HousingWire recently spoke with Matic CEO and co-founder Ben Madick about the changing home insurance market, how it impacts mortgage lenders and homeowners, and why lenders should pay attention.

HousingWire: What is the current home insurance market like?

Ben Madick: The home insurance market is experiencing unprecedented volatility, which has significant implications for homeowners, mortgage lenders and prospective homebuyers.

Two key trends have emerged in this landscape. Firstly, it’s more challenging to acquire insurance as home insurance carriers are imposing restrictions on new business and rapidly exiting specific markets. Secondly, the cost of home insurance is more expensive than ever as premiums are increasing at drastically high rates.

These trends stem from the challenges carriers have faced in recent years, including the surge in weather events and the rising cost of building materials. In 2022, property and casualty insurers recorded a combined ratio of 102.4% as reported by S&P Global Market Intelligence, indicating a lack of profitability.

To mitigate these losses, carriers are raising premiums for both renewal business and new business. Approval from state regulators, typically known as the Department of Insurance (DOI), is necessary for implementing rate increases. However, in certain regions such as California and New York, the DOI has been slow in approving proposed rate hikes. Carriers in California, for instance, have reported applying for home insurance rate increases as far back as six years ago, still awaiting approval. Other states impose a cap on home insurance premium increases, making it challenging for insurers to keep up with inflation.

When faced with premium delays and denials, carriers have to make a choice: either continue writing new business despite the unsustainable loss ratios or discontinue offering insurance in those specific areas. In the past year, an escalating number of national carriers have enforced limitations on new home insurance business universally. Furthermore, carriers have taken more extreme measures by completely discontinuing the underwriting of new policies in specific states. This trend, which had been a longstanding challenge in Florida, is now beginning to impact other states like California, Georgia, South Carolina, New Jersey, New York and Arizona.

In regions where rate increases are approved, carriers may continue selling new business and pass along significantly higher rates to new policyholders. For example, according to the Texas Department of Insurance, 87% of property and casualty rate change requests were approved in 2022. Consequently, home insurance premiums in Texas increased an average of 16% this year compared to 2022, bringing the average annual cost to $2,150. Back in 2020, insurance premiums averaged $1,637 in Texas.

Overall in the U.S., premiums have risen to a record high average of 9% during the first half of 2023, compared to the previous year. Rates began climbing between 5-6% in 2021 and 2022. Prior to 2021, premium increases for new business averaged between 2-4%. Additionally, for homeowners that stay with the same carrier and policy, renewal rates have experienced an even steeper incline. Across the U.S., home insurance premium renewals increased an average of 23% in the first half of 2023.

HW: Why should mortgage companies pay attention to what’s going on in home insurance?

BM: Lenders need to be aware of the insurance landscape as it can have a significant impact on their ability to efficiently close a loan due to availability and pricing. With home insurance demand surpassing supply, homebuyers are experiencing longer search times while they try to find a carrier that will accept their business. In addition to the usual research period, there are new considerations such as customer service wait times. Less than 10 home insurance carriers offer the ability to bind a home insurance policy 100% online without working with an agent in some capacity, making wait times an important factor.

For instance, when State Farm announced they were exiting California, one regional carrier in the state experienced an overwhelming 500% increase in inbound calls, causing significant delays in average wait times for existing and potential customers. These delays add complexities to the timing of when proof of insurance is required, potentially prolonging the closing process by a few days or even weeks, leading to increased costs for mortgage lenders. Rate-lock extensions alone can result in lenders losing tens of thousands of dollars per month.

In the worst-case scenario, the rising cost of insurance could lead to a mortgage being denied during the underwriting process. Accurately calculating a customer’s front-end debt-to-income ratio (DTI) requires accounting for all housing expenses, including homeowners insurance premium. It is not uncommon for loan officers to walk away from a loan or two each month when the borrower’s DTI exceeds acceptable limits once the insurance estimate is factored in.

HW: Why is working with an insurance marketplace important in this changing market?

BM: In a landscape where carriers are increasingly restricting new home insurance business, partnering with a digital insurance marketplace backed by a strong carrier network becomes essential for both borrowers and lenders.

