During the recent Q4 WFG Insights: Quarterly Economic Outlook webinar, WFG National Title Insurance Company Executive Chairman and Founder Patrick F. Stone discussed the current and projected states of the housing market and U.S. economy, and answered pre-submitted questions from the nearly 1,000 registered attendees. He also provided suggestions for weathering the current market down cycle. The following is a compilation of his thoughts and critical observations on the U.S. economy and various aspects of our industry.
On Consumer Confidence and Sentiment Regarding the Nation’s Economy
When asked about his thoughts on our nation’s economy, Stone singled out widespread uncertainty as one of the most significant issues impacting consumer confidence and sentiment.
“In my lifetime, I don't ever recall seeing an environment in which we've had the level of uncertainty we have right now,” Stone said. “That includes inflation, the economy, housing affordability, geopolitical issues, the global economy, the pandemic, and uncertainty around the Ukraine war, including how crazy it could potentially get. So, there's a tremendous amount of uncertainty, and it's reflected in consumer sentiment.”
“There are two measures of how consumers feel about things: consumer confidence and consumer sentiment. Consumer confidence is about a 12-month measure. It's kind of like, ‘how are you doing right now?’ You're going to spend money on Christmas, so forth, and so on. And that is high. That's actually very positive. Consumer sentiment has recovered a little bit, but it is still below where it was during the Great Recession. As a country right now, our long-term outlook is more negative than it was during the Great Recession, which is sort of hard to believe, but a direct reflection of that level of uncertainty.”
The Impact of Rental Rates and Transitory Factors on Inflation
On the subject of inflation, Stone called out rental rates and transitory factors, such as the removal of an entire economic sector during the pandemic, as areas of significant impact.
“The Fed has been berated a lot for using the word transitory, but a lot of the factors that contributed to inflation were transitory in the sense that we had a pandemic that effectively removed one part of the economy, the services segment,” Stone said. “People couldn't go out, couldn't eat out, couldn't go to movies, couldn't do a lot of different things, and they also had the stimulus, so they spent more money on goods. And the constrained supply chain exacerbated the problem by making goods more and more expensive. That should have been transitory. I think if we hadn't had the Ukraine war, that would've corrected along with the supply chain easing. Goldman Sachs says that the supply chain constrained goods. That factor will be nonexistent in 2023. The supply chain is loosening up very nicely.”
“Both The Consumer Price Index and Personal Consumption Expenditures numbers are directly and significantly impacted by apartment rents and imputed rents of houses,” Stone said. “Those numbers are usually five to six months in arrears of what's actually going on in the market, and the rate of increase in apartment rents has been dropping fairly dramatically now for a while. So, I think you'll start seeing major downturns in the inflation indexes in Q1.”
On a Potential Housing Market Crash
When asked if he believes we are heading for a housing market crash, Stone said no, citing supply and demand, low credit risk, and record equity as the primary market drivers.
“A subject that you hear about constantly in the media is whether or not home prices are going to crash and, if so, how much will they come down. The price of a home is really a function of supply and demand, like a lot of different economic-driven prices,” Stone said. “And yes, demand has dropped dramatically because of affordability, but if you look at supply, listings right now are half of what they were in 2016. Listings have dropped dramatically also because people do not need to sell. There's no foreclosure wave. There's no stress that's causing people to have to dump their homes. There's no product or credit risk in the system like there was prior to the Great Recession. Prior to the Great Recession, we had been making junk loans for a couple of years. Remember stated income loans? All you had to do was be able to walk and talk and you could get a mortgage. Whether you actually had a job or not was sort of irrelevant. Of course, Wall Street then securitized all the garbage, and then it crashed and brought the whole thing down.”
On Record Home Equity and Low Credit Risk
“We have a very equity-rich environment right now. If you look around at homeowner equity nationwide, I'm talking about homes that have over 50 percent equity to the values,” Stone said. “In other words, the loans against the mortgages or even second mortgages don't total 50 percent of the value of the home. In the West, 50 percent of all homes are equity-rich. In California, it’s 63.1 percent, in Washington it’s 63.2 percent, and in Arizona it’s 64.8 percent. In the East, Tennessee is at 56 percent, New York is 46.9 percent and Florida is 60.4 percent. On the low-end, Illinois is at 25.4 percent. So 25.4 percent of the homes in Illinois have over 50 percent equity. That's really ‘terrible,’ isn't it? Iowa is 29 percent, North Dakota is 29.56 percent. We have a tremendous amount of equity in homes. We also have no product or credit risk. The last four years, over two-thirds of all mortgages originated at a FICO score above 760. We are not going to have a surge of homes on the market because people are getting foreclosed on.”
