Title Insurance Industry Veteran Patrick Stone Offers Critical Observations, Predictions, and Strategic Advice During WFG’s Q3 Economic Outlook Webinar

Since its introduction in 2020, WFG’s Quarterly Economic Outlook webinar series has gained significant traction as a vehicle to connect and communicate with title insurance and settlement services professionals. More than 1,500 industry professionals registered for the company’s recent Q3 2023 webinar, including real estate agents and brokers, title agents, and mortgage lenders, nationwide.

Participants had the opportunity to submit questions during registration, which WFG Founder and Chairman Patrick Stone and fellow presenter Bill Conerly, Ph.D. answered live during the second half of the hour-long webinar. Topics addressed during the webinar included mortgage interest rate and real estate inventory expectations, commercial real estate trends, the foreclosure outlook, and Fannie Mae’s consideration and acceptance of alternative title insurance products. Stone also shared his thoughts about what it takes for title agencies to not only survive but thrive in this challenging market. 

The following is a summary of the key observations and predictions Stone expressed during his portion of WFG’s 3rd Quarter Economic Outlook webinar.

WFG Chairman and Founder Patrick Stone’s Opening Commentary Summary

• Agree with the prediction of a minor recession in the first half of the year, primarily caused by a global economic slowdown.

• The global economy, significantly influenced by US corporations, has more than doubled since 2000, benefiting US economic health.

• The global economic slowdown, especially a deflationary environment in China, will impact the US and contribute to a short, minor recession.

• Unanticipated factors like the banking crisis, debt ceiling debacle, Russia-Ukraine war, and the uncertainty around government funding at the end of September have influenced current economic conditions.

• Despite the current state of the banking industry and media-created crisis, overall banking health remains strong.

• Interest rates haven't dropped due to anxieties resulting from the mentioned factors and the fear of the government not getting funding at the end of September.

• The government's rising debt, currently at $31.7 trillion – a 10x increase over the last 30 years, raises concerns.

• Despite the economic concerns, there remains optimism due to significant disposable income and prospective developments in the real estate sector.

• Real estate prices function differently from what media suggests, with less than 4% being speculative investments.

• The real estate market is likely to benefit from the high desire and need for homes among millennials and Gen Z, despite the current affordability issue due to high mortgage rates.

• Anticipation of a drop in mortgage rates over the next year and the strong demand for homes provides optimism for the real estate business.

• Home sales may be down 14.7% year over year, but minimal and selective price declines, along with other positive indicators like decrease in time on market and high first-time buyer percentages, point towards a healthy demand.

• Future optimism rests on the expectation of a decline in mortgage rates, potentially driving a surge in real estate in the latter part of 2024 and into 2025.

Question and Answer Segment – Patrick Stone’s Summarized Responses

Do you anticipate a huge surge in foreclosed homes hitting the market nationally like we saw in 2008 to 2010?

• Absolutely not. The worry is overdone, exaggerated, and unnecessary.

• Reasoning: The quality of mortgages originated in the last 13 to 14 years significantly differs from those prior to the Great Recession.

• Evidence: Over the last five years, more than two-thirds of all mortgages have had FICO scores of 760 or higher, indicating extraordinary loan quality.

• Market Condition: The housing credit availability index, product risk, and borrower risk have all seen improvements. Product risk has decreased significantly due to the end of practices such as stated income loans and subprime lending to Wall Street.

• Current State of Mortgages: The mortgage origination market has been tightly controlled since the Great Recession. Less than 1% of homes have negative equity, and over 60% of homes have positive equity above 50%.

• Conclusion: There is no looming issue of foreclosures. There is no cause for concern or loss of sleep.

How will the coming stress in the commercial real estate debt affect liquidity and the economy? How big of an issue will liquidity be? Affect of commercial real estate loan foreclosures on bank liquidity and lending: Do you foresee additional banks failing?

• There's about 1.5 trillion in commercial real estate loans due by the end of 2025. This has sparked a lot of behind-the-scenes discussions on the potential impact on regional banks.

• Despite these concerns, I am not overly worried. Why? Because there's approximately $2 trillion on the sidelines ready to support these loans.

• I am currently involved with a $200 million fund, and we are in talks with seven regional banks.

• Our strategy is to step in and resolve issues when a borrower can't make the payment, by buying the property.

• Geographical and commercial real estate type may impose some limitations, but there's a substantial amount of money ready to acquire assets when commercial borrowers default.

• The real risk, as it seems, lies with regional banks. It remains to be seen how this situation will play out.

Do you see any indication that inventory will increase enough to change the market anytime soon?

• Not anytime soon.

• We underbuilt in the market over the last 13 years, in my estimate, about 3 million homes.

• The lowest estimate I've seen is 1 million, the highest estimate is 5 million.

