During the recent Q2 WFG Insights: Quarterly Economic Outlook webinar, WFG National Title Insurance Company Founder and Executive Chairman and co-host Patrick F. Stone addressed current market conditions, sharing his thoughts on the economy, housing supply and demand, property appreciation, rising interest rates, and the likelihood of another housing bubble. The following is a compilation of some of his key observations and thoughts on where our industry is going.
Key Areas of Economic Concern
During his introductory comments, Stone singled out deglobalization as a significant concern entering Q2.
“If you look back to the '80s, interest rates have dropped steadily over a 40-year period of time. I personally think there's a great deal of correlation between that drop and the increased globalization that we've experienced. We've become a global economy and we've benefited because goods, labor and everything else is a lot cheaper in a global economy,” Stone said. “We've seen some retrenchment recently, both politically and economically. Obviously, the pandemic accelerated some of the problems with supply chains. The disruption or disengagement now with China concerns me. If we, in fact, de-list all those China corporations from our stock exchanges, that will accelerate the problem. The Ukraine war amplified the problem. So I really worry about …whether or not we're going to see a downturn in the positive impacts of globalization, and a resulting raise in interest rates because of that,” he concluded.
Another area over which Stone expressed concern is income inequality.
“With the rise in food and gas prices, we've had a tremendously unequal impact based on income. The bottom 20 percent (of Americans) is spending 30 percent of its take home pay on food and gas…The second 20 percent from the bottom is spending 16 percent, and the top income group is spending 6 percent of their income. So you can see that impact of the Ukraine war on food and gas prices and inflation in general… is really having a significant impact on the lower half of our income group in the United States. Consequently, you have seen…a withdrawal of a lot of people aspiring to own a home from the housing market because of inflation,” Stone concluded.
Housing Supply Versus Demand
While housing demand has been decreasing due to rising interest rates and other economic factors, inventory is down as well, and that is keeping supply and demand in equilibrium, Stone explains.
“The demand-supply equation with regard to homes and home ownership and purchasing has actually been moving in tandem. We've seen inflation, we've seen a significant drop in demand, but we've also seen a significant drop in supply of available homes for sale. So demand-supply has remained surprisingly in balance and we haven't seen a drop or significant decline in prices,” Stone said.
“I personally hate national price indices, they give you the impression that prices are going up at 18.8% annually or 20% annually. Last year…U.S. appreciation was 15.8 percent, but it really varied greatly regionally. New England area (appreciation) was 6.3 percent, Midwest was 10 percent, the West was 8.4 percent and the South was over 20 percent. So we have real disparity in price appreciation by location, by price range and on the underlying economy. I think (price appreciation) will begin to slow down a little bit if the demand actually drops more than the supply. Let's just go back to the great recession of 2008. You had 4 million homes for sale. Now, you have a million homes for sale. So the demand-supply ratio is actually moving in concert. Demand is down, but so is supply,” Stone concluded.
Is a Bubble on the Horizon?
When asked if we are poised for another bubble, Stone said he doesn’t think so and explained how 2022 conditions are very different from those of the subprime meltdown.
“People ask…‘Is this similar to 2007, 2008?’ Not at all, folks. We do not have the product risk or the credit risk that we had prior to the great recession…Prior to the great recession, we had stated income loans, ‘Hey, I make 500,000 a year. So give me this loan.’ It was absolutely ludicrous. You could put down anything and get a loan. Subprime loans were a very, very large segment of the total mortgage market. They were being securitized by Wall Street, so lenders were doing them rapidly because they could sell them to Wall Street. So, we had tremendous product risk. We had credit risk. We were making loans. We don't have the same product or credit risk (today that) we had (then). In fact, if you look at the quality of loans being made in the last five years, two-thirds of all loans being made have been to FICO scores over 760. It's not analogous at all to what we saw prior to the great recession,” Stone explained.
“If things slowed down, would we see people selling homes because they have to? No… Will there be foreclosures? Yes, but I think the foreclosures will be maybe one-tenth of what they were at the great recession. We saw about three and a half million foreclosures in a couple years (then). We'll see maybe 350,000 this time. I just don't see it being anywhere near the same sort of situation,” Stone concluded.
What Lies Ahead for Loan Originations and Interest Rates?
When asked where he thinks loan origination volumes and interest rates are heading, Stone outlined a few scenarios.
