Forecasters Remain Cautious Given Inflation, Interest Rate Uncertainty
The real estate market has cooled over the past quarter, as buyers face mounting economic pressure from inflation, bloated housing prices, and escalating interest rates. But the question in most forecasters’ minds is what will happen in 2023 with inflation and interest rate projections in – as yet – unknowable territory.
Although experts are all over the map when it comes to predicting interest rates – projections for 2023 are currently ranging from 5% to 9% – everyone agrees that it largely depends on the Consumer Price Index and the Federal Reserve’s interest rate decisions that result from that data.
Economic predictions are often based on “the way it happened in the past,” but economic fundamentals are rarely exactly the same mix as in the past. Such is the case today, where economic fundamentals are largely stable and housing inventory remains tight – a promising recipe for a decent, albeit softer, purchase market in 2023.
Rodney Anderson, Executive Vice President, National Agency Manager with Alliant National, noted on a recent October Research webinar that while we are currently experiencing a slowdown in the market, it’s difficult to say what portion of that is seasonal and how much is interest rate-related.
“We’ve had a sellers’ market for a long time, and now, we are returning to equilibrium,” he said. “But if you look at the number of houses on the market, we are still in a sellers’ market, with a lot of regions experiencing only a 3-months’ supply, so there is continued support for prices to remain fairly stable.”
Although there remain a lot of unknowns, many economic forecasters retain a sense of cautious optimism based on what we do know, while lenders and real estate professionals are facing the reality of lower sales and originations in 2023.
Key Factors: CPI and FOMC
The Federal Reserve’s battle against inflation remains one of the key factors in the overall economic outlook for next year, as well as the outlook for the real estate markets, since with each incremental rise in the interest rates, a new segment of buyers will be priced out of the market.
The Federal Reserve has maintained a hard line with regard to inflation, and Federal Reserve Chairman Jerome Powell did not soften his tone during his Dec. 14 presentation following the December meeting of the FOMC, where he announced the Fed would be raising the interest rate another half percent.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” Powell said at the outset of his speech. “Without price stability, the economy does not work for anyone and without price stability we will not achieve a sustained period of strong labor market conditions that benefit all.”
In addition, Powell said he anticipated that “ongoing increases would be appropriate in order to attain a stance of market stability that is sufficiently restrictive to return inflation to 2% over time.”
One positive indicator in December was the Consumer Price Index, which showed inflation had slowed to 7.1%. While that stat was encouraging, Powell said it was not enough to deter further interest rate hikes.
“It will take substantially more evidence to provide confidence that inflation is on a sustained downward path,” he said.
With the target federal funds rate range now at 4.25-4.5% and Powell suggesting further hikes, it is now anticipated that the federal funds rate could rise to 5.5% in 2023, adding some further deterioration to the pool of potential buyers.
Federal Reserve reports stable economic activity
The Federal Reserve’s Nov. 30 release reported economic activity was flat or up slightly across most of the districts, a sign that the economy continues to hold its own despite the known headwinds of inflation, high interest rates and global issues.
Reports across sectors were uneven. Not surprisingly, lending, home sales, apartment leasing and construction all exhibited slowing trends while improving inventory in the auto industry has resulted in an increase in sales in some districts. In addition, spending was up in travel and tourism, and as well as in restaurants and hospitality. Manufacturing was also up slightly on average.
Employment numbers remain steady
Total nonfarm payroll employment increased by 263,000 in November, and the unemployment rate was unchanged at 3.7%, according to the Dec. 2 release from the U.S. Bureau of Labor Statistics. Notable job gains occurred in leisure and hospitality, health care, and government. Employment declined in retail trade and in transportation and warehousing.
Consumer confidence concerns were largely allayed by record Black Friday and Cyber Monday spending. Although inflation has taken its toll on consumers, low unemployment has kept spending steady across many sectors, including mortgage and rent payments, a factor that is keeping foreclosures contained.
Employment is also a major factor in keeping foreclosures down, and while labor demand is weakening, according to the Federal Reserve, businesses are expressing a reluctance to lay off due to hiring difficulties. Most importantly, most districts reported a fairly positive outlook, pointing to stable or slowing employment growth and at least modest further wage growth moving forward.
