1 00:00:10,000 --> 00:00:13,240 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:13,320 --> 00:00:16,759 Speaker 1: I'm Tracy Alloway and I'm Joe Wise. Joe, there's nothing 3 00:00:16,800 --> 00:00:20,159 Speaker 1: better than a good chart. Let's see what chart do 4 00:00:20,160 --> 00:00:22,000 Speaker 1: you have for us today? What chart are you going 5 00:00:22,040 --> 00:00:25,360 Speaker 1: to ask listeners to visualize in their minds since they 6 00:00:25,360 --> 00:00:27,800 Speaker 1: can't actually probably like look at it right now, what 7 00:00:28,080 --> 00:00:30,080 Speaker 1: chart should they be thinking about. I actually have a 8 00:00:30,120 --> 00:00:33,479 Speaker 1: bunch in mind, like there are some extreme charts at 9 00:00:33,479 --> 00:00:36,279 Speaker 1: the moment, given everything that's been happening with markets. I'm 10 00:00:36,320 --> 00:00:39,280 Speaker 1: thinking in particular, you know, bond market volatility, what we 11 00:00:39,280 --> 00:00:43,200 Speaker 1: saw with sterling and guilts very recently. But if you're 12 00:00:43,280 --> 00:00:46,000 Speaker 1: looking for the most interesting charts at the moment, I 13 00:00:46,040 --> 00:00:49,159 Speaker 1: gotta say, I really think the housing market and the 14 00:00:49,200 --> 00:00:53,000 Speaker 1: mortgage market are where it's at. I completely agree with you. 15 00:00:53,120 --> 00:00:56,120 Speaker 1: And you know, like, look, the FED is raising rates 16 00:00:56,200 --> 00:01:00,320 Speaker 1: to slow down the economy to beat inflation, but the 17 00:01:00,400 --> 00:01:04,240 Speaker 1: number one sector of the economy that's most sensitive to 18 00:01:04,360 --> 00:01:06,759 Speaker 1: rate very directly is housing. And so you just see 19 00:01:06,800 --> 00:01:09,920 Speaker 1: some insane charts. We've been posting a bunch, but if 20 00:01:09,959 --> 00:01:11,720 Speaker 1: you know, you know, look at the price of a 21 00:01:11,760 --> 00:01:14,360 Speaker 1: new thirty year mortgage, just like through the roof compared 22 00:01:14,400 --> 00:01:17,399 Speaker 1: to six months ago. So many things like that, And 23 00:01:17,480 --> 00:01:20,679 Speaker 1: you know, housing is so crucial right to the overall economy. 24 00:01:20,720 --> 00:01:22,800 Speaker 1: Everyone wants to buy one or wants to live in one. 25 00:01:23,240 --> 00:01:26,280 Speaker 1: And what does it mean when these numbers are moving 26 00:01:26,400 --> 00:01:29,560 Speaker 1: so fast so hard? Right, Well, everyone also has an 27 00:01:29,560 --> 00:01:33,160 Speaker 1: opinion on warehousing is going. But you know, you mentioned 28 00:01:33,200 --> 00:01:35,040 Speaker 1: a couple of those charts you can look at pretty 29 00:01:35,120 --> 00:01:39,240 Speaker 1: much anything, Like the pure acceleration in mortgage rates has 30 00:01:39,280 --> 00:01:43,679 Speaker 1: been unprecedented, The spread between mortgages and the tenure U S. 31 00:01:43,720 --> 00:01:47,400 Speaker 1: Treasury is now at a record, Housing affordabilities at a 32 00:01:47,440 --> 00:01:50,320 Speaker 1: record though, Like there are so many you can choose from, 33 00:01:50,360 --> 00:01:54,760 Speaker 1: but it really feels like, given the unusual nous of 34 00:01:54,760 --> 00:01:58,000 Speaker 1: the situation and what we're seeing in some of these charts, 35 00:01:58,240 --> 00:02:00,480 Speaker 1: it feels like there's a lot of uncertainties. So, yes, 36 00:02:00,560 --> 00:02:03,800 Speaker 1: everyone would expect higher interest rates to have a negative 37 00:02:03,840 --> 00:02:06,760 Speaker 1: impact on the housing market, but we've also been talking 38 00:02:06,760 --> 00:02:09,880 Speaker 1: about how there's low inventory and you know, there's a 39 00:02:09,960 --> 00:02:13,200 Speaker 1: structural need for more housing in the US, so maybe 40 00:02:13,200 --> 00:02:15,520 Speaker 1: things are different this time. It's a really weird market 41 00:02:15,639 --> 00:02:18,560 Speaker 1: because you know, I think everybody is still kind of 42 00:02:18,600 --> 00:02:21,560 Speaker 1: scarred from the Great Financial crisis, and you see these 43 00:02:21,680 --> 00:02:24,680 Speaker 1: huge moves. You know, well, our house prices don't they 44 00:02:24,680 --> 00:02:26,960 Speaker 1: have to fall off a cliff. And yet if no 45 00:02:27,040 --> 00:02:29,720 Speaker 1: one is forced to sell, what's going to happen? Is 46 00:02:29,800 --> 00:02:32,440 Speaker 1: the housing market just gonna go away, like no transactions 47 00:02:32,520 --> 00:02:35,240 Speaker 1: except for people who like you know, get divorced or 48 00:02:35,240 --> 00:02:37,280 Speaker 1: like have to prove or something like that. Like seriously, 49 00:02:37,320 --> 00:02:41,120 Speaker 1: it seems like a possibility. So much weirdness. You know, 50 00:02:41,160 --> 00:02:42,760 Speaker 1: pull up a chart of like how many people are 51 00:02:42,760 --> 00:02:45,400 Speaker 1: refined their mortgage. I mean it's basically the closest thing 52 00:02:45,440 --> 00:02:47,480 Speaker 1: you find to like zero and a chart like no 53 00:02:47,480 --> 00:02:51,360 Speaker 1: one is refined with mortgages that yeah at seven percent 54 00:02:51,480 --> 00:02:53,240 Speaker 1: or whatever. I thought you were going to mention the reats, 55 00:02:53,360 --> 00:02:56,000 Speaker 1: which is another good chart as well. So there are 56 00:02:56,040 --> 00:02:59,079 Speaker 1: big questions about this market and it does. Yeah. And 57 00:02:59,200 --> 00:03:00,799 Speaker 1: the other thing going on is you have a lot 58 00:03:00,800 --> 00:03:04,680 Speaker 1: of people talking about market structure issues, so how mortgage 59 00:03:04,760 --> 00:03:07,200 Speaker 1: rates are actually set, what's going on in the market 60 00:03:07,240 --> 00:03:10,760 Speaker 1: for mortgage backed securities. A lot of people have been saying, oh, 61 00:03:10,800 --> 00:03:13,880 Speaker 1: there's you know, it's broken, there's something going on. So 62 00:03:14,080 --> 00:03:15,960 Speaker 1: I am very pleased to say we are going to 63 00:03:16,000 --> 00:03:19,200 Speaker 1: get into all of these issues, or at least try to, 64 00:03:19,280 --> 00:03:21,280 Speaker 1: because there is a lot of uncertainty, and we really 65 00:03:21,320 --> 00:03:24,160 Speaker 1: do have the perfect guest. Let's do it. I'm really excited. 66 00:03:24,160 --> 00:03:26,600 Speaker 1: I have so many questions. Let's get god. Okay, we 67 00:03:26,639 --> 00:03:29,920 Speaker 1: are going to be speaking with Jim Egan. He is 68 00:03:30,080 --> 00:03:34,480 Speaker 1: Morgan Stanley's US housing strategist and does some great research 69 00:03:34,639 --> 00:03:36,760 Speaker 1: on all of these topics. So, Jim, thank you so 70 00:03:36,840 --> 00:03:39,200 Speaker 1: much for coming on. Thank you so much for having me. 71 00:03:39,240 --> 00:03:41,760 Speaker 1: It's an honor to be here. So maybe just to 72 00:03:41,800 --> 00:03:46,600 Speaker 1: begin with, we should talk about is this environment that unusual? 73 00:03:46,800 --> 00:03:49,960 Speaker 1: You know, you've been analyzing US housing for a very 74 00:03:50,040 --> 00:03:52,880 Speaker 1: very long time. When you look at what's going on today, 75 00:03:53,200 --> 00:03:56,480 Speaker 1: how remarkable is it too? I would say that a 76 00:03:56,600 --> 00:04:00,640 Speaker 1: lot of these statistics that we use to cast things 77 00:04:00,680 --> 00:04:03,680 Speaker 1: like housing activity, and by that we mean home sales 78 00:04:03,800 --> 00:04:06,880 Speaker 1: or housing starts, as well as home prices, are at 79 00:04:06,960 --> 00:04:09,920 Speaker 1: levels that we either haven't seen before, or if we've 80 00:04:09,920 --> 00:04:12,480 Speaker 1: seen them, we haven't seen them for decades. I think 81 00:04:12,840 --> 00:04:15,760 Speaker 1: you've already mentioned a few of the pretty important aspects 82 00:04:15,800 --> 00:04:18,640 Speaker 1: of this, like when we think about the housing market 83 00:04:18,720 --> 00:04:20,720 Speaker 1: and taking a step back, we have a four pillared 84 00:04:20,760 --> 00:04:26,400 Speaker 1: view supply and demand, affordability and credit availability. Those first 85 00:04:26,440 --> 00:04:30,040 Speaker 1: two we kind of think they're the larger structural, kind 86 00:04:30,040 --> 00:04:33,560 Speaker 1: of underlying tides of the housing market. It's difficult to 87 00:04:33,680 --> 00:04:35,560 Speaker 1: change them so much on a month to month or 88 00:04:35,560 --> 00:04:39,480 Speaker 1: a year to year basis. Affordability and availability are those 89 00:04:39,520 --> 00:04:43,239 Speaker 1: dials that determine kind of the shorter term changes to prices, 90 00:04:43,240 --> 00:04:46,560 Speaker 1: to activity. And I think just to highlight one of them, 91 00:04:46,880 --> 00:04:51,800 Speaker 1: housing affordability. It's deteriorating. Not only is affordability itself at 92 00:04:51,800 --> 00:04:54,120 Speaker 1: a level we haven't seen in at least the past 93 00:04:54,200 --> 00:04:56,760 Speaker 1: thirty to forty years when we're comfortable with the data, 94 00:04:57,120 --> 00:05:00,120 Speaker 1: but the pace with which it's deteriorating. If we look 95 00:05:00,160 --> 00:05:02,440 Speaker 1: at it over the past three months, over the past 96 00:05:02,520 --> 00:05:05,960 Speaker 1: six months, over the past twelve months, we've never seen 97 00:05:06,600 --> 00:05:12,040 Speaker 1: affordability deteriorate this quickly in the housing market. So how 98 00:05:12,160 --> 00:05:14,520 Speaker 1: is it that housing prices are going to crash? Because 99 00:05:14,800 --> 00:05:17,240 Speaker 1: if the price of a new thirty year mortgage in 100 00:05:17,279 --> 00:05:20,040 Speaker 1: many cases, I mean, like I want to look it 101 00:05:20,120 --> 00:05:21,760 Speaker 1: up because I wrote about it last week, but I think, 102 00:05:21,800 --> 00:05:25,560 Speaker 1: like fifty a huge jump. Like what is would you? 103 00:05:25,560 --> 00:05:28,520 Speaker 1: All right, let's start with that question, a what how 104 00:05:28,560 --> 00:05:31,240 Speaker 1: do you? What is the jump or the decline and 105 00:05:31,279 --> 00:05:34,280 Speaker 1: affordability like, how would you convey it what we've seen 106 00:05:34,760 --> 00:05:37,599 Speaker 1: and how does how is like the market not going 107 00:05:37,680 --> 00:05:41,440 Speaker 1: to crash with such an affordability shock. I think that's 108 00:05:41,560 --> 00:05:44,680 Speaker 1: an incredibly important question because it is something we get 109 00:05:44,720 --> 00:05:48,200 Speaker 1: asked so frequently as people they're short, like their memories 110 00:05:48,360 --> 00:05:51,400 Speaker 1: go back to the Great Financial Crisis and they're seeing 111 00:05:52,240 --> 00:05:55,320 Speaker 1: not similar trends and affordability deterioration. But that's the last 112 00:05:55,360 --> 00:05:57,839 Speaker 1: time things were this significant, right, And so I think 113 00:05:58,279 --> 00:06:01,440 Speaker 1: first of all, you asked the tent to the affordability deterioration. 