A marketplace offers numerous benefits, such as time savings for borrowers during the research process, as multiple carriers are digitally integrated into the online shopping experience. This enables borrowers to swiftly determine the availability of options and evaluate the affordability of policies, leading to potential long-term savings and reduced DTI. Moreover, a marketplace increases the chances of borrowers finding suitable policies, particularly in areas where supply is limited.

HW: How does working with Matic help lenders improve the customer experience?

BM: We built Matic’s embedded insurance marketplace specifically for the mortgage industry to provide value to lenders, servicers and borrowers. With Matic, borrowers save time by shopping multiple carriers at once and are automatically presented with transparent pricing and coverage options. Depending on the policy, the borrower can finalize the purchase online, or they can work directly with a licensed advisor. On average, customers save over $500 a year when they purchase a policy through Matic.

Since Matic is integrated into the mortgage process, finding homeowners insurance is no longer an afterthought, which adds visibility and control for the lender, allowing them to foresee potential issues that could result in delayed closings. Additionally, it can create a passive revenue stream for mortgage companies, helping to offset down cycles.

In the early days, we invested a lot of time creating the right mix of carriers covering all 50 states so that we would be able to sustain availability limitations and rate fluctuations. Today, Matic has 45 A-rated carriers, and it continues to grow to account for the rapidly changing market.

Bottom line, Matic’s flexible insurance marketplace is essential for mortgage companies and borrowers, especially during times of unprecedented market volatility.

Learn more about Matic’s digital insurance marketplace solutions for mortgage leaders.

Note about sources/methodologies: Home insurance premiums and year-over-year changes are based on a data sampling from 6 million quoted properties analyzed from January 1, 2019, through July 10, 2023. Average Matic savings is based on Matic policyholder data from January 1, 2022, through December 31, 2022 when prior insurance premium amount is known.

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U.S. house prices rose slightly in May, up 0.7% from April, according to the Federal Housing Finance Agency (FHFA) seasonally adjusted monthly House Price Index (HPI). On a year-over-year basis, prices rose 2.8% from May 2022 to May 2023. But that only tells part of the story.

“U.S. house prices increased moderately in May, continuing the trend of the last few months,” said Nataliya Polkovnichenko, supervisory economist at the FHFA. “However, house prices in some regions of the country remained below the levels seen one year ago.”

For the nine census divisions, seasonally adjusted monthly price changes varied from April 2023 to May 2023. They ranged from -0.5% in the New England division to +1.7% in the Pacific division. The 12-month changes ranged from -2.7% in the Mountain division and -1.7% in the Pacific division, to +5% in the Mid-Atlantic division and +5.5% in the East North Central division (Illinois, Indiana, Michigan, Ohio and Wisconsin).

Also released on Tuesday, the S&P CoreLogic Case-Shiller National Home Price Index indicated that home prices rose month-over-month for the fourth consecutive time in May.

However, this decade-long rally in U.S. home prices could finally come to an end, said Robert Shiller, professor of economics at Yale University yesterday on CNBC. That is if the Federal Reserve stops its rate-hiking cycle.

“The fear of interest rate increases has influenced people’s thinking — it’s not just the homeowners, it’s new buyers who wanted to get in before the interest rates went up even more,” Shiller said on CNBC’s Squawk Box. “They wanted to lock in. So that’s been a positive influence on the market. But it’s coming to an end.” 

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We’re going to start today looking at the pending sales. Last week the National Association of Realtors (NAR) reported that existing home sales declined in June to an annual rate of 4.2 million. It’s now obvious to everyone that home prices have held up in 2023 because demand has exceeded the very limited supply of homes to buy. The question I’ve been getting lately is whether we’ve turned the corner on home sales. The number of transactions. Will the total sales rate fall below 4 million? Will it climb closer to 5 million?

NAR uses a seasonal adjustment to the data, where at Altos we simply count everything. NAR reported a seasonally adjusted annual rate in June of 4.2 million home sales in June. Will that start to grow?