• Builders underbuilt due to uncertainty, economic recovery, lack of demand, and fear of misestimating the prices for goods and materials to build a home.

• Current issues: Though these issues have abated somewhat, and builders are increasing their output, new construction will only return to pre-recession levels this year.

• It will take another five years before we see new construction at the level it needs to be.

• When rates come down, there will be more resale activity. People will downsize and relocate, but inventory will remain a problem for the foreseeable future.

• Inventory correction will not happen quickly and we will have to deal with that.

• I don't see the prices coming down because demand is going to slightly outweigh supply for the foreseeable future.

Do you think home prices will go down and what are the prospects for home prices once the Fed starts cutting rates?

• Residential real estate presents a true balance between supply and demand, and this balance influences pricing.

• Federal rate cuts will stimulate demand as they motivate current homeowners to sell and increase builder activity.

• Obstacles such as tariffs and immigration issues have created challenges for builders, but the outlook is increasingly optimistic.

• As federal rates decrease, builders may become more aggressive about new construction, though supply might not precisely match the increased demand.

• The appreciation of single-family homes is anticipated, but it will likely range from 2% to 5% annually, rather than the drastic rates seen during the Great Recession.

• The 24 to 54-year-old portion of the population, which reported a 30-year high in job satisfaction in 2022, is increasing in job participation and holdings, thereby fueling demand.

• While supply will likely not align exactly with demand, home prices are expected to continue increasing at a rate of 2% to 5% annually. Historically, the rate has been 3.6%.

What level of interest rates will be needed to return to a more normal inventory sales ratio, and when do you think that will happen?

• Patrick Stone believes that a range of 5% to 5.5% interest rates sustained over time would help achieve a balanced inventory sales ratio in residential real estate.

• He predicts this balance could occur within a three to five year timespan, given consistent rates within this range.

• However, he acknowledges this is contingent on multiple variables, including potential tariffs that could disrupt cost prediction for builders.

• Stone emphasizes the necessity of a stable political environment and consistent mortgage rates to foster predictability for builders, which he considers essential for normalizing the sales ratio.

• In his view, achieving balance requires consistent mortgage rates around 5% to 5.5% and steady political engagement over the next three to five years.

Any updates on Fannie Mae not requiring title insurance?

• Fannie Mae is no longer considering an alternative product to title insurance, after recognizing the complexity of loss ratios in title insurance and the industry's state-by-state regulation.

• Despite the shift away from an alternative product, they still accept Attorney Opinion Letters, with 45 received last year.

• However, these letters do not cover fraud, which accounts for about 30% of all title losses, creating potential risks for lenders and Fannie Mae.

• Fannie Mae's focus on creating affordable homes by reducing costs is a positive pursuit, and there may be potential for further discounts in the industry for disadvantaged individuals.

• Overall, worries about Fannie Mae moving away from traditional title insurance are no longer a significant concern.

What's the difference between title agencies that have thrived and those who have struggled in this market?

• Thriving title agencies focus on managing what they can control, a philosophy inspired by stoic philosopher Epictetus, instead of dwelling on uncontrollable factors.

• Successful agencies prioritize delivering value to their customers, maintaining robust relationships through meaningful engagement and demonstrating a genuine interest in their needs.

• They strategically manage costs by converting fixed costs to variable costs. By analyzing their fixed costs, they determine which functions can be outsourced, thus only paying for the services when they are utilized, rather than maintaining a constant financial obligation.

• An array of functions can be outsourced, including document management, office products, job placement ads, gifts, outsource printing, payroll services, information technology, and data security. WFG offers many of these services, as well as others, through its Blocks program.

• In addition to converting fixed costs to variable ones, these agencies continually reevaluate their expenses by comparing current costs to those from more prosperous times. This analysis allows them to identify any disproportionate increases in expenses and work to either eliminate them or make them variable.

Most questions today are on economic uncertainty. Please share the incredible opportunities coming from this uncertain environment we're in.

• Economic uncertainty is a prevalent concern for many today.

• Despite this uncertainty, there are significant opportunities for businesses to shine.

• Patrick Stone believes the key opportunity lies in better serving customers and exceeding their expectations.

• WFG National Title sees themselves as an integral part of their clients’ process, and they repeatedly emphasize this.

• By performing well and enhancing their clients’ processes, the clients gain more recommendations, referrals, and business.

• Patrick Stone asserts that helping the clients make more money leads to their own company making more money.

• The primary strategy amid uncertainty is to focus on clients, and by helping them succeed, businesses can also succeed.

Watch the video replay of WFG’s Q3 Economic Outlook webinar here, or download the full transcript here. Register for WFG’s Q4 2023 Economic Outlook webinar, which will take place on December 5^th at 2 PM ET/1 PM CT/10 AM PT, here.