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Interview with Corelogic's Chief Economist Dr. Frank Nothaft

[Updated: Jul 27, 2020] Jun 30, 2020 by Liz Brumer
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Millionacres sat down with CoreLogic's chief economist, Dr. Frank Nothaft, to get a pulse on the housing and mortgage market in the current climate. Dr. Frank Nothaft is responsible for forecasting the macroeconomy, mortgage and housing markets, and topical market trends for CoreLogic, Inc., America's largest provider of advanced property and ownership information, analytics, and data-enabled services.

Millionacres: Pre-coronavirus you had a positive outlook on the housing market for 2020. Has your outlook changed considering the global pandemic? If so, what factors have been impacted the most (such as affordability, demand, rental rates, available financing)?

Dr. Frank Nothaft: You're absolutely right, we did have a positive assessment pre-pandemic. When we looked at the activity starting this year, in January and February, there was a combination of a strong economy, low unemployment rates, rising income, and low mortgage rates that really set a positive tone. Home sales in January and February were up on a year-over-year basis. The market seemed really well positioned to have the strongest spring home-buying season since before the Great Recession.

But then of course the pandemic hit. We saw widespread shelter-in-place directives from state and local governments, and that led to the decision to cancel open houses that were scheduled. Many home sellers working with their agents decided, if they had just listed their home, to temporarily pull their listing off the market, and many people who were preparing to list their home in the spring market just decided to wait it out. Listings of homes for sale fell dramatically after mid-March. The limited inventory we were seeing in January and February was already very lean compared to the beginning of 2019.

The market, though, has evolved over the last three months and turned around pretty quickly. I think more sharply than anyone had expected. There are a couple of indicators I look at, one in particular is pending sales. Pending sales refer to the ratified contracts, before the settlements, typically happen about 30 to 45 days prior to the settlement. Pending sales were doing well until early March, but fell after the shelter-in-place was put in order. They bottomed out about a month later, about mid-April.

The latest CoreLogic MLS data from mid May, middle of June, pending sales, are actually above last year's level. We get the data from our MLS clients on a daily basis, and we've grouped the data by week, so we can get the high frequency so we can observe if there are changes in the market. Closings are still down because there's still a 30-45 day lag between pending sales and closings. What I'm hoping and looking for in the coming weeks, is that closings will start to trend back up compared to a year ago. Comparing data to the same week or month last year accounts for seasonality, which plays a big role in the housing market.

We took a deeper dive at the data to try and see what's driving this, and what we found is that first-time homebuyers are very active. First-time homebuyers, here in late May and early June, their activity is up, compared to the same week a year ago. When we group the demographics by cohort, we saw a pattern consistent with first-time homebuyers. It's the millennials who have come back strongly in May and early June to buy, and to me what that says the record low level of mortgage rates is really providing that opportunity to buy, it has enhanced the affordability. The 30-year fixed-rate mortgage interest rates are three-fourths a percentage lower than a year before, which means the monthly principal and interest payment to buy the typical home is more affordable for buyers.

Millionacres: With the current housing shortage and continuous need for affordable housing, how do you think the mortgage and housing market can meet the current demand in the given climate? What investments, residential, multifamily, or other affordable housing solutions such as modular housing or microunits appear to have the best impact on the demand?

Dr. Frank Nothaft: They're all a part of the solution. There is no denying we need more production of housing units. We've been underbuilding the number of homes; that's why we've had a small inventory of homes available for sale and shortage of affordable homes in many markets. A good sign as recently reported by the census is that new-home construction picked up from April, which is a positive sentiment among builders. Some of the responses will be to produce and see a pick up in housing starts.

Millionacres: Are you seeing any trends in housing demand, pricing, or relocation away from large metro cities as a result of the outbreak?

Dr. Frank Nothaft: It's very interesting with the pandemic, how will this affect the viability of single-family vs multifamily. We have to see how it evolves over time -- some families really concerned and freaked out and they have now a strong preference to move to either a single-family, two-family home, condominium, townhouse, move out of the city, move away from the dense population, and out of large multifamily buildings.

