Don’t Judge a Pool by Its Label

Stephen, one of the more interesting housing stories this summer is how resilient home prices have remained.

At the beginning of the year, many investors expected elevated mortgage rates, which kind of materialized, right? And those rates to produce a much broader national HBA correction.

Instead, we are seeing almost the opposite.

Existing home prices actually strengthened during the second quarter with roughly 80% of metropolitan areas posting year-over-year gains, up from 71% in the first quarter.

Now, this is nothing like a housing boom.

National prices are only up about 1.5% from a year ago.

But I do think, Stephen, it tells us something rather important.

High mortgage rates by themselves haven't been enough to overwhelm the supply constraints that continue to support home values across much of the country.

You know, I think the regional picture is really where the story becomes moderately riveting.

The Northeast and Midwest continue to post healthy price appreciation because inventory remains relatively tight.

While the South has cooled considerably as more supply has come to the market.

The West has even seen modest price declines.

So when we talk about the housing market in general, we're really talking about several regional markets moving at different speeds.

And I think for mortgage investors, the bigger message is that home prices and borrower health aren't necessarily the same thing.

Rising home values certainly can preserve borrower equity and they reduce broad credit concerns, particularly for seasoned homeowners.

But equity alone doesn't pay the monthly bills.

And that is what I'm talking about.

Stevie Wonder.

Equity does not pay the monthly bills.

That's why I think this fits so well with the K-shaped recovery we have been discussing over past, well, several months, really.

On one side, many homeowners are sitting on substantial equity cushions and continue to benefit from resilient property values.

On the other, a growing number of households are dealing with higher credit card balances, student loan payments, insurance costs, property taxes that we all love so much, and broader affordability pressures in general.

So, while the housing market itself continues to look remarkably stable, I'd say, borrowers' finances are becoming much more dispersed, for the lack of a better term.

For mortgage investors, we know that collateral values may remain resilient even as borrowers' behavior begins to diverge.

That's one of the reasons we continue to spend so much time looking beyond home price data and focusing on the borrower characteristics that ultimately drive refinancing, delinquencies, and of course, prepayments.