The REconomy Podcast™: Why House Prices in Some Markets are More Resilient than Others

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss home price trends nationally and at the market level, examining why house prices in some markets are more resilient than others as house prices adjust to higher mortgage rates.

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Listen to the REconomy Podcast Episode 60:

Of course, those cash buyers could be foreign buyers, because we do know that Florida has the highest share of foreign buyers of all states in the U.S. They could also be baby boomers who have the cash or the equity from another home and they're bringing it to South Florida for the sunny weather and the retirement opportunities. And, of course, cash buyers are not deterred by rising mortgage rates.” – Mark Fleming, chief economist at First American


Odeta Kushi - Hello, and welcome to episode 60 of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey, Mark, I've got a question for you. What are the three most important things in real estate?

Mark Fleming - Hi, Odeta. You know, that's just such a softball question. Everyone knows the answer to that is location, location, location. But, did you also hear that the Japanese just discovered 7,000 more location, location location? I'm not going to keep going.

Odeta Kushi - Yeah, that caught me very much off guard. How do you discover new land in 2023?

Mark Fleming - We'll have to read up on that.

Odeta Kushi - We'll have to do a little bit more digging for sure. But, you know, I thought it was a little bit of a trick question because all three things are the same. But right you are, all real estate is local. And that point has never been more relevant than in today's market.

Mark Fleming - Well, real estate supply and demand dynamics are always local. I mean, we're talking about a heterogeneous, immovable good. So where actually does matter. But the pandemic changed things. If the house can't come to you, it seems that we all started going to the house instead. Nearly every market in the country during the pandemic was characterized as a seller's market, wherever you turned multiple-offer bidding wars were the rule, not the exception.

Odeta Kushi - I am all too familiar with the bidding wars of the pandemic.

Mark Fleming - From personal experience.

Odeta Kushi - Yes, yes. But, as house prices adjust to the reality of higher mortgage rates today, the pace of adjustment has and will continue to vary significantly by market. And that is precisely the topic of today's podcast, what's going on with house prices? And can we discern any regional patterns? Spoiler alert, we can. But first, let's talk about what's happening with house prices nationally, and whether we think this will end in a housing bust. Many people have been saying that the last few years are reminiscent of the housing bubble and subsequent burst of the mid 2000s. Do you think that's the case?

Mark Fleming - Well, first, I think we really need to define a housing bubble, which can generally be described as an unsustainable period of house price growth generated by artificial demand, such as loose underwriting or speculative buying. But we have to be a little bit careful here. As with so many other concepts in economics, there's no like economic bubble-or-not indicator in the data. So it's really hard to know it when you're in one. It's a lot easier to know it after the bust has happened.

Odeta Kushi - Yeah, that's a great point. Hindsight is 2020. Right. So the housing market boom of the mid-2000s is actually a pretty good example of a housing boom and bust. The primary catalyst for higher house prices during the mid-2000s housing boom was wider access to mortgage financing. Sometimes we refer to it as financially innovated affordability products, you had things like no-doc - doc stands for documentation - no doc loans. Typically, to qualify for a mortgage borrowers need to submit proof of income, W-2s, pay stubs, etc. But during the last housing boom, it was more common to have these no documentation mortgages that did not require income verification from the borrower, and simply required that the borrower's provide lenders with a declaration that they can repay the loan. Pretty risky. And those loans are not common today.

Mark Fleming - Low doc, no doc, no problem in the old days. And there were other affordability products, such as teaser rates, fixed-ARM structures, and more that all facilitated essentially, ever bigger loans for the same monthly payment to keep up with the growing home price values. Which, of course, is one reason why those house prices kept going up. Reasonable and prudent financial innovation at the time, right?

Odeta Kushi - Right. Yeah, of course.

Mark Fleming - Well, as we said, hindsight is 2020. And in hindsight, it was pretty clear. But the good news, that's not the case today, lending standards are much tighter today than during the mid-2000s. It's actually a lot harder to get a mortgage today than it was pre-pandemic. And the median credit score of borrowers approved for mortgages has reached as high as 766 in the fourth quarter of last year. That's pretty darn high for the median level, and that's definitely higher than it was prior to the housing boom. In short, the price appreciation we see today is not a result of that so-called financial innovation, but then it begs the question, what is it the result of?

Odeta Kushi - Well, the house price appreciation over the pandemic was supported by the fundamentals and characterized by a severe shortage of supply relative to demand. Millennials were aging into their prime home-buying years during a period of historically low mortgage rates, which fueled demand during a time of historically low supply.

