability issues, with markets like Bend, Oregon; Boise, Idaho; and even Las Vegas, Nevada becoming increasingly unaffordable for a lot of households.

And it’s worth mentioning that that 48 of the 69 markets where less than half of the homes sold were affordable were in states that have at some point in the past implemented comprehensive planning and growth management legislation. And when governments mandate where homes can and cannot be built, one thing happens: it pushes land prices higher which makes new homes more expensive and limits the amount of new supply that builders are able to provide. So, what can be done?

Well, I will start out by saying that states who have implemented growth management plans, which they generally did to slow or stop suburban sprawl, remain disinclined to move these boundaries, and that means it becomes paramount to not look further out but to concentrate within the urban growth boundaries and decide whether it’s time to think about removing single-family zoning altogether.

This is a fascinating thought, but I must add that I am not suggesting that we do away with single-family homes. Absolutely not! What I am thinking about is the ability for a market to decide what makes the most sense. In order to do so, single-family zones need to allow for the development of denser housing, but also allow the market to decide what’s best. Areas that have implemented such change has given rise to a movement in order to address what is being referred to as “missing middle housing.” For those of you who are unfamiliar with this term let me try and explain.

Missing Middle Housing

A depiction of different housing types from Optico Design Inc. that illuminates the "missing middle" housing types that were common prior to World War II but are now far less common and, therefore, "missing". The housing types in the "missing middle" include duplexes, fourplexes, courtyard buildings, cottage corts, townhouses, medium-sized multiplexers, stacked triplexes, and live-work buildings. The housing types outside of the "missing middle" include detached single-family houses and mid-rise apartment buildings.

 

This is a great image courtesy of Opticos, a team of urban designers, architects, and strategists who are passionate about adding sorely needed housing options.

They came up with the term “missing middle” as it describes housing types that were actually very common prior to World War II where duplexes, row-homes, and courtyard apartments were in high demand. Unfortunately, however, they are now far less common and, therefore, “missing.”

And the key function of this type of housing is to meet the rising demand for walkable neighborhoods, respond to changing demographics, and provide housing at different price points. You see, rather than focusing on the number of units in a structure—think high rise apartments or condominiums—this type of housing emphasizes scale and heights that are appropriate for and sympathetic to single-family or transitional neighborhoods.

The Decline of Missing Middle Housing Construction

A bar chart showing the number of duplexes to 8-unit buildings built over roughly the past half-century dating back to 1974. The years 1974 through 2021 appear on the x-axis and the number of completed units built appears in thousands on the y-axis, ranging from 0 to 300. On the z-axis, the chart shows what percentage of total new homes completed the y-axis values for that year accounted for. The z-axis ranges from 0% to 18%. The highest values in the chart are 1974 and 1984, when roughly 250,000 units were completed, which was roughly 15% of the total new homes completed that year. The chart gradually declines from the mid-1980s to present day. Since 2007, there hasn't been a single year where over 50,000 units were completed.

 

And to show you how supply of these types of units has changed, this chart shows the number of duplexes to eight-unit buildings built over the past almost half-century and you can clearly see that up until the late 1980s they were being built in decent numbers, but the 1990s saw a significant shift toward traditional single-family home ownership and builders followed the demand and this type of product started to become scarcer.

Almost 16% of total new homes built in America in the early 1980s were of this style, but that number has now shrunk to just 1.4%—or a paltry 19,000 units.

But I see demand for these housing types growing as we move forward and that buyers or renters, young and old, will be attracted as it will meet their requirements not only in regards to the type of home they would want to live in but, more importantly, it can be built cheaper than traditional single-family housing and therefore it will be more affordable.

But although this sounds like it’s a remarkably simple solution that can solve all our woes, in reality it’s not that easy for two very specific reasons. The first is that many markets are already essentially built out, meaning that in order to develop this type of product, a builder would have to purchase a number of existing homes and raze them in order to rebuild. But given current home values, it’s very hard for a builder to be able to make such a proposal financially.

And the second issue is that current residents within these “transition” areas—which have been developed as traditional single-family neighborhood—simply don’t want to see change. But is this type of product bad? Here are some examples.

