Now in its fifth year, WFG kicked off its Q1 2024 Quarterly Economic Outlook series with a live presentation during the company’s inaugural Agency Executive Summit in March, an invitation-only event for executives of existing and prospective customers within the company’s Agency Network. The event provided WFG’s Agent Network executives with a unique opportunity to engage directly with WFG's Chairman and Founder Patrick Stone and co-presenter Economist and Forbes contributor Dr. Bill Conerly.
In the Q1 installment of the popular presentation, Stone delved into the heart of the current real estate market, covering topical issues such as interest rates projections, home equity trends, housing supply and demand, builder and commercial market performance, median home prices, regional market variations, and loan quality trends. The session concluded with Stone's thoughts on how title agents can remain competitive and position themselves for success in a challenging market. The following is a compilation of the key observations and forecasts Stone shared during this informative live-audience session.
Opening Commentary from WFG Chairman and Founder Patrick Stone
“So, talking a little bit about real estate, I really think real estate is probably one of the parts of our economy that is more truly supply and demand-based than any other part. And by that, I mean that it directly reflects the price of homes. If the supply is low and the demand is high, prices go up. Conversely, if supply is high and demand is low, like we saw right after the Great Recession, prices come down. So it really is truly a supply and demand business. And supply is new construction, resale and foreclosures. That's how I define supply. Demand is need, desire and affordability.
On The Builder Market
‘Based on January's numbers, we're going to come in just about like we did last year, maybe a little bit ahead of last year, but we really haven't had a great year in real estate. In 2005, I believe we had 7 million sales. That was pretty amazing. We've been a little bit depressed the last few years and there are a lot of reasons. You look at single-family housing units completed by builders. We had a tremendous drop-off after the Great Recession. A slow rebuild, but we're still basically below the 50-year average. I know a lot of big builders and I will tell you they were excited and geared up to build a lot of homes starting in January of 2022. They very quickly got over that, sold a lot of their lots, and didn't get really engaged. They have the potential to get engaged and to get engaged significantly once rates come down. But if you're building a home, you're taking a little bit of risk, aren't you? I mean, you've got to buy the lot, then you’ve got to build the home and then you wait for it to sell. But typically you're on the hook for nine to 12 months before you get a return on your investment. So builders are being a little bit careful now until they see they have certitude about where rates are and where we're going. Once we see a significant and meaningful start to a drop in rates, I think builders will engage because they know the demand far exceeds the supply.
On Home Ownership Tenure
“You hear a lot about people not moving because they have low mortgage rates [in place on their existing mortgages]. Straight up, that's not really why. It’s sociological. You can see on this slide, homeowner tenure back in 2005 was 6.5 years average time in a home. All the way up through 2019 it grew. 2020 it hit 13.4 years when the pandemic started. We're at 11.9 years average now. And if you look at this slide, this shows all moves. And you go back to 1986, 20% of the population moved every year. That declined gradually all the way through the start of the pandemic. We were down to about 8.25% moving prior to the pandemic starting. So you've seen a sociological change in our country where people hold onto their homes longer. They're focused on improving their homes. They're not so quick to move. I think [it has] a little bit to do with jobs and everything else, but basically we've slowed down on the amount of moves we've had, and that's impacted resale, right?
On Home Appreciation
“So we don't have builders building and we don't have people moving so much, so that has offset the drop in demand. So we really haven't seen a tremendous disruption in prices. We had a big boom during the pandemic because people were so environmentally conscious. But we're back to a point now where I think you're going to see appreciation average 3.5% to 5% a year going forward. You're not going to see any more big moves.
On the Demand and Desire for Homeownership
“Let's analyze demand a little bit. Need. I know there's not a lot of 11-year-olds that buy homes, but in Gen Z, we've got 69.6 million people. Over the next 10 years, a lot of them are becoming first-time buyer age. Millennials, we have 72.1 million. That's 141.7 million people. That is a huge population of potential home buyers. That is the second biggest bubble behind the Baby Boomers we've seen in history. So the need is there. I mean, we have a tremendous need for home ownership.
“How about desire? 95% of the people 20 to 42 want to buy a home. 95%! Now straight up, I can't measure this, and this is not particularly analytical, but I think you'll identify with it. When I was young, the first thing you did when you became an adult was you bought a home because that was the first step towards financial independence. That was the first step towards being an adult. You got married, you bought a home. That dissipated over the years. Over the last 40 or 50 years that's become less urgent.
