NPLA Meeting Recap: Economy & Housing Market Outlook

Recap and Insights provided by Zach Wallin, Senior Director of Legal Operations at GoDocs

NPLA members were provided with a wealth of data, information, and market observations at the most recent NPLA meeting. The topics discussed covered the overall U.S. Economy, the housing market, and delinquencies and defaults. While there was good news and bad news shared throughout the hour-long presentation, due to the fact that national economists are befuddled by the ever-changing and uncertain market right now, the overall sentiment was that while we may be able to avoid a recession, the U.S. economy appears to be headed for a slowdown. On the housing market front, home sales are likely to be worse than 2023’s twenty-five-year low, with affordability suppressing demand and high mortgage rates suppressing inventory by locking sellers into their current homes. Home prices continue to rise nationwide, but prices may be cooling off as homeowners sit on a record amount of home equity. On the delinquency and default front, there is no foreclosure crisis anywhere on the horizon, with delinquency and foreclosure rates at record lows.

Rick Sharga, founder of CJ Patrick Company, a company that helps its clients drive business strategy and build brand awareness, gave an insightful presentation on overall market trends and where the research indicates the market is likely to go. Below is a deeper dive into his presentation on the U.S. economy, the housing market, and delinquencies and defaults.

The U.S Economy

We continue to see growth in the GDP despite all the predictions for a recession that we had coming into 2024, but we are seeing the growth rate in the GDP slow down. So, while the prediction for a recession may no longer be accurate, the consensus that we might start to see the economy slow down as consumers pull back may be starting already. On the unemployment front, whether you are looking at initial claims or longer-term unemployment, we are still below historically low levels and the long-term average unemployment of 5.25%. We are currently at 3.9% unemployment but way below the long-term average. There are more job openings than people looking for work, causing wages to continue to increase. Wages are now at an all-time high in terms of hourly wages, and employers feel the need to pay higher salaries to employees. They have to keep them or pay higher salaries to new employees to entice them to join their companies.

There are a couple of red flags on the economic front. One of those is that consumer spending is continuing to grow. The growth rate has slowed, but consumer spending is increasing overall. This is coupled with the fact that consumer savings rates have fallen significantly. We are near an all-time low of personal savings rates. The research suggests that the average household has more credit card debt than savings, and the consumer debt burden is growing. Credit card and auto loan debt are growing significantly, with the average interest rate for a credit card at or around 25-30% interest. There is about 1.6 trillion in auto loan debt, a little over 1.5 trillion in student loan debt, and over a trillion dollars in credit card debt. A huge concern in economic circles is whether households are using their credit cards or dipping into savings to make ends meet because the cost of living is as high as it is.

The Federal Reserve has announced its “Higher for Longer” approach, which indicates it will keep the Fed Funds rate as high as it is. The indication is that they will keep it this high until inflation begins to drop. This means that until the inflation rate goes to the 3% range, we are unlikely to see mortgage rates drop significantly. We have been waiting for rates to be cut all year, but now there is not much confidence that we will see a cut in September. The most likely scenario is that we will have to wait until December to see a rate cut, and a few are even projecting another rate hike between now and then.

Other red flags include the inflationary rate and high cost of living. Food and gas prices have soared by 30% in the last three years, consumer confidence is very weak right now, and if that does not get corrected, we could see the economy slow down even more than it is currently. The consensus went from “we are going to have a recession” to “we are going to have a soft landing” with a significant market slowdown.

The Housing Market

Mortgage rates are stuck between 7 and 7.5%. These rates will likely stay stuck for the rest of the year until the Federal Reserve announces a rate cut. Fannie Mae recently had to revise its more optimistic projections and now feels that rates will finish the year at or around 6.9%. This is about one point higher than what they publicly published. Here are some housing data tidbits shared during the presentation:

• • Purchase loan applications are 17% lower than last year, which may provide investors with an opportunity to find more properties.
  • April marked the thirty-second consecutive month where fewer homes were sold than at the same time the previous year.
  • Pending sales are up 1.25% from a year ago at this time, but this realistically could be the peak for the year.
  • Inventory is up 37% from 2023 and continues to rise slowly. This rise is because homes are taking longer to sell. While inventory is up, we are still down about 50% from pre-pandemic levels.
  • New listings are up 10% but still down 20% from pre-pandemic levels.
  • Home prices are up almost 7% year over year, depending on the market.
  • More properties are listed with a price reduction. More properties are being de-listed and taken off the market. 35% of listed properties have a price reduction before they are sold.
  • New construction home sales are down 4.7% from March but still make up 13% of all home sales.
  • New construction home sale prices are up 1.4% from March, and buyer concessions (as discussed at our May 16, 2024, NPLA meeting) drive buyers to new home construction vs. existing resale homes.

Delinquencies and Defaults

While there has been an increase in overall consumer delinquencies for the 3rd consecutive quarter, we are nowhere near the amount of delinquencies we saw in 2006 through 2012. Auto loans and credit card delinquencies are up, but only credit cards surpassed the 2019 levels of serious delinquency. Mortgage delinquencies ticked up slightly to 3.9%, and there is a strong correlation between mortgage delinquencies and unemployment rates. Both mortgage delinquencies and unemployment rates should rise a little in the near future. That said, foreclosures are still about 60% of 2019 levels and falling. We have low unemployment, low mortgage delinquencies, and very low levels of foreclosures. It is amazing how few foreclosures there are right now, and there is no foreclosure crisis anywhere on the horizon.