Real estate and lending projections
While the economy overall appears to be stable, the real estate market continues to decelerate.
According to the National Association Realtors (NAR) Nov. 30 report, pending home sales slid for the fifth consecutive month in October, falling 4.6%. Three of four U.S. regions recorded month-over-month decreases, and all four regions recorded year-over-year declines in transactions.
While there are always seasonal declines in the fall, the year-over-year number was more dramatic, with pending transactions down 37%.
“October was a difficult month for home buyers as they faced 20-year-high mortgage rates,” said NAR Chief Economist Lawrence Yun. “The West region, in particular, suffered from the combination of high interest rates and expensive home prices. Only the Midwest squeaked out a gain.”
On the upside, Yun was hopeful that the upcoming months will see buyers returning to the market if mortgage rates moderate, as they have in the past few weeks.
Taking a hard look at the numbers, Freddie Mac, in its most recent analysis, noted that home sales have fallen to a forecasted 5.4 million units at a seasonally adjusted annual rate in the third quarter of 2022 from 7 million earlier this year. The GSE forecasts that home sales activity will bottom at around 5 million units at the end of 2023.
“We expect house prices to decline modestly, but the downside risks are elevated,” Freddie Mac noted. “As the labor market cools off, housing demand will remain weak in 2023, potentially resulting in declines in prices next year. However, home price forecast uncertainty is wide due to interest rate volatility and the potential of a recession on the horizon.”
Freddie Mac predictions include:
Overall originations are expected to hit $2.6 trillion in 2022 and slow to $1.9 trillion in 2023
Mortgage originations will end the year at $1.9 trillion and slow to $1.6 trillion
Refinance originations slowed to $747 billion and will deteriorate to $310 billion in 2023
The Wild Card: Consumer confidence
Data can certainly tell us a lot, but at the end of the day, consumer experience and assessments can impact the long-range reality, and consumer confidence is decreasing, according to the Conference Board Consumer Confidence Index.
While not dramatic, the index backtracked to 100.2 from 102.2 in October. In addition, consumers assessment of the current conditions decreased to 137.4 from 138.7 last month, and consumers’ short-term outlook declined to 75.4 from 77.9.
Consumer confidence can keep the economy and the real estate market moving forward, while hubris can take us into unsustainable territory, as we learned in 2008. A little reality check may not be a bad thing as we all continue to keep tabs on the data and plan for a softer market in 2023.
An abnormally hot real estate market fed by low interest rates and the unexpected burst of buying during the COVID-inspired escape from the city may be finally cooling down in response to rising interest rates, inflation and a skittish Wall Street.
While real estate is taking a direct hit from rising interest rates, inflation is also reducing potential homebuyers’ buying power, especially in the low to mid-range properties. But there are a few upsides that could help us weather the storm.
The team at Alliant National has compiled information on the data points that will most impact the real estate market in Q4.
Inflation and Supply Chain
Two of the biggest challenges in 2022 are likely to persist through the end of the year and into 2023, inflation and supply chain disruptions. Additionally, the war in Ukraine has resulted in Russian energy supplies being cut off to Europe and economic pressures triggering inflation, the rise in interest rates, and potential recessionary trends are creating a confluence of uncertainty.
Concerning current economic trends, the September edition of the Federal Reserve’s Beige Book, indicated that economic activity was unchanged, since their July report, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening. However, the report also noted that the outlook for future economic growth remained generally weak, with districts noting expectations for further softening of demand over the next six to 12 months.
Market Fundamentals Remain Steady
Despite deteriorating conditions for some home buyers, steady employment numbers should keep real estate moving through the end of 2022. Although the number of buyers competing for each property has decreased in the last few months, homes are still turning over relatively quickly and, in most regions, are sold at the asking price or more.
Continued tight inventory is expected to keep most markets competitive through the final quarter.
While there is no doubt that the real estate market is likely to continue to slow, especially if the Federal Reserve follows through on yet another rate hike, economists remain watchful of other indicators that could bode well for softening the impact.
According to Fannie Mae’s most recent release, GDP is projected to grow 1.3% in the third quarter of this year, followed by 0.7% growth in the fourth quarter.