Mark Fleming - Yeah, but I have to ask, I suppose that purchasing power driven by mortgage rates is fundamental to the market. But I wouldn't say that a less than 3% 30-year, fixed-rate mortgage is normal, or even maybe fundamental, in terms of what that purchasing power would be. All that purchasing power that those home-buying millennials had needed to go somewhere. And, when in a supply constrained market, it ends up all just getting baked into price.

Odeta Kushi - And that's exactly what we saw. But now, as higher mortgage rates undermine purchasing power, it's natural to expect house prices to adjust downward. But a continued dearth of housing inventory will likely keep a floor on how low national house prices can go. But I digress. Let's get back to our main point, regional differences in house prices.

Mark Fleming - That's right. In our December Real House Price Index, house prices declined from the peak in 40 of the 50 markets we track. Note that that peak can vary by market for example, house prices peaked in April of last year in San Jose, but not until May for Phoenix.

Odeta Kushi - And some markets haven't even reached peak yet. Now, it's important to highlight that repeat-sales indices, such as the one used in this analysis, are based on the prices from closed sales, which are a lagging indicator of price changes in the housing market, because the contracted prices for these closed sales were agreed to months earlier. But the regional differences are still important using this measure.

Mark Fleming - So here we go. We're going to categorize those 50 markets into four distinct groups, you gotta imagine some sort of a four-way quadrant here. There's boom and bust. Boom and no bust. No boom, but bust. That's kind of a bad one. And no boom, no bust. In other words, nothing happened.

Odeta Kushi - Those might require a little bit of explaining. So what we do is we take the average growth rate across all top 50 markets from February 2020 until the peak and if a market is above that rate of growth, then it can be defined as a pandemic boom market. And then we take the average rate of growth from peak to current - current being the latest December data. And if you're below that average rate, then you are a bust market.

Mark Fleming - Okay, so what are those average growth-rate thresholds, Odeta?

Odeta Kushi - Well, believe it or not, the pre-pandemic to peak average growth rate was 41%, while peak to current growth was negative 2%.

Mark Fleming - But, wait, wait. Hold up. Hold on a second. 41%.

Odeta Kushi - Yeah.

Mark Fleming - From pre-pandemic to peak. But surely, we should usually be characterizing a market that experienced, say 30% growth from the pre-pandemic to the peak, that would be a boom market under any normal definition, wouldn't it?

Odeta Kushi - Normal? Yes. But we have to set a threshold somewhere and I think it just goes to show that the boom was national.

Mark Fleming - Well, it was a sellers' market like we had never seen before. So maybe instead of boom, no boom. It's more boomy, less boomy. Okay, but we digress. So what seems to be the defining characteristics of each of these market types?

Odeta Kushi - So we'll focus on one market per category to sort of provide an example and give a framework for how to understand the underlying dynamics that drove some markets to boom and bust, and some to just continue to boom. So let's start with a boom and bust grouping. And the example for this category is going to be Phoenix, Arizona.

Mark Fleming - First poster child for the boom and bust group. Phoenix was a market that experienced a fair amount of net emigration over the course of the pandemic. Of the top 50 markets we track, Phoenix experienced the fourth highest growth rate in population between 2020 and 2021, right after Austin, Raleigh and Jacksonville. Investor activity in Phoenix was high last year. In fact, investor purchases of residential homes as rental properties exceeded 30% of all residential home sales last summer. That share has come down significantly since that time because of all the changes in the market that have happened. But, needless to say, a lot of demand for homes in Phoenix over the course of the pandemic.

Odeta Kushi - Right. Phoenix is emblematic of the expression, the higher they rise, the harder they fall. House prices increased 65% from February 2020 to the peak in May of 2022. And from May 2022 until December of last year, house prices have declined by approximately 8%, so the swift pullback in demand due to declining affordability is dragging down house prices in this market.

Mark Fleming - Not to mention the rise in new home cancellations, prompting builders to cut prices as well.

Odeta Kushi - That's a great point. All right. So moving on from boom to bust to no boom and bust. The case market here is San Jose. In San Jose, house prices increased 30% from February 2020 until the peak in April 2022. And prices have since fallen by 10% from the peak. In fact, of all the markets we track, San Jose has experienced the most severe price decline from the peak, yet it made up the bottom 10 markets of pre-pandemic to peak growth. So what's going on here?

Mark Fleming - Yeah, this is a tough one because this is the category that's like, all the pain and none of the gain, right?

