Under Pressure: Real Estate Market Update with National Association of Realtors^® Chief Economist Lawrence Yun

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Text, Wednesdays with Woodward (registered trademark) Webinar Series. 

Wednesdays with Woodward appears on an open laptop which sits on a table along with a small plant and a Travelers coffee mug. Joan Woodward's video feed appears at the top right, and at the bottom left is an umbrella logo with text, Travelers Institute (registered trademark), Travelers. 

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JOAN WOODWARD: Good afternoon. And thank you for joining us. I'm Joan Woodward, and I'm honored to lead the Travelers Institute, which is the public policy division and educational arm of Travelers Insurance. 

Welcome again to Wednesdays with Woodward, a webinar series where we convene leading experts for conversations about today's biggest challenges. And we have a lot of them in today's current environment, both geopolitical and economic. So, we're glad you're here. 

And before we get started, I'd like to share our disclaimer about today's program. 

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About Travelers Institute (registered trademark) Webinars: The Wednesdays with Woodward (registered trademark) educational webinar series is presented by the Travelers Institute, the public policy division of Travelers. This program is offered for informational and educational purposes only. You should consult with your financial, legal, insurance or other advisors about any practices suggested by this program. Please note that this session is being recorded and may be used as Travelers deems appropriate. 

Title text, Under Pressure: Real Estate Market Update with National Association of Realtors (registered trademark) Chief Economist Lawrence Yun. Logos: Travelers Institute, Travelers, c.b.i.a., MetroHartford Alliance, UCONN School of Business, M.S. in Financial Technology.  

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I would also like to thank our webinar partners for today: the Connecticut Business and Industry Association, the Masters in Fintech Program at UConn, and the MetroHartford Alliance. So, welcome. 

Today we are tackling one of our most requested topics, the state of the housing market and what's really going on. The residential real estate market has been buffeted over the past several years by really hot prices, eye-popping bidding wars, low inventories, builder supply chain challenges and issues, and now we have rising inflation with rapidly rising mortgage interest rates. We all want to know, where is this headed? And what does it mean for the broader economy? 

So today, I'm thrilled to announce our guest, the National Association of Realtors Chief Economist, Lawrence Yun. 

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Speakers: Joan Woodward, Executive Vice President, Public Policy, President, Travelers Institute, Travelers. Lawrence Yun, Chief Economist, National Association of Realtors (registered trademark). A photo of each shows Joan Woodward with short blonde hair in a white top, and Lawrence Yun in a black suit jacket. 

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Lawrence is going to share his outlook for the residential and commercial housing markets. A lot's going on with the commercial housing markets in cities across the United States post-pandemic, so we want to know about that as well. 

And in addition to his role as Chief Economist, Lawrence oversees the entire research group at the National Association of Realtors. He supervises and is responsible for, really, a wide range of economic research, including the NAR's existing Home Sales Statistics, the Affordability Index, which is important for all of us, and the Home Buyers and Sellers Profile Report, all of which you can find on the National Association of Realtors website. 

So, Lawrence provides regular commentary and has received nearly 1.6 million realtors out there who are members. He received his Ph.D. in economics from the University of Maryland. And I might note for all of us who are very active on LinkedIn-- and if you're not on LinkedIn, really think about joining. It's a wonderful way to understand what's going on in today's marketplace. If you are in LinkedIn, he's really a great resource and a good person to follow for those real-time insights on real estate and the broader economy. 

So I invite you to join both Lawrence and I on LinkedIn. So, Lawrence, I'm going to let you take over the virtual floor for a few minutes. You have a chock full of data and statistics for us to really sift through. And then we'll be back for a moderated discussion. 

And we really want to get to a lot of your questions. We listen to your survey feedback, and we understand you want us to ask more of your questions on our webinars, so we're going to do that today as well. So, Lawrence, thank you for joining us, and the virtual floor is yours. 

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Joan's video feed is replaced by Lawrence's at the top right, and a slideshow begins with the title text: Market Update and Outlook, Lawrence Yun, PhD, Chief Economist. 

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LAWRENCE YUN: Thank you, Joan, for inviting me and Travelers Institute. I'm glad to share some of my thoughts on this transitioning real estate market. And it is undergoing quite a rapid transition. Let me put it on a full-screen mode, so you can see it better. 

So the market, as Joan referred to, was super hot the past two years. Multiple offers were a very common phenomenon. There was a tremendous degree of frustration last year where homebuyers got outbid by somebody else-- so having to restart that process all over again. Having to waive home inspection, which is uncomfortable, yet people were forced to do knowing so much other buyer competition. 

But that has all changed. Today, the buying activity is running 20, 25, even in some places, 40% below what it was one year ago, depending upon the location-- 40% reduction in home sales activity. For the most part, the home prices are still above one year ago. Maybe it has already peaked in some markets and showing some declines, and maybe we will see continuous some degree of decline. 

But it is still the median prices being comfortably above one year ago levels. The number-- the appreciation number will no doubt steadily shrink, and maybe we will even reach zero mark on a nationwide basis. So when we say national home prices increased by 0-- say, a few months from now or maybe sometime next year-- it means that half of the country will be experiencing some declines while other half of the country will be experiencing increases. 

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A line graph is titled 30-year Mortgage Rate from 1990 with Resistance Points; the y-axis has 0 at the bottom and 12 at the top, and the x-axis has every other year from 1990 to 2022; Source: Freddie Mac. 

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So let's first move over to the first chart, which shows the mortgage rates. So this is a mortgage rate trend from 1990s onward. Any economic variable, any financial market variable, we know it fluctuates up and down. But the overall trend has been downward, downward, downward, from 1990s all the way until the beginning of this year, from this year, as you can see, rapidly rising. 

So first, why was it declining before this year? Well, it was declining because inflation was a non-issue. Consider a lender. Lender lends the money out, hopes to make some interest income from it so they get their money returned to them. If there is a high inflation, of course, then they would have lost the purchasing power. 

They are getting the interest, but the interest is unable to cover 8% higher consumer prices. So in a time of non-existing inflation, mortgage rate can decline. That's happened. But today, we are in a high inflationary environment. And therefore, the lenders are charging much higher. 