“I can tell you my oldest daughters [said], ‘Hey, we may buy a home someday.’ They didn't care that much. With the pandemic, everybody started to [think], ‘Hey, wait a minute. Controlling the environment I live in, where I keep my family is of paramount importance.’ So the desire went up like a rocket ship with the pandemic. We're back to where we were in the seventies. If you can, you buy a home. So, the need and the desire are there. Look at this. 75% think homeownership is a part of the American Dream. 68% think home ownership is a first step towards intergenerational wealth. We have need and desire, we don't quite have affordability, right? So, we are really sort of in balance between supply and demand right now. We had that spike, but I think we're going to go back to them staying a little bit more in line. If interest rates come down, we're going to have affordability come back into play. Builders will build, people will sell a little bit more. I think we'll be fine.
On Median Existing Home Prices
“This shows the median existing home price. You can see the spike with the pandemic and then it dropped. In January we were at a 5.1% annual [appreciation] rate, kind of back to where we were for quite a while, and I think we'll stay right around that 3.6% to 5% appreciation rate going forward.
“Looking at this, you can see that the median price of existing homes -- home sales -- that's actually subject to seasonality just like every other aspect of our business. And you can see here, home sale prices by region. I personally hate the Case-Schiller Index. I think it misleads people a lot. People don't bother to peel the onion and find out precisely how it is area by area. The media tends to make a broad statement. But look here at the difference between the average existing single-family home sales price in the West, from January 2023 - January 2024, and then look at the Midwest.
“So, I do a lot of traveling and I talk to a lot of people and I got asked quite a bit the last couple years, ‘Hey, everybody's leaving California because they’re Communists.’ No, they're leaving California because if you're a young person in California, you can't afford to pay almost $600,000 for a home. You move to the Midwest, you could buy a home for $273,000. [There is a] tremendous difference in price by region. And you can see the Northeast US and the South. And so we've had a lot of people departing the West. That's changing now. That is changing. If you see the existing home sales volume, you can see the West had the smallest decrease year-over-year in January of any region in existing home sales volume.
“Gene [Rebadow] mentioned earlier we have our direct operations in seven Western states. Our business on resale was up almost 30% in January. It was up another 15% in February. So far, March is up 11% more. Compared to the country as a whole, we're benefiting because the West has quit exporting people and we are back to the point where we're a little bit more stable economy in the West.
On Homeownership by Region
“All right, homeownership by region. And this statistic is a little bit misleading because really what this means is the amount of people that own the place they're living, be it a single-family residence or an apartment. So that's why the Midwest is up at 70.1% in 2022, 69.8% in 4th quarter of 2023. But you can see there's probably less apartments, but more people own their apartment or their home in the Midwest. The west is the lowest in 61.4%. But homeownership, I don't think I've ever seen it higher than 70%. And it does vary by region, just like price by region.
On Home Equity and Distressed Property Sales
“How about distressed property sales? We do not have a problem here. We were very fortunate, and I'll show you why in a second. We had the forbearance period where it was basically flat. It started reengaging a little bit, but still very low in terms of distressed property sales. So, look at mortgages. Equity-rich homes in Q2 of 2023 are at 49.2%. Q4 of 2023, 46 0.1% of homes had more than 50% equity. That is huge.
“There is a tremendous amount of equity in US homes. If you're not calling on lenders to get HELOC business, do it. At least try and see if you can get some because it's there and it's going to be there for the next couple of years. People will be tapping that equity. And you can see distressed, seriously underwater or distressed ownership was down to 2.6% in Q4 2023. We have a very healthy real estate market in the sense that the amount of equity [is high] and the amount of distress [is very low]. We are actually in a very good position. We just need more supply and more affordability, and the volume will pick up.
On Loan Quality
“One of the reasons that the equity is so high and the distress is so low is the percentage of loans over 760 FICO score in the last four years. How many people were in the business back in the early 2000s? So it was kind of crazy running up to the financial crisis. I was the chairman of a mortgage company, the 20th largest mortgage company in the US, and I used to have each department come in and give a report at the board meeting. And the last question I would ask them, ‘Okay, for your department, what was your average FICO score?’ Well, November of 2005 the guy running subprime comes in, and he was doing a lot of business. So we get done with his presentation, he gets up to leave, and I said, ‘Wait a minute. What was your average FICO score?’ He said, ‘My average FICO score last quarter was 565.’ I said, ‘You’ve got to be kidding me.’ He says, ‘No. What's wrong with that? That's the market.’ I shut it down. I shut it down. We sold the company in April of 2007.
“You could see this one coming. It was a disaster coming down the road. Average FICO score of 565. You guys remember stated income loans? ‘Hey, I make $500,000. I know I'm unemployed, but I make $500,000.’ It was insane. Look at the crap that was generated between 2003 and 2008. It was bad. We do not have that problem now. We actually have a surprisingly healthy housing market in the sense of the percentage of equity and the low level of distressed property. So, we're really ideally situated once we get affordability down.
“This shows product risk and borrower risk and how much it changed after the Great Recession. We haven't generated crap in a long time. That's a technical term for bad loans.