114 00:06:03,040 --> 00:06:06,360 Speaker 1: Home prices each of the past sixteen months would have 115 00:06:06,400 --> 00:06:08,480 Speaker 1: been a record in year over year growth if we 116 00:06:08,480 --> 00:06:10,520 Speaker 1: were comparing it to two thousand and four and two 117 00:06:10,520 --> 00:06:15,279 Speaker 1: thousand five. We have significantly surpassed that. When you add 118 00:06:15,360 --> 00:06:18,080 Speaker 1: mortgage rates up over three basis point since the beginning 119 00:06:18,080 --> 00:06:19,919 Speaker 1: of the year, those things are going to combine to 120 00:06:20,160 --> 00:06:22,559 Speaker 1: lead to the monthly mortgage payment on the median priced 121 00:06:22,560 --> 00:06:26,440 Speaker 1: home up over fifty year over year. If we include 122 00:06:26,440 --> 00:06:29,560 Speaker 1: incomes the kind of third variable on that affordability calculation, 123 00:06:30,400 --> 00:06:33,120 Speaker 1: we're only a forty six percent year over year. So 124 00:06:33,360 --> 00:06:37,360 Speaker 1: we've deteriorated incredibly substantially. The GFC that year over year 125 00:06:37,360 --> 00:06:41,400 Speaker 1: deterioration never exceeded thirty We capped out in the twenties. 126 00:06:41,920 --> 00:06:45,480 Speaker 1: But why we think home prices aren't going to crash here, 127 00:06:45,560 --> 00:06:48,480 Speaker 1: Why we do think this time is different is because 128 00:06:48,520 --> 00:06:51,479 Speaker 1: the question we have to ask after affordability deterioration is 129 00:06:52,040 --> 00:06:57,040 Speaker 1: whose affordability just deteriorated. The structure of the mortgage market 130 00:06:57,080 --> 00:06:59,760 Speaker 1: itself is very different today than when we compare it 131 00:06:59,760 --> 00:07:01,480 Speaker 1: to two thousand four to two thousand and seven. If 132 00:07:01,480 --> 00:07:04,719 Speaker 1: I were to just take one specific aspect of it, 133 00:07:04,720 --> 00:07:07,960 Speaker 1: it's the overwhelming percentage of mortgages that are fixed rate. 134 00:07:08,600 --> 00:07:11,120 Speaker 1: We think that over of the outstanding mortgage market is 135 00:07:11,120 --> 00:07:14,800 Speaker 1: fixed rate. We were much more heavily skewed towards adjustable 136 00:07:14,840 --> 00:07:17,440 Speaker 1: rate mortgages in the early two thousand's, and so as 137 00:07:17,480 --> 00:07:21,040 Speaker 1: mortgage rates went higher, the monthly payment for current homeowners 138 00:07:21,080 --> 00:07:24,400 Speaker 1: was resetting higher as well this time around, especially when 139 00:07:24,400 --> 00:07:28,560 Speaker 1: you consider the record amount of mortgage regination volumes, the 140 00:07:28,600 --> 00:07:31,280 Speaker 1: fact that we broke that for a new record amount 141 00:07:31,280 --> 00:07:34,160 Speaker 1: of mortgage reginations, most of these homeowners were able to 142 00:07:34,200 --> 00:07:36,960 Speaker 1: either buy their home or we finance their mortgage at 143 00:07:37,000 --> 00:07:41,440 Speaker 1: historically low rates. Their affordability is locked in for thirty years. 144 00:07:42,400 --> 00:07:46,080 Speaker 1: They're not seeing affordability deteriorate. This deterioration is coming for 145 00:07:46,720 --> 00:07:49,800 Speaker 1: first time homebuyers perspective home buyers. That's where this sits. 146 00:07:50,000 --> 00:07:52,640 Speaker 1: It's always the first time home buyers that seemed to 147 00:07:52,640 --> 00:07:54,760 Speaker 1: be in the worst place, it feels like. But this 148 00:07:54,840 --> 00:07:57,440 Speaker 1: is actually something I wanted to ask you. So, given 149 00:07:57,480 --> 00:08:02,360 Speaker 1: the preponderance of fixed rate do higher rates basically just 150 00:08:02,440 --> 00:08:05,520 Speaker 1: mean that people who got a good deal are going 151 00:08:05,560 --> 00:08:08,640 Speaker 1: to be reluctant to sell, especially at a time when 152 00:08:08,680 --> 00:08:11,640 Speaker 1: you know prices might be softening, but definitely at a 153 00:08:11,680 --> 00:08:13,960 Speaker 1: time when they know that if they're going to take out, 154 00:08:14,040 --> 00:08:15,680 Speaker 1: you know, another mortgage, it's going to be at a 155 00:08:15,720 --> 00:08:18,800 Speaker 1: higher rate. Absolutely, and it's something we refer to as 156 00:08:18,840 --> 00:08:20,800 Speaker 1: the lock in effect. They're kind of locked in at 157 00:08:20,800 --> 00:08:24,400 Speaker 1: their current homes at these lower rates. And we mentioned 158 00:08:24,440 --> 00:08:27,480 Speaker 1: housing activity versus home prices earlier. We do think this 159 00:08:27,560 --> 00:08:30,000 Speaker 1: is going to lead to a different evolution of those 160 00:08:30,040 --> 00:08:33,520 Speaker 1: two kind of paths of the housing market. Current homeowners 161 00:08:33,880 --> 00:08:35,800 Speaker 1: in order to sell their home, and a lot of instances, 162 00:08:35,840 --> 00:08:37,640 Speaker 1: would have to take out a mortgage that might be 163 00:08:37,679 --> 00:08:41,599 Speaker 1: two dred fifty bases points higher than their current mortgage. 164 00:08:42,000 --> 00:08:44,760 Speaker 1: That becomes prohibitively expensive when you combine it with how 165 00:08:44,840 --> 00:08:48,320 Speaker 1: much equity they have in their homes. They're just not 166 00:08:48,400 --> 00:08:51,120 Speaker 1: going to be willing to sell their home at the 167 00:08:51,160 --> 00:08:53,760 Speaker 1: lower price point that might be more affordable for the 168 00:08:53,800 --> 00:08:56,880 Speaker 1: first time home buyer. So what we think we're already seeing, 169 00:08:56,960 --> 00:09:00,240 Speaker 1: what we anticipate continuing to see going forward, is that 170 00:09:00,320 --> 00:09:03,760 Speaker 1: the inventory, the listings of existing homes available for sale. 171 00:09:03,880 --> 00:09:06,280 Speaker 1: We have that data going back for single unit homes 172 00:09:06,480 --> 00:09:10,240 Speaker 1: to the early nineties. It was never lower than it 173 00:09:10,320 --> 00:09:13,800 Speaker 1: was in earlier this year. We've been increasing just a 174 00:09:13,920 --> 00:09:16,200 Speaker 1: very little bit off the bottom for the past three months. 175 00:09:16,559 --> 00:09:18,680 Speaker 1: But we think that they're going to keep listings tight, 176 00:09:19,120 --> 00:09:22,440 Speaker 1: which will keep home prices more supported. Like if we 177 00:09:22,440 --> 00:09:25,719 Speaker 1: think about Kase Shiller probably the most frequently quoted home 178 00:09:25,720 --> 00:09:29,040 Speaker 1: price index, it uses something called to repeat sales methodology, 179 00:09:29,160 --> 00:09:30,680 Speaker 1: So when a home is transacted, it looks at the 180 00:09:30,720 --> 00:09:32,960 Speaker 1: last time that home was transacted, and so if we're 181 00:09:33,000 --> 00:09:36,080 Speaker 1: not going to be selling those homes at lower prices 182 00:09:36,080 --> 00:09:39,360 Speaker 1: than they were purchased, that's going to help support home 183 00:09:39,360 --> 00:09:42,800 Speaker 1: price activity. But on the other side of this, it 184 00:09:42,840 --> 00:09:45,720 Speaker 1: means that that existing homeowner is also not buying another 185 00:09:45,760 --> 00:09:47,880 Speaker 1: home after they sell theirs, which we think is going 186 00:09:47,920 --> 00:09:51,280 Speaker 1: to kind of exacerbate the decrease in sales volumes. So 187 00:09:51,320 --> 00:09:54,600 Speaker 1: you can see a sharp drop in sales without necessarily 188 00:09:54,679 --> 00:09:59,119 Speaker 1: that corresponding drop at home prices. So it's really I mean, obviously, 189 00:09:59,120 --> 00:10:01,360 Speaker 1: if you're looking at the the first time home buyer, 190 00:10:01,440 --> 00:10:03,440 Speaker 1: this is not a pleasant time. So it's a bad 191 00:10:03,480 --> 00:10:05,160 Speaker 1: time to buy a home. It's a bad time to 192 00:10:05,240 --> 00:10:11,000 Speaker 1: sell a home. So just for renters too, for homeowners, 193 00:10:11,040 --> 00:10:13,000 Speaker 1: for renters, for everyone really, and it seems like it's 194 00:10:13,000 --> 00:10:15,640 Speaker 1: a really bad time to be a broker or realtor. 195 00:10:15,720 --> 00:10:18,200 Speaker 1: It seems like that is the space that's going to 196 00:10:18,320 --> 00:10:20,680 Speaker 1: sort of like bear the burden of adjustment. You know. 197 00:10:20,720 --> 00:10:23,800 Speaker 1: It's just interesting, getting back to like the price question. 198 00:10:24,240 --> 00:10:27,040 Speaker 1: The two things that it seems like, going back to 199 00:10:27,080 --> 00:10:30,280 Speaker 1: the housing crash that really for sales were a these 200 00:10:30,320 --> 00:10:34,760 Speaker 1: mortgage resets, So suddenly affordable affordable mortgage becomes a less 201 00:10:34,760 --> 00:10:39,840 Speaker 1: affordable mortgage and a deteriorating labor market. So if you 202 00:10:40,040 --> 00:10:42,040 Speaker 1: get laid off and you don't have much equity in 203 00:10:42,040 --> 00:10:44,719 Speaker 1: your home, you kind of have to sell it. It's 204 00:10:44,920 --> 00:10:47,600 Speaker 1: neither of those are currently in place. We agree with 205 00:10:47,640 --> 00:10:51,120 Speaker 1: that statement completely, right, I think that, And we've talked 206 00:10:51,120 --> 00:10:53,760 Speaker 1: about affordability. The other pillar that was kind of the 207 00:10:53,800 --> 00:10:56,880 Speaker 1: short term dial that we focus on is credit availability. Yeah. 208 00:10:56,920 --> 00:11:01,200 Speaker 1: I think when people hear credit availability, especially with the GFC, 209 00:11:01,640 --> 00:11:04,800 Speaker 1: in your mind, you go towards the borrow or characteristic 210 00:11:04,840 --> 00:11:06,920 Speaker 1: piece of that. You go towards FICO scores, loan to 211 00:11:06,960 --> 00:11:09,600 Speaker 1: value ratios, debt to income ratios. Right, the kind of 212 00:11:09,679 --> 00:11:12,920 Speaker 1: characteristics that we like to think of when we're thinking 213 00:11:12,960 --> 00:11:15,400 Speaker 1: about the probability of a mortgage defaulting or something along 214 00:11:15,400 --> 00:11:17,320 Speaker 1: those lines, right eether the likelihood that it will prepay. 