This shows row-homes in Brooklyn on the left and traditional “triple-deckers” in Massachusetts on the right:

A side-by-side look at two different types of East Coast building types: the horizontal Brooklyn Row-Homes and the more vertically constructed Massachusetts "Triple Deckers."

 

This is a bungalow court project in California:

 

An interconnected building of California "Bungalow Courts" with low-pitched roofs and small porches, all connected by a winding sidewalk.

 

Here are some Live/Work Units in Colorado:

 

A white live/work unit in Buena Vista, Colorado with a second-story patio built onto the right side of the building.

 

These are some amazing mews homes in Utah:

 

A community of Mews Homes in South Jordan, Utah painted white with arched windows and small eaves hanging above the doorsteps.

 

And finally, a new terrace housing project that will be built in Washington DC:

 

A drawing of Terrace Housing in Washington DC showing facades with many windows lined side-by-side on a city street.

 

Don’t get me wrong, I’m sure that some of you who simply aren’t inspired by this type of architecture, and that is understandable. But can we simply stick with the status-quo? I don’t think so. And some state legislators have already implemented significant zoning amendments in order to try and encourage this type of development.

Back in 2018, Minneapolis was the first city to allow this type of development inside single-family zoned areas. This was followed by Oregon State in 2019. Senate Bill 9 was signed by Governor Newsom of California last year which made it legal for property owners to subdivide lots into two parcels and turn single-family homes into duplexes, effectively legalizing fourplexes on land previously reserved for single-family homes. So, we are starting to see some change.

This is a good start but as I mentioned earlier in areas that are already built out, even this type of forward-thinking legislation will not be the panacea that some want. But I’m not giving up hope.

Addressing the “missing middle housing” would allow for homes of all shapes and sizes, for people of all incomes including workers who are essential to our economy and community. Here I am talking about our teachers, firefighters, administrative assistants, childcare providers, and nurses—just to name a few!

There are currently 45 million Americans aged between 25 and 34 and most aspire to homeownership. However, the massive price growth which, by the way, many of us have benefitted from over the past several years, has simply put a “starter home” out of their reach.

I will leave you with one last statistic. Over 28% of American households today are made up of a single people living alone, and it is anticipated that up to 85% of all U.S. households will not include children by the year 2025. Finally, by 2030, one in five Americans will be over the age of 65.

Are we going to meet the needs of the country’s changing demographic going forward? I certainly hope so, but it will take a lot of work for us to get there. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

Bye now.

The post The Growing Housing Affordability Problem appeared first on Windermere Real Estate.

Moving Patterns for U.S. Homeowners and Renters in 2021


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 


Hello there. I’m Windermere Real Estate’s Chief Economist Matthew Gardner and welcome to the latest episode of Monday with Matthew. Over the past few months, analysts like myself have been starting to get our hands on early numbers from the Census Bureau and, although we won’t get the bulk of the data for another several months, I thought it would be interesting to take a quick look at some of the information that the government has put out specifically as it relates to patterns.

This is a relevant topic given the pandemic, with many people wondering if we saw a mass shift in where we choose to live because of COVID-19. This belief that we packed up and moved because of the pandemic is, at face value, quite credible, especially given that home sales in 2021 were at levels we haven’t seen since 2006. But the reality, at least from the data we have received so far, actually tells a different story.

Moving Patterns for U.S. Homeowners and Renters in 2021

We Move More Infrequently

 

This first chart looks at people and not households and it shows that, contrary to popular belief,  we’re actually moving less frequently now then we have done in decades, with the share of people not moving in a single year rising from just about 84% to over 91½%. Of course, we are having fewer children now than we did, but not to the degree that would change the trend.

Unsurprisingly, Renters Move More Often than Owners

Two charts showing that on average, renters move more often than owners in the span of years between 2000 and 2021. Over this stretch of time, the percentage of renters staying put rose from 67.5% to 84%, while homeowners staying put rose from 90.9% to 95.1%.

 

And when we break this down between homeowners and renters there is quite the discrepancy between the two groups. Although the number of renters not moving has risen from 67½ percent up to 84% since 2000, the number of homeowners staying put has moved from almost 91% all the way up to 95% last year.