The indirect process is, of course, the Federal Reserve is raising their short-term interest rate. The mortgage market-- mortgage-backed security market trying to readjust to all that situation. So you see that mortgage rate today has climbed to 7% from 3% of last two years-- 7% mortgage rate. I put the three red bar for people who are involved in the stock market, bond market trading. And it's something called resistance point. 

It's one of those trading unrelated to economic news. It's more of a momentum trading where, suddenly, there's a massive buying simultaneously or massive selling occurring simultaneously among the Wall Street traders. So resistance point is, in essence, like a wall. Once you hit the wall, it begins to come back down. So generally speaking, resistance point would say, you hit the wall, then you retreat, as you can see on these lines. 

So this year when the mortgage rate began to increase and reach the same point as the first resistance-- the first lower level bar-- you could either hold at that level or burst through. And what do you know, it just went right past it as if the wall did not even exist. And once that happened, it makes a big gain-- not a small gain, but a big gain until the next resistance point is established. And the next resistance point is where we are today at 7% mortgage rates-- so critical juncture. 

If it holds at this level, possibly mortgage rate can retreat back down to maybe 6.5% before retesting at 7 and see where it goes. But if it somehow bursts through the 7% resistance, then one is looking at the next resistance, which is at 8.5%, something that we do not want to see, certainly our members-- realtor members do not want to see. But that is a possibility if it bursts through. So we are at this critical juncture. 

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Line graph title: 10-year Treasury Yields and 30-year Mortgage Rates; 0 to 20 on the y-axis, and every other year from 1970 to 2022 on the x-axis; Source: Freddie Mac and U.S. Treasury. 

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First thing I do every morning is I look at the 10-year Treasury yield. What is the interest rate on that? That would be, in essence, the borrowing rate by the federal government. I am here in Washington, D.C. The street is fairly light because federal employees still, for the most part, are working from home. 

It's up to the individual supervisors to determine their work policy, but many are evidently working from home because downtown is still empty, which actually raises the question about the office market. And I'm not sure how my microphone picks up outside noise. But at times, there's a little siren because we are just a couple of blocks from the U.S. Capitol, so there's often sirens going on. 

But aside from that, I look at the U.S. Treasury yields because U.S. government is running a budget deficit. We are borrowing more money, so that is the interest rate that the government would pay, in essence. And the mortgage rate, given the backing of Fannie and Freddie, government-sponsored institution, it is slightly above the U.S. government borrowing rate. So you see the two graphs almost moving similarly together.

 

At times, the gap is little wider than normal. And today, it is much wider than normal. Mortgage rate is at 7%. Ten-year Treasury is at 4%. This is a 300-basis point difference, or 3-percentage point difference. Normally, it would be only half that-- 150-basis point difference. 

So in a sense, if we had a normal spread, mortgage rate today would be 6% and not 7%. So worth investigating as to why it is so wide. I mean, is it the case that Federal Reserve is unloading some of the mortgage-backed securities they had purchased, so it's leading to this larger spread? 

Or is it the case that possibly that the market-- mortgage servicing market is not as competitive as we thought? So any time there is less competition, there could be more market power to influence some of the financial variables. But it's very widespread. Under normal circumstances, mortgage rate today would be 6% rather than 7%. 

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Line graph title: Pending Home Sales Index...Sinking Below 2019 Levels; 50 to 140 on the y-axis, and on the x-axis, every month from January 2020 to August 2022; Source: N.A.R. 

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But the mortgage rate is what it is. And it's high, rapidly rising. And therefore, our contract signings, pending home sales contract has been falling, falling, and falling. It always moves in the exact opposite direction with the mortgage rates. 

This graph is from early 2020, right before COVID. So you can, in essence, say the red bar is the pre-COVID sales activity. All the datas are seasonally adjusted. We know the spring months are much stronger than winter, so we adjust the data to remove some of the seasonality. 

So what we are saying is, in that sense, that early months of COVID lockdown, we were stuck at home, people cannot buy property, so it sank. But once the economy reopened, a bursting of homebuying demand. First, record low mortgage rate-- people wanted to take advantage of it-- increased purchasing power from low interest rates, and remote work possibility. 

So all of these factors contributed to very active home sales activity way above pre-COVID days. But beginning of this year when the mortgage rate began to rise, contract signings decline, decline, decline. And depending upon the market, it's running 20% below one year ago, 30%, or even 40% below one year ago. 

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Line graph title: U.S. Median Home Price; y-axis: 50,000 to 450,000, x-axis: January of every year between 2000 and 2022; Source: N.A.R. 

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In the meantime, U.S. home prices are still holding on, relatively speaking. There is some indication that California markets are beginning to buckle. So in San Francisco, prices are already past peak. 

And maybe by this time next year, prices could be 10% lower in San Francisco area. The reason why San Francisco or California market would be more impacted is simply that they are expensive. An expensive market always is more vulnerable to changes in mortgage rate. 

Changes in mortgage rate has the same percentage impact whether in Indianapolis or in, say, San Diego. But the normal dollars is quite large in San Diego in terms of a monthly required payment. And consequently, we see more adjustment in expensive areas. But U.S. median home price, as you can see, is at essentially near-record high. There's some seasonal decline that occurs every year as we enter the winter months. 

But if you look at the beginning of the chart, you see some degree of price bubble. In hindsight, we can say that because prices crashed 30%. But that was led by those funny, shady, risky subprime mortgages-- no income documentation, teaser rate. It simply imploded, and we had a crisis. Thankfully, we don't have those risky mortgages. 

Today, people have to qualify for that all the income requirement, various ratio to get a mortgage. And consequently, homeowners, in fact, are smiling. I mean, they are seeing weakness in the housing market. But the homeowners broadly are smiling to say, I locked in at 3%, and I have seen a tremendous price growth over the past two years, which is my wealth, so homeowners are quite content, and there is no weakness/softness in the home price market at the moment, just holding on. 

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Line graph title: Affordability Index; 0 to 250 on the y-axis, and years 2000 to 2022 on the x-axis; Source: N.A.R. 

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If we look at the Affordability Index, it's an index that our organization created many years ago comprising of three factors-- home prices, income, and mortgage rates-- three very simple variables-- higher the affordability index, easier to buy, or more Americans are in a position to buy. Lower the affordability, more difficult to buy. 