On Investor Pull-back
During the Economic Outlook portion of the webinar, Stone mentioned that he’d recently been asked if he was worried that there would be a lot of homes dumped on the market by investors like OpenDoor and Zillow in response to their recent exodus from the market. He had this to say on the subject.
“In October, the number of investor-purchased homes was actually still higher than it was prior to the pandemic, even with everybody pulling out of it, so I don't see that being a big problem. I just don't see anything out there that's going to cause a crash in home prices. Were they going to come down a little bit? Yeah. And there are some markets where they are overpriced a little bit like Boise, maybe Austin and a couple other places, but I don't see them coming down dramatically. If I had to give you a guesstimate, maybe year-over-year by the end of the year, they might be slightly negative. They're still positive through October year-over-year. I think by the end of the year they'll still be positive, maybe down 3 to 6 percent at the end of this cycle. But again, not a real major issue.”
On Household Formation
Stone advised webinar attendees that he considers household formation to be a major driver of future housing demand. He is what he had to say on that subject.
“One of the things that's still going on at a high level is household formation. We have the second biggest population bubble in their thirties now. This is the second biggest population segment behind the Baby Boomers, and so household formation, where people need a place to live, be it a multi-family, apartment, or a single-family residence, is out there. There's a great deal of demand for places to live. When we recover from this cycle, you're going to see that demand manifests itself and people buying a lot of homes. I think one of the things that's also happened because of the pandemic, and it's hard to quantify this, is that the value of home ownership has gone through the roof. Everybody understands that they need to control their environment. Having a home is very critical to this. Finally, the GSEs have raised the size of mortgages that they will back. It’s now at $725,000 with about 13 markets in which they could go up as high as a million dollars.”
On Mortgage Interest Rates and Where They May be Heading
When asked where he believes mortgage interest rates are headed, Stone offered the following background and future projections.
“Historically, 30-year mortgages run one and a half to two points above the 10-year Treasury bill. If that was in place right now, you'd be looking at five to five and a half percent mortgage rates. Unfortunately, what's happened is that banks have had some impact to their balance sheet because of higher rates, so they're holding mortgage rates a little bit higher now. But, I do think that with the drop in the inflation indices, over the next four to six months you will see mortgage rates stay in the six to six and a quarter percent rate. I think by the end of Q2, mid-summer 2023, rates will be down between five and a half and six percent, down to five and a quarter to five and a half percent by the end of Q3 in September, and at five to five and a quarter percent by the end of the year. And in Q1 and throughout 2024 I think we finally break below five percent again.”
Do I think we'll get back down to three percent mortgages again? No, that's not going to happen. That was a phenomenon of an extended quantitative easing on the part of the Fed. They were buying mortgage-backed securities and treasury bills at about $120 billion a month for I think seven years. So that was really an artificial situation. And I think if we get mortgage rates down to five or slightly less than five, that's more than enough. So Q1 to Q2 of 2024, the market will dramatically improve, in my opinion. I think 2024 will be a good market for residential real estate and a good market for our industry.”
On the Potential for Disruption and Consolidation in the Title and Escrow Industry
Stone was asked whether he thinks disruption will play a big role in the title industry and also if he expects consolidation within the industry. Here’s what he had to say on this topic.
“The word ‘disruption’ emerged in the last four or five years because some new companies said they were disruptors in the industry,” Stone said. “Candidly, there's been very little change in the industry. What HAS happened is that technology has gotten better, access to the points of data has gotten easier, and that's created some efficiencies. People talk about AI transforming the industry. We've been able to use automated title for refi with the recent refi surge. But, candidly, I think we overuse it in some markets where the databases are based on OCR technology. Having said all that, I do think we are going to see some contraction in the industry. We're going to see some consolidation. We're going to see a dramatic drop in the number of Realtors. We're seeing a fairly significant drop in the number of mortgage lenders. We will see a drop in the number of title companies. And the companies that are proactive about adjusting their expenses to the current market will survive. Those that are not, won't. Are layoffs inevitable? Unfortunately, yes, they are. About 50 percent of our costs nationwide in this industry are personnel costs. If business drops in half, you can't afford to maintain the same level of staffing. You have to adjust to it and adjust to it quickly. Figure out a metric that allows you to maintain a profit. A metric of productivity based to files per employee. Figure it out and adjust to it. It is not your fault that you have to do this. It IS your fault if you don't do it. So let's get proactive about managing it, and I think we'll get through it okay.”