So, the data thus far is not suggesting that we saw any form of mass exodus following the pandemic, in fact we haven’t been moving as much for the past 2-decades, but people did move since COVID-19 hit and the reasons they did were fascinating. The following charts are broken up into four categories of movers: those who moved for family reasons; those who moved for employment related reasons; those that moved for housing related reasons; and finally, those that moved for other reasons.

Reasons to Move (1)

A chart showing the reasons why owners and renters moved. Moving due to a change in marital status was virtually the same, while more renters moved for things like getting a new job and moving closer to work. More owners moved due to retirement and because they lost their job.

 

So, starting with family-related reasons, it was not surprising to see the major reason for both owners and renters to move was to establish a new household, nor was it surprising to see a greater share of renters headed out on their own than homeowners. Finally, the share of those moving because of a change in marital status was essentially the same between renters and homeowners. And when we look at employment related reasons for people moving last year, a greater share of renters moved because of a new job than homeowners, and more renters moved to be closer to their workplaces than did homeowners. Again, not really surprising, given that a large share of renters work in service-based industries and therefore proximity to their workplaces is important. You will also see that a greater share of homeowners than renters moved because they lost their jobs and, finally—and not at all surprisingly—far more homeowners moved because they chose to retire than renters.

Reasons to Move (2)

A graph showing the housing-related reasons to move for both owners and renters. Noticeable differences include that more renters moved to find cheaper housing and to attend or leave college, while more owners moved for change of climate and health reasons.

 

And when we look at housing related reasons that people moved, a large share of owners and renters moved from their current home or apartment and into a new, bigger, better house or apartment. A statistically significant share looked to move into a better neighborhood, and I do wonder whether owners were doing this because of the ability to work from home and possibly move to a better location further away from their workplaces. And even though renters tend to stay closer to their workplaces, I wonder whether these renters weren’t in white-collar industries and that the ability to work from home has led them to move into an area that they perceive to be better suited to them.

And finally, a significant share of renters moved because of the fact that rents have been skyrocketing over the past 18-months or so. This clearly impacted some homeowners, too. And finally, under the “other” category, more renters than owners moved because they were either entering or exiting a relationship with a domestic partner, and more renters left to either go to college or because they had completed their degrees.

Health-related reasons for moving had a significant impact on homeowners over renters, and I found it particularly interesting to see a lot of owners saying that “climate” was a reason for their move. Of course, I can only hypothesize as to whether people are simply looking to move to warmer climates or whether climate change is starting to have an increasingly large influence on where we choose to live. My gut tells me that climate change is becoming a far more important consideration for homeowners, although we can’t deny that a lot of people, specifically on the East Coast, moved South during the pandemic.

These next few charts break down movers not just by whether they our owners or renters but also by ethnicity.

2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers

Six pie charts showing the non-moving and moving percentages for 2021 among populations of White, Black, and Asian owners (95.1%, 95.6%, and 95.7% respectively for non-movers and 4.9%, 4.4%, and 4.3% respectively for movers) and White, Black, and Asian renters (83.7%, 85.3%, and 84.9% for non-movers respectively, and 16.3%, 14.7%, and 15.1% for movers respectively.)

 

Here you can see that homeowners across these three ethnicities were pretty much uniform in their desire to stay in their existing home with only 4 to 5% moving. And renters who, as we have already seen, did move more frequently last year than homeowners, were also in a very tight range at between 83 and 85%.

2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers (2)

Six pie charts showing the non-moving and moving percentages for 2021 among populations of Hispanic, Mixed (White & Other), and Mixed (Black & Other) owners (94.8%, 95%, and 94.9% respectively for non-movers and 5.2%, 5%, and 5.1% respectively for movers) and Hispanic, Mixed (White & Other), and Mixed (Black & Other) renters (87.7%, 83.6%, and 85.2% for non-movers respectively, and 12.3%, 16.4%, and 14.8% for movers respectively.)

 

And the same can be said about Hispanic owners and mixed race families, with about 95% not moving last year. Now this is modestly lower than White, Black, or Asian households, but the difference is very marginal. As for renters, between 83 and almost 88% of them within these three ethnicities moved last year, but you will see a bigger share of Hispanic renters stayed put as opposed to all the other ethnicities shown here.