Odeta Kushi - Yeah.

Mark Fleming - Many of the markets with the largest price declines from peaks, such as San Jose and San Francisco, are also considered overvalued markets, meaning the median existing-home sale price exceeded house-buying power in these markets in the first place. They were already kind of overpriced. For San Jose in December, the housing market was overvalued by nearly $570,000.

Odeta Kushi - That's a lot. So these larger coastal markets, such as San Jose, San Francisco, LA, have long been among the most expensive markets. They were already expensive pre-pandemic and so there wasn't as much room to run as in Phoenix, for example. But when mortgage rates rose more than double - they more than doubled over a year - those already expensive markets started to feel the pain from that pullback in demand. All right. What about the category of boom, no bust? This is a good place to be, right?

Mark Fleming - All the gain and none of the pain in our scenario here. Well, that would be a market like Miami. Miami experienced very fast growth of - I can't believe, we have to check this number - 55% from pre-pandemic to peak, which as of now is December of 2022. That's right, it hasn't stopped going up. No price declines, according to our repeat-sales index through the end of the year. But that really begs the question, why?

Odeta Kushi - Yeah, I've thought about this a lot. I think most most people have. But one reason that comes to mind is all-cash buyers. So John Burns Real Estate Consulting has a national survey and I was reading over the results from February and they indicated that the southern Florida housing market is holding up better than most of the country, in part, because of cash buyers. Cash buyers accounted for 78% of sales in Fort Myers, 69% in Naples and 49% in Fort Lauderdale.

Mark Fleming - Wait, wait - I feel like that's a theme to this episode - wait, wait, hold up. That statistic, 50% or more cash buyers in those markets. So, essentially, these markets have more cash buyers than not, that's got to be really high.

Odeta Kushi - Indeed it is. All-cash buyers represented just 19% of transactions nationally in their resale agents survey in February.

Mark Fleming - And, of course, those cash buyers could be foreign buyers, because we do know that Florida has the highest share of foreign buyers of all states in the U.S. They could also be baby boomers who have the cash or the equity from another home and they're bringing it to South Florida for the sunny weather and the retirement opportunities. And, of course, cash buyers are not deterred by changes, in particular, rising mortgage rates.

Odeta Kushi - That's true. All right. Now for the last category. No boom, no bust, flatlining. Although, you'll see pretty soon, it's not necessarily flat, it's just not quite as high as the other markets. The case study market here is New York City. The pre-pandemic to peak growth in June 2022 in New York City was 31%, muted compared to other top markets, and price declines from peak in New York City were a very modest 0.3% in December of 2022.

Mark Fleming - This is like the steady-Eddie category, right? Just keep on truckin, keep on truckin. New York City didn't experience as much of a boom during the pandemic because there was a flock to the suburbs from the dense urban core of the city during the pandemic. And so that sort of helped mitigate any of that extra pressure of increasing prices. Not as fast to rise, not as hard to fall.

Odeta Kushi - Now, we know that even the markets that have not yet experienced price declines from the peak are likely to do so soon. It's tough to maintain the same pace of growth in the face of rapidly declining affordability.

Mark Fleming - But we have to put this in a little bit of context. With that being said, even with these price declines, there is one trend that bodes well for all 50 markets. Much of the homeowner equity that has been gained during the pandemic remains. As the housing market rebalances, price declines will continue in many of those markets. But those declines would have to be very, very substantial to erase all of the equity gain in that pre-pandemic-to-peak phase of the cycle that was accumulated by homeowners over the last few years.

Odeta Kushi - And that's actually another reason why this time it's different from the mid-2000s. A national housing bust would likely mean a wave of foreclosures. Homeowner mortgage payments today as a percentage of their income - what we call their mortgage burden - remains historically low. And, as we just mentioned, homeowners have high levels of home equity today, which helps to protect against foreclosure and the contagion of price declines.

Mark Fleming - Not to mention the labor market somehow continues to show strength in the face of Fed rate increases, and you need both for foreclosure to happen - an inability to pay your mortgage and the lack of equity - for foreclosure to be the outcome.

Odeta Kushi - That's right. All right. Well, that's it for now. Remember that real estate is local again. And, for those who are interested, check out our Twitter feeds and the blog post to this episode to see the scatterplot of these market categories. Thank you for joining us on this episode of the REonomy podcast. If you have an economics-related question you'd like us to feature on a future episode, you can email us at We love to hear from our listeners. And, as always, if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

This transcript has been edited for clarity.

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