On Mortgage Rates, Sell Decisions, Nepo Buyers and Affordability
“Alright, so the percentage of mortgage rates less than 4% are very high. Why did I say that's not as big as factor of sociological implications? You can see here, about one in four US homeowners, 26%, say high mortgage rates would not impact their decision on when to sell their home. And of that 26%, 43% say it's because they would not need a mortgage to buy a new home. So that isn't really impacting. It's more sociological. People are staying in their homes longer.
“Nepo homebuyers, recent home buyers under 30 used either a cash gift from a family member or an inheritance in order to afford down payment. So, we do have young people buying homes because of intergenerational wealth.
“Back to the affordability issue. You can see the 30-year mortgage rates. I checked this morning, they were at 6.77% and the 10-year this morning was 4.30%. That’s a 2.47% difference. Historically, the 30-year mortgage rate runs 1.5% to 2% above the 10-year T-bill. If you look back 50 years, that's almost consistently the case. If you have accelerating inflation, that spread broadens significantly. And it was up about 3.5% there for a while over the 30-year, over the 10-year. Now it's back to 2.4%. I will tell you this, and I firmly believe it. If we have a rate cut in June or July, and I think we will, you'll see that spread tighten back down to 2%. So after that first rate cut, I expect the 30-year mortgage rate to be down to 6.3%. Second cut, I think it may come down close to 6%. I'm expecting mortgage rates to be close to 6% by the end of 2024. So, I'm optimistic about the second half of the year because you've noticed people are starting to buy homes even with mortgage rates where they are. The volume is going to go up. The second half of the year is going to go up. Will it be a rocket ship? No. It's going to be gradual, but it will be meaningful and it's there.
On 2025 Forecasts and Commercial Lending Expectations
“I see the first part of 2025 being pretty good. I do worry a little bit about the second half of 2025, especially towards the end of 2025, and I'll tell you why. You can see commercial real estate debt then outstanding changed from the quarter earlier. So this basically is measuring how much more commercial real estate debt is generated each quarter. And you can see that the second half of 2nd quarter of 2023 is the lowest it's been a long time. It was low in the third and fourth quarter. Commercial real estate debt has slowed way down because there is $1.5 trillion worth of commercial real estate debt coming due by the end of 2025. $1.5 trillion. And a lot of that is held by regional and community banks. And one of the things you see here, US commercial real estate construction square footage. That started to drop in 2023. It has slowed down dramatically because we have fully built apartments to take care of all the apartment need. We have all the apartments we need right now. Commercial real estate is questionable. We get to the end of 2025, I personally expect a little disruption. I think we will have some regional and community banks fail.
“And now, on the plus side, there is a tremendous amount of money [in the market]. I'm involved in one fund personally, and we are talking to community and regional banks about this issue and saying, ‘Okay, you’ve got problems here. Get us involved. We'll buy the property. We'll make your loan full. We'll do whatever we need to do. Or, if you foreclose, we'd like to talk to you about buying the property.’ There is at least $1.5 trillion out there willing to do that. So, will this be a major long-term disruption? No. Will it be a hiccup? Yes. Will it be noticeable? Yes. Will the media say we're having a banking crisis? Yes, because they do that any time a bank fails, right? I mean, I'm still mad about the Silicon Valley thing. I worked on Wall Street for a while. The only time I have ever heard of a large institution making interest rate investments and not hedging their bet was Silicon Valley Bank. So we had a problem with Silicon Valley, we had runs on two other banks, and we had a banking crisis according to the media. Now that abated very quickly because it really wasn't a banking crisis. We're going to probably go through that a little bit at the end of 2025. I think it'll correct fairly quickly, but expect a little hiccup towards the end of 2025. But 2025 will be a much better year than 2024. 2024, I think, is going to be a much better year than 2023. So I am cautiously optimistic. I don't expect a rocket ship in terms of change, but I do think things will get better.
Question and Answer Segment
Do crypto transactions pose more risk to the parties?
“Alan Fields, who's head of our underwriting department, has some really good information on crypto. Contact us if you’re interested in receiving this information.
“Really, the issue on crypto is more on the escrow side than the title side. And why is that? Because the valuation on crypto changes dramatically every day. So how do you do an escrow with crypto? I couldn't. I don’t think we can. So that's the problem that we have with crypto. There are a lot of other issues as well. You’ve got to do a 1099.
If you want specific information on that, I'll forward Alan's thinking on it. But I still don't think crypto is meaningful. It doesn't have meaningful functionality in terms of real estate. There's just too many issues with it. And I personally don't like any sort of monetary instrument that's not embraced by the government. I think that's your problem. But the rapid change in value makes it very, very difficult to use crypto for anything to do with real estate.”