2021 Mobility by Ethnicity & Tenure: Moves In & Out of State

Six pie charts showing the percentages of staying in state vs moving out of state for 2021 among populations of White, Black, and Asian owners (82.1%, 81.8%, and 75.2% respectively for those who stayed in state and 17.9%, 18.2%, and 24.8% respectively for out-of-state movers) and White, Black, and Asian renters (82.6%, 81.4%, and 74.1% for those who stayed in state respectively, and 17.4%, 18.6%, and 25.9% for out-of-state movers respectively.)

 

Looking closer now at those who did move, even though fewer Asian households moved when compared to all other ethnicities, far more left the state than stayed, and the same was true for Asian renters with over a quarter moving out of state.

2021 Mobility by Ethnicity & Tenure: Moves In & Out of State (2)

Six pie charts showing the percentages of staying in state vs moving out of state for 2021 among populations of Hispanic, Mixed (White & Other), and Mixed (Black & Other) owners (86.6%, 81.9%, and 80.9% respectively for those who stayed in state and 13.4%, 18.1%, and 19.1% respectively for out-of-state movers) and Hispanic, Mixed (White & Other), and Mixed (Black & Other) renters (83.6%, 82.4%, and 81.1% for those who stayed in state respectively, and 16.4%, 17.6%, and 18.9% for out-of-state movers respectively.)

 

Again, a greater share of the Hispanic homeowners who did move last year stayed in the state where their old house was, and the share of mixed households was roughly at the average for all ethnicities. And the share of Hispanic and mixed-race renters who stayed in State was also about average.

What I see from the data is that the huge shift that many expected during COVID has not been affirmed—at least not by the numbers we have looked at. That said, we are sure to see numerous revisions because of the issues that COVID 19 has posed on Census takers, so we may get a different story as more data is released and revisions posted. What I found to be most interesting in the numbers we have looked at was the massive increase in renters moving in with their “significant others.” But I am not surprised, given that there are around 48½ million people aged between 20 and 30, and this is their time!

And I was also interested in the share of the population who moved due to climate. I will be doing some more digging around in the darkest recesses of the Census Bureau website to see if I can find out more about this. Although I can’t confirm it, my gut tells me that climate—and specifically climate change—will be a factor of growing importance when people are thinking about where they want to live.

And there you have it. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

Bye now.

The post Moving Patterns for U.S. Homeowners and Renters in 2021 appeared first on Windermere Real Estate.

The Current State of the U.S. Housing Market


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 


Hello there, I’m Windermere’s Chief Economist Matthew Gardner, and welcome to this month’s episode of Monday with Matthew. With home prices continuing to defy gravity, mortgage rates spiking, the Fed raising interest rates significantly, a yield curve that is just keeping its nose above water, and some becoming vocal about the possibility that we are going to enter a recession sooner rather than later, it’s not at all surprising that many of you have been asking me whether the housing market is going to pull back significantly, and a few of you have asked whether we aren’t in some sort of “bubble” again.

Because this topic appears to be giving many of you heartburn, I decided that it’s a good time to reflect on where the housing market is today and give you my thoughts on the impact of rising mortgage rates on what has been an historically hot market.

The Current State of the U.S. Housing Market

Home Sale Prices

 

As usual, a little perspective. Between 1990 and the pre-bubble peak in 2006, home prices rose by 142%, which was a pretty impressive annual increase of 5.6% over a 16 1/2-year period. When the market crashed, prices dropped by 33%, but from the 2012 low to today, prices have risen by 131%, or at an even faster annual rate of 8.6% over a shorter period of time—10 years.

You may think that prices rising at an annual rate that exceeds the pace seen before the market crash is what has some brokers and home buyers concerned, but that really isn’t what has many people scared. It’s this.

Mortgage Rates in 2022

A slide titled "Mortgage Rates in 2022" showing the increase in 30-year fixed conforming mortgage rates between December 30, 2021 (3.11%) and April 14, 2022 (5%).

 

At the start of 2022, the average 30-year fixed mortgage rate was just a little above 3%. But, over a brief 15-week period, they have skyrocketed to 5%. This has led some to worry that the market is about to implode. Of course, nobody can say that the run-up in home prices hasn’t been phenomenal over the past few years, and it’s certainly human nature to think that “what goes up, must come down,” but is there really any reason to panic? I think not, and to explain my reasoning, let’s look back in time to periods when rates rose significantly and see how increasing mortgage rates impacted the marketplace.