On the Potential for New Mortgage Offerings and Risky Loan Programs
When asked if he foresees new mortgage programs entering the market, including potentially risky loan programs, in order to get buyers into a property, Stone had this to say.
“I think we're all a little anxious on that subject because we saw what happened the last time we got crazy about mortgages and how they were constructed and whether there was any credibility to them, but we don't have the same problem this time and I don't see a lot of risky mortgages,” Stone said. “I don't see a lot of issues in which there's going to be garbage thrown out there. Lenders are still pretty careful. The ability to sell the loans is limited if you do anything too far outside the box. Having said that, I'm surprised we haven't seen more seller carryback financing yet. That's what kept us going in the early 80s when the S&L industry went under. Contract sales and seller carryback financing was the only way to finance a home. If mortgage rates stay high, we might see that emerge; but I don't see a lot of crazy loans coming to the forefront. There's just no tolerance for it, and people are still painfully aware of what goes on when you do that and what the downside is, so I don't see that happening.”
On Markets and Areas of Opportunity for Growth
Recognizing that the market is extremely tough right now, Stone was asked where he sees opportunities for growth and which segments and geographic markets he thinks will get hit the hardest during the downturn.
“I think, given the amount of equity that I detailed earlier, you certainly have to look at home equity loans as a potential growth area,” Stone said. “And, I think in the interim, you need to be smart about the fact that affordability is a major factor. So, I would look really hard at higher-end homes, and look at situations and markets in which people can and will pay cash. I do think we probably exhausted the pandemic-induced surge into certain places. However, if you looked long term, over the last 10 years, 687,000 people have moved from California to Texas. I don't know exactly what that tells you, but that's a pretty strong trend. And I think you will see some continuation of those kind of trends. So, long story short, look at the market and what is actually going to be viable. Home equity is going to be viable. Cash purchases are going to be viable. I do think some segments of the commercial market are going to be viable. But, it is a very uncertain market now until you get some decline in mortgage rates. The market is going to be different in different places. Really look at what's working in your market and see if you can adjust to it because it's different everywhere right now.”
On the Commercial Real Estate Market
Stone was also asked to provide his thoughts about the commercial real estate market; a segment which his company has focused strategically on growing in recent years.
“I personally have invested a lot in industrial property over the last 20 years, but industrial values have gotten a lot of attraction the last couple of years. Values have gone up and you’ve got to be a little bit more careful in that area now. I'm investing right now in a senior assisted living center, and I think Bill [Conerly] and I are probably evidence that senior assisted living has a potential upside going down the road.”
I’m worried a little bit about offices. If you look at offices right now in the US, they report vacancy rates of 14 to 16 percent across the country; but, if you look at occupancy rates, occupancy is running about 47 percent. So, in other words, offices are still half empty. People talk about returning to work and there's been some return to work mandates out there, but by and large, I question whether or not office occupancy and usage will return to the level it was prior to the pandemic. I do think that technology and social issues have caused us to reassess that and we may come at it a little bit differently. I do think shopping malls are probably in trouble. I think retail has a life, but it's going to have to be very well done and appealing, but people will shop retail. Storage has gone through the roof, and I think that's probably overbuilt a little bit. I may be wrong, but I think it is.”
“So, I think commercial is still attractive in a lot of areas, but investors should be really careful right now about what they do in this segment. Transaction volume is still pretty high and it's still a fairly significant factor in the market. This is partly because there's so many investment dollars looking for a place to live and a lot of investors have moved into commercial. REITs have done very, very well and I think that will continue to be the case. There'll be a lot of money moving into REITs.”
On What to Monitor to Determine Which Way the Market is Heading
When asked what he’ll be monitoring over time as an indication that the real estate market is either getting better and coming back or that things are getting worse, Stone offered the following commentary.
