This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 

Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew. You know, one of the many things I love about being an economist is that it is a remarkably humbling profession. You see, just when we start to believe that our models are close to perfection, something comes along to remind us that forecasting isn’t an exact science.

And if you’re wondering what I am talking about, I recently took a look at the 2022 mortgage rate forecast I put out at the start of the year and…well, let’s say that rates rose at a far faster pace than I had anticipated. I thought that now would be a good time to take another look at rates and share my thoughts on the direction that they will likely take during the rest of the year and my reasoning behind it. And that means we need to talk about inflation.

30-Year Conventional Mortgage Rates: 2018 – 2022

So, a quick look back. As you can see, there wasn’t much to celebrate in 2018, with rates rising from 3.95% to 4.94% before pulling back and ending the year at around 4.5%. In 2019, rates fell following the Feds’ announcement that they were likely done with raising the Fed Funds Rate, and the mortgage market also reacted positively to the announcement from the White House that they were going to impose tariffs on select Chinese imported goods. We saw an uptick in late summer, but that was mainly due to news related to BREXIT.

In 2020, rates were dropping but spiked very briefly when COVID-19 shut the country down and bond markets panicked. But with the Fed jumping in with an emergency rate cut and announcing that they would start buying a significant number of treasuries and mortgage-backed securities, rates tumbled to an all-time low of just 2.66%. In 2021, rates rose as new COVID infections plummeted, but then dropped again as the Delta variant took hold, but ultimately trended modestly higher in the second half of the year.

And then we get to 2022. Rates started the year at just over 3.1% but have since skyrocketed to over 5.8% before a small pullback that started a few weeks ago. In as much as economists expected rates to rise this year, nobody anticipated how fast they would rise. So, what went wrong? Well, there’s actually a rather simple answer.

Even though we expected rates to trend higher in 2022, there were two things we hadn’t built into our forecast models.

1. Russia’s invasion of the Ukraine
2. Inflation continued to climb for far longer than we expected

So, how do things look for the rest of the year? To explain my thinking, it’s important to remember that the bond market and, by implication, mortgage rates hate nothing more than high inflation because when inflation is running hot, it limits demand for bonds which, in turn, forces the interest rate payable on bonds to rise and this pushes mortgage rates higher.

But what’s been fascinating to watch is that over the past couple of weeks, rates have actually been dropping which is certainly counterintuitive given where inflation is today. And the only reason I can see for this is that bond traders were thinking that inflation might be topping out.

But then we got the June CPI numbers, and it certainly didn’t suggest that inflation was slowing, in fact it showed the opposite. But even though the total inflation rate hasn’t yet peaked, I believe that a shift has actually started and that we are closer to a peak in inflation than you may think.

Indicators of Inflation: Consumer Spending

The June CPI report showed the headline inflation rate still trending higher but look at the core rate which excludes the volatile food & energy sectors. That has actually been pulling back for the past three months. And consumer spending when adjusted for inflation fell 0.4% in May. That’s the first monthly drop since last December, and I expect the June number when it comes out at the end of the month to show spending dropping even further.

This is a very important dataset that often gets overlooked but it is starting to tell me that the economy is slowing because of inflation and slower spending acts as a headwind to further price increases.

The core PCE price index is up 4.7% year-over-year, but this was the smallest annual increase since last November and you can see that it is also starting to roll over. This index is actually the Fed’s favored measure of inflation as it’s more comprehensive that the CPI number as it measures the change in spending for all consumers, not just urban households.

Indicators of Inflation: 5-Year Breakevens and Producer Price Index

The five-year “inflation breakeven” has plunged more than a full percentage point since peaking at just under 3.6% in late March. And this number is important as it lets us know where bond traders expect the average inflation rate to be over the next five years.

The Producer Price Index measures inflation at the wholesale, not retail, level and even though the total rate rose as energy costs continue to impact the manufacturing sector, the core rate has been pulling back for the past three months. Now let’s look at some commodity prices and see what’s going on there.

Selected Commodity Prices: Natural Gas, Copper, Soybeans, Wheat

• The price for natural gas is down over 34% from its recent high
• Copper prices are down 26% from the recent June peak and down substantially from March
• Soybean prices are down 10%
• Despite the war in Ukraine, wheat prices are down 27% from June

Retail Gas Prices: West Coast, West Coast Excluding CA, U.S.