Housing and Mortgage Markets During Times of Rising Rates

A slide titled "Housing & Mortgage Markets During Times of Rising Rates." Two extreme statistics are as follow: Between June 2005 and July 2006 there was a negative 32.3% change in housing starts and between October 1993 and December 1994 there was a negative 12.7% change in home sales.

 

This table shows seven periods over the past 30 years when mortgage rates rose significantly. On average, rates trended higher for just over a year before pulling back, and the average increase was 1.4%. But now look at how it impacted home prices: it really didn’t. On average, during these periods of rising financing costs, home prices still rose by just over 5%.  Clearly, not what some might have expected. But there were some negatives from mortgage rates trending higher, and these came in the form of lower sales in all but one period and new housing starts also pulled back.

So, if history is any indicator, the impact of the current jump in mortgage rates is likely to be seen in the form of lower transactions rather than lower prices. And this makes sense. Although rising financing costs puts additional pressure on housing affordability, what people don’t appear to think about is that mortgage rates actually tend to rise during periods of economic prosperity. And what does a flourishing economy bring? That’s right. Rising wages. Increasing incomes can certainly offset at least some of the impacts of rising mortgage rates.

Static Equilibrium Analysis – 1/3

A slide titled "Static Equilibrium Analysis" showing that the P&I payment would be $1,365 for a $357,300 home with a 4% mortgage rate, using the February 2022 U.S. median sale price. This assumes the buyer has put down 20% on the home.

 

To try and explain this, I’m using the median US sale price in February of this year, assuming a 20% down payment and the mortgage rate of 4%. And you can see that the monthly P&I payment would be $1,365. But as mortgage rates rise, and if buyers wanted to keep the same monthly payment, then they would have to buy a cheaper home. Using a rate of 5%, a buyer could afford a home that was 9% cheaper if they wanted to keep the payment the same as it would have been if rates were still at 4%.

But, as I mentioned earlier, an expanding economy brings higher wages, and this is being felt today more than usual, given the worker shortage that exists and businesses having to raise compensation. Average weekly wages have risen by over five-and-a-half percent over the past year—well above the pre-pandemic average of two-and-a-half percent. Although increasing incomes would not totally offset rising mortgage rates, it does have an impact.

Static Equilibrium Analysis – 2/3

A slide titled "Static Equilibrium Analysis" showing what home buyers would be able to afford at different mortgage rates, using the U.S. average household income of $70,611, assuming they've put 20% of their gross income down for the down payment. At 4%, they could afford a home just under $360,000 and at 5%, they could afford a home at $321,038.

 

To demonstrate this, let’s use the U.S. average household income of $70,611.  Assuming that they’ve put aside 20% of their gross income for a down payment, they could afford a home priced just under $360,000 if mortgage rates were at 4%. As rates rise—and assuming that their income doesn’t—their buying power is reduced by over 10%, or just over $38,000.

Static Equilibrium Analysis – 3/3

A follow up to the "Static Equilibrium Analysis" slide showing that if the average income were raised to $74,848, the buyer would be able to afford a home of $340,302 at a 5% mortgage rate.

 

But if we believe that incomes will rise, then the picture looks very different. Assuming wages rise by 6%, their buying power drops by just 5% if rates rose from 4% to 5%, or a bit less than $19,000.

Although rates have risen dramatically in a short period, because they started from an historic low, the overall impacts are not yet very significant. If history is any indicator, mortgage rates increasing are likely to have a more significant impact on sales, but a far smaller impact on prices.

But there are other factors that come into play, too. Here I’m talking about demand. The only time since 1968 that home prices have dropped on an annualized basis was in 2007 through 2009 and in 2011, and this was due to a massive increase in the supply of homes for sale. When supply exceeds demand, prices drop.

So, how is it different this time around? Well, we know that the supply glut that we saw starting to build in mid-2006 was mainly not just because households were getting mortgages that, quite frankly, they should never have gotten in the first place, but a very large share held adjustable rate mortgages which, when the fixed interest rate floated, they found themselves faced with payments that they could not afford. Many homeowners either listed their homes for sale or simply walked away.

