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» VISIT US ONLINE @ DSNEWS.COM 59 impacts us at a local level," Ragland said. "We have to absorb that. It's very difficult for us to adjust when you're talking about a raw material like lumber that is a necessity in housing." UNSUSTAINABLE TRENDS According to data from Black Knight, Inc., foreclosure starts for May 2018 hit the second- lowest total in more than 17 years. e national foreclosure rate for May was only 0.59 percent— the lowest rate in some 15 years. ValueInsured's Q1 2018 Modern Homebuyer Survey reported that 62 percent of interested first-time homebuyers planning to purchase a home in "the near future" stated that they worry they won't be able to afford the down payment for the homes they are seeking. When it comes to millennial first-time homebuyers, that percentage increases slightly to 65 percent. ValueInsured's survey found that 22 percent of all existing homeowners shared the same concern that they wouldn't be able to afford the down payment on a new home—even after selling their current home. For homeowners aged 65 and older, the number increases to 28 percent, and it hits 36 percent for homeowners in rural areas. Owners of starter-priced homes were even more concerned, with 43 percent of those surveyed expressing concerns about being able to afford a new home after selling their current residence. Even still, the experts we spoke to were measured even when pointing out the real problems that exist. "Most markets today are reasonably priced, and even if they're high priced, we don't see the irrationally exuberant behavior associated with a housing bubble and the potential for a correction," Fleming said. "It's fundamental demand predicated against a relatively tight supply." "e conditions at the lower end of the market have been dominating," Hale told DS News. "Inventory continues to decline. Construction is happening primarily at the higher price points. By the end of the year, that could be significant enough to push up overall inventory levels, or at least keep them approximately flat. However, flat inventory at a record low level is still going to mean that prices keep rising." Millennials and other first-time homebuyers drive much of that demand for lower-priced homes. Nothaft told DS News, "e CoreLogic Home Price Index is up close to 7 percent over the last year. e lower-priced homes, selling at 75 percent of the local area median, are rising closer to 9 percent year-over-year." Unfortunately, the lower end of the market is feeling that inventory crunch acutely in many markets. Moreover, inventory shortages are also being aggravated by the fact that many existing homeowners are choosing to stay put in their current homes. Even when they do find another home, that doesn't always mean the original house is returning to the pool of available homes. "Mobility rates are down," Dietz said. "Many homeowners who do move are then choosing to rent those homes, so that's holding the inventory down. Builders continue to grow the amount of single-family construction that's taking place, but it's insufficient for the current level of demand." On top of increasing home prices and insufficient inventory, many existing homeowners also feel locked in place due to rising interest rates and the so-called "prisoner's dilemma." "ere's a financial penalty to moving, because you will lose the lower rate you already have and take on a higher rate," Nothaft said. "e challenge is finding something you like more than where you already live, and that becomes more difficult with less inventory available. at disincentives people from listing or supplying in the first place, which further exacerbates the inventory problem." Hale explained "the path we're on depends on what price point you're looking at. For the median and the low-median prices, we continue to see significant inventory shortages that don't appear likely to be alleviated anytime soon. New construction is entering at the above-median price points." THE PATH AHEAD FOR SERVICERS So, how should servicers be spending this time of relative prosperity and stability? Mark Fleming recommends focusing on the type of consumer who will be buying a home in the decades to come. "e consumer will only become more digitally comfortable," Fleming said. "e consumer will likely be in their mid-30s instead of late 20s when they first buy their first home. ey will also be more likely to be nonwhite, so understanding the differences between different ethnic communities and the ways in which people want to communicate can make a big difference in how we go out and find the customer of the future." "When the next downturn comes, it will not have uniform impacts across each metro area across the country," Nothaft said. "What servicers can do right now is try to identify the highest risk markets where the impact of the next downturn will be felt with more severity. Close to half of the 100 largest metro areas are overvalued. If prices are high relative to their normal relationship to income in the local market, that speaks to the degree of risk there is for a substitutive house price correction in that local market." Several of those interviewed also cautioned lenders to avoid making the same mistakes as before. "We are at the point in the housing cycle where there's a temptation to ease credit standards because affordability is eroding," Nothaft said. "Nobody wins if you put a family in a house they can't afford. e family loses, the lender loses, the neighborhood loses." Still, this moment of time is one rich with potential for servicers to thrive. "It's Goldilocks time for servicers," Kapfidze said. "Everything is just right. Refinancing volume is falling, so their loans are not walking out the door. Delinquencies are near all-time lows, so you don't have this added expense of servicing distressed loans. If you're a servicer, this is probably as good as it gets, so this is the time for you to invest in things that can give you a competitive edge when the business cycle turns." What should that evolution look like? Kapfidze has a few ideas. "Develop technology to deliver a more delightful customer experience. ink about the pain points from the height of the crisis and try and solve those problems. But right now, it must be great to be a servicer." "What servicers can do right now is try to identify the highest risk markets where the impact of the next downturn will be felt with more severity." – Frank Nothaft, SVP and Chief Economist, CoreLogic

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