However, most economists agree that consumers have been far more unpredictable in recent years and better than predicted GDP growth in Q4 could mitigate some of the other headwinds.
Home equity, another positive indicator for the housing market, has increased dramatically over the past decade. The value of homeowner equity in the United States increased from approximately $8.77 trillion in 2010 to approximately $21.1 trillion in 2020, according to TransUnion. CoreLogic reported recently that homeowners gained another $3.6 trillion from 2021 to 2022 as home values continued to escalate, providing some solid financial strength to help homeowners weather a potential downturn.
First-Time Homebuyer Numbers Dropping
During an October Research webinar in September, Selma Hepp, Executive, Research & Insights Interim Lead of the Office of the Chief Economist for CoreLogic noted that the real estate market is experiencing its biggest hit from first-time homebuyers, who are increasingly squeezed out of the market by the trifecta of higher prices, higher interest rates and inflation that is pricing them out of the market.
In spite of that reality, first-time homebuyers, though making up a smaller percentage of homebuyers in recent months, did bump up their participation in August.
Part of that continued interest could be that many buyers are still finding buying more appealing than renting in markets where rents have escalated faster than monthly mortgage payments in recent years. That reality combined with increasing wages in some sectors is helping offset the trifecta.
Strong Employment Outlook Encouraging
U.S. employment numbers have remained strong through the summer, with the economy adding 293,000 jobs In June, 526,000 in July, 315,000 in August, and 263,000 in September, in spite of recession concerns that predicted otherwise. There are 2.0 job openings for every unemployed person, so the demand for labor is strong and should remain so through Q4, though job openings appeared to be on the decline in October.
In mid-September, the Q4 ManpowerGroup Employment Outlook Survey (NYSE: MAN) indicated that the global labor market was likely to remain strong with steady hiring expected to continue through the remainder of 2022.
ManpowerGroup Chairman and CEO Jonas Prising reported the need for technology talent along with the growth of employment opportunities in finance, banking, and insurance are keeping the labor market strong, especially in the U.S. This along with the fact that the U.S. labor force participation grew to 62.4% in August bodes well for the real estate market as we finish out 2022.
While employment remains strong, the Conference Board Economic Forecast for the U.S. Economy, released on Sept. 14, forecasts 2023 GDP growth will slow to 0.3% year-over-year.
Service-based industries live or die by the quality of their customer service. While other industries rely on their products or supply chains, service enterprises primarily differentiate themselves through the experiences they offer. Today’s savviest service-related companies are acutely aware of this. They also know retaining customers is much easier and economical than finding and converting new ones.
Recently, Missy Trubatisky, Alliant National’s Underwriting and Escrow Training Manager, called upon her years of title insurance experience to develop and present a training entitled “Customers for Life.” The presentation offered numerous examples of how title agents can build a superior customer service program and ultimately grow their businesses. Read on for some of the major takeaways.
It’s About Mindset
Perhaps the biggest thing to remember about creating “Customers for Life” and delivering superior customer service is that it is a bigger endeavor than any one action or campaign. Instead, it requires a complete shift in mindset. You must treat every deal like it is the most important of your career. Is this asking for a lot? Maybe. But it’s what your customers expect. And if you are in the services game, why would you want to do anything else? Missy says there are a few easy tricks to start shifting your thinking on this matter.
First, make every situation an opportunity to succeed, not an obligation to fulfill. Next, remember to present yourself professionally – every day and during every closing. Lastly, remember the golden rule, and then go one step further. Treat others not only as you want to be treated, but also as you would want your mother or children treated in the same situation, Missy says.
Opportunity vs. Obligation
You might be thinking: “Sure, it’s easy to talk about changing your mindset. Pulling it off is another thing entirely.” However, Missy says that when you start breaking it down, you quickly realize that it is not quite a Herculean lift. Instead of looking at it as a major undertaking, view customer obligations and opportunities as roughly the same thing.