So today it is at multi-year low in affordability, a combination of high prices and higher rising mortgage rate cutting into affordability. The last time the affordability index was this low, as you can see, is 2006 when the home prices were just peaking before the crash. But this time, even though affordability index is at a similarly difficult level, I don't anticipate any 30% price decline. 

Ten percent price decline in California is certainly a possibility. But for the rest of the country, it's probably going to be near zero, meaning that some market may see plus five. Other markets, maybe minus five-- not a drastic change from what occurred in the past couple of years, so it's not going to damage homeowners, nor is it going to damage the financial institution. So the price change over the next year will be very minimal, either positive or negative in many, many markets because we don't have those funny mortgages. 

And second, we don't have oversupply. 

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Line graph title: Inventory of Homes Rising from Super Tight Conditions; y-axis: 0 to 4,500,000, x-axis: years 2000 to 2022; Source: N.A.R. 

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In fact, this is the inventory of homes on the market, the supply. Economics 101 would say, too much supply will lead to prices needing to adjust. But as you can see, today's inventory level perhaps is a little above one year ago by a small amount. 

But last year, it was an acute inventory shortage. So you can say we are essentially a very similarly low inventory level. Of course, we have far fewer buyers. But look at the inventory condition back in the 2006 period or during the housing market crisis. Four million homes on the market, which would be four times larger than today's condition. 

And that is why the housing, at least the home prices, are on much firmer ground. The buyers are not there, but the supply is not there either. And consequently, the probability or the chance of another 30% price decline, as happened in, say, 2010, will not happen because a much solid foundation or reduction in inventory. 

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Line graph title: % of Homes Sold as Foreclosed or Short Sale; y-axis: 0 to 45, x-axis: 2010 to 2022; Source: N.A.R. 

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Here's another indication that the homeowners are quite content and in a comfortable position. The number of home sales that is under foreclosure or needing a short sale-- say someone who was in mortgage forbearance programs-- so they lost their job during COVID, unable to pay mortgage, so that balance was blooming up. And now they still cannot find jobs. They need to sell. Once they sell, the price they receive is unable to cover the mortgage, so it will be a short sales. 

Well, these distressed property sales are accounting for only 2% of the market, historically near low levels. Last year, it was 1%. So it went from 1% to 2%. Now, some journalists may write, oh, 100% increase in distressed property sales. 

But look at this graph. Essentially nonexistent and certainly not the case of 35% or 40% being distressed property sales, as happened in 2010 period. So housing market, again, or the home price is on much solid foundation. 

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Bar graph title: Annual Single Family Starts; y-axis: 0 to 2000, x-axis: years 2000 to 2022; Source: Census slash Hud. 

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Homebuilding, in the meantime, is lackluster. In fact, it's been lackluster for the past 10 years. Look what was happening to housing start in the year 2000, which may be considered a very normal. Then it began to increase-- in a sense, oversupply-- before we encounter a housing crisis in 2008, '09, '10 period. 

But once the housing crisis was finished-- foreclosure property sales out of the way-- homebuilders were still cautious. They were not building all that much. In fact, you can say we had a decade of underperformance by the single-family homebuilders. 

And that's why we had a housing shortage even before the arrival of COVID. So 2019 was that housing shortage. Housing shortage became acute shortage during COVID. 

But right now the builders are cutting back on production. Naturally, they are cautious. It would increase cancellation. 

But once home is completed, it is still selling fast. So perhaps builders need to put that into the equation because construct, once it's finished, they are still able to sell quickly at a profit because if the builders do not build and mortgage rates somehow retreats back down one year from now or two years from now, we could again encounter a housing shortage situation. 

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Bar graph title: Annual Multifamily Starts; y-axis: 0 to 600, x-axis: years 2000 to 2022; Source: Census slash Hud.  

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In the meantime, the apartment building is very active. So you can see the situation of an apartment building is running at a 40-year high. The rents are rising. And naturally, the builders want to chase that high rising rent. 

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Bar graph title: Recession or Not? Why Fuss Over Small Numbers? Two Straight Quarters of G.D.P. Decline; negative 40 to positive 40 on the y-axis, and on the x-axis, quarters 1 through 4 of both 2020 and 2021, and quarters 1 and 2 of year 2022; Source: Bureau of Economic Analysis. 

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Let me now flip to the broader economy. GDP measure is showing two consecutive quarters of a decline. Informally, it will be an economic recession. Officially, we have to wait until the committee who decide whether we are in recession or not. Now, in one sense, you can say we are producing less. Or six straight months? 

Maybe it should be a recession. 

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Line graph title: Stock Market: S&P 500 Index; 0 to 5,000 on the y-axis, and every other month from January 2020 to September 2022 on the x-axis; Source: Standard & Poor's. 

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You don't believe it? Well, check your retirement portfolio. Much of your wealth has evaporated-- so another indication perhaps we are in a recession. 

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Line graph title: Bizarre Recession: Job Openings (greater than) Unemployed; y-axis: 0 to 25,000, x-axis: every month from January 2020 to June 2022; Source: B.L.S. 

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But this is a very bizarre recession if we are really in one. We have a strength in the labor market. There are far more job openings, as reflected in the blue line-- help wanted sign-- compared to people searching for jobs. So you see a help wanted sign at a restaurant, but there is help wanted signs for truck drivers, delivery trucks, a help wanted sign at the nursing home, help wanted sign at the police. There's a shortage of police officers across the country. 

So there's large degree of help wanted signs. Oh, the mechanics at the airlines. So if you have a little mechanical failure, expect long, long delays at the airport. So very bizarre recession, if we are in an official recession, where labor market is quite strong in terms of the help wanted sign that is out there. So somewhat of a mixed picture on the economy. 

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Bar graph title: Payroll Jobs as of September 2022; y-axis: 100,000 to 160,000, x-axis: January 2020 to September 2022; Source: B.L.S. 

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Now, total number of people on a payroll job-- so those receiving steady income-- realtors, many realtors are not on steady income. They are on commission income. And therefore, their income fluctuates. But among those people who are receiving W-2 statement salary, this is the total number of jobs. 