215 00:11:17,360 --> 00:11:19,720 Speaker 1: On the other side of that, we don't capture the 216 00:11:19,760 --> 00:11:24,000 Speaker 1: product aspect, the product risk aspect of credit availability as much. 217 00:11:24,200 --> 00:11:26,079 Speaker 1: And that's what you just hit on. Right. You have 218 00:11:26,200 --> 00:11:30,439 Speaker 1: this proliferation like the subprime mortgage back securities market, for instance, 219 00:11:30,800 --> 00:11:32,800 Speaker 1: that got so large in two thousand four to two 220 00:11:32,800 --> 00:11:35,920 Speaker 1: thousand seven. First of all, that market doesn't exist anymore, 221 00:11:36,200 --> 00:11:38,720 Speaker 1: but a big characteristic of that market where things we 222 00:11:38,760 --> 00:11:43,680 Speaker 1: called or short reset arms that were fixed at lower 223 00:11:43,760 --> 00:11:46,280 Speaker 1: rates for two or three years before adjusting for the 224 00:11:46,280 --> 00:11:48,560 Speaker 1: final twenty seven or twenty eight years of that mortgage 225 00:11:48,600 --> 00:11:51,199 Speaker 1: is life. Those products made up a significant chunk of 226 00:11:51,200 --> 00:11:54,400 Speaker 1: the mortgage market back then. They almost effectively do not 227 00:11:54,480 --> 00:11:58,359 Speaker 1: exist today. And when you think about what that inherently 228 00:11:58,480 --> 00:12:01,800 Speaker 1: asks owner to do, a mortgage to borrower to do 229 00:12:02,360 --> 00:12:05,120 Speaker 1: is in month twenty five or thirty seven, when that 230 00:12:05,160 --> 00:12:07,360 Speaker 1: payments about to change to a place that could be unaffordable, 231 00:12:07,440 --> 00:12:09,240 Speaker 1: especially as the unemployment rate is creeping up and they 232 00:12:09,280 --> 00:12:11,760 Speaker 1: may not have that income anymore. They need to be 233 00:12:11,800 --> 00:12:15,240 Speaker 1: able to refinance that mortgage. If credit standards are tightening 234 00:12:15,280 --> 00:12:17,640 Speaker 1: at the same time, if home prices have flattened out, 235 00:12:17,640 --> 00:12:19,040 Speaker 1: if they've started to come down a little bit, and 236 00:12:19,080 --> 00:12:21,880 Speaker 1: all of a sudden there isn't excess equity in the house, 237 00:12:22,360 --> 00:12:24,360 Speaker 1: all of a sudden, that refinance is not going to 238 00:12:24,400 --> 00:12:26,880 Speaker 1: be feasible for that borrow where and they're effectively in 239 00:12:26,960 --> 00:12:29,120 Speaker 1: a place where it's going to be very difficult for 240 00:12:29,160 --> 00:12:31,840 Speaker 1: them to make that monthly payment. Because those products don't 241 00:12:31,840 --> 00:12:34,360 Speaker 1: exist anymore. You just do not have those resets. You 242 00:12:34,400 --> 00:12:38,199 Speaker 1: don't have a homeowner that's reliance upon the credit availability 243 00:12:38,240 --> 00:12:42,680 Speaker 1: environment going forward, and credit availability it tightened, we gave 244 00:12:42,760 --> 00:12:45,480 Speaker 1: up six years worth of easing in the six months 245 00:12:45,679 --> 00:12:48,560 Speaker 1: after the onset of COVID in March, where at the 246 00:12:48,559 --> 00:12:52,760 Speaker 1: tightest levels we've been in effectively twenty years. And if anything, 247 00:12:53,360 --> 00:12:57,120 Speaker 1: because of risk weighted asset stresses at large banks, we 248 00:12:57,160 --> 00:12:59,520 Speaker 1: think the pathroom here might even be towards tighter lending standards. 249 00:13:00,080 --> 00:13:04,480 Speaker 1: So the equality of mortgage credit is incredibly healthy. UM, 250 00:13:04,520 --> 00:13:07,760 Speaker 1: we don't think that because of the lack of reliance 251 00:13:07,760 --> 00:13:09,880 Speaker 1: of homeowners on the ability to refinance, we don't know 252 00:13:09,920 --> 00:13:12,120 Speaker 1: that's going to force them into defaults and foreclosures. But 253 00:13:12,160 --> 00:13:14,160 Speaker 1: that also means that we think that the risk of 254 00:13:14,160 --> 00:13:17,400 Speaker 1: a dramatic increase to defaults and foreclosures that could we 255 00:13:17,400 --> 00:13:19,679 Speaker 1: think about what could bring home prices down. It's those 256 00:13:19,720 --> 00:13:28,000 Speaker 1: distressed transactions, those forced sellers. UM. Divorce is very distressing. 257 00:13:28,400 --> 00:13:31,360 Speaker 1: I want to get into distress sellers. But just before 258 00:13:31,360 --> 00:13:33,520 Speaker 1: we do. The other thing I think about when I 259 00:13:33,559 --> 00:13:37,400 Speaker 1: think about pre two thousand eight housing and the subprime 260 00:13:37,440 --> 00:13:40,800 Speaker 1: crisis is I think about inventory, and the housing market 261 00:13:40,920 --> 00:13:44,320 Speaker 1: was so hot, credit, as you just described, was so ample. 262 00:13:44,480 --> 00:13:46,520 Speaker 1: Everyone could get alone. You know, there are all those 263 00:13:46,520 --> 00:13:49,480 Speaker 1: scenes from that big short movie about going down to 264 00:13:49,520 --> 00:13:52,760 Speaker 1: Florida and everyone has like five properties. But the other 265 00:13:52,800 --> 00:13:55,120 Speaker 1: thing I think about is just lots of homes getting 266 00:13:55,120 --> 00:13:59,960 Speaker 1: built in that environment. How are you viewing the inventor 267 00:14:00,080 --> 00:14:02,559 Speaker 1: or question at the moment and how does that feed 268 00:14:02,600 --> 00:14:06,600 Speaker 1: into your housing forecasts. We think it's one of, if 269 00:14:06,640 --> 00:14:09,240 Speaker 1: not the most important statistic right now. When we think 270 00:14:09,280 --> 00:14:13,720 Speaker 1: about inventories, we view it from from three angles. There's 271 00:14:13,800 --> 00:14:17,080 Speaker 1: you mentioned homebuilding, there's the new inventory, there's the listing 272 00:14:17,080 --> 00:14:19,800 Speaker 1: we talked about, the lack in effect existing inventories, and 273 00:14:19,840 --> 00:14:22,840 Speaker 1: then there's what we call shadow inventory or distressed Those 274 00:14:22,840 --> 00:14:25,400 Speaker 1: are those defaults and foreclosures. That's what you would need 275 00:14:25,680 --> 00:14:28,560 Speaker 1: to really provide kind of downward momentum for big year 276 00:14:28,600 --> 00:14:31,160 Speaker 1: over year decreases and home prices. As I mentioned, because 277 00:14:31,160 --> 00:14:33,480 Speaker 1: of credit availability, who we don't think that last piece 278 00:14:33,520 --> 00:14:35,440 Speaker 1: is going to play a material role in this cycle. 279 00:14:35,520 --> 00:14:39,400 Speaker 1: So you think about the other two existing inventories. We 280 00:14:39,440 --> 00:14:43,400 Speaker 1: already mentioned the lack in effect. One statistic that we've 281 00:14:43,440 --> 00:14:46,600 Speaker 1: been thrown or we've been discussing a lot recently is 282 00:14:46,600 --> 00:14:50,400 Speaker 1: months of supply. Now, months of supply has been despite 283 00:14:50,400 --> 00:14:55,280 Speaker 1: how low inventories are, the fastest increasing piece of the 284 00:14:55,320 --> 00:14:57,600 Speaker 1: inventory metric universe, if you will, And the reason for 285 00:14:57,640 --> 00:15:01,120 Speaker 1: that is because it's it's an equation. The numerators inventories 286 00:15:01,480 --> 00:15:04,800 Speaker 1: started to increase a little bit from their all time lows, 287 00:15:04,960 --> 00:15:09,240 Speaker 1: the denominator of sales sales volumes have already pulled back materially. Right. 288 00:15:09,320 --> 00:15:12,960 Speaker 1: So months of supply is the number of months that 289 00:15:13,040 --> 00:15:16,080 Speaker 1: it would take for the existing inventory to get sold 290 00:15:16,200 --> 00:15:20,160 Speaker 1: at the current sales pace, exactly. And if we think 291 00:15:20,160 --> 00:15:22,360 Speaker 1: about the absolute level of months of supply right now, 292 00:15:22,560 --> 00:15:25,160 Speaker 1: we're sitting right around four. And that's total months of 293 00:15:25,160 --> 00:15:27,840 Speaker 1: supply for units for sale for both existing and new 294 00:15:28,040 --> 00:15:31,480 Speaker 1: versus total new and existing home sales, right, and that 295 00:15:31,600 --> 00:15:34,360 Speaker 1: number the general rule of them is if you're below 296 00:15:34,920 --> 00:15:38,480 Speaker 1: six months of supply, then that's a tight inventory market. Right. 297 00:15:38,520 --> 00:15:42,040 Speaker 1: That is theoretically going to be a seller's market because 298 00:15:42,040 --> 00:15:44,920 Speaker 1: there's more demand than there is supply of those homes. 299 00:15:45,360 --> 00:15:49,000 Speaker 1: And that historically has seemed to hold true. If we 300 00:15:49,040 --> 00:15:52,400 Speaker 1: look at total months of supply going back to today, 301 00:15:52,800 --> 00:15:55,200 Speaker 1: whenever months of supply has been below six, and again 302 00:15:55,200 --> 00:15:58,480 Speaker 1: we're at four right now. Home prices have continued to 303 00:15:58,520 --> 00:16:00,840 Speaker 1: be climbing six months forward, and that is one hundred 304 00:16:00,840 --> 00:16:05,000 Speaker 1: that has been the case of the time. How low 305 00:16:05,400 --> 00:16:07,560 Speaker 1: could it go? So I'm just looking at the last 306 00:16:07,840 --> 00:16:09,360 Speaker 1: and you know, this is what's so fun about how 307 00:16:09,440 --> 00:16:11,200 Speaker 1: is it is there's just a million ways to slice 308 00:16:11,200 --> 00:16:13,000 Speaker 1: and dice this, But I'm just looking at the last. 309 00:16:13,040 --> 00:16:17,360 Speaker 1: Like existing home sales for August seasonally adjusted annualized rate 310 00:16:17,400 --> 00:16:20,000 Speaker 1: four point eight million, but like that's a still bit 311 00:16:20,080 --> 00:16:22,640 Speaker 1: higher than uh, you know, that's higher than it was 312 00:16:22,680 --> 00:16:26,640 Speaker 1: in couldn't continue to go substantially lower from here? And 313 00:16:26,840 --> 00:16:30,000 Speaker 1: if this divergence that you're talking about where activity and 314 00:16:30,120 --> 00:16:33,440 Speaker 1: prices diverged, how extreme could that get? Yes, so we 315 00:16:33,560 --> 00:16:35,360 Speaker 1: do think that it will continue to go lower from 316 00:16:35,360 --> 00:16:39,280 Speaker 1: here with current homeowners locked in with affordability pressures for 317 00:16:39,720 --> 00:16:42,160 Speaker 1: from new home buyers. In fact, if we look at 318 00:16:42,200 --> 00:16:46,360 Speaker 1: the affordability deterioration, we comp that to the Great Financial Crisis. 