We all know that working with customers entails at least some obligations. What matters, though, is how you choose to look at it. For instance, agents need to deliver the title commitment – typically within 20 days. Your obligation here is to deliver the commitment before the 21st day. Your opportunity is to deliver it in less than a week. In doing so, you demonstrate superior customer service; you provide the WOW factor. Making an obligation an opportunity isn’t as hard as you might think. It just involves a subtle shift in mindset, she says.
That’s Not Quite All
It would be nice if that was all it took to deliver superior customer service. But there is a bit more to it than that. Displaying ethical behavior, maintaining a sterling reputation, and engaging in effective communication also influences whether you can create customers for life.
How can you display ethical behavior in business? That’s a deep question. There are so many layers to ethical behavior, but for simplicity’s sake, Missy says you can boil it roughly down to integrity and character.
Your character is what others believe they know about the kind of person you are. Your integrity directly impacts how people view your character. It speaks to whether people view you as trustworthy. Trust is the basis of obtaining customers for life, Missy notes. When customers trust that you will do what you say, they will come back repeatedly.
Unsurprisingly, whether people consider your business ethical will determine its overall reputation. It will also dictate its longevity. When you are a service-based business, your reputation is all you have; you must protect it at all costs. This is where accountability comes in. It’s okay to make a mistake. We all do it. What’s important is how you address it. Here’s how you can go about making it right:
First, own the mistake
Second, figure out how to fix the mistake
Third, don’t try to hide it or sweep it under the rug
Lastly, learn from it, and don’t make the same mistake again
The final part of creating customers for life involves prioritizing effective communication with your customers. But before you can do that, you must first listen to their needs, Missy says. That means listening from beginning to end. We’re all guilty of formulating our side of the conversation even while others are formulating theirs. When we do that, we miss out on vital information that we need to know. We fail to understand what is important to our conversation partner.
Conversely, when you understand what is important to another person, you can show that you care about them. This creates the foundations of a trusting and mutually beneficial business relationship.
Alliant National: Committed to Building Customers for Life
Building a reputation for superior customer service takes real work, but when you are caught up in the day-to-day minutiae, it can be difficult to make needed changes. Still, there are numerous steps we all can take to improve our customer service and make our clients feel more appreciated and valued. All that’s required is going back to the basics. Missy emphasizes this when explaining the genesis of her presentation and how Alliant National seeks to help agents create loyal, lifelong customers. “Everyone needs a reminder from time-to-time on good basic customer service skills and the importance of developing those skills,” she said. “It’s critical for Alliant National to present these courses to offer a unique perspective to a vital skill.”
Want to learn more about creating “Customers for Life?” Check out Missy’s full presentation here.
The “R” word is one of the most feared words in the marketplace today: RECESSION. There’s a lot of debate around whether the United States is in recession, but whether you call it a recession, slowdown, correction, or a normalization, it’s clear the market is changing.
As a title professional, now may be a good time to consider taking action, particularly if you’re already seeing some slowing in your market. New situations like this present new dangers and requirements, but they also present opportunities.
Let’s start with the dangers. The most obvious threats are reduced sales or revenues, which could threaten profitability and put pressure on cashflow. Those are troubling possibilities, but good management techniques can help you navigate these potential headwinds. Here are some steps to consider:
Keep a close eye on your business metrics
Get accurate revenue numbers and watch them carefully.
Seek realistic sales projections. Know what’s in your pipeline, and in your customers’ pipelines.
Watch expenses closely.
Know your “cash-burn” rate (i.e., how long you can operate at a loss).
Hope for the best, but make a plan for the worst
No one likes layoffs, but you should have a plan. Make this as soft as possible. You may consider salary “freezes” and percentage salary reductions as an option should conditions warrant.
Work with landlords, vendors, suppliers, and banks for more favorable terms.
Build a “war chest” or “rainy day fund.” Having cash-at-hand is prudent.
Consider a line of credit. Seasonal slowdowns, roughly October through February, may make cash flow challenging. One alternative may be to obtain a reasonable line of credit from a trusted, local lender that can be used for short term coverage of payroll or extraordinary expenses “just in case” it is needed. The line of credit option creates flexibility for expense management.
Having discussed the dangers, here are some new responsibilities you may face in a contracting economy:
Get your game face on
Things are a lot more competitive. There is more competition for each revenue dollar. Prepare your team to compete more effectively.
