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Mortgage Industry Roundtable: Inventory Woes, Part 2

shutterstock_470893604Earlier this week, DS News and MReport sat down with Jorge Ponce, Director of Business Development & Implementation at FirstClose; Joey McDuffee, Director at Wipro Gallagher Solutions; and Kevin Watson, District Manager, Middle Tennessee at Churchill Mortgage to discuss inventory woes in the housing market. In Part Two of this three-part series, we discussed potential incentives to getting more homes into the marketplace.

MReport: One of the reasons for the inventory shortage is baby boomers don't want to sell their homes. Like you said, they don't want to get in a bidding war, especially when they have equity. Do you think there's a way the market or the industry can find a way to entice baby boomers to sell their homes?

Ponce: The market has to correct itself. When you look at real estate over a period of 10 years, there's always going to be a point where home price values increase, and there's going to be a point where they decrease. We're approaching the 10-year mark and a lot of them are actually peaking.

The problem with rising home prices is that earned income averages don't rise with home prices. Essentially what happens is consumers have to take into account affordability. In order for the market to start moving again home price values are going to have to start dropping down to deflate that bubble. In this industry, the difference between home price indices and earned income average, that's usually the bubble, right?

In some markets where property values have shot up, you're creating a bubble similar to that of pre-crisis. Once that starts to correct itself, some of these inventory issues go away. But, keep in mind, what are the interest rates going to be at? Are those interest rates going to be affordable to folks—first-time home buyers?

Watson: One more thing to add—from my micro-economical world, talking to realtors every day and I'll say, "Hey, all my buyers are cash buyers." Sometimes that's an excuse, but it's not, and so I have to believe that there a lot of baby boomers buying right now. But they're moving down into a fixed income situation. An article from US News said by 2030, the baby boomers will reach 65. A lot of them are already hitting that. I think they're buying, but they're moving down.

The generation behind the baby boomers is not that large—the Gen X. Because of that, I think we're going to see the market correct itself faster in the higher-priced homes, because inventory can't cover what's moving down. Millennials are coming in at the same time, so you're having similar competition for those smaller homes and. You've got two huge groups competing in the same market.

Ponce: It could be one of those situations where one is causing the other, kind of circular. The competition for those homes amongst those two groups could be driving those property values up and that's what could be causing the inventory problem. It's all interrelated.

McDuffie: From a baby boomer perspective, I know some of my parents' friends have really started looking at life expectancy, and instead of staying in their current neighborhood, they're looking for an active adult community lifestyle. More of these are getting built around the country and, of course, they offer kind of a wealth of amenities, including no maintenance, the vibrant social scene, and all the needed necessities, which are accessible via walking or a golf cart.

As more of those planning communities get developed, that’s an incentive for baby boomers to downsize, which opens up the market. I do agree boomers are competing with that millennials.  Even in my neighborhood where I just sold, homes there were mostly 1960s ranch homes. Most of those would have been sold to first-time home, but we're seeing some of the retirees and baby boomers moving in because they're more single level.

A couple different things can incentivize baby boomers. One other thing to point out, depending on the market—I think in Florida, back during the downturn, they enticed long-term homeowners to sell by changing the real estate tax policy. Government could actually have a say in how this all plays out. In Nashville, we have some freeze on property taxes based on your age. But I think that's the other piece of the puzzle that might prod homeowners to go out and either downsize or move to one of these active adult communities.

Ponce: That, I think, has always the natural progression. Kevin, you were mentioning that folks are more interested in upgrading versus downsizing. I'm seeing upgrading by means of remodeling as opposed to going out and buying bigger, right? I just thought of a stat. The current unpaid principal balances for home equity lines of credit in seconds is at the all-time lowest since pre-financial crisis. That means that a lot of these folks have a lot of equity and that completely fits with your theory, Kevin. These folks are remodeling because they have equity. They can go out and get a line of credit and remodel and build up, as opposed to sell and buy bigger. I think that is also contributing to the shortage.

McDuffie: Some of our friends call it the HGTV effect, where homeowners are watching the Property Brothers or Fixer Upper and they're saying, "Why do I want to go out when I can a remodel?" It'll increase the value of their home overall without having to deal with all the associated costs that come into play and all the hassle of moving.

Watson: Has anyone here on the call tried to renovate anything recently, and tried to get a subcontractor to help them do that?

Ponce: No, but I'm sure there's probably a waiting list.

McDuffie: No.

Watson: Yeah. Oh, my goodness. It's almost impossible because of the demand for building right now.

We've got people coming from Huntsville, Alabama to do subcontracting work in Nashville. What you're finding is, I have a lot of people call me and say, "Yeah, we're thinking about renovating our home." But good luck finding someone to do it.

The demand for new construction is sort of a vicious circle. When you're a subcontractor and you can get a steady job from a contractor, you're going to take that every day before you get a one-off from just one person.

Ponce: Maybe that will be homeowner’s cue to say, "Okay. If we can't renovate, then what is my home worth in the market?

About Author: Joey Pizzolato

Joey Pizzolato is the Online Editor of DS News and MReport. He is a graduate of Spalding University, where he holds a holds an MFA in Writing as well as DePaul University, where he received a B.A. in English. His fiction and nonfiction have been published in a variety of print and online journals and magazines. To contact Pizzolato, email joseph.pizzolato@thefivestar.com.

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