Lykken on Lending

In our Hot Topic this week we have Odeta Kushi, Deputy Chief Economist at First American Financial Corporation on the program to discuss a special focus on the millennials and homeownership.

She was born and raised in Albania, moved to the US upstate New York when she was about seven years old. And she has actually always been just fascinated and interested in housing, homeownership as kind of part of that American dream. So she studied economics and really liked statistics. So she learned that statistics are so important in analyzing economic trends and just really developed an interest in real estate and housing and homeownership and also those demographics are just so important in housing, and being able to forecast what’s going to happen in the housing market.

To read more about this week’s podcast click here!!

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Housing Market’s Demographic Tailwind and Affordability Headwind with Odeta Kushi

Welcome, everybody. We’re so grateful to have you here with us. This show is created by mortgage professionals and we’re here for mortgage professionals, but we’re most grateful for you, our readers. We appreciate you being here. Our commitment is to bring you timely information that you can read anywhere, anytime. We are proud to be a part of the Industry Syndicate. Check out all the podcasts at IndustrySyndicate.com. We’re also grateful for our sponsors. The Mortgage Bankers Association of America had a great interview with Michael and Tony. We got a lot of positive feedback with the interview.

Also, we caught up with their friends at Finastra. They’re doing a great job with their mortgage bot solution. A lot of new innovations are coming in with them. I’m grateful for their sponsorship, as well as Lenders One and the Mortgage Collaborative. These two co-ops do a great job of helping lenders connect with each other of the same size.

Check that out. I could go on and on about both of these co-ops. We’re members of both of them. Pick one or both. That’s what we recommend. They definitely get involved. It does not replace the MBA membership, but when you get be a member of one of these co-ops, you’ll find that you’ll benefit from it. Also, Community Mortgage Lenders of America Association. We are grateful to be a part of them.

CMLA, as well as InSellerate. Josh Friend does a great job. That interview that we did with Josh Friend is still getting radically downloaded because of the radical things that they’re doing inside their company to connect you with borrowers. Great empower engagement platform. Also, when you’re recruiting, you got to look at Mobility Market Intelligence, as well as Modex.

Both of these companies do a great job of bringing empirical data, and again, a special thank you to Snapdocs. I’m so thrilled to have the entire Snapdocs team with us on the show as a sponsor. Check out Snapdoc, one of the up-and-coming companies, and you will want to get to know them. We signed up with SuccessKit and if you’re a vendor or lender and you’re wanting testimonials on your website, you need to check out SuccessKit.

I have been thrilled with what they’ve done for us in our consulting business, I’m sure they’ll do the same for you. Lender Toolkit is the newest one of our newest sponsors. We’re so thrilled to have them as a sponsor. Special thank you goes out to Rob, Les, Alice, Allen, Matt, and Jack for their contributions to the show.

Folks, I’m excited to have joining us Odeta Kushi. She is originally from Albania. I met her in San Diego going down an escalator. I believe it was at after the Empower Event. It was an outstanding event and everyone was so positive and flowing, and we are just also conversational-oriented and talking about what a blessing that whole event was. I met Odeta and I was drawn to her intelligence and articulation. She has a podcast, of course, that thrust me into it. We’re excited to have you here, Odeta. Thank you so much.

I’m so excited to be here. It was so great meeting you at MBA and even better to have the opportunity to be on your show with you.

I’m excited about that. We should tell everyone that she is currently the Deputy Chief Economist for First American Financial Corp. She conducts research around Demographic Trends. That caught my attention and that’s one of the reasons I wanted to bring her on. A special focus on Millennials and Home Ownership. We’re looking forward to getting into all of this, but give us a little of your background. How did you go from Albania to Deputy Chief Economist at First America? Tell us about that journey. I love that.

I was born and raised in Albania, moved to the US, upstate New York specifically, when I was about seven years old. I’ve always been just fascinated and interested in housing and home ownership as part of that American dream. I studied Economics, and liked statistics and all of that came together. I focused on economics and the statistics that are so important in analyzing economic trends and developed an interest in real estate, housing, and home ownership; demographics are just so important in housing and in being able to forecast what’s going to happen in the housing. I’ve always been interested in the topic and feel very lucky to be able to work in the space.

The whole topic of demographics is focusing on where the industry is going and what we have lying ahead and it is interesting. Let’s get into the demographics part of this thing. Mike, Fran, and Tony put out some great slides at the conference. They talked about the single biggest group is the Millennials and the Gen Z-ers. It’s a mix where it’s right on the cluster, if I remember correctly, from that slide, I’m very interested to get your perspective as to when are these people going to start buying. When is this group going to start buying homes?

We talk about housing, demographics have to be discussed. This is a fundamental of housing and Millennials are the largest generation in history, ranging between the ages of 25 and 40. They gained this reputation as their Renter Generation and Avocado Toast Generation, that they were always going to be renting. That’s not the case. They’re buying later in life compared to their generational predecessors.