319 00:16:46,440 --> 00:16:49,160 Speaker 1: It's been worse, it's been faster. But if we kind 320 00:16:49,160 --> 00:16:53,080 Speaker 1: of index both periods to win the affordability deterioration really started, 321 00:16:53,480 --> 00:16:56,200 Speaker 1: we're out pacing the Great Financial Crisis to the downside 322 00:16:56,520 --> 00:16:59,040 Speaker 1: in terms of how fast sales have have fallen. We 323 00:16:59,120 --> 00:17:02,760 Speaker 1: think that the conditions that we've talked about could allow 324 00:17:02,800 --> 00:17:05,040 Speaker 1: that to remain the case for at least the next 325 00:17:05,440 --> 00:17:07,919 Speaker 1: six to twelve months. Our existing home sales forecast in 326 00:17:07,920 --> 00:17:12,359 Speaker 1: our base case have us falling basically to below levels, 327 00:17:12,400 --> 00:17:13,960 Speaker 1: so not getting We don't think that the peak to 328 00:17:14,040 --> 00:17:16,040 Speaker 1: trough will be as substantial as it was during the 329 00:17:16,040 --> 00:17:19,119 Speaker 1: Great Financial Crisis, so we're not entertaining those levels. But 330 00:17:19,160 --> 00:17:22,600 Speaker 1: you mentioned right now we can see it coming down 331 00:17:22,640 --> 00:17:42,000 Speaker 1: about levels in the base case. What kind of supply 332 00:17:42,200 --> 00:17:45,400 Speaker 1: response would you expect from the home builders in this 333 00:17:45,520 --> 00:17:48,840 Speaker 1: kind of environment. So you know, people have been talking 334 00:17:48,880 --> 00:17:51,880 Speaker 1: about the US being structurally short on housing for many 335 00:17:51,960 --> 00:17:54,320 Speaker 1: years now, but at the same time interest rates are 336 00:17:54,359 --> 00:17:57,280 Speaker 1: going up. There's this big question mark over the future 337 00:17:57,320 --> 00:18:00,920 Speaker 1: of the market. As we've been discussing, would you expect 338 00:18:00,920 --> 00:18:04,320 Speaker 1: them to ramp up production in that environment? It seems unlikely. 339 00:18:04,480 --> 00:18:06,359 Speaker 1: We agree with the final piece of that statement. We 340 00:18:06,400 --> 00:18:08,879 Speaker 1: do think that it is unlikely right now. We agree 341 00:18:09,200 --> 00:18:12,600 Speaker 1: structurally short supply right now, we have estimates on that. 342 00:18:12,720 --> 00:18:15,959 Speaker 1: We wanted to be conservative two million units underbuilt. If 343 00:18:15,960 --> 00:18:17,480 Speaker 1: we wanted to be a little bit more aggressive in 344 00:18:17,480 --> 00:18:20,920 Speaker 1: our assumptions, we can get that numbered six million units underbuild. 345 00:18:21,080 --> 00:18:24,919 Speaker 1: You would think that that would call for a higher 346 00:18:25,560 --> 00:18:27,080 Speaker 1: rate of home building. And by the way, those estimates 347 00:18:27,119 --> 00:18:30,120 Speaker 1: are for both single unit and multi unit housing holistically. 348 00:18:30,800 --> 00:18:35,000 Speaker 1: But we're seeing some interesting dynamics there. Builders have been 349 00:18:35,080 --> 00:18:38,680 Speaker 1: responding to what had been record growth and home prices, 350 00:18:39,040 --> 00:18:42,480 Speaker 1: this tight inventory environment. Building single unit building in particular 351 00:18:42,560 --> 00:18:46,720 Speaker 1: increased pretty spectacularly in the immediate aftermath of COVID. In fact, 352 00:18:46,920 --> 00:18:49,120 Speaker 1: we hit all time lows. The data there goes back 353 00:18:49,160 --> 00:18:51,960 Speaker 1: to that we use in kind of the winter of 354 00:18:52,960 --> 00:18:55,200 Speaker 1: So this was kind of a final pop after almost 355 00:18:55,240 --> 00:19:00,119 Speaker 1: a decade of growth in building volumes. But now we 356 00:19:00,119 --> 00:19:03,680 Speaker 1: we've plateaued, and you mentioned a little bit earlier, Tracy, 357 00:19:04,600 --> 00:19:07,560 Speaker 1: the difference in building volumes today versus the great financial crisis. 358 00:19:08,359 --> 00:19:10,720 Speaker 1: Let's level set with what that decade of growth and 359 00:19:10,720 --> 00:19:13,480 Speaker 1: building has where that's brought us. If I look at 360 00:19:13,520 --> 00:19:17,800 Speaker 1: twelve months trailing single unit starts, we're only back to levels. 361 00:19:17,840 --> 00:19:19,800 Speaker 1: So we haven't crossed the two thousand We haven't. We 362 00:19:19,800 --> 00:19:21,919 Speaker 1: haven't gotten to two thousand two or the real building 363 00:19:21,960 --> 00:19:24,960 Speaker 1: pop in oh, four oh five or six. But because 364 00:19:25,000 --> 00:19:27,560 Speaker 1: of things like supply chain issues we talked about labor 365 00:19:27,560 --> 00:19:31,119 Speaker 1: market issues very briefly earlier. The units under construction, we 366 00:19:31,160 --> 00:19:33,240 Speaker 1: pay so much attention to starts. We pay so much 367 00:19:33,240 --> 00:19:37,200 Speaker 1: attention to completions, the time in between those when the 368 00:19:37,200 --> 00:19:39,480 Speaker 1: shovel's broken ground, but you haven't finished the home yet. 369 00:19:39,520 --> 00:19:43,080 Speaker 1: Because of these backlogs, single unit starts back to levels, 370 00:19:43,320 --> 00:19:46,280 Speaker 1: units under construction back to two thousand four levels, so 371 00:19:46,320 --> 00:19:47,879 Speaker 1: you do have a little bit of a backlog that 372 00:19:47,920 --> 00:19:50,439 Speaker 1: needs to be cleared. We do think that this is 373 00:19:50,480 --> 00:19:53,360 Speaker 1: going to when you combine it with affordability pressures when 374 00:19:53,359 --> 00:19:57,280 Speaker 1: you can buy, which is exaggerated by the mortgage rate moves. 375 00:19:57,560 --> 00:19:59,360 Speaker 1: We think this is going to lead builders to pull back. 376 00:19:59,359 --> 00:20:01,280 Speaker 1: We think single IT starts are going to come down 377 00:20:01,520 --> 00:20:03,680 Speaker 1: pretty sharply in the fourth quarter. We think they're gonna 378 00:20:03,680 --> 00:20:07,960 Speaker 1: be downe compared to so so we don't think that 379 00:20:08,040 --> 00:20:11,720 Speaker 1: it's as strong environment for that behavior. Yeah, I'm looking 380 00:20:11,760 --> 00:20:13,840 Speaker 1: at the well, I'm actually I pulled up a chart 381 00:20:13,880 --> 00:20:17,800 Speaker 1: of multi family units under currently under construction. It's one 382 00:20:17,800 --> 00:20:20,199 Speaker 1: of the few lines in housing that is still like 383 00:20:20,240 --> 00:20:22,480 Speaker 1: a straight up right because I guess it's just so 384 00:20:22,520 --> 00:20:25,879 Speaker 1: slow with the process of building all these things that 385 00:20:26,200 --> 00:20:28,280 Speaker 1: they're still they're still getting done. I guess if you 386 00:20:28,280 --> 00:20:32,040 Speaker 1: start a new construction, you finish it we'd like to 387 00:20:32,040 --> 00:20:34,040 Speaker 1: believe that it once you break ground, that you're going 388 00:20:34,080 --> 00:20:36,119 Speaker 1: to make your way towards finishing and at least some 389 00:20:36,160 --> 00:20:38,160 Speaker 1: point in the future. And you're right, the multi unit 390 00:20:38,240 --> 00:20:41,560 Speaker 1: under construction that there's one of the charts we see 391 00:20:41,560 --> 00:20:44,320 Speaker 1: pretty frequently is total units under construction is finally passed 392 00:20:44,640 --> 00:20:47,359 Speaker 1: the Great Financial Crisis, And we do think that you 393 00:20:47,400 --> 00:20:48,840 Speaker 1: have to take a step back and look at this 394 00:20:48,960 --> 00:20:52,399 Speaker 1: single unit versus multi unit narrative. Single unit, as I 395 00:20:52,440 --> 00:20:55,439 Speaker 1: mentioned back to oh four multi unit, I believe the 396 00:20:55,480 --> 00:20:59,320 Speaker 1: numbers back to where it was in the ninety's it 397 00:20:59,400 --> 00:21:03,480 Speaker 1: is looking now looking at single family. Um, yeah, it 398 00:21:03,520 --> 00:21:05,879 Speaker 1: looks like I guess back to for you know, I 399 00:21:05,920 --> 00:21:08,400 Speaker 1: was in Dallas recently and the number of multi family 400 00:21:08,520 --> 00:21:11,720 Speaker 1: homes being like that happened built there, and it's just 401 00:21:12,440 --> 00:21:14,160 Speaker 1: crazy compared to what it used to be. It used 402 00:21:14,160 --> 00:21:17,040 Speaker 1: to all be single family. But anyway, since we're talking 403 00:21:17,080 --> 00:21:20,480 Speaker 1: about supply, one thing that has come up on the 404 00:21:20,480 --> 00:21:23,959 Speaker 1: show at various times is the idea of a certain 405 00:21:24,040 --> 00:21:28,800 Speaker 1: cohort of homeowners, the baby boomers, many many of whom 406 00:21:28,880 --> 00:21:31,600 Speaker 1: bought their houses at relatively low prices, and have seen 407 00:21:31,640 --> 00:21:35,919 Speaker 1: them appreciate the idea that you know, eventually, let me 408 00:21:35,920 --> 00:21:38,080 Speaker 1: think how to phrase this. Eventually they're going to pass 409 00:21:38,119 --> 00:21:41,199 Speaker 1: on um maybe you know, they'll retire or have to 410 00:21:41,200 --> 00:21:44,439 Speaker 1: go to nursing homes or something will force that inventory 411 00:21:44,480 --> 00:21:47,320 Speaker 1: to get unlocked. Is that something that you're keeping an 412 00:21:47,359 --> 00:21:51,600 Speaker 1: eye on. Yes. From a demographic perspective on the housing market, 413 00:21:51,640 --> 00:21:53,840 Speaker 1: we spend a lot of time talking about millennials and 414 00:21:53,920 --> 00:21:57,160 Speaker 1: Gen Z and the demand that they're going to represent 415 00:21:57,280 --> 00:22:00,320 Speaker 1: as they roll through. We do think that you need 416 00:22:00,359 --> 00:22:03,280 Speaker 1: to start focusing on the baby boomers. When we look 417 00:22:03,280 --> 00:22:06,080 Speaker 1: at the percentage of homes of owned homes that are 418 00:22:06,080 --> 00:22:09,280 Speaker 1: held by people over the age of sixty from two 419 00:22:09,320 --> 00:22:12,920 Speaker 1: thousand twelve, it is a very consistent number. It's roughly 420 00:22:13,680 --> 00:22:17,520 Speaker 1: the housing stock it oscillates between from two thousand twelve 421 00:22:17,600 --> 00:22:22,760 Speaker 1: to today. It's gone from to roughly thirty one out 422 00:22:22,760 --> 00:22:24,600 Speaker 1: of every three homes in this country is held by 423 00:22:24,640 --> 00:22:27,560 Speaker 1: somebody over the age of sixty five. When we look 424 00:22:27,600 --> 00:22:30,720 Speaker 1: at how long they've owned those homes, over of them, 425 00:22:30,960 --> 00:22:35,359 Speaker 1: roughly fifty four moved in before the year two thousand. 426 00:22:36,200 --> 00:22:39,199 Speaker 1: So when we think about our activity forecasts, we think 427 00:22:39,240 --> 00:22:41,560 Speaker 1: sales are going to fall for the dynamics we've discussed. 