Keep a close eye on your competitors. Know what they are doing and where they may be looking to take market share, your employees, etc.
Take special care of your best customers. Know where your revenue is coming from. “Show the love” to customers who may be at risk.
Find partners you can trust. Look for loyalty, financial strength, and assess the risk of being betrayed. Some underwriters may put increased pressure on you to make minimums, or they may cut staff or divert resources to support their direct and affiliate operations while neglecting your needs. Find the partners that are going to be highly responsive to your needs so you can get your difficult deals closed.
Watch out for “bad moods.” Your team members may worry about slowing market conditions or even about being laid-off. Fear and stress can make it difficult to compete. Company culture is important. Stay close to your team and engage them. Get their input. Share your action plans.
Make new commitments. Revise sales projections and requirements for the sales team. Now is the time to invest in your team’s selling skills and marketing efforts.
Find efficiencies. It’s time to streamline processes and improve your systems. Seek ways to do more with less.
If you cope with the threats, fulfill your obligations, and have adequate financial capital, you may have the chance to take advantage of opportunities in a slowdown. Some of these opportunities include:
Improving the quality of your team
Upskilling – consider education and training for your staff including CE, CLE, and sales training.
One consideration is to hire top performers from competitors. Of course, you want to remain vigilant for competitors looking to “poach” your employees.
Become a bigger and better company
Now may be the time to consider purchasing a competitor for a discount to expand into new markets and to obtain new capabilities.
You may wish to rethink your customer experience and employee experience to give you a competitive edge.
Streamlining management and operations can help you become a more agile company. This might include bringing in new technology to do more with less and to improve turn time and accountability.
Consider making new offers – such as commercial transactions, education and training for your real estate agent customers, or new digital capabilities for customers such as mobile apps.
Regardless of whether the economy experiences a soft landing, hard landing, stagflation or a recession, anticipating what you might do in advance of these situations is essential to the success of title professionals. By planning ahead, you can overcome market challenges and adopt a new “R” word to describe your organization: RESILIENT. Of course, your Alliant National agency representative or agency manger is always available to discuss market conditions and ways to help your business thrive!
We’ve learned from the refinance boom and bust years that being a one trick pony in the title insurance profession is not the pathway to longevity. Diversifying your transactions with purchase, refinance, builder, REO and mobile home transactions is a good way to hedge your bets in the cyclical reality of the real estate market.
Commercial transactions can also be a great way to solidify your competitive position in the local market. However, many agents are a bit leery of taking the plunge due to the more complex nature of these deals.
Donna More, VP and Senior Underwriting Counsel for Alliant National Title Insurance Company, says that while she can understand an agent’s initial trepidation, there is a logical pathway for agents to move into the commercial end of the business, and Alliant National underwriting counsel can be a great resource as you are learning the ropes.
“I think an experienced underwriting attorney is key in these transactions,” More says. “We know right off the top what is going to come up. We can get the agent prepared, alert them on what they are going to need, and tell them what questions to ask – even before they get the search report – so they can avoid some surprises later on in the transaction.”
She notes that agents are hesitant to get into commercial because they don’t want to appear ignorant when questions and issues come up. But most of the tough issues will be resolved by underwriting counsel.
“We are going to be the ones who come up with methods of resolution, based on our professional experience,” she explains. “That is one of the big advantages we offer our agents. With our experience and knowledge, we are often able to predict what is going to happen, or what is going to be needed. We can already be thinking ahead to the best way to resolve potential issues.”
But let’s not put the cart before the horse.
There are some key steps you can take before venturing into commercial transactions. It’s also helpful to understand how the players’ roles are different and explore some of the elements that are unique to commercial transactions.
Learning about commercial transactions
The best way to learn the nuances of commercial deals, according to More, is first, to take on small deals in order to learn by doing; second, to work closely with underwriting counsel to get questions answered; and finally, to seek out educational opportunities.
“I recommend that agents who want to get into commercial and want to feel competent and prepared should take classes,” she advises. “There are always good takeaways from the commercial real estate seminars. Also, ask local attorneys what they recommend would be helpful to gain a higher degree of sophistication in commercial real estate.”
