Tom Heintjes: Hello, and welcome to a new episode of the Economy Matters podcast. I'm Tom Heintjes, managing editor of the Atlanta Fed's Economy Matters magazine and your podcast host. Today, we're once again sitting down with one of our regular guests, Domonic Purviance, a subject matter expert in the Atlanta Fed's Supervision and Regulation Division. Domonic, you must feel like I'm always chasing you down to be on the podcast, but there's just so much to talk about when it comes to housing—and I do appreciate your willingness to sit down with me again today. I promise not to ask you again until 2025.
Domonic Purviance: It's a pleasure being here.
The Atlanta Fed's Domonic Purviance. Photo by Stephen Nowland
Heintjes: First off, let's talk about the Federal Reserve's policy moves recently. In the past two meetings, the Fed has reduced the fed funds target rate, and since residential real estate is especially sensitive to interest rates, what does this mean for the housing market? It's pretty recent, so maybe the impact isn't really observable yet.
Purviance: Well, long term, I think it means that we will see some reprieve from higher rates. But unfortunately, in the short term, mortgage rates have actually gone in the opposite direction, and so it's a little bit counterintuitive. We're learning a lot more about—at least, the general public is learning a lot more about—what are the drivers of mortgage rates, because we tend to assume monetary policy has a direct impact on it. And in a way it does, but mortgage rates are more tied to the bond market and long-term rates, like Treasuries, more so than they're tied to the fed funds rate, which the Federal Reserve is primarily responsible for.
Heintjes: Even though mortgage rates were elevated for some time, as the Fed began tightening policy, most homeowners have mortgage rates that are not so elevated—right? They took out their mortgages before rates started climbing.
Purviance: Right. So, a couple of things: most people, if you bought a home or refinanced your home before rates started to go up, you're sort of locked in at this very low, fixed mortgage rate. About 95 percent of all mortgage holders have a mortgage that is less than 6.5 percent. It creates some of what we call the lock-in effect, where if you're locked in at a low 3 percent mortgage rate, and you maybe bought your house before home prices started to rise, and so you're sort of in a sweet spot in that you own a house at a very affordable rate and affordable monthly payment—but at the same time, if you want to move, you're less incentivized to move, because if you bought another house, you'll be paying a higher interest rate. And of course, the home prices have, in some cases, gone up 30 or 40 percent, depending on what market you're in. And so, your housing costs would be significantly higher, so a lot of people are electing to not buy today. I should mention this, because this question might come up: Why are mortgage rates still high, given the change in Fed policy?
Heintjes: Yes, I did want to drill down into that.
Purviance: A lot of it has to do with expectations—future expectations—from investors about inflation, as well as deficits going into next year. If there is this expectation that inflation will go up or there'll be higher deficits, then that creates the expectation from investors that long-term financial instruments like 10-year Treasuries may need to have a higher rate in order to attract investors. And because mortgage-backed securities are tied to Treasuries, if Treasury rates go up then mortgage rates will also go up. The other thing that's happening is, if there's a greater payoff risk for investors in mortgage-backed securities, they may charge a higher premium for mortgages in order to get more of their returns earlier. So, to explain that, if you got a mortgage today and mortgage rates are somewhere closer to 7 percent—they started to go down this summer; I think the bottom was about 6.5 percent, so they're closer to 6.9 percent today. And so if you bought a house today and you got a 6.9 percent mortgage, if mortgage rates went down to 6 percent or 5 percent, you're most likely to refinance. And so, if you're an investor holding the security on that mortgage, that mortgage will pay off and you'll lose the cash flow associated with the mortgage. And so, investors are charging a higher premium in order to get some of those returns before the home buyer refinances. So that's the premium that's associated with the payoff risk. If you think about how the mortgage rate tracks along with Treasuries, and there's a spread between the 10-year Treasury rate and the mortgage rate—typically, that spread is somewhere around between 150 to 200 basis points. Over the past maybe 20 years, it's been about, on average, 185 basis points. Well, that spread is over 200 basis points now, and that's because of that payoff risk premium that investors are getting for mortgages. And so, the added risk, the uncertainty moving into next year about a strong economy—that actually may create some risk for inflation. Greater budget deficits at the federal government also creates some uncertainty. That keeps rates higher, and then you add that risk premium from investors that pushes the spread even higher, so the net effect, if you're a consumer listening to this, is unfortunately, rates are higher than you would expect.