428 00:22:41,560 --> 00:22:43,600 Speaker 1: We think prices are going to be more protected. That 429 00:22:43,600 --> 00:22:45,480 Speaker 1: doesn't mean that they won't turn a little bit negative 430 00:22:45,560 --> 00:22:48,719 Speaker 1: year over year. But when we think about what are 431 00:22:48,720 --> 00:22:53,119 Speaker 1: the stresses to that scenario, it's where could an uneconomic seller, 432 00:22:53,200 --> 00:22:56,359 Speaker 1: if you will work at an uneconomic seller, evolve from. 433 00:22:56,440 --> 00:23:00,240 Speaker 1: And we do highlight this group as one of those 434 00:23:00,240 --> 00:23:02,640 Speaker 1: potential and economic sellers. They have a lot of equity 435 00:23:02,640 --> 00:23:05,000 Speaker 1: in their home if they owned a home. They own 436 00:23:05,000 --> 00:23:07,479 Speaker 1: a home today, odds are I mean, we know that 437 00:23:07,600 --> 00:23:09,240 Speaker 1: over half of them moved in before two thousands. They 438 00:23:09,240 --> 00:23:11,200 Speaker 1: own that home. In two thousand and eight, they saw 439 00:23:11,280 --> 00:23:14,480 Speaker 1: the property, the value of their property fall, they saw 440 00:23:14,520 --> 00:23:17,320 Speaker 1: it stay below its original value for almost a decade. 441 00:23:17,920 --> 00:23:20,879 Speaker 1: Perhaps as headlines come through, they're going to be more 442 00:23:20,920 --> 00:23:23,360 Speaker 1: willing to sell that property at a lower price point 443 00:23:23,359 --> 00:23:25,320 Speaker 1: than we expect given the lock and effect that we've 444 00:23:25,320 --> 00:23:29,240 Speaker 1: talked about. Now, the counter argument there is aging in place. 445 00:23:29,520 --> 00:23:31,399 Speaker 1: That trend has happened a lot more frequently. People are 446 00:23:31,440 --> 00:23:34,040 Speaker 1: living longer, they're living in their homes longer. We don't 447 00:23:34,080 --> 00:23:37,720 Speaker 1: expect this supply to be a factor in our price 448 00:23:37,800 --> 00:23:41,040 Speaker 1: forecasts for at least another decade, but if that would 449 00:23:41,040 --> 00:23:43,960 Speaker 1: have come up sooner, that's where we kind of get 450 00:23:44,000 --> 00:23:45,880 Speaker 1: into more of a bearer case, and that would provide 451 00:23:45,960 --> 00:23:49,000 Speaker 1: more pressure on home prices than we're currently expecting. Before 452 00:23:49,000 --> 00:23:52,560 Speaker 1: I forget just on the home prices question itself, some 453 00:23:52,720 --> 00:23:56,760 Speaker 1: of these indusicries have shown some declines, right, yes, And 454 00:23:57,760 --> 00:24:00,199 Speaker 1: when we think about home prices, there are a lot 455 00:24:00,200 --> 00:24:02,680 Speaker 1: of different industries, a lot of different ways to interpret 456 00:24:02,720 --> 00:24:05,320 Speaker 1: the indusseries. And so I think that we actually just 457 00:24:05,400 --> 00:24:09,720 Speaker 1: revised our home price forecast down the last week, and 458 00:24:09,880 --> 00:24:12,640 Speaker 1: one of the things that precipitated that we talked about 459 00:24:12,680 --> 00:24:15,879 Speaker 1: your rear home prices. Month over month home prices for 460 00:24:16,000 --> 00:24:19,600 Speaker 1: Case Shiller turns negative in July. First time that's happened 461 00:24:19,880 --> 00:24:22,959 Speaker 1: since on a seasonally adjusted basis, I believe, since two 462 00:24:22,960 --> 00:24:25,520 Speaker 1: thousand twelve. First time that happened in a decade. Now. 463 00:24:25,840 --> 00:24:27,960 Speaker 1: We already thought the pace of growth was gonna slow. 464 00:24:28,280 --> 00:24:30,280 Speaker 1: We just expected that to happen in September. It's happening 465 00:24:30,320 --> 00:24:32,480 Speaker 1: a little early, and it's happening in certain parts of 466 00:24:32,480 --> 00:24:36,440 Speaker 1: the country more so than others. California we're seeing price 467 00:24:36,480 --> 00:24:39,800 Speaker 1: declines on a month over month basis. Denver, Seattle, Portland. 468 00:24:39,920 --> 00:24:42,639 Speaker 1: Those are some of the bigger, especially case Shiller M says, 469 00:24:42,680 --> 00:24:45,720 Speaker 1: that are already showing that month over month price decrease, 470 00:24:45,760 --> 00:24:47,880 Speaker 1: and in some instances you're seeing three or four percentage 471 00:24:47,920 --> 00:24:51,440 Speaker 1: points down, you're over year even in those metros were 472 00:24:51,440 --> 00:24:54,240 Speaker 1: still up nine. These are some places that have seen 473 00:24:54,240 --> 00:24:58,040 Speaker 1: it up much more spectacularly. But that second derivative, if 474 00:24:58,040 --> 00:24:59,880 Speaker 1: you will, is changing and the pace of that decreases 475 00:24:59,920 --> 00:25:02,520 Speaker 1: a ccelerating and that should continue to happen as we 476 00:25:02,560 --> 00:25:04,440 Speaker 1: go into the back half of this year the first 477 00:25:04,440 --> 00:25:08,639 Speaker 1: half of next year. So why shouldn't someone look at 478 00:25:08,640 --> 00:25:11,000 Speaker 1: that say, oh, it's happening. The price declined, Like, why 479 00:25:11,119 --> 00:25:15,199 Speaker 1: is that not a signal of actual like sustained declines. 480 00:25:15,720 --> 00:25:18,280 Speaker 1: So the reason that we don't think it's a signal 481 00:25:18,320 --> 00:25:22,800 Speaker 1: for actual sustained declines is because a for true home 482 00:25:22,840 --> 00:25:25,720 Speaker 1: price declines to to be dramatically in excess of what 483 00:25:25,720 --> 00:25:28,359 Speaker 1: we're forecasting. So so year over year eight ten plus 484 00:25:28,400 --> 00:25:30,680 Speaker 1: per cent um, we think you would need to stress. 485 00:25:30,720 --> 00:25:32,879 Speaker 1: You need forced sellers that really need to hit a 486 00:25:32,880 --> 00:25:35,919 Speaker 1: lower bit on their home. You've mentioned kind of the 487 00:25:35,960 --> 00:25:38,240 Speaker 1: things that we typically look at from a turnover perspective, 488 00:25:38,960 --> 00:25:41,440 Speaker 1: death and divorce other metrics that would make you forced 489 00:25:41,440 --> 00:25:44,480 Speaker 1: to sell a home that can be roughly five percent 490 00:25:44,560 --> 00:25:47,800 Speaker 1: of the housing market. That that's that's not enough of 491 00:25:47,840 --> 00:25:49,639 Speaker 1: a of a metric for us to really weigh on 492 00:25:49,640 --> 00:25:53,000 Speaker 1: home prices. But the other pieces is supply listings of 493 00:25:53,040 --> 00:25:56,320 Speaker 1: homes is so tight if people aren't willing to sell 494 00:25:56,760 --> 00:25:59,399 Speaker 1: into the kind of depressed demand that we're talking about. 495 00:25:59,680 --> 00:26:01,439 Speaker 1: What we think you're going to see is a market 496 00:26:01,440 --> 00:26:04,560 Speaker 1: that kind of stalls out here, right, and that that 497 00:26:04,600 --> 00:26:06,639 Speaker 1: will lead national home prices to show a little bit 498 00:26:06,640 --> 00:26:09,159 Speaker 1: of weakness. Our forecast of down three percent year over 499 00:26:09,240 --> 00:26:12,359 Speaker 1: year December three, Like, the negative headline attached to that 500 00:26:12,480 --> 00:26:16,680 Speaker 1: is that's down seven percent from today. Okay, the positive 501 00:26:16,720 --> 00:26:18,560 Speaker 1: headline attached to that is that only brings home prices 502 00:26:18,560 --> 00:26:22,480 Speaker 1: back to January. Crazy it's been up until very recently, 503 00:26:22,720 --> 00:26:25,160 Speaker 1: and that brings you back to January, which is thirty 504 00:26:25,440 --> 00:26:30,080 Speaker 1: above March. So you changed your forecast relatively recently. I 505 00:26:30,080 --> 00:26:33,000 Speaker 1: think you're looking for I mean basically flat or something 506 00:26:33,040 --> 00:26:35,080 Speaker 1: like that, and you changed it to minus three percent. 507 00:26:35,200 --> 00:26:37,440 Speaker 1: As you just mentioned, what was the sort of tipping 508 00:26:37,480 --> 00:26:39,760 Speaker 1: point that you saw on the market that made you 509 00:26:39,840 --> 00:26:42,919 Speaker 1: hit the button on that. Yes, So I think the 510 00:26:42,960 --> 00:26:45,480 Speaker 1: fact that we saw home prices turned negative a little 511 00:26:45,480 --> 00:26:47,840 Speaker 1: bit earlier than we thought they would, sales volumes were 512 00:26:47,880 --> 00:26:50,360 Speaker 1: coming in a little bit weaker than our forecasts had expected, 513 00:26:50,680 --> 00:26:55,280 Speaker 1: but forward looking expectations changed as well. Like when we 514 00:26:55,280 --> 00:26:57,960 Speaker 1: think about research at Morgan Stanley, we're taking into account 515 00:26:58,160 --> 00:27:00,600 Speaker 1: what all of our various teams are saying. Our US 516 00:27:00,640 --> 00:27:04,639 Speaker 1: economics team, given the persistence of inflation, they recently raised 517 00:27:04,680 --> 00:27:07,480 Speaker 1: their call for monetary tightening, adding basis points worth of 518 00:27:07,520 --> 00:27:11,359 Speaker 1: hikes to the November, December and January meetings. Are US 519 00:27:11,480 --> 00:27:14,199 Speaker 1: interest rate strategists on the back of that, raised their 520 00:27:14,240 --> 00:27:16,920 Speaker 1: forecast for the tenure, so they raised their forecast fifty 521 00:27:16,920 --> 00:27:20,119 Speaker 1: basis points. In December, they raised its seventy basis points 522 00:27:20,119 --> 00:27:23,080 Speaker 1: to three point seven five for the middle of next year. 523 00:27:23,800 --> 00:27:27,240 Speaker 1: That changes where we think mortgage rates could be throughout 524 00:27:27,280 --> 00:27:29,560 Speaker 1: next year, which means that the deterioration we've seen an 525 00:27:29,560 --> 00:27:33,080 Speaker 1: affordability there won't be any real relief next year now. 526 00:27:33,400 --> 00:27:36,360 Speaker 1: And so we were expecting that perhaps kind of during 527 00:27:36,400 --> 00:27:38,520 Speaker 1: the spring selling season next year that was providing a 528 00:27:38,520 --> 00:27:42,720 Speaker 1: little bit more support. That support is now absent. So 529 00:27:42,840 --> 00:27:45,280 Speaker 1: this actually leads really nicely into something that Joe and 530 00:27:45,320 --> 00:27:48,280 Speaker 1: I wanted to ask you about, which is when interest 531 00:27:48,400 --> 00:27:53,760 Speaker 1: rates go up, how does that actually feed into mortgage rates? Because, 532 00:27:53,800 --> 00:27:55,760 Speaker 1: as we mentioned at the beginning, you know, we have 533 00:27:55,960 --> 00:28:00,040 Speaker 1: seen this unprecedented rise in mortgage rates. I think the 534 00:28:00,080 --> 00:28:03,520 Speaker 1: average thirty years at like almost seven percent in the 535 00:28:03,600 --> 00:28:06,560 Speaker 1: US now six point seven five something like that, and 536 00:28:06,600 --> 00:28:11,320 Speaker 1: there's this huge spread between tenure treasury yields and mortgage 537 00:28:11,400 --> 00:28:14,480 Speaker 1: rates again something else that's at a record. What's going 538 00:28:14,520 --> 00:28:16,520 Speaker 1: on here? Why does it seem like mortgage rates are 539 00:28:16,560 --> 00:28:20,320 Speaker 1: increasing at an even faster pace than benchmark interest rates. 