We look at the data and we do see at the same age of 30, Millennial homeownership rates is lagging behind Gen X and also Baby Boomers certainly, but that’s because Millennials are staying in school longer. They’re delaying key lifestyle decisions such as getting married and having kids in lieu of furthering their educations. That’s pushing home ownership further. We’re finally starting to see Millennials age into their prime home-buying years. With that, we’re seeing that Millennials are making up the largest share of home buyers. This is not the renter generation. They’re just doing it later in life.

How much is student debt playing into that?

Certainly, student debt has increased over time. What’s important to highlight is that the interest rate on student loan payments, loan repayment terms, and the student loan debt payment income ratio have remained stable over time. Student loan debt, according to our analysis, is more likely to delay than prevent home ownership for this generation. I think that’s an important point to make because we’re so focused on student loan debt, but we’re thinking it’s more likely to delay a little bit later in life than it is to prevent homeownership for this generation.

One of the things we talked about on the escalator is while Millennial home ownership has been delayed relative to their generation predecessors, Millennials now have the greatest influence and the potential of home ownership, at least the demand side. When you look at the housing market and you look at what parts of the country geographics, how much does that play into it as it relates to the demographics?

Millennials, we find are moving to Sunbelt markets. We’re seeing an outmigration in places like New York City and Los Angeles, and then we’re seeing the Texas metros just explode. Huge in-migration of young households in Austin, in Houston. It seems that Millennials like the Sun, tech jobs, and lower cost of living, all of these factors that plate into some of these migration patterns. Of course, we have to talk about the shift to the suburbs.

That was dominating headlines over the course of the pandemic. It’s important to highlight that the shift of the suburbs predated the pandemic. Millennials were moving out to the suburbs because again, they were forming households, having kids, getting married and looking for more space. We were seeing that shift to the suburbs even prior to the pandemic. It was accelerated by the pandemic. That is another trend that we’ve been seeing as well.

Housing Market’s Demographic Tailwind: The shift of the suburbs predated the pandemic. Millennials were moving out to the suburbs because again, they were forming households, having kids, getting married and looking for more space.

You mentioned the trend for many of the Millennials moving to hot markets like Austin where we’re located, and that is certainly the case, but we are struggling with the supply side of this equation. When are you predicting that is going to shift and we’re going to get back in balance?

It’s tough to answer when, but the supply issue is an issue nationwide. The housing market has been underbuilt for the last decade. That’s one of the reasons that we’ve been seeing house price growth reach record levels, double-digit house price growth. Econ 101 tells us when you have increasing demand against limited supply, that means prices are going to rise.

There is a decade-long supply shortage for multiple reasons. Builders face all these supply-side headwinds, everything from constrained labor supply, exacerbated during the pandemic, and lack of available and affordable land to build on. The cost of inputs has gone up, as we all know. Of course, regulatory impediments all have contributed to slower growth in the construction industry.

Less new construction and inventory is available, and then existing homeowners are just staying put. The ten-year length has reached record levels. Existing homeowners maybe don’t want to sell because they’re afraid they won’t find something to buy that’s better than their existing home. Overall, inventory has hit near historic lows. I think that is the primary issue and primary constraint facing the housing market.

Interest rates is another big factor where things are going. We’ve watched some interesting volatility here. I love to get your perspective on what we’re going to be seeing as relates to interest rates. I’m hearing several say and predict we’re going to have a very volatile year in 2022. Do you share that perspective?

Interest rates are tough, as we know, the 30-year fixed rate mortgage is loosely benchmarked to the ten-year treasury yield, and that tends to be impacted by everything from geopolitical events, any kind of economic and health uncertainty. The consensus is that mortgage rates will rise. The consensus is up to about 3.7% by the end of 2022. That’s historically very low. The historical average is just over 7%, so interest rates of 3.7% are still very low.

The general consensus is that rates will rise for a few reasons. Higher inflation going into 2022, the Fed tapering its asset purchases, and then, of course, the economy improving. We know that in improving economy tends to put upward pressure on the ten-year treasury yield and mortgage rates as well. That is the consensus now and could change. Of course, we have this variant that could result in more uncertainty, but right now, the expectation is that rates will rise.

When you look at interest rates and rising prices, we have an affordability problem moving forward. Talk about that. What are you seeing?

Affordability is not just a function of interest rates but also a function of income and nominal house price growth. Yes, mortgage rates are expected to rise and wages are expected to rise as well. We have a tighter labor market where we’ve seen wages start to increase and household income increase, which could push back against the rising mortgage rates. The expectation is that nominal house price growth will remain positive but maybe start to moderate.

All those factors need to be considered when thinking about affordability. There’s a little bit of a tug-of-war. Rising mortgage rates and also rising incomes. What will be the net effect on affordability? It’s hard to say. Right now, nominal house price growth has far exceeded house-buying power. House-buying power is just how much home you can afford to buy, given interest rates and income. Nominal house price growth has been so high that it’s been outpacing the growth in house buying power and we’ll have to monitor that, looking at those dynamics.

We talk about the geopolitical world we live in. We look at just what we have in politics here in the good old USA. Talk about how you guys are seeing this play out. There’s more and more concern about the amount of debt we’re putting on ourselves, on our children, and our children’s children. How much is that going to have an impact on where we end up in housing?