Although it’s true that over the past two or so months more buyers have started taking ARMs as rates rose, it’s not only a far smaller share than we saw before the bubble burst, but down payments and credit quality remained far higher than we saw back then.

So, if we aren’t faced with a surge of inventory, I simply don’t see any reason why the market will see prices pull back significantly. But even if we do see listing activity increase, I still anticipate that there will be more than enough demand from would-be buyers. I say this for several reasons, the first of which is inflation.

What a lot of people aren’t talking about is the proven fact that owning real estate is a significant hedge against rising inflation. You see, most buyers have a mortgage, and a vast majority use fixed-rate financing. This is the hedge because even as consumer prices are rising, a homeowner’s monthly payments aren’t.  They remain static and, more than that, their monthly payments actually become lower over time as the value of the dollar diminishes. Simply put, the value of a dollar in—let’s say 2025—will be lower than the value of a dollar today.

But this isn’t the only reason that inflation can actually stimulate the housing market. Home prices historically have grown at a faster pace than inflation.

Hedge Against Inflation

A slide titled "Hedge Against Inflation" showing a line graph of the average annual inflation and change in median home price from 1969 to 2021. While the average annual inflation fluctuates between 1% and 5% for most of the chart except for the mid-70s and early-80s, the change in median home price fluctuates between 25% in the late-70s to roughly negative 12% in 2009.

 

This chart looks at the annual change in total CPI going back to 1969. Now let’s overlay the annual change in median U.S. home prices over the same time period. Other than when home prices crashed with the bursting of the housing bubble, for more than fifty years home price growth has outpaced inflation. And this means we are offsetting high consumer prices because home values are increasing at an even faster rate.

But inflation has additional impacts on buyers. Now I’m talking about savings. As we all know, the interest paid on savings today is pretty abysmal. In fact, the best money market accounts I could find were offering interest rates between 0.5% and 0.7%. And given that this is significantly below the rate of inflation, it means that dollars saved continue to be worth less and less over time while inflation remains hot.

Now, rather than watching their money drop in value because of rising prices, it’s natural that households would look to put their cash to work by investing in assets where the return is above the rate of inflation—meaning that their money is no longer losing value—and where better place to put it than into a home.

Housing as a Hedge Against Inflation

A slide titled "Housing as a Hedge Against Inflation" showing that most home buyers finance their purchase at a fixed-rate of interest, which is not susceptible to inflation. Mortgage payments are fixed, therefore as incomes rise, the payments actually become cheaper.

 

So, the bottom line here is that inflation supports demand from home buyers because:

  1. Most are borrowing at a fixed rate that will not be impacted by rising inflation
  2. Monthly payments are fixed, and these payments going forward become lower as incomes rise, unlike renters out there who continue to see their monthly housing costs increase
  3. With inflation at a level not seen since the early 1980s, borrowers facing 5% mortgage rates are still getting an amazing deal. In fact, by my calculations, mortgage rates would have to break above 7% to significantly slow demand, which I find highly unlikely, and
  4. If history holds true, home price appreciation will continue to outpace inflation

Demand appears to still be robust, and supply remains anemic. Although off the all-time low inventory levels we saw in January, the number of homes for sale in March was the lowest of any March since record keeping began in the early 1980’s.

But even though I’m not worried about the impact of rates rising on the market in general, I do worry about first-time buyers. These are households who have never seen mortgage rates above 5% and they just don’t know how to deal with it! Remember that the last time the 30-year fixed averaged more than 5% for a month was back in March of 2010!

And given the fact that these young would-be home buyers have not benefited from rising home prices as existing homeowners have, as well as the fact that they are faced with soaring rents, making it harder for them to save up for a down payment on their first home, many are in a rather tight spot and it’s likely that rising rates will lower their share of the market.

So, the bottom line as far as I am concerned is that mortgage rates normalizing should not lead you to feel any sort of panic, and that current rates are highly unlikely to be the cause of a market correction.