We are now at a record high. More Americans are working today than ever before. And you have to say, well, we have a population growth every year. So every year, we should have a record. And what this graph shows that right before COVID and then lockdown-- which smashed away 20 million jobs out of the picture-- but with each passing month, more job creation, more job creation, such that we are now back at record high. 

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Title: Payroll Jobs: September 2022 versus March 2020, Jobs Now vs March 2020; A map of the United States, each state color-coded for % Change, negative 6.13% to positive 7.10%. Source: N.A.R. analysis of B.L.S. 

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Here is an interesting graph—state-by-state variation. Not all states have recovered equally. So looking at the latest information, September of this year versus March 2020 right before COVID in terms of employment numbers, we are seeing large variation. Green color is good. So if you look at Idaho, 7.1% means there is 7.1% more jobs in Idaho today versus March 2020. 

Florida is doing well-- or at least was doing well right before the hurricane. North Carolina, Texas, Utah also top performers. But the orange color would be the one they are still struggling. 

So you are looking at New York, Michigan still below what it was compared to pre-COVID days-- so some variation. I'm sure you are honing into your state. Well, that is your numbers. If you want to compare with the rest of the country, that is how your state is performing. 

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Line graph title: Consumer Sentiment Index (University of Michigan); y-axis: 50 to 110, x-axis: quarterly from January 2019 to September 2022; Source: University of Michigan. 

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In the meantime, how do the consumers feel about the economy? According to University of Michigan survey, people are saying the economy stinks. So again, recession or not, but consumers are saying the economy stinks because they are reminded at the grocery store. They're reminded at the gas station. And they're looking at their retirement portfolio-- so not a good picture on consumer sentiment.

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Line graph title: Fannie Mae Survey: Is it a good time to buy? y-axis: 0 to 70, x-axis: quarterly from January 2019 to April 2022; Source: Fannie Mae. 

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Here's a even uglier picture related to homebuying, real estate. Fannie Mae survey on a very simple question, is it a good time to buy? And people are expressing, nope, it's not a good time. Well, certainly, we are seeing it in the statistics with far fewer home sales. 

Maybe consumers are saying this because of higher mortgage rates or lack of choices-- not enough inventory in the neighborhood they want to purchase. Only one home is showing up, rather than, say, seven or eight which they want to review. So people are saying it's not a good time to buy. 

Only caveat to this graph is what people say and what people actually do do not match up. Look at the middle of the graph, 2020 and 2021-- housing market boom. But was there an increase in people who say they want to buy? No. They remained the same. 

So it looks like consumers will act if the conditions are right. If somehow the mortgage rate retreat a bit or more inventory show up, maybe they want to buy. They want to strike and make a deal. But the sentiment today remains very, very low. 

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A table titled: Inflation Benefits Debtors? Declining % of income towards mortgage over time; three columns of data for each year from 2022 to 2030; column titles: Monthly Payment on Mortgage Debt $350,000 at 7%, Monthly Salary growing at 5% growth, % of salary towards mortgage; Source: N.A.R. Analysis. 

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We know that inflation is painful. Inflation is frustrating. But is there any benefit to inflation? And history shows us when there is an unexpected inflation, there is a wealth redistribution, wealth redistribution to the debtors over the creditors. And debtors benefit because amount of the money they borrow essentially becomes less heavy than before with inflation. 

For a quick illustration, let me just quickly run these numbers. Assuming a person takes out a $350,000 mortgage, at today's 7%, their monthly principal and interest will be 2,329. Most people are taking out a 30-year fixed-rate mortgage. So let's say that payment is the same next year and down the line. 

The middle column is people's income. I'm using a household with $80,000 annual income, translating monthly to 6,667. That's the monthly income. According to the Bureau of Labor statistics, people's wages today are rising by 5%. 5% increase in salary? 

People should celebrate. Except, it's not time to celebrate because grocery bills are rising even faster than that. So it's actually a declining in standard of living. But nonetheless, people are still receiving higher pay. 

Social Security check recipients next year will get an 8% cost-of-living adjustment. So high inflation, at least there is some degree of increased income generation. So the following year, you see that incomes are rising and rising, assuming we have this persistent high inflation in the upcoming years. 

But if you look at the last column-- very simple math-- amount of debt payment-- mortgage debt payment in relation to income steadily diminished. So again, indicating that if there is an inflation, at least debtors benefit to some degree. 

Let's use another scenario. Let's say inflation disappears in a couple of years. If that's the case, this table no longer is relevant. 

But what is relevant is that if inflation disappears in a couple of years, the mortgage rate will not be at 7%. It will be at 5% or possibly even 4%. People can refinance into lower interest rates. 

So very interesting situation today. Many people simply cannot get a mortgage at 7%. But those who are able would face this table if we have high inflationary environment. But if the inflation dies away, then people can always refinance. 

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Table title: Forecast; Years 2019, 2020, and 2021, with forecasts for both 2022 and 2023; three columns of data for each year: Unit Sales, Home Price, Dollar Volume; Source: N.A.R. 

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So my final slide, the forecast for the housing market-- first, let me look at the history. 2019 before COVID-- very boring year in hindsight, no increase in sales, prices increased by only 4%. 2020 became exciting. 2021 became even more exciting for the housing market. 

But this year is a transition year-- much higher mortgage rates. Once the December numbers are in, I think we will show about 15% reduction in sales. And it will continue into next year, assuming mortgage rate sticks at 7%. 

Home prices, in the meantime, this year, as I already said, is going to be above last year. But next year, it will be essentially zero, meaning half of the country will see price gain. Half of the country will see price decline. Gains and declines will be very minor-- plus minus-- plus five or minus five. Only exception will be markets like California where you may encounter a 10% decline. 

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Lawrence exits out of the slideshow, and the screen is split in half with Joan on the left and Lawrence at the right. 

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So thank you very much for listening. And in fact, if I can just add one more minute because I did not cover commercial real estate as much. But on the commercial real estate, what we are finding is softness in the office market because of that remote work. Even the vacancy rates are a misnomer. Washington, D.C., vacancy rate of 15% officially. 

But you look at the actual building. It's more than half empty. People are not showing up-- half empty. So office market is tittering, wobbly condition. But the industrial commercial buildings are very strong. 