“I think we run the risk of a recession and I do think we're going to see an economic slowdown because of inflation. So, I do anticipate a drop in resale activity towards the end of 2022. Maybe we'll be down 15 percent this year from last year in resale activity, maybe down 75 percent in refinance activity. I don't think prices will come down as a result of that. We'll see what happens here, but I'm not pessimistic about the housing market,” Stone said.
“Interest rates are (already) fairly high. I think (what will happen with rates) depends greatly on whether or not we see a resolution of the Ukraine War sometime in the next three to six months at the most. If we see that, I don't think you'll see interest rates go up a long way from here. Coming down will take some time. Again, that depends a lot on what happens with globalization. About 90 percent of all mortgages outstanding right now are at 5 percent or less. So this is why you saw the refi market just drop off a cliff. Mortgage rates got above 5 percent. It just phenomenally shrunk the available market for refinances. You see mortgage rates come back down under 5 percent, refis will pick up. They get under 4 perfect, they'll be significant. They get down to three and a half percent, you'll see a surge. There's still a lot of available mortgages out there over 5 percent that can be refied and should be refied, but you need the rates to come down on that,” Stone said.
What is the Next Major Home Buyer Segment?
Stone believes that the most likely growth segment will be first time homebuyers.
“I think that there is a tremendous demand on the part of first time home buyers. We are seeing a lot of people in household formation age, which is also first time home buyer age, 30 to 39 years. Does it manifest itself in a lot of new home buyers? That's dependent on interest rates and on supplies for construction of new homes. We have underbuilt starter homes now for a long, long period of time. You go back to 1980, 40 percent of all new homes were starter homes. In 2019, it was 7 percent. We had a whole decade where we didn't build starter homes. So we've got an imbalance. Depending again on interest rates and the economy, we're going to have a large demand and no supply,” Stone said.
Where is Title Industry Technology Headed and How Can We Prepare for What Lies Ahead?
With so much economic and industry uncertainty, many had questions about technology and how best to prepare for the unknown, and Stone shared his thoughts on both.
“Working from home has really showed us that we can use technology effectively to change how…and how efficiently we operate. I say that because I think the title insurance and escrow business did a phenomenal job of working from home during the pandemic and used technology to do so. Could we do more? Yes. I think there should be an increased level of integrations and I see that happening because of APIs. The more integrations, the less re-keying of data and the more efficiency we get as an industry. We are still a horribly inefficient industry. I'm talking about real estate in general. So look for technology to make some significant differences over the next three to five years as people become more open-minded about embracing technology and use technology to reduce time and cost,” Stone said.
“I do worry more than a little bit about where we go overall as an industry in concert with other segments of the industry. It is still a very dysfunctional, I'm talking about real estate as a whole, still a fairly dysfunctional industry in terms of working together or cooperating between all the segments. Everybody has sunk cost. Everybody has different regulatory environments, different regulators that (they) report up to. So it's not an easy solution to solve and it won't be done overnight,” he concluded.
Final Words of Wisdom
In closing, Stone encouraged Title industry professionals to conduct an objective self-assessment to identify ways to optimize their operational efficiency.
“Take a really hard look at where you are, figure out a metric for measuring how you operate and plan for a 10 or 20 percent reduction or a 10 and 20 percent increase. Get your thoughts together now about what you're going to do if we have more significant changes in the market. Don't wait until it happens because…you’re going to have a hard time doing something effectively and quickly. So plan now and make sure you have penciled out how you're going to do it, what you're going to do, when you're going to do it. Don't wait till it happens because you'll never react fast enough if you do that, Stone said.”
We have seen in the last two years a tremendous increase in efficiency because of technology. I mentioned earlier, work from home became viable because of technology. Take a look at what you're doing. Take a look at what you can do. I encourage everybody to look at outside advice, get some ideas and thoughts on what you can do that will give you the scope and ability to accommodate changes both up and down in the market. I recommend taking a hard look at (your) technology, where (you) are and what could be done to improve the efficiency and scale of (your) operation through adoption of technology. We have a subsidiary called WEST. Reach out to them. They'll be happy to help you.”
To watch the full WFG Q2 “Quarterly Economic Outlook” webinar click here, or visit https://wfgtitle.com/news/.
Link to this for “click here” hyperlink: https://vimeo.com/713858462
About Williston Financial Group
Williston Financial Group (Portland, Oregon) is the parent company of WFG National Title Insurance Company, WFG Lender Services, WFG Default Services, Valutrust Solutions, LLC, WEST, and other title, settlement and technology solutions providers. It is one of the fastest growing national title insurance and settlement services providers in the mortgage and real estate services industry. For more information visit www.wfgtitle.com.