Heintjes: Well, you actually touched on something I wanted to ask you about, and that is: What does all this have to do with the level of refinance activity we're seeing? Are people refinancing, or is it not as attractive as you might think, given that the Fed has lowered its target rate—or how is refinancing affected?
Purviance: Well, the problem is, if you have a mortgage and you're trying to refinance your mortgage, the only reason why you would refinance today is if you could get a lower rate than you currently have. As I mentioned, over 90 percent of all mortgage holders today have a 30-year fixed rate of 6.5 percent or lower—and really, the majority is below 4 percent. And so as long as rates are above 6.5 percent, there is no incentive for people to refinance. The only people who would refinance their mortgage today are people that maybe bought a year ago when rates were 7 percent, and so, 6.8 percent or 6.9 percent may be more advantageous for you to refinance. But we're not seeing a big spike in refinance activity, given where rates are.
Heintjes: Domonic, I'm a big fan of your Home Ownership Affordability Monitor. It's a very popular tool at the Atlanta Fed, and I wanted to ask you about the trends in housing affordability that you're observing. Do interest rates translate into more affordable housing, or what are the trends like? And I want to focus on the Southeast, because I know other countries have other different dynamics. But just in the Southeast, what trends do you see in affordability?
Purviance: So first, just a plug for the HOAM tool—that's the Home Ownership Affordability Monitor, It's our publicly available tool, you can go to our website and access it. We've done some significant updates to the tool just in the last month, that allow you to get more neat charts and get greater granularity. So I would encourage anyone listening to the podcast to visit the Atlanta Fed's website and check out the tool.
Heintjes: Yes, and we'll have a link to that on the site. So thanks for that plug.
Purviance: What's happened in the Southeast, to answer your question: so, the Southeast is a pretty broad region. Some markets are seeing different conditions than others. Over the past few months, prior to this recent spike in interest rates, interest rates were trending down, and that created greater homeownership affordability. And so, affordability has improved slightly, but the challenge is: as interest rates are coming down, home prices in many markets—like in, let's say Atlanta or Nashville, some of our larger markets—home prices remain elevated. Now, we're not seeing double-digit appreciation the way we saw a few years ago, but maybe home prices are either stable or up 5 percent—in Atlanta it's up about 2 percent, year over year. So not excessive home price appreciation, but home prices remained high even though interest rates went down. So we weren't seeing a significant benefit in affordability. Now, in some markets—and this is sort of the big change that we've been observing all year—we have seen inventory increase, especially in markets in Southwest Florida, like Naples or Fort Myers.
Heintjes: Do you mean like the months' supply availability? Is that what you mean?
Purviance: I just mean the total inventory level. I'll talk about months' supply, because the months' supply of inventory is a combination of supply and demand factors—but just the overall available inventory in the market has increased, and in some cases significantly. And so, in some parts of Florida inventory is up 30 or 40 percent year over year. Now, when you look at the months' supply of inventory, we're not seeing any indications that the markets are oversupplied, and that's because we were already very, very undersupplied—so even a 40 percent increase in inventory still keeps us in what's considered a balanced inventory level. Just to define it, a "months' supply" is how many months it would take to absorb the current amount of inventory, given the current rate of absorption. Anything between four months and six months is considered balanced. We're not seeing too many markets that are over six. There are some markets that have a month's supply, particularly in Southwest Florida, that's oversupplied. When a market is oversupplied, that creates downward pressure on price, and we do see that across the state of Florida. There are some markets where prices are coming down—by like 2 percent or 3 percent. We're not talking about significant declines, but prices are declining in some markets. And so, we see higher days on market, we see homes that are selling that the sellers are having to offer discounts in order to get homes to sell. So all of that's happening in markets where supply is increasing. Why is supply increasing in markets? Supply is increasing across the country, and most of that's because—
Heintjes: I assume it's because builders have been busy. But is it that simple?
Purviance: No.
