During the recent Q3
WFG Insights: Quarterly Economic Outlook webinar co-host
Patrick F. Stone, Founder and Executive Chairman of WFG National Title Insurance Company, discussed the current and projected states of the housing market and the economy. The following is a compilation of his thoughts and critical observations on our industry, property values, housing supply and demand, real estate investing, cryptocurrency use, and the likelihood of another foreclosure onslaught.
On Market Projections and Property Appreciation Trends
When assessing current market and property valuation trends, Patrick Stone cautioned against placing too much stock in current industry assessments that don’t factor in historical perspective.
“The media has what’s called recency bias. They focus on the most recent item or piece of news and emphasize it way out of proportion. They don’t give it any historical perspective or relate it to normal times. And right now, coming off two years of record activity because of the pandemic [and low interest rates], we are comparing current numbers to abnormally high numbers. The media also tends to report on uniform national numbers, as if everything is affected the same in every market. Real estate prices vary by region, even though the media beats the drum about everything going up a certain percentage. They also vary by market segment, price range, and level of appreciation. If you divided price ranges into thirds, you would see a significant difference in the appreciation rate in different price ranges. None of this is ever conveyed in the media so that the public really understands what’s going on.”
Putting the Downturn in Perspective
In response to the current doom and gloom headlines, Stone had the following to say.
“The media is comparing everything with where we were at the top of the pandemic. If you go back to 2019, it gives you a little bit of consolation that things aren’t as bad as the media portrays them to be. Has it slowed down dramatically? Yes, it has. Do we have too much supply compared to demand, which would cause prices to come down? No, we don’t. Supply has decreased as well as demand, so the balance between supply and demand is better than the media would have you believe. Part of that is because builders basically stopped building. They were getting ready to have a significant surge in new construction, but with interest rates going up and all the global and economic uncertainty, builders shut it down. So we do not have a lot of supply on the market. The number of listings has gone down dramatically. So the supply-demand balance is not out of line to the degree that you would see significant decreases in valuation. I personally don’t think we’re going to see a lot of decline in value.”
On Supply and Demand
When discussing housing supply and corresponding demand, Stone offered some historical perspectives and highlighted the role millennials play in homeownership demand.
“If we go back to the great recession, we were just beginning to get back to normal right before the pandemic. And by that, I mean that home purchases and new construction [were] sneaking up on being normal. Then [during the pandemic, demand] started surging because there was a heightened sense of the value of home ownership. If you look at what drives the market -- demand, supply and affordability -- millennials are now in their 30s and up to 40 years old, which is the time people step into the market and start buying homes. We have a tremendous population bubble with millennials, so demand in terms of population is absolutely there. Demand in terms of a sense of desire or the value of home ownership went up with the pandemic as well. There was an emotional realization that owning a home and controlling your environment had value. So people tended to buy homes in the pandemic, and that created a surge. And then you had affordability at probably the best level it has been at in my lifetime. We were in a fairly solid economic situation with good income across a lot of the population, and very, very low interest rates, down below three percent. So affordability was outstanding, and you had a very strong surge in real estate.”
On Income Inequality
Stone called out income inequality as an area of significant concern for the second consecutive quarter.
“If I have a worry right now, it is that the income inequality in our country has resulted in the lower 20 or 40 percent of the population being much more impacted by inflation. The rest of us top 60 percent are noticing and complaining about it, but it really hasn’t changed lifestyles that much for [us] like it has for the bottom 40 percent. Until we get this under control, it will impact demand for starter homes.”
On Foreclosures
Stone doesn’t expect foreclosures to make a resurgence, referencing the conditions of the Great Recession in comparison.
“People say, ‘don’t you worry about a housing market crash?’ Not at all. I really don’t. If you look at the FICO scores for the last 7 to 8 years, over two-thirds of all mortgages originated have had FICO scores over 760. This is not at all like where we were before the great recession. We had product and credit risk before the great recession. Do you remember stated income loans? If you could walk and talk, you could get a mortgage, and you didn’t even have to prove that you had a job. We were in a very precarious position prior to the great recession, and we paid for it. We added about three and a half million foreclosures in a two-year period. Worst case, right now it would be one-tenth of that. And I’d be surprised if it’s that high. So I do not see a lot of foreclosure or short sale risk. Appreciation will slow down, but I don’t think it’s going to go negative. It’s coming down fairly quickly now. I think we’ll get back to the three percent annual appreciation range and stay there. Depreciation [will be] limited to a few markets that had an over-the-top surge in move-ins during the pandemic. But that was overstated by the media also, and builders are very, very cautious right now. There were a lot of big national builders planning on really going after the first or starter home market, and they pulled back dramatically, and building is way, way down. We’ll see where that goes, but by and large, I just think we need to get through the next year and a half or so. And then I think you’ll see real estate start to come back, and I think it’ll be relatively healthy.
On Real Estate Investing
When asked what incoming real estate investors should consider, Stone offered the following advice.
“If you’re a real estate investor, that typically means that you have dollars to spend and invest, and you’re looking for the best place to put them. I still like real estate as an investment. I personally invest in real estate, both single-family rentals, and multi-family and industrial properties. I think the real estate investor can still do that if you have dollars to invest. And I don’t see these properties going down in value. One of the things that are occurring right now is you’re seeing an extraordinary amount of multi-family being built. If I read it correctly, about 400,000 apartments are going to be built this year, which may be the highest level of all time, but certainly the highest level since 1975.”