540 00:28:20,600 --> 00:28:22,680 Speaker 1: I think there's there's a couple of reasons for why 541 00:28:22,960 --> 00:28:25,760 Speaker 1: that spread that you're talking about between mortgage rates and 542 00:28:25,800 --> 00:28:29,399 Speaker 1: treasury rates has increased, And one of them is, if 543 00:28:29,400 --> 00:28:34,120 Speaker 1: you're a mortgage backed securities investor, your structurally short rate volatility. 544 00:28:34,240 --> 00:28:37,120 Speaker 1: And not only have mortgage rates or interest rates moved higher, 545 00:28:37,119 --> 00:28:40,440 Speaker 1: but volatility has been incredibly high the day to day, 546 00:28:40,520 --> 00:28:42,880 Speaker 1: week to week swings we're seeing in the tenure treasury 547 00:28:43,160 --> 00:28:47,200 Speaker 1: Like that volatility would in and of itself kind of 548 00:28:47,240 --> 00:28:49,400 Speaker 1: weigh a little bit on the spread that we're talking about. 549 00:28:49,720 --> 00:28:52,920 Speaker 1: But I think the other aspect to this is who 550 00:28:52,960 --> 00:28:57,240 Speaker 1: are your buyers of mortgage backed securities who kind of 551 00:28:57,280 --> 00:28:59,720 Speaker 1: supports that that mortgage rate. For the past couple of 552 00:28:59,760 --> 00:29:03,320 Speaker 1: years of FED has been an incredibly large buyer quantitative easing, 553 00:29:03,400 --> 00:29:07,320 Speaker 1: they were directly buying mortgages. They're no longer buying mortgages 554 00:29:08,080 --> 00:29:12,600 Speaker 1: thanks because of risk weighted asset pressures. They're no longer 555 00:29:12,640 --> 00:29:15,160 Speaker 1: going to be buying conventional kind of Fannie and Freddie 556 00:29:15,440 --> 00:29:19,480 Speaker 1: mortgages going forward, what we're seeing from a dollar perspective, 557 00:29:19,520 --> 00:29:21,440 Speaker 1: across currency perspective might make it a little bit more 558 00:29:21,440 --> 00:29:25,000 Speaker 1: difficult for overseas investors to be buying mortgages. And so 559 00:29:25,120 --> 00:29:27,560 Speaker 1: when when you have so many of what have been 560 00:29:27,640 --> 00:29:30,920 Speaker 1: your larger buyers over the past couple of years, for 561 00:29:31,000 --> 00:29:34,720 Speaker 1: various reasons, not as willing and able to step into 562 00:29:34,720 --> 00:29:37,560 Speaker 1: the market right now, combined with the rate volatility we've seen, 563 00:29:37,640 --> 00:29:40,280 Speaker 1: or perhaps even exaggerated by the rate volatility we've seen, 564 00:29:40,720 --> 00:29:42,280 Speaker 1: that can kind of lead to that gap in spreads. 565 00:29:42,640 --> 00:29:47,400 Speaker 1: There's a certain irony that post GFC capital requirements are 566 00:29:47,480 --> 00:29:51,560 Speaker 1: now like leading to higher mortgage rates and potentially causing 567 00:29:51,640 --> 00:29:54,440 Speaker 1: an affordability issue. Isn't there too? There is you know, 568 00:29:54,600 --> 00:29:56,680 Speaker 1: this is the part of the interview where I say, 569 00:29:56,800 --> 00:29:59,480 Speaker 1: could you clarify for our audience, But what I actually 570 00:29:59,520 --> 00:30:02,800 Speaker 1: mean is to clarify for me. Can you walk through though, 571 00:30:03,200 --> 00:30:09,400 Speaker 1: why MBS investor is structurally short rate volatility specifically? How 572 00:30:09,440 --> 00:30:14,040 Speaker 1: does that work? Yeah, it's basically because of, for better 573 00:30:14,160 --> 00:30:18,200 Speaker 1: or worse than, the freely prepayable nature of mortgage marketing 574 00:30:18,200 --> 00:30:21,880 Speaker 1: in the United States. Right as rates rally, as as 575 00:30:21,920 --> 00:30:24,800 Speaker 1: interest rates come down, as mortgage rates follow them down, 576 00:30:25,200 --> 00:30:27,200 Speaker 1: your homeowner is going to be much more likely to 577 00:30:27,280 --> 00:30:30,400 Speaker 1: prepay that mortgage returning principle to the investor in a 578 00:30:30,440 --> 00:30:35,040 Speaker 1: lower rate environment where their ability to invest it is challenged. Um, 579 00:30:35,080 --> 00:30:37,560 Speaker 1: as mortgage rates go higher, all of a sudden, that 580 00:30:37,560 --> 00:30:39,880 Speaker 1: mortgage backed security that you bought but you had an 581 00:30:39,880 --> 00:30:42,760 Speaker 1: expected duration on it's going to be longer as people 582 00:30:42,800 --> 00:30:45,520 Speaker 1: are more incentivized or locked in to stay in their 583 00:30:45,560 --> 00:30:47,160 Speaker 1: home right now. And that that's kind of the tip 584 00:30:47,200 --> 00:30:50,120 Speaker 1: of the iceberg for that. Okay, I have another mortgage 585 00:30:50,240 --> 00:30:54,600 Speaker 1: rate financing question, and the Mortgage Brokers Association, you know, 586 00:30:54,600 --> 00:30:58,120 Speaker 1: their mortgage applications data came out and I saw that 587 00:30:58,360 --> 00:31:02,560 Speaker 1: REFI activity is down, and my question is why is 588 00:31:02,600 --> 00:31:05,400 Speaker 1: it not down a percent? How is there anyone still 589 00:31:05,480 --> 00:31:10,160 Speaker 1: refining a mortgage today? Who is who? Like I've refined 590 00:31:10,160 --> 00:31:12,120 Speaker 1: a mortgage, but that was a few years ago, un 591 00:31:12,160 --> 00:31:15,880 Speaker 1: rage fund Like, who's refining today? That is a fantastic question. 592 00:31:16,280 --> 00:31:19,680 Speaker 1: And we think that harkening back to kind of the 593 00:31:19,680 --> 00:31:24,360 Speaker 1: beginning of our conversation, it feeds into how much of 594 00:31:24,400 --> 00:31:26,640 Speaker 1: the housing market, in the mortgage market are at levels 595 00:31:26,640 --> 00:31:30,760 Speaker 1: that we haven't seen before. So borrowers are out of 596 00:31:30,760 --> 00:31:33,600 Speaker 1: the money to refinance, so you're thinking that should be zero, Right, 597 00:31:33,720 --> 00:31:35,840 Speaker 1: They're more out of the money than than they've probably 598 00:31:35,840 --> 00:31:37,720 Speaker 1: ever been on a weight at average basis. But on 599 00:31:37,760 --> 00:31:42,040 Speaker 1: the other side, homeowners have more equity in their homes 600 00:31:42,040 --> 00:31:44,760 Speaker 1: than they've ever had before. And so if we're talking 601 00:31:44,800 --> 00:31:47,920 Speaker 1: about a borrower, who if you bought a home with 602 00:31:47,480 --> 00:31:50,920 Speaker 1: a down and home prices are up almost over the 603 00:31:50,960 --> 00:31:53,000 Speaker 1: past two and a half years, you can take a 604 00:31:53,040 --> 00:31:55,200 Speaker 1: little bit of that equity out of your home. So 605 00:31:55,280 --> 00:31:58,640 Speaker 1: that goes into the refight index that takeing. Yes, so 606 00:31:58,720 --> 00:32:01,000 Speaker 1: REFI as a combination of both rate and term, So 607 00:32:01,040 --> 00:32:03,160 Speaker 1: people who just refinanced to get a lower mortgage, right, 608 00:32:03,200 --> 00:32:05,840 Speaker 1: but also the cash out what you've got is he. 609 00:32:22,920 --> 00:32:28,280 Speaker 1: So you mentioned MBS investors being structurally short volatility, which 610 00:32:28,360 --> 00:32:30,680 Speaker 1: makes me want to ask about where are the g 611 00:32:30,880 --> 00:32:34,640 Speaker 1: s c s nowadays? Like they used to be a 612 00:32:34,720 --> 00:32:38,560 Speaker 1: big market stabilizer. No, it's stabilizing force right in the market, 613 00:32:38,680 --> 00:32:43,360 Speaker 1: and it seems like they're sort of not there anymore. 614 00:32:43,400 --> 00:32:47,760 Speaker 1: To put it mildly, I think that they're like when 615 00:32:47,760 --> 00:32:50,440 Speaker 1: we walk through the buyer bases earlier, they weren't one 616 00:32:50,480 --> 00:32:53,480 Speaker 1: of the buyers that I mentioned, right, and so that 617 00:32:53,640 --> 00:32:56,840 Speaker 1: puts more of an onus on those other buyer bases, 618 00:32:56,880 --> 00:32:59,040 Speaker 1: and some of them are stepping back for those reasons 619 00:32:59,040 --> 00:33:01,600 Speaker 1: we alluded to. Can we talk a little bit more 620 00:33:01,680 --> 00:33:05,640 Speaker 1: about speaking of a buyer stepping back? How do you 621 00:33:05,720 --> 00:33:09,880 Speaker 1: quantify the significant you know, so rate volatility is one 622 00:33:09,920 --> 00:33:14,160 Speaker 1: contributor to the widening spread between mortgages and treasuries, and 623 00:33:14,160 --> 00:33:16,040 Speaker 1: then the other one is, you know, the FED was 624 00:33:16,200 --> 00:33:18,440 Speaker 1: hoovering up a lot of nbs for a long time 625 00:33:18,520 --> 00:33:22,120 Speaker 1: and now it's not and it's going into quantitative tightening mode. 626 00:33:22,640 --> 00:33:25,760 Speaker 1: How do you quantify that or think about the effect 627 00:33:25,920 --> 00:33:30,120 Speaker 1: of the Fed's role in mortgage as so J back O, 628 00:33:30,600 --> 00:33:33,360 Speaker 1: who is our cohead of Securit Test Products research. He 629 00:33:33,480 --> 00:33:36,440 Speaker 1: runs our agency NBS research team. One of the things 630 00:33:36,520 --> 00:33:38,360 Speaker 1: that that he's done a great job of with respect 631 00:33:38,440 --> 00:33:41,400 Speaker 1: to when the FED has been involved, when the FED 632 00:33:41,440 --> 00:33:44,200 Speaker 1: hasn't been involved, is kind of looking at we talked 633 00:33:44,240 --> 00:33:47,560 Speaker 1: about this mortgage spread, kind of looking at how the 634 00:33:47,560 --> 00:33:51,480 Speaker 1: mortgage basis has moved or what level it's existed at 635 00:33:51,720 --> 00:33:54,440 Speaker 1: depending on the behavior of the FED over time. Right, 636 00:33:54,440 --> 00:33:56,200 Speaker 1: Because when the FED is buying, when you have this 637 00:33:56,360 --> 00:33:59,960 Speaker 1: large buyer stepping into the market, like that spread show 638 00:34:00,320 --> 00:34:02,200 Speaker 1: be tighter. You have a lot of this demand there. 