And I will leave you with this one thought. If you agree with me that a systemic drop in home prices has to be caused by a significant increase in supply, and that buyers who are currently taking out adjustable-rate mortgages are more qualified, and therefore able to manage to refinance their homes when rates do revert at some point in the future, then what will cause listings to rise to a point that can negatively impact prices?

It’s true that a significant increase in new home development might cause this, but that is unlikely. And as far as existing owners are concerned, I worry far more about a prolonged lack of inventory. I say this for one very simple reason and that is because a vast majority off homeowners either purchased when mortgage rates were at or near their historic lows, or they refinanced their current homes when rates dropped.

And this could be the biggest problem for the market. Even if rates don’t rise at all from current levels, I question how many owners would think about selling if they were to lose the historically low mortgage rates that they have locked into. It is quite possible that for this one reason, we may experience a tight housing market for several more years.

As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

Bye now.

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Blockchain Technology and Cryptocurrencies in Real Estate


This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 


 

 


Hello there, I’m Windermere Real Estate’s chief economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew. This month we’re going to take a look at Blockchain technology and cryptocurrencies themselves and how both may impact home buyers and sellers in the future.

But before we dive into the potential impacts of cryptocurrency on the residential housing market, I must preface this by saying that the very word “crypto” is one that certainly divides people. Some see it as revolutionary, a tangible asset that will take over one day as the de-facto global currency, while others believe it to be unsustainable and ultimately valueless. And there are even some who firmly believe that it’s nothing more than a Ponzi scheme.

Now, everyone is certainly entitled to their opinion, and I will refrain from offering my own view on the currencies themselves, but, although still in its infancy, it continues to evolve and is garnering significant interest from individuals and large corporations alike.

Why are corporations interested, you ask? Well, a recent report from Crypto.com1 put the number of people around the globe who own some form of cryptocurrency at more than 295 million and they are forecasting this number to explode this year and hit the 1 billion mark! And the value of all these currencies today? As of March 14, the combined value of all cryptocurrencies was 1.74 trillion dollars2 with the largest, Bitcoin, valued at almost 740 billion dollars. So, it should not be a surprise to see many mainstream companies across multiple industry sectors start to introduce ways to accept crypto as payment for goods and services.

Companies moving into this space include AMC movie Theaters3 who recently announced their plan to accept coins by the end of this year. Fintech companies like Paypal and Square are also betting on crypto by allowing users to buy currency on their platforms. And, unsurprising to most, Tesla is also interested, but have yet to confirm whether they will accept coins as payment for their vehicles or not.

With cryptocurrencies now gaining traction in mainstream businesses, the housing sector has started to take an interest too with the emergence of companies like Propy, whose goal is to totally automate the home sales process by introducing Blockchain based technology to allow transactions to occur entirely online using smart contracts. Other companies are figuring out how to use blockchain technology to grow the “fractional-ownership” segment of the housing market.

But when it comes to simply buying a house—well that is an entirely different situation. Of course, a home buyer could easily cash out the Crypto they have and use those funds for a down payment, or even to buy a house outright. But we don’t see more of this today as they understand selling their currency is a taxable event and, more than likely, taxes owed will hit their balance sheets pretty hard. And knowing that this is a real issue in the market, it should come as no surprise that a company has come up with a plan to overcome what is seen as one of the biggest obstacles to using digital currency for home buying.

Blockchain Technology and Cryptocurrencies in Real Estate

 

And they are Milo, who claim to offer the world’s first “crypto-mortgage”. Essentially, they will allow borrowers to use Bitcoin—but only Bitcoin as of right now—as collateral for a 30-year mortgage.

How this works is pretty simple. All buyers have to do is to “pledge” their coins on a one-for-one basis. Simply put, someone looking for a $500,000 mortgage would have to put up $500,000 worth of Bitcoin. This way, they don’t actually have to sell their coins, so there are no tax implications. And instead of going through a FICO credit check and showing proof of income to evaluate a borrower’s creditworthiness, Milo evaluates them based on their crypto wealth as well as the value of the property they are hoping to buy.

And in exchange for locking up their crypto, borrowers get a 30-year mortgage for their home purchase can also make their mortgage payments via traditional currency or Bitcoin. But there are differences between this and a traditional mortgage. First off is the interest rate. It currently ranges anywhere from 5 to 8% depending on the loan-to-value ratio. This is higher than the rate they could get today.