It appears as if gas prices have also rolled over. Of course, here on the West Coast it’s more expensive than the nation even when you take California out of the equation.

U.S. Treasury Yields: 10-Year and 2-Year Constant

And finally, to cap things off, traders must also be pondering the same numbers as I am because bond yields themselves have been tumbling at both the long and short ends of the yield curve with the 10-year note still yielding less than 3% even after the CPI report and two-year yields, while still elevated, are still down from 2.42% just two weeks ago.

So, given all the charts we have looked at, I hope that you too are seeing some light at the end of the tunnel when it comes to the likelihood that inflation is about to start easing.

No doubt, the headline inflation number for June wasn’t one that anyone wanted to see but, if the trends we have looked at continue, I still expect inflation to start slowly creeping lower, which will push bond prices higher, yields will start to pause—if not drop—and that will allow mortgage rates to hold at or close to their current levels for the time being. Although we could see rates coming down, though they will still start with a five for the foreseeable future. I hope that you have found my thoughts of interest.

About Matthew Gardner

As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.

In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 

Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew.

If you’ve listened to me at all over the past several years, you’ll know that I am pretty passionate about one subject: housing affordability. And, given the significant price growth that we’ve seen over the past decade, as well as the recent spike in mortgage rates, I wanted to talk a little bit about what might be done to address this very serious issue.

The Growing Housing Affordability Problem

Now, when we think about housing affordability and how it might be solved, a lot of people get tied up in the minutiae when, quite frankly, it really isn’t that hard a problem to solve. You see, there’s one very simple way to address this: to build more housing units. But, as easy as that may sound, there are a lot of obstacles that are holding new supply back. But before I get to that, I want to share some data with you that might help to demonstrate how serious an issue we all face.

Every quarter, the National Association of Homebuilders puts out its affordability numbers for metro areas across the country. An analysis of sales and incomes allows them to show the number of homes—both new and existing—sold in a quarter that were affordable to households making median income.

Housing is Increasingly Unaffordable

Here you will see numbers from just a few of the 240 metropolitan areas across the country and the share of sales in the first quarter of this year that were “technically” affordable. I think you’ll agree that it’s eye opening.

Although I am only showing you a few of the U.S. markets I will tell you that the ten least affordable US housing markets were all in California. The Golden State is also home to 21 of the top 25 least affordable markets in the country. But what you might also find interesting is that our primary cities aren’t the only ones that are suffering from affordability issues, with markets like Bend, Oregon; Boise, Idaho; and even Las Vegas, Nevada becoming increasingly unaffordable for a lot of households.

And it’s worth mentioning that that 48 of the 69 markets where less than half of the homes sold were affordable were in states that have at some point in the past implemented comprehensive planning and growth management legislation. And when governments mandate where homes can and cannot be built, one thing happens: it pushes land prices higher which makes new homes more expensive and limits the amount of new supply that builders are able to provide. So, what can be done?

Well, I will start out by saying that states who have implemented growth management plans, which they generally did to slow or stop suburban sprawl, remain disinclined to move these boundaries, and that means it becomes paramount to not look further out but to concentrate within the urban growth boundaries and decide whether it’s time to think about removing single-family zoning altogether.

This is a fascinating thought, but I must add that I am not suggesting that we do away with single-family homes. Absolutely not! What I am thinking about is the ability for a market to decide what makes the most sense. In order to do so, single-family zones need to allow for the development of denser housing, but also allow the market to decide what’s best. Areas that have implemented such change has given rise to a movement in order to address what is being referred to as “missing middle housing.” For those of you who are unfamiliar with this term let me try and explain.

Missing Middle Housing

This is a great image courtesy of Opticos, a team of urban designers, architects, and strategists who are passionate about adding sorely needed housing options.

They came up with the term “missing middle” as it describes housing types that were actually very common prior to World War II where duplexes, row-homes, and courtyard apartments were in high demand. Unfortunately, however, they are now far less common and, therefore, “missing.”

And the key function of this type of housing is to meet the rising demand for walkable neighborhoods, respond to changing demographics, and provide housing at different price points. You see, rather than focusing on the number of units in a structure—think high rise apartments or condominiums—this type of housing emphasizes scale and heights that are appropriate for and sympathetic to single-family or transitional neighborhoods.