Apartment market is super strong. Retail market is in between where it is beginning to recover, but not as strong as industrial or apartment. So thank you very much for listening. And now I'm going to turn it over to Joan. 

JOAN WOODWARD: Well, Lawrence, that was quite an education-- Economics 101 and 201, I believe, with regard to the economy overall. It's always nice to have different perspectives. I think you probably know I had the Federal Reserve President Neel Kashkari from the Minneapolis branch with us last week. And he sang pretty much the same song you are singing, which there's room for optimism, but there's also room for caution in both the economy and the housing market. 

I want to dig a little deeper, too, into the commercial and industrial housing market in a minute. But what we like to do on these programs is we like to turn the tables on our audience and just get a sense of how they're feeling about their own economic situation. So we're going to put up a poll here in a second and ask our audience to answer this poll. 

So if you've been in the market to purchase a home within the last year, how has the current market impacted you? So have you stopped looking because it's too expensive, and mortgage rates are rising? Have you stopped looking because there's not enough inventory out there? Or you're still planning to go full bore ahead with your home purchase. So let's see how many folks in our audience had a bit of caution here. And then I'm going to ask you to comment as to whether or not this is what you're seeing in your data. 

So you're previously thinking about buying a home, but the last several months has caused you to change your outlook. 63% of our viewers say that's true for them. 15% said because there's not enough inventory. And we have the bold and the brave 22% saying they're going ahead anyway without regard to the current condition. So does this pretty much jive with what you're seeing? 

LAWRENCE YUN: Yeah, certainly, the sales are down because people are saying it's too expensive, or they cannot get a mortgage. Just to put a little context on the mortgage-- mortgage rate at 3%-- say, someone was taking out a mortgage and they said, well, only thing that I can afford as a monthly payment of, say, $1,300 per month. At today's 7%, that number changes. It suddenly goes from 1,300 to near $2,000. 

So people talk about being angry at the grocery store, at the gas station, people who want to buy a home, I mean, they're in complete shock. They simply cannot get a mortgage. So I think, for some people, they’re in that situation. But those with financial capability, even at 7%, they're still hesitant because of the affordability being a very challenging condition. So there is even hesitancy among those people with cash. 

JOAN WOODWARD: OK. Again, I refer back to Neel Kashkari, who we had on the program. And he said that he sees little evidence that core inflation has peaked right now. And so, I guess, you, looking at all this data and all these numbers, do you feel that core inflation has peaked? Or do you think we have a ways to go? 

LAWRENCE YUN: Oh, well, the gasoline prices are definitely past peak. It's much lower than what it was during the summer months. I mean, it's still high, but it is not as high as what had happened in the summer months. 

And then you look at the food prices, which is still rising. But gas and food are outside of the core. So core inflation is what the Federal Reserve is looking at. And what is the big component of the core? It is rents. 

And the rents are still rising. Some of the private sector information is showing deceleration, meaning that it may be rising more slowly now than before. But when I look at the actual figure, the deceleration means the rents were rising at 15%, but now it's rising at 8%, while the official Bureau of Labor Statistics data is showing acceleration, going from 6% to 7% to 8% increase in rent. So the core inflation-- I mean, maybe a few additional months, at least on the rent component, before it begins to show peaking condition. 

JOAN WOODWARD: This might be in the weeds a little bit, but I think it's important to define. What is core inflation relative to just general inflation? What is the difference? And when we think about these statistics that come out every month, what is the difference between core inflation and regular inflation? 

LAWRENCE YUN: Oh, for most people, regular inflation is what they are looking at. How much are they paying for stuff? While the core inflation, in essence, is trying to remove volatile factors because, in the past, gasoline prices tend to be very volatile up and down. And we did not want-- or the economists did not want to panic the public to say, oh, we have high inflation even though it could be a very temporary situation. 

Food prices also tend to be very volatile. So the intent of the core inflation is let's remove the volatile component, and let's focus on slow-moving prices, like college tuition, medical bill. Those are more slow-moving prices-- and rents. So that will be the core inflation.

JOAN WOODWARD: OK. thank you for that. So do you have any concerns? Let's talk about your last slide with your forecast. With the slowdown in the market, interest rates, rising mortgage rates, what about home valuations? So someone may have bought a home last year or the last couple of years during COVID, paid a higher price. But you're saying you're not so worried about valuations dropping like we saw maybe in 2008. Can you explain the difference in the markets from the financial crisis-- the mortgage crisis in 2008 versus where we are today with regard to values dropping? 

LAWRENCE YUN: So the values back in the financial crisis in 2008, the Great Recession, it declined 30%, 35%. And I think in some Florida and Phoenix market, it declined 50%. So these are massive declines in home prices. 

This time, we will not see that for the reason that, first, we don't have those subprime lending. We don't have enough supply. So those are the major differences. But the affordability is still raising alarm. Affordability is a very, very difficult condition. 

So I mentioned about California market where I do anticipate about 10% price decline, which means, say, someone who bought $1,000,000 home is now looking at 900,000. I mean, that's $100,000 reduction in wealth. People may say sort of paper wealth. Maybe they wait five more years, it will recover. 

But nonetheless, they feel like they lost $100,000 for recent homebuyers. But at the same time, Californians who bought home two years ago, they are smiling big because prices have risen by 30%. So you gain 30. You give up 10. So they're overall happy. 

And the other factor is that they locked in on those low interest rates-- 3%. In fact, I would say there are a good portion of homebuyers of the past two years who would say, I would not be homeowners today at 7%, but thank God I got that 3% that I was able to enter. 

JOAN WOODWARD: Great. And do you think those folks who got the 3% in the last couple of years or last five years or so-- do you think they're saying to themselves, I'm going to stay here for a very, very long time? I'm not going to maybe move out of that starter home for a while because I can't afford that 7, maybe 8% mortgage. Do you think the shortage in inventory has to do with people saying, I'm not going to give up my low interest rate mortgage? Is that part of the shortage right now too? 

LAWRENCE YUN: Yeah, you know, absolutely. People are loving their 3%. So just consider a family who has a new child into the family. And they said, well, let's buy a house with extra bedroom. 