639 00:34:02,200 --> 00:34:05,000 Speaker 1: When they're not buying, that spread should be wider, right, 640 00:34:05,000 --> 00:34:07,560 Speaker 1: And so that's that's definitely something that we keep in 641 00:34:07,600 --> 00:34:10,080 Speaker 1: mind in terms of thinking about what that mortgage spread 642 00:34:10,120 --> 00:34:14,520 Speaker 1: has looked like over time and accounting for what the 643 00:34:14,520 --> 00:34:17,120 Speaker 1: FET is doing at different points in time. So I 644 00:34:17,160 --> 00:34:20,800 Speaker 1: have a slightly weird question just going back to supply, 645 00:34:21,040 --> 00:34:24,239 Speaker 1: but I bought a very old house this year which 646 00:34:24,360 --> 00:34:27,600 Speaker 1: just had one of those like energy efficiency things done 647 00:34:27,600 --> 00:34:29,920 Speaker 1: on it, and we got like the lowest score possible 648 00:34:30,280 --> 00:34:35,960 Speaker 1: because there's absolutely no insulation. How much do technological advances 649 00:34:36,320 --> 00:34:41,360 Speaker 1: in housing like potentially drive supply? Like I'm thinking you know, 650 00:34:41,440 --> 00:34:44,440 Speaker 1: if everyone decides, O, energy prices are so high, I 651 00:34:44,520 --> 00:34:47,799 Speaker 1: want a really energy efficient house with solar panels on 652 00:34:47,840 --> 00:34:50,279 Speaker 1: it and that sort of thing. Could that drive like 653 00:34:50,320 --> 00:34:53,440 Speaker 1: a new round of activity. Congratulations on the home parks, 654 00:34:53,760 --> 00:34:57,440 Speaker 1: thank you as I watch heating oil prices go up 655 00:34:57,480 --> 00:35:00,399 Speaker 1: from starting to doubt myself but fix. But I would 656 00:35:00,440 --> 00:35:04,239 Speaker 1: view it less as a desire to trade up for 657 00:35:04,320 --> 00:35:08,040 Speaker 1: a more energy efficient home, if you will, especially given 658 00:35:08,040 --> 00:35:10,359 Speaker 1: what's happened at home prices and mortgage rates right now, 659 00:35:10,800 --> 00:35:14,319 Speaker 1: and perhaps more of a willingness of that homeowner too. 660 00:35:15,480 --> 00:35:17,479 Speaker 1: Maybe remove some of the equity, like we talked about 661 00:35:17,560 --> 00:35:19,080 Speaker 1: from that from that home, there's a lot of that 662 00:35:19,120 --> 00:35:22,960 Speaker 1: equity there, and perhaps spend that on their current house 663 00:35:23,000 --> 00:35:25,879 Speaker 1: to kind of improve the efficiency that you just sort 664 00:35:25,880 --> 00:35:30,040 Speaker 1: of anticipated. My question, could the lock in environment where 665 00:35:30,040 --> 00:35:32,160 Speaker 1: it just like I and you see people talk about 666 00:35:32,200 --> 00:35:34,120 Speaker 1: this all the time. It's like I can't move anywhere 667 00:35:34,120 --> 00:35:35,680 Speaker 1: because I don't want to give up my mortgage and 668 00:35:35,840 --> 00:35:42,000 Speaker 1: markets terrible. Could that sustain renovation activity? And because I 669 00:35:42,040 --> 00:35:45,120 Speaker 1: think renovation activity also really kicked into a high gear 670 00:35:45,480 --> 00:35:47,600 Speaker 1: during the pandemic and everyone was stuck at home, is 671 00:35:47,640 --> 00:35:50,080 Speaker 1: like I gotta like you know, fix my whatever so 672 00:35:50,239 --> 00:35:52,319 Speaker 1: that I living my home lot more. But could that 673 00:35:52,440 --> 00:35:54,960 Speaker 1: lock in have that same effect? That is certainly an 674 00:35:54,960 --> 00:35:57,600 Speaker 1: option that could happen. Right now, do you think about 675 00:35:58,160 --> 00:36:01,000 Speaker 1: how we typically talk about, oh, this is a entry 676 00:36:01,080 --> 00:36:03,160 Speaker 1: level home and then you have your move up home buyer, 677 00:36:03,320 --> 00:36:06,719 Speaker 1: and if we've made it much more difficult to kind 678 00:36:06,760 --> 00:36:10,600 Speaker 1: of progress along that path, then you're kind of looking 679 00:36:10,600 --> 00:36:13,120 Speaker 1: at your current house and saying, well, what do I 680 00:36:13,120 --> 00:36:14,600 Speaker 1: need to do to this house to make it more 681 00:36:15,480 --> 00:36:18,560 Speaker 1: accommodative of how my lifestyle is going to evolve, how 682 00:36:18,600 --> 00:36:22,120 Speaker 1: my family might be evolving, how my trends and work 683 00:36:22,160 --> 00:36:26,160 Speaker 1: from home might be evolving, you know. So speaking staying 684 00:36:26,160 --> 00:36:29,480 Speaker 1: on this supply and demand question, can you talk a 685 00:36:29,520 --> 00:36:32,320 Speaker 1: little bit about and we were talking about the boomers earlier, 686 00:36:32,320 --> 00:36:34,080 Speaker 1: but you say, you know, there's a lot of interest 687 00:36:34,160 --> 00:36:37,160 Speaker 1: in millennial home buyers or maybe Gen Z homebuyers. What 688 00:36:37,280 --> 00:36:41,920 Speaker 1: is household formation? What is the process that drives household formation? 689 00:36:42,000 --> 00:36:44,560 Speaker 1: And my understanding is I think it's spiked quite a bit, 690 00:36:45,040 --> 00:36:46,640 Speaker 1: but I don't, you know, it's not I don't have 691 00:36:46,680 --> 00:36:48,640 Speaker 1: a sense of what it actually is or why it 692 00:36:48,680 --> 00:36:51,880 Speaker 1: would spike due to COVID, But what is household formation, 693 00:36:52,320 --> 00:36:55,680 Speaker 1: what drives it, and how is the change and that 694 00:36:56,239 --> 00:36:59,279 Speaker 1: going to affect the market going forward? Absolutely. So when 695 00:36:59,280 --> 00:37:01,319 Speaker 1: I mentioned the or pillars at the top, one of 696 00:37:01,320 --> 00:37:03,719 Speaker 1: them was demand. And when I say demand in this context, 697 00:37:03,800 --> 00:37:06,040 Speaker 1: I mean household formations. Okay, that is the metric we're 698 00:37:06,080 --> 00:37:08,359 Speaker 1: looking at. So to talk about household formations, let's talk 699 00:37:08,400 --> 00:37:10,839 Speaker 1: about how we define a household would be great if 700 00:37:10,840 --> 00:37:15,240 Speaker 1: you will, right, and so basically, a household is a 701 00:37:15,239 --> 00:37:17,040 Speaker 1: a unit living together in a in a shelter. It 702 00:37:17,040 --> 00:37:19,759 Speaker 1: can be ownership or rentship. I like to use an 703 00:37:19,760 --> 00:37:23,319 Speaker 1: example where you basically have four people that just kind 704 00:37:23,360 --> 00:37:26,480 Speaker 1: of maybe they graduated from college, they moved to let's 705 00:37:26,480 --> 00:37:28,440 Speaker 1: say New York City where we're sitting right now, right 706 00:37:28,640 --> 00:37:31,800 Speaker 1: and they live in one apartment. They are one household 707 00:37:32,400 --> 00:37:34,840 Speaker 1: when they moved, when they graduated, when they moved to 708 00:37:34,840 --> 00:37:36,720 Speaker 1: the city, that that was a formation of a household 709 00:37:36,719 --> 00:37:38,920 Speaker 1: because as part of their parents household before that, they 710 00:37:38,920 --> 00:37:40,960 Speaker 1: didn't count as one. So you have one household formation. 711 00:37:42,000 --> 00:37:44,160 Speaker 1: What we're really going to be talking about his headship rights. 712 00:37:44,560 --> 00:37:49,160 Speaker 1: That's the percentage of any group, cohort of the population. 713 00:37:49,239 --> 00:37:50,880 Speaker 1: How you choose to define it, we're defining it by 714 00:37:50,920 --> 00:37:53,080 Speaker 1: age here that heads their own household. So this this 715 00:37:53,160 --> 00:37:56,120 Speaker 1: group of people, their headship rates four of them in 716 00:37:56,160 --> 00:37:58,880 Speaker 1: one household. Two years later they all moved into their 717 00:37:58,880 --> 00:38:03,759 Speaker 1: own apartment. We now have four households. Formation would be three. 718 00:38:03,840 --> 00:38:05,640 Speaker 1: We went from one to four. It's a net figure, 719 00:38:06,440 --> 00:38:08,920 Speaker 1: and the headship rate for this very small cohort is 720 00:38:08,920 --> 00:38:12,920 Speaker 1: ad So when we think about how household formations are 721 00:38:12,920 --> 00:38:15,560 Speaker 1: going to evolve, we're looking at how those headship rates evolved, 722 00:38:15,800 --> 00:38:18,720 Speaker 1: in particular by age. The steepest part of that slope 723 00:38:18,719 --> 00:38:21,000 Speaker 1: is as people move through their twenties and early thirties, 724 00:38:21,320 --> 00:38:24,719 Speaker 1: kind of branching out on their own, starting with a 725 00:38:24,719 --> 00:38:28,600 Speaker 1: heavier roommate environment towards a lesser roommate environment in general. 726 00:38:29,120 --> 00:38:32,440 Speaker 1: And that's why there's so much focus on millennials and 727 00:38:32,520 --> 00:38:37,200 Speaker 1: gen Zsa. You mentioned how much we've seen recently the 728 00:38:37,239 --> 00:38:42,439 Speaker 1: headship rate, the percentage of people in there four, their 729 00:38:42,440 --> 00:38:46,120 Speaker 1: head ship rate was close to fifty year lows, and 730 00:38:46,120 --> 00:38:48,080 Speaker 1: that's for a number of reasons. Did we hear a 731 00:38:48,080 --> 00:38:50,319 Speaker 1: lot of discussion about things like student loan debt, the 732 00:38:50,360 --> 00:38:52,640 Speaker 1: fact that a lot of these this generation graduated into 733 00:38:52,640 --> 00:38:54,840 Speaker 1: a recession, making it a little bit more difficult to 734 00:38:54,960 --> 00:38:58,120 Speaker 1: kind of form your own household, like those kinds of 735 00:38:58,200 --> 00:39:01,719 Speaker 1: taking on excess roommates moving into your parents basements. That 736 00:39:01,719 --> 00:39:03,600 Speaker 1: that brought them down to fifty year loss. But household 737 00:39:03,600 --> 00:39:06,319 Speaker 1: formations were still coming in above long run average because 738 00:39:06,360 --> 00:39:09,680 Speaker 1: you had such a large group of people moving through 739 00:39:09,680 --> 00:39:13,800 Speaker 1: the age cohorts that were so important for household formations. 740 00:39:13,800 --> 00:39:15,640 Speaker 1: So the rate at which they were the forming were lower, 741 00:39:15,680 --> 00:39:18,360 Speaker 1: but the number of people so helpful. This is like 742 00:39:18,400 --> 00:39:20,839 Speaker 1: answering questions have been too embarrassed to ask for years. 743 00:39:20,960 --> 00:39:23,160 Speaker 1: This is is exactly why. So then what happened in 744 00:39:23,960 --> 00:39:26,680 Speaker 1: that caused So I think that you had a couple 745 00:39:26,680 --> 00:39:29,879 Speaker 1: of dynamics that we're playing out in one that helped 746 00:39:29,920 --> 00:39:34,440 Speaker 1: cause the spike. I think A you had the pandemic, 747 00:39:34,960 --> 00:39:38,000 Speaker 1: which two reasons you had a kind of risk aversion 748 00:39:38,360 --> 00:39:40,920 Speaker 1: people not wanting to live in such densely populated areas 749 00:39:40,960 --> 00:39:43,279 Speaker 1: where in a lot of instances you kind of might 750 00:39:43,400 --> 00:39:44,880 Speaker 1: more likely to have roomates. They want to live in 751 00:39:44,960 --> 00:39:47,960 Speaker 1: less densely populated areas, more likely to have single family housing. 