Heintjes: No, of course not. [laughter]
Purviance: It's because even though it's not advantageous for most people to sell, some people just have to. If you get married, you get divorced, you downsize, you get a job somewhere—so we're not seeing a lot of discretionary sales or people that want to move up, but we're seeing that people who have to sell are willing to sell. The other factor that is sort of anecdotal, but in a lot of markets that are seeing an increase in nonprincipled interest cost, specifically homeowner's insurance, and that have had this wave of storms come through some of these areas, we're seeing that being an impetus for people to sell. And in Florida, in particular, there has been a pretty significant increase in HOA costs because of some special assessments in order to do some delayed maintenance on some condo properties. And those can be pretty high and hard to cover the cost of, if you're maybe a senior person on Social Security. So a lot of people dealing with the pressure, even though they're locked into a low mortgage rate, they may be dealing with the pressure of having to pay higher insurance costs. And in some cases, the insurance costs could be 12 percent of your monthly payment—and even higher if your mortgage costs were locked in at a very low rate. And so, we are seeing this increase of inventory being put on the market. Some of it could also be the result of damaged inventory from some of these storms, that people are just having to sell. So there are a lot of factors creating an increase in inventory. We can talk about the new home side a little bit later, but it's not purely because homebuilders are introducing a lot of inventory.
Heintjes: Well, as you noted, the Southeast is very diverse—a lot of pockets of types of activity, and there's no "one size fits all" answer about affordability. But I wonder if there are certain markets in the region that stood out to you, either in terms of increased or decreased affordability? You mentioned Florida, but surely there are places outside of Florida that got your attention.
Purviance: Yes, we haven't seen a whole lot of improvement in affordability in most markets. Now, the increase in mortgage rates—that hasn't really filtered into some of our numbers yet, so I actually expect affordability to improve. Right now, nationally, if you make the median income, which is about $85,000 a year, you're going to spend 42 percent of your annual income to afford the median price house, which is about around $400,000—a little bit higher than that. Affordability is somewhere about 30 percent, so 42 percent is much higher. And some markets, relative to the rest of the nation—like Atlanta, where the share of income needed to afford the median price house here is about 38 percent. In some other markets, it's much lower than the national average. And then of course, in some markets in Florida it's much higher than the national average. But in terms of improvement, the markets that are seeing improvement in affordability are markets that are seeing some downward pressure on home prices. Those are markets where inventory has increased a little bit, and so that's bringing home prices down and that's making overall affordability improve. And so again, because we're seeing that build-up in inventory in markets in Florida—and in some of our coastal markets like Louisiana, we're seeing some increased affordability, but most of that's because there's some downward pressure on home prices. We're not seeing as much reprieve in affordability created by interest rates.
Heintjes: The Southeast continues to get a lot of new residents. People are moving down here to Georgia, Florida, other states. Do those new arrivals have any effect on affordability or demand for housing? Obviously, there must be greater demand if we're having a larger population, right?
Purviance: Well, part of what happened...during the pandemic, let's just say, if you were living in New York and you saw your home value increase by 40 percent or so, and interest rates were very low, you could sell your house in New York and buy something here, put a significant down payment on a house here, and be locked in at a low interest rate. But what's happened since rates have gone higher, fewer people are moving to Georgia than during the height of the pandemic years. Now, some argue it's returned to prepandemic levels. But if you're conditioned to expect a lot more people moving to the market, I think that creates some pressure on home prices, if more people are moving than there is supply available for them, then that would create this upward pressure on price—but we're not seeing as many people move. If you look at Georgia, for example, in 2022 we had over 100,000 people move here on net—you just take the people who left compared to the people who moved in. So, we were net 108,000 new residents to the state. Well, last year in 2023, that dropped to about 88,000—so 20,000 fewer people moving, and big markets like Atlanta capture a lot of that demand. Across Florida, it's the same. Florida and Georgia, and I would include the western part of Tennessee in our district, normally capture a lot of people moving—not so much Alabama, Mississippi and Louisiana. But all of those states, the big in-migration states like Florida, Georgia and Tennessee, aren't seeing as many people move. And that goes back to that "rate lock" effect: people are locked in at a low rate in those feeder markets like New York, New Jersey, and California. So fewer people are coming; that's one of the reasons why inventory in some of our markets is starting to build, because there are less people who are able and willing to move—and that actually may help affordability.
Heintjes: Domonic, we used to read and hear a lot about bidding wars, offers over the asking price, cash offers, and so on; are those types of stories still commonplace, or has a more traditional way—I'll call it a traditional way—of purchasing a home become more widespread?