And then they said, well, 3%-- we have to give up 3% for extra bedroom? Nope. We love our 3% more. So they're going to stay put in the current house. And that's the situation. 

But to be more economic statistician, last time mortgage rate changed some meaningful amount was when Ben Bernanke was the Chair of the Federal Reserve and there was a temper tantrum where he mentioned something, and the market reacted to what he had mentioned. And the mortgage rate quickly moved from, I believe, 4% to 6%. And during that time period, we saw the listing decline by 12% just because of that changes in mortgage rates. Today, mortgage rate difference are even larger than what happened during Ben Bernanke, so we expect even more people to stay put. 

JOAN WOODWARD: OK, picking up on another Fed official again. Back to Kashkari because he said something that kind of really was interesting to me as an economist. He said the danger of us  “talking ourselves into recession just by saying we're in a recession”-- that really affects how people behave. And consumer spending, as you know, is the one that juices the GDP numbers. So how do you think the inflation fears and recession fears play into how we act in our daily lives? Is it true that we could, just by continuing to talk about a recession, throw ourselves into a recession from a consumer spending standpoint? 

LAWRENCE YUN: Oh, one thinks about some of the great orators of the past, say FDR, Ronald Reagan, Winston Churchill, Barack Obama, where they could talk and boost the confidence of the country. And if people feel confident, they say, yeah, I feel secure about the situation, so I can buy that couch for my home. I can spend more money into the economy. 

But that consumer sentiment index that I showed you, which is very low-- so it's possible that consumers could be talking themselves into a recession and not spend money, which then leads to actual recession. So people say that confidence is one of the cheapest way to stimulate the economy. It doesn't require a tax cut. It doesn't require government spending. Can we boost the confidence? And then confidence itself will lead to better economic activity. 

JOAN WOODWARD: OK, interesting. In this political election year, right, politicians talking about that the economy is still going strong. And there was evidence, obviously, in the unemployment numbers. The payroll numbers are quite good. Getting a number of questions in from our audience specifically about different markets. 

So you talked about the California market. You talked about the Florida market and Texas market being, quote, hot. What are some of the other markets around the country? I know you had the map up there. But what are the hottest markets right now for real estate, and then maybe the coolest markets, the ones that you're a little more worried about? Can you give us-- other than California, and maybe Florida, and Texas-- a little more granular detail? What about the mid-Atlantic? What about the Rust Belt states? 

LAWRENCE YUN: Well, so to answer that question, I actually have to go back in time because, this year, everything is weakening. Every market appears to be weakening condition. But just going back to a time just a little bit-- one is looking at Austin, Texas, Nashville, Denver, Salt Lake City, Boise, Idaho-- just booming. 

Seattle was doing super well. So you saw various markets. And then generally, the Southern states-- Florida market was booming. 

What's happening today is every market is seeing reduction in sales. Prices are decelerating, meaning that it is still up from one year ago, but the appreciation is slowing. Among the top performance, even in this environment, I would characterize as a more affordable market with good job condition. 

So one is looking at places like Raleigh, North Carolina, or the Research Triangle, Charlotte. The Fayetteville, Arkansas, is doing quite strong condition. While the weakness would be more towards the north New England states with the exception of Maine. 

Maine is somehow getting these remote workers from New York City, Boston to come over to Maine. So Maine is holding on relatively well. So these are some of the variation conditions 

JOAN WOODWARD: OK. I want to shift to the affordability of maybe the first-time homebuyer out there. We have a lot of questions coming in talking about the median price and affordability. 

So according to The New York Times, they reported recently that it can now take more than a decade, more than a decade for the typical U.S. first-time buyer to really actually afford the down payment on even a modest home. And we also learned that the average age for a first-time homebuyer is now up to 33 years old. I mean, that's the highest I think we've ever seen. So what do we need to do to keep the dream of homeownership within reach for our young people who may be getting married later or maybe having kids later, but they still want to own that American dream, and they're facing those really high rents in, especially, the downtown inner city areas? 

LAWRENCE YUN: You know, we saw the population bulge of the baby boomers. And then they had the homeownership opportunities. But the children of the baby boomers-- essentially, the echo boomers or today's millennials-- are larger in size. If you were to go to any Main Street America and randomly ask people, how old are you? And people will say, oh, I'm 17, or I'm 45. But the peak number-- the largest number in population is actually the age 30, 31, 32. 

These are the prime first-time buyer age. So we have more Americans at this age. What's happening to the first-time buyers? It is at a historically low percentage. So first-time buyers should be buying, active in today's market conditions. 

But because of affordability challenges, they are being shut out. And consequently, it doesn't mean 20 years delay to save up for down payment. Well, you are looking at people who are in their 50s. Surely, we cannot allow that for our country. 

And that's why it's critical to have increased supply. Increased supply will moderate home prices, let the income catch up. How do we increase supply? 

Maybe there is a natural profit incentive for the builders to build. But more on the affordable side, it's hard to do. So some type of tax credit to build affordable housing or increase government spending dedicated to homebuilding, meaning that infrastructure spending that was passed, maybe some money could be carved out to say, use this money to build more homes. That will certainly help increase supply and provide better access for the millennial generation to realize what many people consider to be the American dream. 

JOAN WOODWARD: OK. We're really hopeful on that one. I want to talk about supply chain issues because we see oil shocks around the world. 

Of course, OPEC Plus just, of course, restricted the supply of gas and oil. But there are also other supply chain issues going on in Asia getting different computer chips and other components for homebuilders. Lumber prices and labor prices are both going up. So are things improving for the homebuilders? And do you see that as a bright spot given the lack of inventory? Do you think the homebuilding industry is going to take this opportunity to really double down on more inventory or not? 

LAWRENCE YUN: At least, the overall supply chain issue is beginning to steadily diminish, which is a good thing. But the material cost going into construction is still running above consumer price inflation. Consumer price inflation is up 8%. 

Construction material costs are rising at 15%. The lumber prices are no longer doubling, fortunately. And it has definitely come down from the peak. 

But it's still higher costs. And I'm here in Washington. There is some construction activity. As I walk past it, there's help wanted signs. We need bricklayers. 