When I think of politics and what relates most to housing, I always go back to monetary policy and the future of monetary policy and what that could mean for the housing market. The Fed Chairman Jerome Powell came out and said that we should not be using transitory anymore. Maybe inflation is going to stick around longer than the Fed anticipated. What is the implication of that on the housing market?

Higher inflation is likely to result in higher tenure treasury yields, and potentially higher mortgage rates as well. That’s how I like to think of monetary policy impacting housing. It’s not necessarily what will the Fed do with the federal funds rate. It’s what’s happening to long-term bond yields. How does that impact mortgage rates? Keeping an eye on that and how it’s impacting the housing market.

You have a podcast. Tell us a little bit about it. How can people hear about it.

We have Mark Fleming, who’s the Chief Economist of First American. We co-host a show called The REconomy Podcast where we focus on affordability trends. We talk about demographics and whatever’s of interest in the housing market. We release an episode every other week, and you can find that on our Ecom Center FirstAm.com/economics. We try to tackle any interesting topic that’s on our minds that week.

Give us an example of some of the topics that you have been tackling.

We have a focus on affordability and there are a lot of questions about what rising rates could mean for the housing market. We did an analysis looking back in time, looking at different rising rate eras, and figuring out what impact there was on home sales and house prices. What we found is that home sales and house prices are both fairly resilient in the face of rising mortgage rates, house prices particularly, and that is because house prices are what we call downside-sticky. Homeowners would rather withdraw from the market rather than sell at lower prices.

Housing Market’s Demographic Tailwind: Home sales and house prices are both fairly resilient in the face of rising mortgage rates because house prices are what we call downside-sticky. Homeowners would rather withdraw from the market rather than sell at lower prices.

We found that during different rising mortgage rate eras, house prices tended to continue to stay positive. House price growth remained positive and home sales for the majority of these eras continue to go up as well. That’s been one of our focuses, trying to understand what might happen in a rising mortgage rate environment.

One of the things we talked about is how the housing market was largely pandemic-proof. We got to know what do you mean by it was largely pandemic-proof.

The housing market hit many records over the course of the pandemic. Home sale records and house price appreciation records. When the pandemic first started, we wanted to try and get a better understanding of what might happen in housing. We took a look at the unemployment rate over time and what we found is that there’s a clear distinction between the unemployment rate for renters versus homeowners. We know that homeowners are less likely to be unemployed overall, and in times of economic distress, the rate of unemployment among homeowners increases less than the rate among renters.

Over time, the difference between renter and owner unemployment rates is about 4.5% points. When the pandemic started and we realized this was a services sector recession, disproportionately hurting younger lower-wage workers in the hospitality industry, we thought this was likely going to impact renters disproportionately and that’s exactly what happened. Renters were disproportionately hurt during this pandemic recession, whereas home buyers, potential homeowners, or potential home buyers were not as impacted by the decline in the labor market. We know that home ownership is correlated with being older and more educated.

That’s one of the reasons that we saw homeowners not as impacted by this labor decline. We saw savings rates increase over the course of the pandemic. Of course, the renewed interest in home ownership, the need for more space, the fact that our homes are no longer just a dwelling but also your office, your daycare center, your gym. All of these factors made buying a home top of mind for many people. It comes down to the bifurcation in the labor market and the fact that younger lower-wage workers were hurt more than higher older workers.

When you look at the Millennials, you look at the demographic groups, what are some of the greatest headwinds facing this next generation of first-time home buyers?

I would say the biggest headwind is supply. You can’t buy what’s not for sale. We know there’s all of this demand in the market. A lot of Millennials are looking to buy that first home, aging into marriage, household formation and having kids, wanting to maybe move out to the suburbs. There’s just not a lot of inventory for them to choose from. I say that the lack of inventory is a primary headwind for this generation.

Do you think the work-at-home movement is going to continue?

I certainly think that we’re headed towards a more hybrid environment. We’re in for more work-from-home days than prior to the pandemic, and that’ll have some interesting implications on commercial real estate as well. There’ll be this untethering of us from our downtown centers, maybe we don’t need to go to the office as much or maybe there’s more demand in the suburbs where a lot of people have moved over the course of the pandemic. I certainly think the work-from-home will be here to stay even after pandemic concerns wane.

It’s such a joy to have met you and have you. I’m looking forward to continuing to follow you. I’d love to have you back on and continue this conversation. Thank you so much, Odeta.

Thank you so much for having me. I’ll make sure to say hi to Mark for you as well.

Please do.

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Be sure to come back here next week. A special thank you to our sponsors, Finastra, CMLA, Lenders One, InSellerate, The Mobility MMI, Modex, the MBA, Knowledge COOP, the Mortgage Collaborative, Snapdoc, SuccessKit, and Lenders Toolkit. Good to have you with us, everybody. I look forward to seeing you back here next time.

Important Links

• IndustrySyndicate.com
• Mortgage Bankers Association of America
• Finastra
• Lenders One
• Mortgage Collaborative
• Community Mortgage Lenders of America Association
• Josh Friend – Past episode
• Mobility Market Intelligence
• Modex
• Snapdocs
• SuccessKit
• Lender Toolkit
• Podcast – The REconomy Podcast
• First American Financial Corp