The Decline of Missing Middle Housing Construction

And to show you how supply of these types of units has changed, this chart shows the number of duplexes to eight-unit buildings built over the past almost half-century and you can clearly see that up until the late 1980s they were being built in decent numbers, but the 1990s saw a significant shift toward traditional single-family home ownership and builders followed the demand and this type of product started to become scarcer.

Almost 16% of total new homes built in America in the early 1980s were of this style, but that number has now shrunk to just 1.4%—or a paltry 19,000 units.

But I see demand for these housing types growing as we move forward and that buyers or renters, young and old, will be attracted as it will meet their requirements not only in regards to the type of home they would want to live in but, more importantly, it can be built cheaper than traditional single-family housing and therefore it will be more affordable.

But although this sounds like it’s a remarkably simple solution that can solve all our woes, in reality it’s not that easy for two very specific reasons. The first is that many markets are already essentially built out, meaning that in order to develop this type of product, a builder would have to purchase a number of existing homes and raze them in order to rebuild. But given current home values, it’s very hard for a builder to be able to make such a proposal financially.

And the second issue is that current residents within these “transition” areas—which have been developed as traditional single-family neighborhood—simply don’t want to see change. But is this type of product bad? Here are some examples.

This shows row-homes in Brooklyn on the left and traditional “triple-deckers” in Massachusetts on the right:

This is a bungalow court project in California:

Here are some Live/Work Units in Colorado:

These are some amazing mews homes in Utah:

And finally, a new terrace housing project that will be built in Washington DC:

Don’t get me wrong, I’m sure that some of you who simply aren’t inspired by this type of architecture, and that is understandable. But can we simply stick with the status-quo? I don’t think so. And some state legislators have already implemented significant zoning amendments in order to try and encourage this type of development.

Back in 2018, Minneapolis was the first city to allow this type of development inside single-family zoned areas. This was followed by Oregon State in 2019. Senate Bill 9 was signed by Governor Newsom of California last year which made it legal for property owners to subdivide lots into two parcels and turn single-family homes into duplexes, effectively legalizing fourplexes on land previously reserved for single-family homes. So, we are starting to see some change.

This is a good start but as I mentioned earlier in areas that are already built out, even this type of forward-thinking legislation will not be the panacea that some want. But I’m not giving up hope.

Addressing the “missing middle housing” would allow for homes of all shapes and sizes, for people of all incomes including workers who are essential to our economy and community. Here I am talking about our teachers, firefighters, administrative assistants, childcare providers, and nurses—just to name a few!

There are currently 45 million Americans aged between 25 and 34 and most aspire to homeownership. However, the massive price growth which, by the way, many of us have benefitted from over the past several years, has simply put a “starter home” out of their reach.

I will leave you with one last statistic. Over 28% of American households today are made up of a single people living alone, and it is anticipated that up to 85% of all U.S. households will not include children by the year 2025. Finally, by 2030, one in five Americans will be over the age of 65.

Are we going to meet the needs of the country’s changing demographic going forward? I certainly hope so, but it will take a lot of work for us to get there. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 

Hello there. I’m Windermere Real Estate’s Chief Economist Matthew Gardner and welcome to the latest episode of Monday with Matthew. Over the past few months, analysts like myself have been starting to get our hands on early numbers from the Census Bureau and, although we won’t get the bulk of the data for another several months, I thought it would be interesting to take a quick look at some of the information that the government has put out specifically as it relates to patterns.

This is a relevant topic given the pandemic, with many people wondering if we saw a mass shift in where we choose to live because of COVID-19. This belief that we packed up and moved because of the pandemic is, at face value, quite credible, especially given that home sales in 2021 were at levels we haven’t seen since 2006. But the reality, at least from the data we have received so far, actually tells a different story.

Moving Patterns for U.S. Homeowners and Renters in 2021

We Move More Infrequently

This first chart looks at people and not households and it shows that, contrary to popular belief,  we’re actually moving less frequently now then we have done in decades, with the share of people not moving in a single year rising from just about 84% to over 91½%. Of course, we are having fewer children now than we did, but not to the degree that would change the trend.

Unsurprisingly, Renters Move More Often than Owners

And when we break this down between homeowners and renters there is quite the discrepancy between the two groups. Although the number of renters not moving has risen from 67½ percent up to 84% since 2000, the number of homeowners staying put has moved from almost 91% all the way up to 95% last year.