So we cannot build more homes. We need to pay higher wages. All that is eating into the final price of the home. So supply chain is still an issue out there. 

JOAN WOODWARD: OK. Let's shift for a moment, and we're going to get more to audience questions. But I want to talk about the commercial real estate market in a lot of downtown areas. You mentioned the Washington, D.C. area. A lot of the federal government employees are not back to their offices on a full-time basis. 

So what do you think about these leases that are coming due in the next year or 18 months and companies actually reducing their footprint in the cities? How do you think that's going to affect? Do you think that commercial real estate will eventually turn into residential condos or other apartment buildings? Is that a possibility? How are you thinking about that? 

LAWRENCE YUN: Yeah, definitely. I think we will have a oversupply of office just because of less usage. I think many corporations, large organizations are rethinking what is the right hybrid model. 

And at the same time, a company may own eight floors of a building. And they say, well, we don't need eight floors. Maybe we can lease out another four floors. So a large number of vacant properties will begin to show up on the market in the upcoming years. 

And the question is, what happened to this vacant spaces? Can it be converted into where we are short? We are short on housing. So maybe we can be turned into-- whether it is affordable housing, age-restricted senior housing. But any type of housing is where we have a shortage. But trying to make the numbers work is very difficult, and that's why tax credit or government spending to make those conversions would be needed. 

JOAN WOODWARD: OK. I want to talk about the parallels between being a real estate agent and an insurance agent because there was a time over the last decade or so that the realtors were very worried about the new apps that came along, and you might not need a realtor to do a transaction. You might just do this all on one of the apps-- the many apps-- realtor.com, Zillow, et cetera-- that are out there. 

And then insurance agents worried for many years that the direct to consumer-- that people would be purchasing insurance online without the need of a trusted adviser like an insurance agent. So I think there's a lot of parallels here because that didn't materialize. We still very much have a trusted adviser in the real estate agent group. And we very much have a trusted adviser when we buy an insurance policy. So how do you think about that? And how do you think our realtors and our insurance agents can succeed in this new normal of inflation and high interest rates? 

LAWRENCE YUN: You know, first, one has to admire all the technological innovation, more competition into the space. That's all good. But we have to let the consumer speak. 

And the consumers have said, I want to work with the realtors. I want to work with an actual person, insurance agent. Because in terms of the realtors, they are essentially making a most expensive purchase for most people in America. So they want that to be a sound, secure, right decision. 

And second, people want to protect that with insurance. So they don't want to just blindly, just randomly do a few computer clicks to get an insurance. So we have to let the consumers speak. 

And the consumers have said, we want to work with trusted advisers when making a home purchase or in terms of getting insurance. But we always welcome technological competition, innovation. But we have to let the consumers speak, and the consumers are saying they feel comfortable with working with actual trusted professionals. 

JOAN WOODWARD: OK. A question coming in from the audience about building codes and post-Hurricane Ian, obviously, in Florida and other wildfire areas. I mean, do you-- how do you think about the rebuilding in some of these very, very volatile areas where climate change has really been impactful? Does the realtors have a position on should these communities be rebuilt in the same places that could get wiped out again either through a hurricane, flooding or wildfire? How do you think about the rezoning and the building codes in some of these areas? 

LAWRENCE YUN: Any time if it's a repetitive event in the same location, one has to wonder, why build the same house when there's a continuous, repetitive event? Things like tornado, one really do not know where it will hit. So one cannot really say, well, you cannot build there because we don't know where it will land. Wildfires-- is it predictable, repetitive events or is it really unpredictable? 

But clearly, hurricanes are fairly predictable as to where it will hit. Like in Florida markets, I'm sure within the next five years, another big one will hit. So the question becomes, how do we provide insurance in a repetitively hit events? It has to be properly assess actuarially sound-- the little tripping up on the actuarial insurance terminology. So it should be sound. 

But at the same time, you look at, say, a widow who may be living along the Florida coast. They have a fixed income. They knew what their flood insurance rate would be. 

But we cannot simply double that rate just next year. So any increases should be done in a manageable way. I don't know what that manageable increases are. Is it 10%? Is it 15% how it is? 

Or should the federal government actually buy out some of the homeowners to say, OK, we will buy your properties, and we will resettle you someplace else? And then once the next hit comes, there is no rebuilding in that area. But right now is subsidized, in terms of some of the repetitive hurricane flood is subsidized. But that subsidy cannot be quickly taken out immediately in a one go. So it has to be steady adjustment. 

JOAN WOODWARD: OK. Thank you for that. A question coming in from Greg Sample at Willis Towers Watson-- "How long will it take for multifamily units to catch up to demand and ease the spiraling cost of rents?" 

LAWRENCE YUN: I think we are almost there, meaning that the rents peak is probably occurring this year. And next year, rent increases should be moderating somewhat. But still, rents are high. And people's income is not able to catch up. But that also again requires large degree of supply and even some tax credit-funded building of affordable homes. 

JOAN WOODWARD: OK. Question coming in from Raymond Walsh-- "Does the strong dollar and tightening credit and money supply, is it likely exports will diminish with U.S. jobs? Would you agree that job losses could change this picture dramatically? I mean, if job losses start to accrue, isn't that stagflation at this point?" 

LAWRENCE YUN: Oh, yeah, absolutely. High inflation, sluggish economy, job losses-- stagflation. We don't want to see that. So high dollar, strong dollar just means that it's hard to export American products. 

And Americans want to eagerly buy foreign products because foreign products are cheap. I would be more concerned today about European economy. It looks like it's almost certain that European economy will go into a recession just because very large costs on energy.

The terrible Ukrainian war that is occurring-- so high energy costs. So some factories in Germany may have to go through a blackout period, which means they're not producing the BMW to sell. So it's good that it will lead to a recession. And any time there is a major area going through a recession, they will buy less of American products-- not only the strong dollars, but they don't have the income to buy American products. So that could actually bring the U.S. economy even to a slower growth or even tilted towards negative. 

JOAN WOODWARD: OK. Thank you for that. A question from Victoria Cheng-- "Could you comment on renovations and additions to homes?" Instead of maybe moving, people are considering doing a renovation or an upgrade to existing home. And what is your general-- I know it varies by market, and it varies by neighborhood-- but what is your general advice on renovations or additions versus moving? 