Pending Sales

There are now 378,000 single-family homes in contract. There were 68,000 new contracts for single-family homes this week. In the chart below, the light portion of each bar represents the new contracts each week. In these videos, we focus on single-family houses and don’t include condos to keep the data clear and consistent. But, there were another 15,000 condos and townhomes that went into contract this week. The pace of 80,000 to 90,000 new sales per week translates into 4.2 million for the year. 

When you think about completed sales, the pending sales that we report here are the earliest proxy for the sales that will complete in the future. Homes typically take 30-45 days in contract. When NAR reports the June sales data, these were pending sales in April and May. So if you want to see where the sales rate will be in the future, keep your eyes on this data set. 

The pace of new sales is not accelerating. Home buying demand is limited by affordability of course, but this is a supply-constrained market. Even if demand picks up, the rate of sales is still going to be way under 5 million. The rate isn’t accelerating, but the comparison with 2022 is now getting easier.

In June, NAR reported that the existing home sales rate was 18% lower than 2022 at the same time. By our count, that margin has narrowed to 10% now. And the new sales rate — that is represented the light portion of each bar in the chart — is only 5% fewer than last year. So the pace of home sales is holding steady now, while it was falling in 2022.

Just to zoom in on the new sales rate. In this chart, the data shows the total count of new contracts each week. The taller the bar, the more sales are happening. The dark part of the bar represents single-family homes, and the light portion of each bar represents condos and townhomes. I included condos here so you can see the total sales pace I’m referring to. With 80,000 to 90,000 new contracts starting each week, that translates right into 4.2 million for the year. In this chart, the data also shows how rapidly the sales rate fell again in September of 2022. And how steady it has been this year. So, while the rate of sales is not really increasing, the comparison with 2022 will get easier. 2024 will likely show an increase in sales too because Q1 this year was still recovering.

The median price of single-family homes that took offers and went into contract this week was $380,000. That’s up a tiny fraction over last week and a little over 1% higher than 2022. The trends in this chart show how quickly home buyers reacted to the big mortgage rate jumps in 2022. See the big dips in the light red line in July and September? This tells us two things: if rates jump again, consumers will react. And, by September if mortgage rates don’t jump, then the year-over-year home price changes will get much easier. You can see why home prices will likely end the year up over 2022 unless mortgage rates spike again.

I spoke with Robert Dietz the chief economist for the National Association of Home Builders (NAHB) last week on the Altos podcast, and he mentioned that they’re still of the view that last November’s peak in mortgage rates was the peak. Rates have hovered around 7% all year. The assumption that mortgage rates will come down from here is based on three things:

1. That inflation has peaked and will continue to subside. 
2. That the economy continues to cool or go into recession and the Fed will lower rates.
3. The super high spreads between the 10-year bond and the 30-year mortgage will start to return back to normal levels. 

I don’t predict mortgage rates, but Dietz was very clear in his analysis, and I find that very compelling.

Inventory

There are now 479,000 single-family homes on the market across the U.S. Each year, housing inventory typically peaks in the third quarter. If a year is a market slowdown, like 2022 or 2018, inventory might not peak until September or October. This year is not a slowdown year. Our estimation is that inventory could peak as early as next week. My guess though, is that inventory will continue to climb into late August and resemble 2021 more than say 2016. The key takeaway on inventory is that there is no signal anywhere in the data of a surge in inventory. 

We’re currently projecting to end 2023 with just over 400,000 single-family homes on the market. When we started the year, our projection was closer to 600,000. That projection changes each week when new data comes in. Each surprise lower adjusts the end of year lower. We’ve had low-inventory surprises almost every week all year.

Price

The median price of single-family homes in the U.S. is $450,000 again this week. That’s unchanged from last week and also unchanged from 2022 Last year home prices were coming down pretty quickly. In 2022, home prices peaked at a record $459,000 in early July. Home prices didn’t reach that peak again this year. $450,000 is a psychological threshold for sellers and prices tend to cluster around these big numbers. So we could see several weeks at $450,000 or $449,000 before more discounting kicks in later in the summer. Home prices should end the year at about $410,000, just a percent or two higher than the end of 2022. 