This may only show up over time as shelter-in-place orders are lifted and leases come to their maturity. We may actually see a move in that direction, young families that had a preference of living in the city, perhaps moving out of the city where it's less densely populated and moving out of high-rise apartment buildings to a low-rise garden-style apartment or townhouse community or even single attached or detached housing. We may see some separation between demand and preference by tenants. Multifamily new rents may actually come down in some markets, reflecting a pickup in vacancy, the desire for property managers to maintain occupancy levels. I wouldn't be surprised over the next couple of years to see the national average multifamily apartment rent down a couple of percent. Single-family property rent may slow, but we may not see it turn negative.

Millionacres: What regions, markets, or metro areas are the least impacted or have had the quickest rebound from the pandemic?

Dr. Frank Nothaft: The speed of recovery in certain markets or metro areas is related to shelter-in-place directives and how strong and vibrant the economy was prior to the pandemic. Dallas and Houston were doing very well pre-pandemic. Dallas had an unemployment rate around 3%-3.2% pre-pandemic. Lots of in-migration because of employment growth and job opportunities. Texas as a whole has been a state and area where shelter-in-place directives have not been as strict as other places like California, Seattle, New York, Washington D.C. Metro area. But they have come back more strongly, with home up sales up more over the last month compared to other markets.

Millionacres: What do you see as being the biggest opportunity for real estate investors in the current economic climate for the remainder of 2020 and beyond?

Dr. Frank Nothaft: There is clearly a weakness in retail and hospitality and there's a bit of weakness in office, not as much because of thoughts that there will be more of a shift of working remotely. The part of commercial real estate that seems to be in demand is a warehouse, and that's because of logistics and shipping from online orders. This will likely continue over the near term and longer term. Looking at the apartment market, over time will do the best out of the commercial sector because people still need to live somewhere. That provides a fundamental demand for apartments. I do believe apartments will soften, I'm expecting that we might see apartment rents down about 2% over the next twelve months, as the recession and high unemployment promote new household formations, where people go into their own home (with family or friends) and create their own home.

For single-family attached or detached, I do see rent growth slowing but not going negative, so this may be a nice opportunity for real estate investors in the current climate and coming months. And given the shortage of inventory and strong demand, especially among millennials, home values will have more upward pressure in the near term. I see this trend continuing for the remainder of the summer and fall 2020. However, as we get into 2021, I think it could be a very different story.

Millionacres: What do you see as the biggest threat to the housing and/or mortgage market for the remainder of 2020 and beyond?

Dr. Frank Nothaft: I worry about a very slow recovery and elevated unemployment that extends well into 2021. It's the highest we've seen in the United States in at least 80 years. So even if the unemployment rate gradually declines, that's still really high. The longer the unemployment rate remains elevated, the more lasting impact they have on consumers wanting or having the ability to buy, including homes. Which impacts the housing market.

While there has been some financial stimulus provided to Americans through stimulus checks and forbearance allowance on mortgages, what happens longer term if we don't have an additional stimulus that we don't have to support workers who have lost their jobs?

If the unemployment rate is still elevated, 8%, 9%, or 10%, this will cause a weakening home- price growth and strain for those who have to make the mortgage payments. If the forbearance period expires and there has been no programmatic extension, we're going to also see a rise in delinquency in mortgages and foreclosure on mortgages. That's a phenomenon that can really hit the market at the end of 2021. This can put some additional downward pressure on home values.

Our forecast for CoreLogic's national home price index predicts price growth to continue over the next few months; however, 12 months from now is that the national index will be down 1%. It doesn't mean that prices fall in every single jurisdiction across the U.S., but it does mean that generally, prices are declining in most areas. Of the 50 states, we're projecting a decline in home prices in 41 states and higher than they are right now in nine states a year from now.

This interview has been edited for length and clarity.

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