Making sense of a ‘weird’ housing market

“Weird” is a word a Scotsman Guide reporter kept hearing when searching for a home in the Seattle area over the past two months.

It would crop up in conversations with listing agents at open houses where barely anyone showed up.

“It’s just a weird market right now,” they would say.

Or when a condo unit listed for nearly $100,000 more than a unit of comparable size in the same complex, despite having only modest interior upgrades, their real estate broker commented, “It’s a weird market. I think it will start getting more normal by spring.”

Pressed on her reasoning, the real estate veteran said she believes hesitant buyers will begin to accept that high interest rates are the new normal and will return from the sidelines, restoring more balance to the market.

For context, Redfin reported on Oct. 14 that home sellers outnumbered buyers by 62.6% in September. That is the largest divide in the home listings platform’s records dating back to 2013.

So, when Scotsman Guide sat down with Odeta Kushi at the Mortgage Bankers Association’s annual conference in Chicago last week, the first question posed to the deputy chief economist of First American Financial Corp. was just how weird the current housing market is by historical standards.

Kushi: I think what’s interesting about this market, at least relative to the pandemic market, is we’re just seeing these massive regional divides. We were just talking to someone yesterday who lives in Chicago, and they’re experiencing bidding wars and strong price growth, 5% to 6%, which is strong for our current market. Certainly nothing like we saw in the pandemic, but then a lot of our Sun Belt markets are experiencing price declines on a year-over-year basis.

What’s happening is the Northeast and the Midwest [are] relative outperformers, [and in] the South and parts of the West we’re seeing downward pressure on prices, which I think is distinct from the pandemic housing market, where everywhere you looked you had multiple offers and bidding wars.

Another thing is that we’ve been in this slump for some time now with existing-home sales. Every time we get a little bit of momentum, it doesn’t last very long. The fact that we’ve been in this environment since 2022, I think is unique in that sense, but it’s also contributing to quite a bit of pent-up demand.

SG: To what extent are pandemic-era distortions driving the fragmented national housing market today?

Kushi: I do think part of it is left over, because a lot of the markets where we’re seeing price declines were some of our pandemic darling markets. But there’s a couple of factors going into that.

The markets where we’re seeing price declines obviously have the same rate impact as other markets where affordability has come down. So that’s depressed demand. But they also have this dynamic where a lot of them are seeing a lot of positive domestic net in-migrations, people moving into their markets. And that’s slowed in a lot of these markets, so that pulls back on demand as well.

And then on the supply side, builders were responding to all of the pandemic growth by putting more homes on the market, and so now they have this supply that is sitting. That’s a perfect recipe for downward pressure on prices. Whereas in the Northeast, you didn’t have that same supply response. I grew up in Rochester, N.Y., and that happens to be one of the still hot housing markets. We just didn’t have the same supply response.

SG: It’s a challenging rate environment, and MBA data has shown a steady decline in refinance demand recently. Who is a refinance candidate in the current market?

Kushi: I think it’s really just the small segment of people who are in the money for a rate-and-term refi that maybe bought in 2023 when rates were even higher than they are today. So, there’s just a small pool of people who are in the money.

I think the story right now has been more around HELOCs [home equity lines of credit]. We’re putting out a report soon … where we look at the level of what you would probably know as “tappable equity,” the accessible equity in the market right now. We find that level is hitting above $13 trillion for the first time since we’ve been tracking it, which starts in 2005. And 80% of that $13 trillion is rate-locked in, which means their mortgage rate is below the prevailing rate.

SG: During the MBA’s economic commentary event Sunday, the association’s economists mentioned the likelihood of a Federal Reserve rate hold in October, a potential hike in December, one more hike in Q1, and then no further rate movements in 2027. Where do think the Fed goes from here?

Kushi: The crystal ball gets a little bit hazier in 2027, but I would generally agree it looks like market participants are expecting a pause in October to see how the data develops.

We’ll see if the price shock in energy is expanding out to other components. That’s really the concern, because typically the Fed will look through an energy crisis if they believe it’s temporary, if they believe it will stay contained within the energy sector.

Once you start to get that broadening effect is when I think the Fed starts to step in, and they’re in a place to do that because it doesn’t immediately threaten the labor market, since the labor market’s been pretty resilient.

SG: I think it was [Fed Governor] Chris Waller who recently spoke about the Fed historically looking through price shocks, but how it’s become a series of shocks in recent years that are becoming harder and harder to look through.

[Editor’s note: It was actually Chicago Fed President Austan Goolsbee who made those remarks in September.]

Kushi: Exactly. It’s not just headline CPI [consumer price index inflation] at this point or even core. It’s really taking a look at all the different components of inflation to see if we’re starting to see the impact of higher energy prices there.

SG: Has the reduced focus on forward guidance by the Fed [under new chair Kevin Warsh] made your job more difficult as an economist?

Kushi: We’re looking at a number of reports. We were just talking about the fact that even for a labor market, it’s triangulating between the Employment Situation [Report] and Indeed job postings and ADP and all of the different sources to try and get the pulse on where things are going.

It’s always helpful to have a reaction function to respond to as an economist, but a lot of the fundamentals are still what they are. We know if the labor market trends in one way that the Fed’s going to react a certain way, and so we’re still responding to the same signals as we did in the Powell era.

SG: What other interesting things are you seeing in the housing market these days?

Kushi: For many years, when people would call me and say the housing market’s in a recession, I’d say, “Yes, but…”  My asterisk was always the new-home side is a relative outperformer and a big bright spot in the housing market.

The new-home sales data that came out recently was still a strong report given the environment we’re in, mostly because of [home builders’] ability to buy down rates and offer incentives, but also because they’re catering to the environment. Builders are building smaller. They’re catering more to that first-time home buyer. They’re meeting the moment.

In fact, the median home sale price of a new home has been below that of an existing home for several months now. That is very abnormal.

SG: It seems like builders had been pulling every incentive lever they could find to avoid price cuts, but then price cuts became inevitable. Builder sentiment surveys have not been great over the past year.

Kushi: They’re not feeling very good about the market. Certainly the increase in interest rates is not helping them because it squeezes margins and makes buydowns more expensive. But builders are not rate-locked in. The existing homeowner can just choose to pull their listing. The builder, they have to sell that inventory. So what we’re seeing instead is they’re pulling back on permits and starts. They’re throttling back on building more homes.

The other thing that we’re monitoring is pent-up demand in general. One of the more clever ways of measuring it is through what we call “shadow homeowners,” which are young adults [in their] 20s to 30s, still living with their parents, but that look a lot like what a homeowner might look like.

We’ve estimated that number to be about 1.3 million, mostly in the 30- to 34-year-old category. There’s been an increase since the ’90s of this shadow homeowner population, and it’s mostly in that early 30s cohort. But then combine that with the fact that we’ve had below-average sales since 2022, which we estimate to be around 2 million to 4 million sales. I think there’s just a lot of pent-up demand in the market that will trickle its way in, which I think is a tailwind for our industry.