And the interest rate is not fixed, but variable, and based on the prevailing price of Bitcoin. The rate can go up or down depending on the value of the Bitcoin they have pledged, and this mortgage rate will be adjusted every year. Interestingly, if the price of Bitcoin goes up, borrowers can actually take back some of their crypto once a year. If the price of Bitcoin goes down, they may be asked to provide more crypto as collateral.

And finally, when the buyer sells, on closing Milo is paid back in U.S. dollars, and then the seller gets the Bitcoins they used for collateral back, along with the profit made on the sale.

I think that this is certainly an interesting play in the ownership housing sector and, although still in its infancy, looks to meet the needs of crypto owners who don’t want to face the tax obligation that would occur if they were to sell their coins to buy a home. Now, I must make clear that Windermere is certainly not endorsing Milo. In fact, I personally have concerns about the program given how volatile cryptocurrencies are.

You see, it is possible that users may be caught out by the value of their Bitcoin dropping significantly and, if this occurs at or around their anniversary date, it could significantly raise the interest rate—and therefore the monthly payment—on that loan, and if the price drops too far, then they may have to go through what is, in essence, a margin call, where they will have to submit more funds to the lender to bring them back to a point where equity in the home combined with the value of the Bitcoin covers the loan itself.

And I would add that if for some reason the buyer has to sell the home within the first three years4 of purchase there are pre-payment penalties that will be incurred. All in all, it is an interesting model, but it is still in its infancy. As always, time will tell how well it gets adopted.

The bottom line for me is that the likelihood of Cryptocurrency revolutionizing the way we buy homes from a finance perspective is still several years away, but after that, who knows! Something that does have the capacity to be adopted into the mainstream far quicker is the blockchain technology itself. I personally see title insurance as a segment that could benefit significantly and may well adopt this tech sooner than others.

With title insurance companies responsible for verifying and ensuring that a buyer or lender (depending on the type of title insurance) gets either clean ownership or a lien position in the land in question, Blockchain could change many aspects of how these processes are carried out. Here are some of the benefits:

The Potential Benefits of Blockchain Technology in Real Estate

A slide showing the benefits of Blockchain technology in real estate transactions, namely added security.

 

Security. More than 25 percent of title reports (alta.org) detail some form of defect to the title itself, but the ability of blockchain to immediately detect erroneous or potentially fraudulent information can significantly help to support the reliability of the records, therefore making the job of title insurance companies much more straightforward.

 

A slide showing the benefits of Blockchain technology in real estate, smart contracts, for example.

 

And then there’s smart contracts, which are actually a form of e-closing that is already beginning to be embraced by some in the industry. This technology makes the transfer of ownership almost seamless. Literally, it would take just a few clicks of a mouse. And this is also a massive benefit for the industry as the closing process would also change dramatically and become far more effortless and less time consuming than today’s standard means of closing on a home purchase.

 

A slide showing the benefits of Blockchain technology in real estate, improved record-keeping included.

 

And finally, record-keeping. While fraud and tampering are huge concerns for title companies, blockchain could all but eliminate these instances within ownership records. And, as it would convert land records to a distributed ledger, it cannot be altered within the blockchain itself, therefore making it safe in perpetuity. Blockchain, by design, prevents bad information from disrupting the chain and any attempt to tamper with it can be easily detected and therefore avoided. This is a massive upgrade from the county ledger that title insurance companies find themselves working with today.

No one can deny that Blockchain and cryptocurrencies, while still relatively new, do not appear to be just a flash in the pan. As we have discussed today, a number of companies continue to make inroads into the real estate world. Will some fail? Of course. But others will succeed. So, while still in its infancy, we should all have some sort of understanding of its potential to be a disruptor in the housing space in the future.

It’s my own personal belief that the Blockchain tech itself will be the thing that gets adopted by the real estate world faster than the rise of crypto as a way to buy or finance a home but, whatever your thoughts on this topic are, I think that it is highly unlikely that we will see it simply fade away over time.

As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month. Bye now.

 

References:

  1. https://crypto.com/
  2. https://coinmarketcap.com/
  3. https://www.reuters.com/
  4. https://help.milocredit.com/

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