More says it shouldn’t be too hard to find educational opportunities, since bar associations and land title associations offer commercial real estate classes. Even if the class is geared towards lawyers, it can still give an agent insight into commercial deals, affording them a greater level of comfort, she adds.
More acknowledges that the most complicated commercial transactions are usually handled by attorney title agents but notes that there are plenty of non-attorney title agents who have been successful at developing a clientele with their existing real estate agent and broker customers who handle both residential and commercial transactions.
She also advises mining existing customer relationships for potential opportunities.
“Someone who bought a $3 million home and closed with you is probably a fairly successful businessperson and may be involved in buying and selling commercial properties,” she says. “Nurture those relationships.”
She also suggests getting immersed in the local business community and commercial industry organizations, especially the real estate associations like Commercial Real Estate Women (CREW) or NAIOP, the Commercial Real Estate Development Association (fka the National Association for Industrial and Office Parks).
“Being involved in the local commercial industry organizations is a very good source of knowledge and business,” More says. “Go to the local meetings and take advantage of the educational opportunities to build your confidence.”
How commercial title work differs from residential
Commercial transactions can be complicated, with more lawyers involved and often more parties to the transaction. In addition, the principals are often not individuals, but legal entities.
“The title agent needs to be very familiar with the types of legal entities in their state and what the requirements are for proof of good standing and proof of authority,” More explains.
She says an agent is also more likely to have to deal with ancillary issues, such as easements for access. Generally speaking, in a residential sale, the home is on a platted lot and there are no issues with access. But with commercial property, it could involve a landlocked parcel and you have to be concerned about access or the adequacy of access.
“The other important difference is how you deal with the lenders,” she says. “The lenders are going to expect more. In the more sophisticated transactions, there are going to be more requirements and different documentation needed. Even though you as the title agent would not be preparing the documents, you will have to familiarize yourself with all the documents in the transaction as well as get them signed as part of the package and recorded.”
More notes that construction loans are also more complicated for commercial properties and lenders will have a lot more requirements. The agent could also run into construction lien issues.
“Florida has a construction lien law that is very detailed and very complicated. That’s another reason why it’s so important to go to your underwriting attorney to get the guidance you need,” she advises.
Same basics, different pacing
The basics of the title and closing work in a commercial transaction is not very different from residential transaction.
“The agent needs to go through the commitment, see what the requirements are, and get familiar with the exceptions,” she explains. “It is especially important for a title agent to be able to distinguish what the parties are responsible for vs. what they are responsible for. And of course, they should come to underwriting as soon as they see something that makes them say, ‘I don’t know what this is.’”
However, More clarifies, the title agent must account for everything even if it is the sellers’ or buyers’ responsibility to actually perform the task or provide the documentation.
Sometimes commercial deals can be turned around quickly, but usually they take longer because the inspections and due diligence are more complicated, often involving permitting, approvals, DOT issues and access.
“In my seminars for Florida agents, I have always suggested checklists for any transaction, but it is most imperative in commercial deals,” More says. “Go through the contract. Check the timelines. Also, as the title agent, you need to share your title work with all parties – seller, buyer and lender. Sellers and their lawyers will have a much bigger role in a commercial transaction. The seller will have to come up with all kinds of documentation. On the buyer side, the lender will need to see the organization of the entity and will want to look at their books and balance sheets.”
And of course, the title agent will be involved in the curative work, even if it is only to give the seller guidance as to what will be required.
“In addition to keeping up with the timing, probably the most crucial part of what they do is keeping track of what needs to be fixed and how it needs to be fixed,” More notes. “That’s where we come in. They need underwriting to determine how to cure a problem or explore the alternatives available to fix an issue. We rate those alternatives – this is the best course of action or this is the option we don’t want to do.”
Final word
Commercial real estate transactions do require some expertise, but it is knowledge that can be acquired over time through educational opportunities and on-the-job experience with smaller transactions. But the most important resource you have at your disposal will always be the experienced and knowledgeable underwriting attorneys at Alliant National. We are always here to help you learn how to navigate this fascinating and challenging aspect of the title insurance business in order to take your agency to the next level.