Purviance: Yes, it's more of a buyer's market than a seller's market today. There are some pockets where you still see some bidding wars and things like that, but on average we're seeing people who are listing their house on the market and it's taking a little bit longer to sell, so they're discounting those homes in order to sell them. If you look at things like the sales-to-list price, it's come down. You list the home, and then what you end up selling it for is some sort of discount. We've seen the sales-to-list price—that ratio—decline, which means people are having to discount the homes to sell. Not significantly—we're not seeing like major, like 30 percent discounts that would indicate some significant stress in the market. But we are seeing homes on the market maybe declining by 5 percent, or somewhere in the high single digits—and that's an indication that it's more of a buyer's market than a seller's market. So, we're not hearing as much about bidding wars. It's not the overall narrative sellers are having. We could talk about the new home market, where it's easier to understand this. But for the most part, sellers are having to offer some sort of incentive or discount to make buying a house a little bit more attractive.
Heintjes: You teed up my next question nicely. I wanted to ask you about home builders, and how would you describe their sentiment these days?
Purviance: It's interesting. I just came back from Augusta this morning and did a presentation for the homebuilders association there. And I've been throughout the state of Georgia this year. I've been to Savannah and down to South Georgia, to different homebuilders associations, getting their sentiment. So, the beginning of this year, builders were expecting interest rates to decline, and they were prepared to pull back on some of the incentives that are currently being offered. What happened was, when interest rates went up there's this lock-in effect; that means that there's less existing home inventory, so people who have a home are less willing to put their home on the market. So that created an accelerated demand for new homes, so builders were actually benefiting from the shortage of supply in the existing home market: so, there's an increase in housing starts, and to meet demand, more builders had to have speculative inventory—that means you build a house without a buyer, without a presale. That's because they were competing for people who were looking for a house to immediately move into, so we saw a big increase in inventory under construction. However, because interest rates were higher, builders had to offer some incentive in order to make buying a house more affordable. If you think about it, the distribution of home buyers is comprised of existing buyers and first-time buyers. For the existing buyer, for the most part that market is suppressed because people are locked into their house at a low rate. So, we've seen a bigger share of first-time home buyers than you would expect. We would think, "Well, higher interest rates means fewer first-time buyers"—that's actually not the case. At least the share of buyers that's comprised of first-time buyers has increased. Now, in order to make buying a house affordable for first-time buyers, builders are having to do rate buy-downs. That's really across the country, in most of our regions—and particularly for builders that are doing more volume—meaning they're building a significant number of homes a year. They're having to offer rate buy-downs in order to make it affordable. At least they would offer the incentive of...it could be anywhere from 10 to...I've heard of builders spending upwards of $30,000 per house to buy down the interest rate in order to make it affordable for that first-time buyer. So, if the current interest rate is 6.9 percent, a builder could buy down that rate to as low as 5 percent, or I've heard of builders buying it down as low as 4 percent. That's how they're able to make housing more affordable, and it doesn't show up as a discount to the home price—but it does in a way impact the margins for builders, but they sort of make it up, because that product is easier to sell. So it's kind of complicated, but builders have enough margin—cushion—to be able to absorb that cost, and that's how they're able to sell new homes and make it more affordable. But what's happened this year, to bring us to the present: they were expecting rates to go down, so they expected that they could pull back on rate buy-downs. But because rates stayed higher for longer, and it looks like mortgage rates are going to continue to stay high, at least for the near-term future, it's highly likely that builders are going to have to continue to offer these incentives in order to make buying a house more viable. So, they're seeing demand; people prefer a new house with all the bells and whistles, and less maintenance concerns of an existing house. But in order to make this work, builders are having to offer that incentive in order to get people in these houses.
Heintjes: You had mentioned rate buy-downs in previous episodes you've been on, and I keep expecting you to say that they're not doing that anymore, but clearly they are.
Purviance: Yes. I was at a conference two months ago with home builders, and they were saying once you start something like that, it's kind of hard to stop. It looks like as long as rates remain high, then builders are going to have to do rate buy-downs in order to make it more affordable. And right now they have the margin to do it, but it may become a little bit more challenging as we move forward.
Heintjes: Interesting. Domonic, I wanted to ask you if you're seeing a difference in single family homes versus multifamily housing. Is there a different dynamic at work there?