So, the data thus far is not suggesting that we saw any form of mass exodus following the pandemic, in fact we haven’t been moving as much for the past 2-decades, but people did move since COVID-19 hit and the reasons they did were fascinating. The following charts are broken up into four categories of movers: those who moved for family reasons; those who moved for employment related reasons; those that moved for housing related reasons; and finally, those that moved for other reasons.

Reasons to Move (1)

So, starting with family-related reasons, it was not surprising to see the major reason for both owners and renters to move was to establish a new household, nor was it surprising to see a greater share of renters headed out on their own than homeowners. Finally, the share of those moving because of a change in marital status was essentially the same between renters and homeowners. And when we look at employment related reasons for people moving last year, a greater share of renters moved because of a new job than homeowners, and more renters moved to be closer to their workplaces than did homeowners. Again, not really surprising, given that a large share of renters work in service-based industries and therefore proximity to their workplaces is important. You will also see that a greater share of homeowners than renters moved because they lost their jobs and, finally—and not at all surprisingly—far more homeowners moved because they chose to retire than renters.

Reasons to Move (2)

And when we look at housing related reasons that people moved, a large share of owners and renters moved from their current home or apartment and into a new, bigger, better house or apartment. A statistically significant share looked to move into a better neighborhood, and I do wonder whether owners were doing this because of the ability to work from home and possibly move to a better location further away from their workplaces. And even though renters tend to stay closer to their workplaces, I wonder whether these renters weren’t in white-collar industries and that the ability to work from home has led them to move into an area that they perceive to be better suited to them.

And finally, a significant share of renters moved because of the fact that rents have been skyrocketing over the past 18-months or so. This clearly impacted some homeowners, too. And finally, under the “other” category, more renters than owners moved because they were either entering or exiting a relationship with a domestic partner, and more renters left to either go to college or because they had completed their degrees.

Health-related reasons for moving had a significant impact on homeowners over renters, and I found it particularly interesting to see a lot of owners saying that “climate” was a reason for their move. Of course, I can only hypothesize as to whether people are simply looking to move to warmer climates or whether climate change is starting to have an increasingly large influence on where we choose to live. My gut tells me that climate change is becoming a far more important consideration for homeowners, although we can’t deny that a lot of people, specifically on the East Coast, moved South during the pandemic.

These next few charts break down movers not just by whether they our owners or renters but also by ethnicity.

2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers

Here you can see that homeowners across these three ethnicities were pretty much uniform in their desire to stay in their existing home with only 4 to 5% moving. And renters who, as we have already seen, did move more frequently last year than homeowners, were also in a very tight range at between 83 and 85%.

2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers (2)

And the same can be said about Hispanic owners and mixed race families, with about 95% not moving last year. Now this is modestly lower than White, Black, or Asian households, but the difference is very marginal. As for renters, between 83 and almost 88% of them within these three ethnicities moved last year, but you will see a bigger share of Hispanic renters stayed put as opposed to all the other ethnicities shown here.

2021 Mobility by Ethnicity & Tenure: Moves In & Out of State

Looking closer now at those who did move, even though fewer Asian households moved when compared to all other ethnicities, far more left the state than stayed, and the same was true for Asian renters with over a quarter moving out of state.

2021 Mobility by Ethnicity & Tenure: Moves In & Out of State (2)

Again, a greater share of the Hispanic homeowners who did move last year stayed in the state where their old house was, and the share of mixed households was roughly at the average for all ethnicities. And the share of Hispanic and mixed-race renters who stayed in State was also about average.

What I see from the data is that the huge shift that many expected during COVID has not been affirmed—at least not by the numbers we have looked at. That said, we are sure to see numerous revisions because of the issues that COVID 19 has posed on Census takers, so we may get a different story as more data is released and revisions posted. What I found to be most interesting in the numbers we have looked at was the massive increase in renters moving in with their “significant others.” But I am not surprised, given that there are around 48½ million people aged between 20 and 30, and this is their time!

And I was also interested in the share of the population who moved due to climate. I will be doing some more digging around in the darkest recesses of the Census Bureau website to see if I can find out more about this. Although I can’t confirm it, my gut tells me that climate—and specifically climate change—will be a factor of growing importance when people are thinking about where they want to live.