LAWRENCE YUN: We have seen a robust rental remodeling activity the past couple of years. It's part of that remote work. So people love their homes. They just want to make it-- redo it so that they have a dedicated space to do office-related work at home. So we saw a good spending. 

But other part is that they are now loving their 3% rate. They don't want to give it, that up. So additional child in the family-- maybe they want to extend additional room, maybe a room over the garage, build it. So maybe that could be something that people work on. 

So I think the remodeling activity will pick up as people are staying put a little longer. Certainly not good news for our members, but we want to assure the homeowners feel right financially. And maybe they just love the neighborhood. They don't want to move out of it. And the only way to readjust to some changing life circumstance is to do remodeling. 

JOAN WOODWARD: OK. This is a bit of an insurance question for you. So Lisa Flowers wants to know, "With financial constraints families are feeling now, does that impact our potential seeing more claim frequency?" So should we expect more insurance claims for smaller items, for example, as people don't have that extra funds to cover the smaller claims? Do you think we're going to have more insurance claims coming in? 

LAWRENCE YUN: Yeah, that one, it seems like, logically, that may be the case among people right on the margin. So that one, I really cannot provide the answer. But logic would suggest there are people right on the margin, just looking for their last nickels and dimes. And they see some issue, they may want to file a claim. 

JOAN WOODWARD: OK. What is your forecast? This is coming in from Dan Borgna. What is your forecast for second or vacation homes in hot markets like in Florida, or the Jersey Shore or, as you say, Arizona? People have, during COVID, realized they don't need to work from their primary residence and maybe can work from a second home. Do you think the vacation second-home market will continue to stay hot? Or do you think that will have a greater downtrend than just a primary home? 

LAWRENCE YUN: Well, it saw a bigger increase during the boom of the past two years. So the vacation home resort area saw a bigger increase. Then this year, it's seeing actually a bigger decline. I'm not sure whether that's due to some companies saying come back to office, even if it's not five days. 

So maybe that's leading to it. But here's my long-term projection, meaning that 10 years from now-- 10 years from now, having a second home will be a very common phenomenon. So Americans all have two-car garage. We all have two automobiles in our garage. But having a second home, I think, will be very common-- not by an individual family because it may be too expensive, but by extended family. 

This week, I get to use. Next week, my sister gets to use. The following week, my uncle gets to use because within the extended family, they're office workers, and I'm sure they have schedules, such that, well, I can work from home, but I don't want to work from home. I want to work in a resort destination. And therefore, I feel very optimistic about their resort vacation destinations. 

JOAN WOODWARD: Wow. OK, interesting. That's a good positive outlook, I guess, for the second or vacation homes. Last question here from our audience-- a lot of questions coming in about variable rate mortgages. So if people were looking to get into the home market this year or next year, do you suggest them thinking about maybe a five-year ARM or a seven-year ARM versus a 30-year fixed, hoping that mortgage rates will be coming down in the foreseeable future? 

LAWRENCE YUN: So I have a son who is in his mid-20s. And he's wondering whether he should buy. And I said, if you decide to buy, go with the adjustable-rate mortgage.

 And the reasoning for that is, first, interest rates are low. And for younger people, it's never their final home. It's their starter home. And generally, they move in five, six, seven years. 

So at least during that time, their payment is fixed. It's not changing. Only after five years it's changing. 

But it could actually change lower with the inflation under control. But the adjustable rate definitely offers lower interest rate in today's market versus 30-year fixed. So that's the advice that I'm giving to my son, so I'll take it as is. 

JOAN WOODWARD: OK, great. I have a couple of those in their 20s too, and I think I'd give the same advice. Lawrence, I cannot thank you enough. This hour just flew by. And we'd love to invite you back on our program in a year or so just to give your outlook for the housing market again to our audience. 

And we're just so grateful for you and everything the National Association of Realtors does do. Again, we're a big insurer of realtors out there with the E&O insurance, and we're very proud. I think we were the first company in 1956 to have that offering, which I just learned. So we're a very proud supporter of the realtors and the whole housing industry. So good luck to you as you navigate these next couple of years, and we'll hope to see you back on our show soon. 

LAWRENCE YUN: Thank you. 

JOAN WOODWARD: All right. And to my audience, I just want to give you a heads up. Watch your email boxes tomorrow. We're going to be announcing our November and December winter lineup. 

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Upcoming Webinars: November 2 -Trucking Industry Outlook: What We're Looking Forward to in 2023; November 9 - Reclaiming the Lost Art of Connecting; November 16 - Global Hotspots and Geopolitical Risks; November 30 -Got Your CPCU (registered trademark)? Explore New Opportunities to Grow Your Risk Management Career; Register: travelersinstitute dot org. 

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Just to give you a sneak preview, November 2, we're going to talk about the outlook for the trucking industry. The trucking industry was greatly impacted during COVID. And we're going to talk about the opportunities for 2023. 

Then on November 9, we're going to be joined by award-winning author Susan McPherson. And she's going to share her tips from her new book, which we're giving away, as we always do-- the Lost Art of Connecting for building those meaningful business relationships. They've never been more important than they are today in our remote and hybrid environments. So she'll be fantastic. 

And then we're going to talk to a former Pentagon official on November 16, Dr. Ian Brzezinski, about the geopolitical risks and the geopolitical outlook both for China, Russia, Ukraine, Europe, NATO-- there's lots to talk about. So join us when we host Ian Brzezinski on our Geopolitical Risks event on November 16. 

To close out November, we're going to be joined by the CPCU Institute's-- the people who put out the CPCU certification-- their President, Peter Miller. And on November 30, he's going to talk about what educational opportunities there are for agents and brokers in 2023. So again, please fill out our survey. 

It's in the chat. We’re so appreciative of all your time joining us on their programs, and we'll see you next week. Take care. 

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Wednesdays with Woodward (registered trademark) Webinar Series; Watch Replays: travelersinstitute.org; LinkedIn Connect: Joan Kois Woodward; Take Our Survey: Link in chat; #WednesdayswithWoodward. Travelers Institute, Travelers, Red umbrella logo, travelersinstitute.org. 

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