“That depends on what segment in the market you work in and where you're located, but by and large, just the activity level is a good indication of the market coming back,” Stone said. “We need to see interest rates come down and there'll be a surge in business because the demand is there. I don't think the demand or desirability of home ownership has changed. It's probably still as high or close to as high as it's ever been, so I think if you have affordability come back to a level where people can engage, you'll see the market take off. I guess affordability is probably the biggest issue to watch in combination with mortgage rates, and then the underlying economy and how it’s doing. I'm pretty optimistic again that that's going to happen relatively soon. In the next 12 to 18 months anyway. I do think you will see some segments of the market come back faster than other segments. Obviously, people with cash and the ability to buy with cash have a distinct advantage right now. And, again, I encourage everybody to take a hard look at home equity. I think that's going to be a really good market this coming year.”
On the Builder Market
On the subject of residential construction, Stone was asked whether builders should hold off on constructing new homes now or continue building, to which he offered the following insights.
“Building stopped for multiple reasons earlier this year. I think most builders were pretty optimistic before January. Then they got pretty nervous. Builders need to know a couple things. They need to know and have certitude about the cost of construction. And because the cost of materials have gone up and down, they haven't been able to have clarity about the cost of construction. That and the availability of labor has really created a lot of uncertainty about what it costs to construct a home. The other thing builders need to understand is when home will be able to be on the market and will there be a market for the home? The level of uncertainty has caused builders to be very, very cautious and really shut down a lot of construction this year. It dropped like a rock and new construction starts went down dramatically. Permits didn't go down anywhere near as much, but builders are sitting back and saying, ‘until I have certitude about the cost, when it gets to the market, and will there be a market there when the home is complete,’ they don't want to take the risk. They don't want to sit there and put a lot of money into the home and then have to carry it for a year or two. So, I think builders are going to be cautious until they have certitude about cost and certitude about the mortgage rates and the ability to actually sell the home. And you can't blame them for that. That makes a lot of sense. It’s just stupid to step out and take unnecessary risk unless you have some clarity about how it's going to end. So, I think they need to be cautious for a little bit longer.”
On What Companies Should Do to Best Position Themselves for Survival
In closing, Stone offered the following advice to real estate-related companies, including title companies, to improve both revenue and their overall positioning for the remainder of the current down cycle.
“I think 2024 will be a good market for residential real estate and a good market for our industry,” Stone said. “The challenge is getting through the next 12 to 18 months and remaining positive. People that are positive win. Don't be negative, even if you're conservative. People will want to be around you and will want to do business with you if you're positive.”
“If you're running a business, cut all the unnecessary costs. It's not your fault that the housing market stopped. It's not your fault that mortgage rates went up. It IS your responsibility to react proactively and decisively. Cut all unnecessary costs now, because you will have at least 12 months in which you're going to have to be conservative, maybe up to 18, or, if Bill's right, maybe a couple years. So, cut your costs now, assess your market and focus on the things that are working in your market that can help you obtain and do more business.”
“Also, Increase your activity level. In other words, increase your outreach. You've got to be out there talking to clients, and talking to them in a positive manner. Let them know you're going be here and that we’re all going to get through this. We’ll get through this by being focused on our business and doing a good job with customer service. I also think that you’ve got to be smart about your expenses. Get your expenses in line with your revenue. If you don't do that, you won't be here. So, you’ve got to do that.”
“Again, it's not your fault that the market went south. It's your responsibility to deal with it and deal with it proactively. Then, really work on connections. Go out there and try to build relationships and connections with people. Doing this will provide a good network to reinforce what's going on, as well as a good source for feedback. Don't isolate. Don't lock the door and shut down, because you want and need input from people. You want to know what's going on, and you will get input and ideas from people that'll be constructive and helpful. So, manage your business, manage your time, manage your life. We'll get through this and we'll get through this in a positive way and in a successful manner.”
To watch the full WFG Q4 “Quarterly Economic Outlook” webinar click here, or visit https://wfgtitle.com/news/
About Williston Financial Group®
Williston Financial Group® (WFG®) is the Portland, Oregon-based parent company of several national title insurance and settlement services, and technology providers, including WFG National Title Insurance Company, WFG Lender Services, Valutrust Solutions, LLC and MyHome, a Williston Financial Group Company. One of only six national underwriters, WFG achieved a national footprint faster than any title insurance provider in history. The WFG family of companies offers full-service title insurance and settlement services for use in residential and commercial mortgage and real estate transactions nationwide. For more information, visit www.wfgtitle.com.