Purviance: Well, on the multifamily side, my colleague, Brian Bailey, who does commercial real estate, specializes in multifamily, so he can give you a little bit more, better color to this. But what's happening on the multifamily side, especially in the Southeast, is we are seeing more compressed rent growth, mostly because there is an increase of new inventory that's coming on the market in the Southeast, so that's leading to less rent growth. And that's actually been a benefit. If you think about inflation coming down, a big component of inflation is the cost of shelter. Because we're seeing less upward pressure on rents—in fact, we're not seeing like...maybe in small pockets rent is coming down, but we're just seeing less rent growth. And that's been a positive for the apartment sector, for the multifamily side. Now on the single-family—let's just say single-family rental—side, there is a little bit stronger conditions in the single-family rental side, at least from what I'm hearing anecdotally. Mostly because it's so expensive to buy a house, and so if you want to be in a certain neighborhood and you can't buy, but there's an option for you to rent. And so, we're seeing more stable demand and less of an oversupply market for single-family rental than we're seeing for multifamily. I will say, on the single-family rental side, at least there began to be this strong market for build-to-rent. If you think about it, if you're an investor, if you're trying to build a portfolio of single-family properties, you have to go out and buy them. But because there's a shortage of inventory, there just wasn't enough homes to buy. And so that created this growing market for build-to-rent. And how it would work is if you're a builder, you're building a new subdivision, you may sell a portion of those homes to an investor, or an investor could finance the building of a whole new subdivision where all the homes are rental properties. That's slowed down a little bit because the cost of capital doesn't make it as viable, but that seems to be the future of single-family rentals is an increase in build-to-rent. And right now, it's just more affordable to rent than it is to buy a house, and so the demand for single-family rental still remains strong. We're seeing more stable rent growth in single-family versus apartments, mostly because people who want a single-family house who can't afford to buy it are more interested in renting.
Heintjes: Right. Domonic, as we sit here, it's November. People are looking into the next year, and you've always been very tolerant of my request for you to take out your crystal ball. So I hope you will bear with me again when I ask you to take out your crystal ball, and I want to ask you: What would you say we should expect in the near term for housing, given what we see with inflation, falling or not falling interest rates, and other factors that we've been discussing today? What is your expectation?
Purviance: If I recall, the Magic Eight Ball, you shake up and it gives you some of these responses, one of the responses—"it looks kind of hazy." [laughter]
Heintjes: "Please try again."
Purviance: I do think that the reason why mortgage rates are going up is because there is some uncertainty. Now, part of that is a new administration coming in, and so we don't necessarily know what the future holds. So part of that has to play out, but we don't know...inflation is sort of moving in the right direction. Will we see inflation kick back up in some factors, or could we enter into recession? I'm not predicting that at all, but we just don't know. And so, there's some uncertainty about the underlying economic conditions that would affect where rates go. Because I think job growth remains relatively stable, there's nothing on the horizon that would suggest that we'll see lower wage growth, or some deterioration in the labor market. So as long as people are gaining jobs and there's household formation, there's going to be demand for housing. I don't see interest rates dropping far enough to create some incentive for people who are locked into a low-rate mortgage to sell. That's going to be something, in my opinion, that's going to take us a while to work through. If you think about what I mentioned earlier: 95 percent of people have a mortgage below 6.5 percent, so as long as rates remain high, there's going to be less refinance activity, there's going to be less people who are willing to sell. That's a long-term thing that we have to work out. So that impacts the supply side. Now, on the demand side, as long as...I don't foresee us, even in markets where inventory is increasing, it's not likely unless there's some major thing that happens that we don't know about, that inventory is going to become so balanced that we see some major correction in home prices. So the inventory situation actually keeps home prices a little sticky. Now, there are some markets that will see some further decline than others, but for the most part, people who are expecting home prices to go back to prepandemic levels, that's most likely not going to happen, unless we see some major event. And so what that means is, the catalyst for improving housing demand is going to be what happens with interest rates. And so as long as interest rates remain elevated—and there's some uncertainty as to how long that would be—we're going to see affordability remain a challenge, unfortunately, for prospective homebuyers.
Heintjes: Well, those are all great insights, Domonic, and as always I want to thank you so much for your time today, and I look forward to having you back on the podcast in the near future. We will revisit all of this.
Purviance: Thank you. And hopefully my nonprediction turns out to be right.
Heintjes: I won't hold you to any of it. [laughter]
Purviance: Thank you.
Heintjes: But, before we say goodbye, I want to ask you to visit the new and improved Home Ownership Affordability Monitor that we mentioned before, which Domonic helps oversee here at the Atlanta Fed, and we will have a link to that on our website at atlantafed.org—where you will also find lots of other interesting information about the regional and national economy. And that brings us to the end of another episode of the Economy Matters podcast. Again, I'm Tom Heintjes, managing editor of the Atlanta Fed's Economy Matters magazine, and I want to thank you for spending time with us today. Let's get together next month.