“Prior to investing, make sure you know what you’re getting into. Make sure you’re not going to get hit by oversupply in any particular segment or location. Make sure you pick locations where you’re comfortable that the property won’t be buried under a lot of other similar properties going on the market. I like industrial property because of eCommerce. It’s slowed down a little bit, but I still think that’s attractive. So there are real estate investments to be had, even rental property, but make sure you really research what you’re doing.”
On Cryptocurrency Use in Real Estate Transactions
When asked about the potential for cryptocurrency in real estate transactions, Stone said, while it would be beneficial, particularly in the case of foreign investors, he believes that it would require government acceptance and regulation to take place.
“I think when it becomes accepted by the government and regulated so that you don’t have the tremendous variation in value day to day, [cryptocurrency] may get more acceptability. But I think it’s going to be a while before it’ll be used in real estate transactions. It would be nice to have something that is regulated, standardized, and can be counted on, especially since we’re starting to see foreign investors come back into the U.S. real estate market. And there are a lot of ways that having a more efficient exchange of value would be desirable. There are a lot of reasons that we need something more efficient and less costly than our current system, but I do think it’s going to have to be regulated, and I also think it’s going to be a while before it becomes a factor in the market.”
On Where the Title Industry is Headed
When asked where the title industry is headed, Stone shared the following observations.
“Obviously, with the boom market, we had a lot of people thinking they could disrupt the market or dramatically change the market. The underlying need for title insurance is really an outgrowth of the inconsistency of data and accessibility of data in a lot of markets. Now there’s been some automation through using OCR to automate title plants; but there’s still a fairly high level of uncertainty there, but the ability to access information and be sure that you know what’s going on requires some time and effort.”
“I got a kick out of the idea that attorneys are going to write a letter guaranteeing a title. I think that has more downside than upside. I think you need to have access to the information on a rapid and easy basis. You have to have the ability to assess that information and determine whether or not it’s going to impact ownership or whatever affects the title. And you need to have someone saying ‘this is the status.’ ‘Here are the things that impact the title, and we will guarantee the new owner or the lender that their rights are assured, and we will protect them.’ Now, do I see that going away? No. Do I see automated title becoming more of a factor? I do, but I think we will see that loss ratios vary greatly by state [with] the use of automated titles. So I think we’ll need to be careful there. I think title insurance is going to be around for a while. I don’t think that the government is going to invest in making records totally automated and accessible for everybody so that they can easily digest what they’re buying and what impacts it. So you’re going to see title insurance around for a while. I do think that the companies in this industry are going to have to become more automated and operate more efficiently, because I do not see us having the ability to continue to raise rates based on liability like we have in the past. So, in short, title insurance will be here, but we’re going to need to get more efficient and be more economically viable because we’re not going to continue to see the rate increases that we’ve seen throughout history.”
On How to Prepare for a Weaker Market
Stone offered the following advice on how to prepare for a weaker real estate market.
“I think that [people] in this industry should be really focused on changing fixed costs to variable costs so that their costs are in line with volume. The reality is, if you have a fixed cost that you can’t lower and volume goes down, your revenue is going to go down, and that’s a problem. So I would suggest to anybody and everybody, no matter what segment of real estate they’re in, that they realize that this is a volatile industry. It goes up. It goes down. It is never going to be totally predictable, and there are too many variables that impact it. So you need to be really smart about saying, ‘okay, I’m going to be in this business, but I’m going to try to align my cost with the volume of business I’m handling.’ ‘I’m going to get away from fixed costs, and I’m going to go to variable costs.’ WFG offers the Blocks program to help agents do just that. I think everybody should sit down and take a look at their expense structure. What are they spending money on, and can they align that expenditure with the volume of business instead of having it be a fixed cost? The level of market change in this industry surprises everybody on almost every economic cycle. We’re sitting here talking about how quickly things changed in the last six or seven months. The volume has dropped dramatically, as you indicated earlier, and both refis and resales are way down.”
“The biggest mistake you can make in this industry is to assume you know where it’s going. I learned that one about 40 years ago. Don’t make any assumptions about where it’s going, and [don’t] bet your livelihood and the viability of your company or enterprise on where you think the market’s going. Get as flexible as you can, so you can adjust to the volume of the market. There are too many variables that impact this to make any predictions with certitude. We can’t. So we’ve got to be really, really careful.”
Advice for Business Owners
Stone closed this quarter’s Economic Outlook Q&A session with some advice for real estate industry business owners.
“The best advice I can give anybody is… don’t make your decisions based on projections or national trends. Make your predictions and your decisions based on your clients. Make sure you understand what your clients want, where your clients are, what they need, what they are worried about, and align your business to make sure that you can take care of your clients and make [them] happy. There is going to continue to be real estate business. People in real estate are going to continue to make money, but you’re going to have to be much more focused on what your clients want, what they need, [and] what they’re concerned about, and be able to answer their questions. If you can help your clients have clarity and understanding of the market they’re in, they’re going to do business with you.
I gave a speech about a month ago to a major real estate group. I spoke for an hour and five minutes, asked if there were any questions, and I got an hour and 10 minutes of questions. So I was on stage for two hours and 15 minutes, and I could have gone on for another half hour. There were multiple hands in the air. People want information. People want to know what’s going on. Make sure your clients understand what you see, what you know, and what you think is happening. Answer their questions. Help them understand what’s going on, and they will do business with you. That’s the best way to ensure your future. Make sure your clients are happy. That has never changed. I think it’s still applicable.
To watch the full WFG Q3 “Quarterly Economic Outlook” webinar click here, or visit https://wfgtitle.com/news/.
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.