Summary

The economy appears headed for a slowdown, but we may avoid a recession. Consumers are beginning to show signs of financial weakness, so we must keep an eye on that moving forward. Home sales are now likely to be worse than 2023’s 25-year low. Normally, we would be looking at 5 million home sales, but we will be lucky to get to 4 million this year. Affordability is suppressing demand from buyers; high mortgage rates locking in sellers, suppressing inventory. New home sales are cooling off, but still a higher percentage of the total than usual. New home inventory is back to normal levels, with a large construction backlog. Home prices continue to rise but may be leveling off. Homeowners still have a record amount of equity – over $32 trillion. And there is no foreclosure crisis anywhere on the horizon. Even if unemployment rises to 4-5%, that still will not be enough for us to see foreclosures at pre-pandemic levels. Delinquency and foreclosure rates are near record lows.

Q&A Session

During the Q&A session, the question was posed about the contradictory nature of the economic reports and whether we are at a point of stagflation or just burning through the COVID money in the market. Rick Sharga felt it was more of the latter than the former. He said that he feels we are not heading toward stagflation, and the accelerating consumer debt and decelerating savings make him think that we have already burned through COVID-19 money.

It was also asked if this normalizes (forecasting becoming more accurate) in future: Rick felt the forecasts will become more accurate, as these are people who make a living by being right more often than not. Forecasts will start to get more accurate.

Fraud and the Avoidance of Fraud Member Discussion:

The second portion of this NPLA meeting was dedicated to a panel discussion on fraud and the avoidance of fraud in the marketplace. Two types of fraud were discussed: (1) Related-party transactions where the fraudster is not a third-party purchasing for value but is instead purchasing it from their buddy and trying to artificially inflate the value of real estate to borrow more and put cash in their pockets; (2) Bad Actors being involved where someone you wouldn’t otherwise do business with are involved. Justin Parker from RCN Capital, Ezra Dweck from IceCap Group, and Rankin Blair from Lima One Capital participated. The following is a summary of the discussion:

• • RCN Capital: Regarding the first type of fraud mentioned, they see title issues as well, where there is a tremendous amount of artificial inflation to the cost basis of the property. Wholesale and assignment deals, in particular, are the key areas where they see this often. The other thing they’ve seen is property flipping, where people are not properly disclosing the actual cost basis of a property. They may have gotten the property on a $5,000 assignment, but they put $30,000 into it, and now it’s worth $150,000, and they aren’t disclosing that. They walk away with the funds by cashing out via long-term debt because that’s a huge money positive for them. Ways we prevent it: trying to obtain the underlying contracts, asking a tremendous amount of questions about the chain of title and everybody involved in the transaction, particularly on the initial acquisition and what their relationship was to each other.
  • IceCap Group: We, as an industry, put a lot of weight on appraisals, but appraisers are people, too, and don’t want to ruin deals. We take a deep dive on the property and see who has owned it and if there are connections to the buyer, which is a big deal. We are also seeing multiple properties being conveyed in one transaction. When that happens, there may be ten properties you know about and three you don’t, and the three are purchased for a dollar each. We’ve discovered that lawyers generally won’t lie but will not tell you everything they know. If you ask them if these properties are the only properties being conveyed in the transaction, they won’t make that type of attestation. Once those things are happening, you know something bad is happening. Sometimes, we see people selling to an LLC, an LLC transfer. The buyer then buys the LLC and then tries to sell themselves the property at an inflated price, a 100% purchase loan. For membership interest transfers, we often look at who signed the original mortgage for the last property, where they are now, and why they are not signing now. What happened in the interim? We do property deep dives, grading every property we buy from A to F.
  • Lima One Capital: Regarding who’s involved in the transaction, we are not seeing outright fraud in the appraisal process itself, but the assumptions and statements being baked into the appraisal that are becoming fact and inflating the value. A claim is made that turns into fact, so we are spending a lot of time trying to unpack all the assumptions within the appraisals to make sure that if it’s stated as an assumption that will or can happen in the future, we vet it out to make sure there is support and validation for any of those claims. We are also seeing an increasing number of title companies doing things they shouldn’t do in terms of documentation on settlement statements. We are ensuring that we validate payoffs and claims within the settlement statement and that they tie back to the underlying title work as a validation check. We are seeing payoffs being made to people who aren’t listed within the title commitment, which certainly is a red flag and would bring the transaction to a halt.
  • NPLA: There is a bunch of fraud. The good guys are always trying to catch up to the bad actors. NPLA is trying to provide means for its members to share information about who they would not work with so all members can benefit from that and protect us all from the fraud that is out there.

This panel discussion, which will be continued at the next NPLA meeting, highlighted the fact that there is significant fraud in the marketplace we are all experiencing. Methods have been developed to stay ahead of the fraudsters by obtaining underlying contracts, asking a tremendous amount of questions about the chain of title, asking the lawyers involved to make written statements as the facts of the transaction and conveyances, doing a deep dive on every property and looking at who signed the original mortgage for the last property and where are they now and why they are not signing now, by questioning all the assumptions and statements baked into the appraisals as facts, and by validating all payoffs and claims within the settlement statement. We look forward to this discussion continuing, and we will see you next time at the June 11th meeting.

Author Bio:

GoDocs is an innovative leader in automated loan document generation, transforming the commercial lending process. With a fully cloud-based platform, GoDocs provides a flexible digital solution that makes commercial loans more cost-effective to document and faster to close, all while maintaining compliance in all 50 states. GoDocs is a Corporate Member of the NPLA.

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