What are some strategies that title agencies can implement to remain competitive in a challenging market?
“I think the outreach to the client base is critical. Now, one of the problems that I've always had in this industry, and every one of you has in this industry, is how do you differentiate yourself? How do you differentiate yourself from your competitor down the street? I'll tell you one thing that's worked for us, and for me personally, is to convince the client that we want to be a part of their process. And, if they make more money, we make more money. Right? So you need to convince your clients you want to be a part of their process. And the way you do that is you say, ‘I don't want to sell you anything. I want to know how I can help you do what you do better. So let's talk about your process, how you interact with title companies, how you interact with lenders, how you interact with the client. What can we do to make your process better? Because I want you to be successful.’
“I'm being a little bit general here, but things vary dramatically state-to-state in our industry. But really think about how you can connect with that client and talk about what they do, how they do it, and what you can do to help that be better. Sometimes you can't really do much, but the fact that you care will change their opinion of you compared to your competitors. Make it about the client. We're not selling the client something. We're helping them realize success in their process. What we do is a part of their process. So talk about them in that way. Try to get them to tell you what they need or what they're frustrated with. I've been at this next month, it'll be 49 years, and I can tell you, countless times sitting across from a client, I’ve tried everything in the book. And they go, ‘Yeah, yeah, yeah, okay, yeah, right. I'm really interested.’ ‘What can I do to help you? Okay, you can't think of anything. What frustrates you most about the title business?’ Actually ask them. Don't be afraid of the answer. Make them talk to you. The old overcoming objections. I went through Xerox sales training back in the early seventies, spent two weeks overcoming objections. Really work at getting people to tell you what they're thinking, what they're worried about, what they need, or what they're frustrated with. You'll differentiate yourself if you change the way you relate to your clients. We want to help you be successful. But really think about being a part of the client’s process. In my mind, that's the key issue.”
Does a down market present any opportunities for business?
“Yes, yes, yes. If you want to grow your business, a down market is actually the best time to get aggressive in your marketing and sales. And I'll tell you why. Because most of your competitors aren't. Alright. Straight up. If you are active, proactive, and engaged with potential clients in a proactive, positive manner, they will identify with you and want to do business with you. I have gained more market share in my career in down markets than up markets. In up markets everybody spends a tremendous amount of money on marketing and sales. They're out there beating the bush, they're out there talking. They're promoting this, that, and the other thing. In down markets, they go silent. They become inner-focused. They cut costs. They don't interact with the client. Use this as an opportunity to differentiate yourself from your competitors. Get out there and talk to people. Down markets can be a very positive environment in which to be successful if you're active, proactive, and positive. And hopefully we've given you enough information today that you can tell a positive story to your potential clients and you can interact with them and show them that you not only care, but you've got an attitude that will result in success.”
Download the full transcript of WFG's Q1 2024 Economic Outlook webinar here, and register for WFG’s Q2 2024 Economic Outlook webinar, which will take place on Tuesday, June 18th at 1 PM ET/Noon CT/10 AM PT, here.
About Patrick Stone
Patrick Stone is Chairman and Founder of Williston Financial Group, the Portland, Oregon-based parent company of several national title insurance and settlement services providers, including WFG Lender Services and WFG National Title Insurance Company. Stone’s lengthy career in real estate and related services includes C-level positions with three public companies and serving as a director on two Fortune 500 boards. His senior executive management positions include nine years as president and COO of the nation’s largest title insurance company, chairman and co-CEO of a software company, and CEO of a real estate data and information company. Stone also served as vice-chairman of Metrocities Mortgage, a 2005 top-20 mortgage lender, and as chairman of The Stone Group, an Austin, Texas-based tenant-represented brokerage company. In 2013, Inman News named him one of the year’s ‘100 Most Influential People in Real Estate.’ Stone received HousingWire’s coveted Vanguard Award for lifetime career achievement in 2019 and again in 2021, was recognized in 2019, 2020 and 2023 as a Lending Luminary by Progress in Lending, and was the recipient of October Research’s annual Leadership Award in 2020.
About WFG National Title Insurance Company
Portland, Oregon-based WFG National Title Insurance Company (WFG), a Williston Financial Group company, is a leading provider of title insurance and real estate settlement services for commercial and residential transactions nationwide. One of just six truly national title underwriters, WFG accomplished its national footprint faster than any other underwriter in history.
Built around the directive to “communicate, collaborate, coexist,” WFG strives to improve the real estate process through the creation and delivery of comprehensive, innovative services and technology solutions that empower and increase transaction transparency for the title agents, real estate professionals, lenders, and consumers it serves. The company enjoys a Financial Stability Rating of A’ (A prime), as assigned by Demotech, Inc. For more information, visit www.wfgtitle.com.