The median price of the new listings is $400,000 this week. That’s down from last week. The price of the new listings is basically unchanged from 2022. Again, this is yet another signal that despite affordability challenges for so much of the country, there are sufficient buyers at these prices and these mortgage rates that home prices are not falling in 2023.

The percentage of homes with price reductions increased to 33.7%. That’s a third of the homes on the market that have taken a price cut from their original list price. Each line on this chart represents a year. You can see the annual curves that the market goes through and how it illustrates when the demand is highest, the price reductions are the lowest. I included a few more years here to illustrate how solidly in “normal” territory the market is. Balanced between buyers and sellers. The slope of the curve, how steeply it’s rising or falling, tells us if the market is shifting. 2023 is represented by the dark red line. The light red line represents 2022, and the yellow line represents 2020. Those two years are the most striking. You can see how dramatically the market changed in those years. But If you study the data closely, you’ll notice that in 2017 and 2019, the market accelerated in the second half of the year. In 2018 it decelerated. Those were much more subtle shifts but if you were selling a house in the fall of 2018, you felt it for sure.

The trend in price reductions right now is just on the slow side of balanced. We can see fractionally more price cuts when mortgage rates are near 7% than when they’re closer to 6%. Slightly fewer offers, which means slightly more price cuts for the homes on the market. 

The balance in this data implies that the sales prices in August, September and October will hold up just fine. Again, buyers are mortgage rate sensitive, so if rates spike, we’ll watch the rate of price cuts increase too. You can see the jump in the light red line in September of 2022. Hopefully, Dr. Dietz is correct and rates have seen their highest watermark. 

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Rithm Capital Corp., the real estate investment trust that operates NewRez, Caliber and several other businesses, entered into a definitive agreement to acquire Sculptor Capital Management Inc. for $639 million, the company announced on Monday. 

The deal, if approved by regulators, will bring to Rithm Sculptor’s $34 billion of assets under management, including real estate, credit and multi-strategy investing spectrum. To Sculptor, Rithm will provide capital to accelerate growth across sectors and seed new funds and strategies. 

Rithm is paying $11.15 per Class A share of Sculptor – a premium of 18% over the closing price on July 21 – with cash on hand and available liquidity. The transaction is expected to be neutral to Rithm earnings in 2024 and accretive in 2025. 

In the first quarter of 2023, Rithm had a GAAP net income of $68.9 million, compared to $81.8 million in the previous quarter. The company had $1.4 billion in cash. Rithm is scheduled to release second-quarter earnings on August 2. 

Michael Nierenberg, chairman, CEO and president of Rithm Capital, said in a statement that the transaction is “transformational.”

“Sculptor’s $34 billion of AUM coupled with Rithm’s $7bn of permanent equity capital and $30+ billion balance sheet creates a world-class asset management business,” Nierenberg said. 

Sculptor will operate as a subsidiary of Rithm, led by Jimmy Levin as CIO and executive managing partner, who will report to Nierenberg. Sculptors’ investment and leadership teams will continue in their roles. 

“We have long sought a partner with the stable capital structure, culture and vision to help unlock the potential for our platform to deliver more and greater value to our fund investors,” Levin said in a statement. 

Sculptor formed on November 17 a special committee of independent directors to explore potential transactions. Sculptor’s leadership has agreed to vote their shares, representing about 26% of the outstanding voting shares, in favor of the transaction. The board of directors of Rithm and Sculptor have approved the deal.

The transaction, subject to customary closing conditions, is expected to close in the fourth quarter of 2023.

The deal with Sculptor comes four days after Rithm’s acquisition of $1.4 billion worth of unsecured personal loans from Goldman Sachs‘ Marcus business unit. Rithm bought the portfolio at a discount, Nierenberg told Bloomberg. 

“This purchase is extremely attractive to us building off our past and current expertise in consumer finance,” Nierenberg said in a statement.

In another potential transaction, Rithm said in May that it was considering spinning off the mortgage division to aid its flagging stock, which company executives described as “extremely undervalued.”

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