752 00:39:48,239 --> 00:39:52,040 Speaker 1: We tracked home prices by zip code, population density, the 753 00:39:52,080 --> 00:39:55,520 Speaker 1: gap between suburbs and less densely populated urban areas versus 754 00:39:55,560 --> 00:39:58,200 Speaker 1: densely populated urban areas gapped out over the course of 755 00:39:59,719 --> 00:40:02,640 Speaker 1: to the largest we'd ever seen. And again that data 756 00:40:02,680 --> 00:40:06,480 Speaker 1: goes back late eighties or ninies, but so risk aversion 757 00:40:06,640 --> 00:40:09,680 Speaker 1: work from home allowed them to make that move. And 758 00:40:09,719 --> 00:40:12,880 Speaker 1: then we've talked a lot about mortgage rates. As mortgage 759 00:40:12,920 --> 00:40:14,920 Speaker 1: rates were falling to all time lows, the buying power 760 00:40:15,239 --> 00:40:18,400 Speaker 1: of this cohort is now much more substantial, and so 761 00:40:18,800 --> 00:40:21,319 Speaker 1: that kind of just exaggerates their ability to kind of 762 00:40:21,360 --> 00:40:24,000 Speaker 1: to drive home prices up there and to afford buying 763 00:40:24,040 --> 00:40:26,840 Speaker 1: homes before we had this record growth in home prices 764 00:40:27,600 --> 00:40:32,320 Speaker 1: at the same time leaving these densely populated areas, rents 765 00:40:32,400 --> 00:40:36,040 Speaker 1: coming down. That also enabled people who weren't necessarily making 766 00:40:36,040 --> 00:40:39,720 Speaker 1: that move out to kind of decrease their roommate counts. 767 00:40:40,000 --> 00:40:42,200 Speaker 1: And so you had household formations from that perspective in 768 00:40:42,239 --> 00:40:43,879 Speaker 1: terms of going from two or three roommates to living 769 00:40:43,880 --> 00:40:46,880 Speaker 1: by yourself, and informations from going from a renter in 770 00:40:47,120 --> 00:40:50,680 Speaker 1: a roommated situation in a densely populated area to kind 771 00:40:50,680 --> 00:40:52,520 Speaker 1: of the less densely populated areas. So that took us 772 00:40:52,520 --> 00:40:55,080 Speaker 1: from above long run average to well above long run average, Tracy, 773 00:40:55,080 --> 00:40:57,040 Speaker 1: I had totally forgotten that was such a big story. 774 00:40:57,120 --> 00:40:59,399 Speaker 1: The suburbs verse the city is that was like such 775 00:40:59,400 --> 00:41:02,239 Speaker 1: a big thing. Yeah, I think a number of people 776 00:41:02,280 --> 00:41:04,359 Speaker 1: have moved back into the city now, not me though 777 00:41:04,840 --> 00:41:07,720 Speaker 1: I'm in the country, um sort of. Anyway, you mentioned 778 00:41:07,719 --> 00:41:12,280 Speaker 1: millennials there, and we've been talking a lot about housing affordability, 779 00:41:12,360 --> 00:41:14,920 Speaker 1: and there has been this discussion about whether or not, 780 00:41:15,200 --> 00:41:18,640 Speaker 1: you know, people that have massive student debt might have 781 00:41:18,640 --> 00:41:21,239 Speaker 1: difficulty saving in the current environment, whether or not they'll 782 00:41:21,239 --> 00:41:23,879 Speaker 1: be able to afford houses in the future. There's also 783 00:41:24,360 --> 00:41:26,600 Speaker 1: a thing that crops up every once in a while 784 00:41:26,640 --> 00:41:28,560 Speaker 1: where people talk about, well, maybe a lot of younger 785 00:41:28,600 --> 00:41:31,520 Speaker 1: people don't want to own home simply because they might 786 00:41:31,560 --> 00:41:34,000 Speaker 1: be into you know, apartments that come with lots of 787 00:41:34,040 --> 00:41:37,719 Speaker 1: amenities like pools and movie rooms and things like that. 788 00:41:38,320 --> 00:41:42,960 Speaker 1: What's your impression of, I guess, the American dream or 789 00:41:43,000 --> 00:41:46,600 Speaker 1: the viability of the American dream at the moment. Do 790 00:41:46,719 --> 00:41:51,200 Speaker 1: people still want to own houses? As you know, affordability 791 00:41:51,280 --> 00:41:54,480 Speaker 1: really comes into question anytime we've seen kind of like 792 00:41:54,520 --> 00:41:58,680 Speaker 1: the the softer almost survey based data, it still points 793 00:41:58,719 --> 00:42:03,560 Speaker 1: towards people wanting to own homes. I do think that 794 00:42:03,760 --> 00:42:07,799 Speaker 1: affordability pressures that credit availability like, Yes, we think it's 795 00:42:08,280 --> 00:42:11,480 Speaker 1: probably moving tighter in the in the short term, But 796 00:42:12,200 --> 00:42:14,000 Speaker 1: even if it starts to move wider, some of the 797 00:42:14,000 --> 00:42:16,680 Speaker 1: regulations have been put into place post the GFC make 798 00:42:16,719 --> 00:42:20,399 Speaker 1: it unlikely that we're going to see lending standards ease 799 00:42:20,440 --> 00:42:22,960 Speaker 1: to anywhere close to what we saw in two thousand seven. 800 00:42:24,040 --> 00:42:26,080 Speaker 1: I say that to imply that right now the home 801 00:42:26,120 --> 00:42:28,480 Speaker 1: ownership break is between sixty five and sixties six percent. 802 00:42:28,920 --> 00:42:32,359 Speaker 1: We don't see it going back to like we saw 803 00:42:32,480 --> 00:42:34,960 Speaker 1: back in the early two thousand's. We do think that 804 00:42:35,000 --> 00:42:39,200 Speaker 1: there's still a desire to own homes, the step towards 805 00:42:39,239 --> 00:42:42,880 Speaker 1: owning homes occurring a little bit later in people's lives. 806 00:42:43,320 --> 00:42:47,520 Speaker 1: But we also think that single family rentorship, which I 807 00:42:47,520 --> 00:42:50,399 Speaker 1: think has become a much more talked about topic over 808 00:42:50,400 --> 00:42:52,040 Speaker 1: the course of the past ten of fifteen years, and 809 00:42:52,120 --> 00:42:55,520 Speaker 1: largely due to the institutional ownership of those homes. Um 810 00:42:55,719 --> 00:42:57,719 Speaker 1: we think that that's going to become, or we think 811 00:42:57,760 --> 00:43:00,759 Speaker 1: it always has been and will continue to be, kind 812 00:43:00,760 --> 00:43:04,720 Speaker 1: of another pillar of of housing of shelter in this country. 813 00:43:04,920 --> 00:43:07,279 Speaker 1: So we talked a little bit about your forecast for 814 00:43:07,360 --> 00:43:12,240 Speaker 1: next year, which is the minus three decline in home prices. 815 00:43:12,239 --> 00:43:16,880 Speaker 1: What's the variable that you are most closely watching that 816 00:43:17,080 --> 00:43:22,920 Speaker 1: could change that outlook? Supply? We are watching inventories, if supply, 817 00:43:23,120 --> 00:43:27,120 Speaker 1: if uneconomic sellers come from areas that we're not expecting. 818 00:43:27,280 --> 00:43:31,359 Speaker 1: If supply increases faster than we think it will, then 819 00:43:31,400 --> 00:43:33,560 Speaker 1: all of a sudden, the likelihood that you have people 820 00:43:33,560 --> 00:43:35,960 Speaker 1: willing to sell into what we already think will be 821 00:43:35,960 --> 00:43:40,399 Speaker 1: a meager demand environment increases, and that likelihood would then 822 00:43:40,640 --> 00:43:43,840 Speaker 1: bring home prices lower. So that's the number one variable 823 00:43:43,840 --> 00:43:46,319 Speaker 1: we're looking at all right. Well, Jim Egan, it was 824 00:43:46,400 --> 00:43:48,439 Speaker 1: lovely having you on all thoughts. Thank you so much 825 00:43:48,440 --> 00:43:51,600 Speaker 1: for taking the time to walk us through household formations 826 00:43:51,719 --> 00:43:56,239 Speaker 1: and mortgage as I asked about like five questions that 827 00:43:56,360 --> 00:43:58,440 Speaker 1: I was like to embarrassed to ask for, like you know, 828 00:43:58,480 --> 00:44:00,919 Speaker 1: over the last ten years. So I've ship you coming 829 00:44:00,960 --> 00:44:04,480 Speaker 1: out and answering them clarifying. I actually I feel like 830 00:44:04,520 --> 00:44:07,160 Speaker 1: I understand the few things. Thank you for having me on. 831 00:44:07,239 --> 00:44:24,520 Speaker 1: It was a lot of them. Yeah, that was great, well, Joe, 832 00:44:24,600 --> 00:44:27,279 Speaker 1: I thought that was fascinating just to sort of like 833 00:44:27,480 --> 00:44:31,160 Speaker 1: really lay out how unusual this current moment is and 834 00:44:31,200 --> 00:44:33,520 Speaker 1: how we're sort of like breaking records on a lot 835 00:44:33,560 --> 00:44:37,760 Speaker 1: of housing market indicators or you know, like structural rates 836 00:44:37,760 --> 00:44:39,960 Speaker 1: and things like that. The other thing that stood out 837 00:44:39,960 --> 00:44:43,040 Speaker 1: to me was just that lock in Yes. Well, you know, 838 00:44:43,200 --> 00:44:45,960 Speaker 1: it's funny like University of Michigan, I think in their 839 00:44:46,040 --> 00:44:49,080 Speaker 1: economic Sentiment, they asked these questions like is it a 840 00:44:49,120 --> 00:44:51,359 Speaker 1: good time to buy? Or is it a good time? 841 00:44:51,719 --> 00:44:54,440 Speaker 1: And these people say these days they say no. And 842 00:44:54,480 --> 00:44:56,200 Speaker 1: then the other question they say, is this a good 843 00:44:56,239 --> 00:44:59,120 Speaker 1: time to sell? And that was really high up until 844 00:44:59,160 --> 00:45:01,960 Speaker 1: recently because it's like a seller's market, but that's plunged. 845 00:45:02,160 --> 00:45:04,680 Speaker 1: So we have a very weird situation in which it's 846 00:45:04,680 --> 00:45:07,360 Speaker 1: a it's a it's neither a seller's market nor a 847 00:45:07,360 --> 00:45:09,880 Speaker 1: buyer's market, which means we're just going to get this 848 00:45:10,080 --> 00:45:14,120 Speaker 1: like freeze where there's just not much transactions. And look, 849 00:45:14,120 --> 00:45:15,759 Speaker 1: I don't know what's gonna happen with prices, but I 850 00:45:15,800 --> 00:45:20,279 Speaker 1: find this idea compelling that if if supply doesn't shoot up, 851 00:45:20,800 --> 00:45:22,759 Speaker 1: it's hard to get a big drop in prices. Yeah. 852 00:45:22,800 --> 00:45:25,680 Speaker 1: I think that kind of goes to Jim's final point 853 00:45:25,719 --> 00:45:27,719 Speaker 1: as well about it's sort of all about supply and 854 00:45:27,760 --> 00:45:30,800 Speaker 1: inventory at the moment. The other thing that I found interesting, 855 00:45:30,880 --> 00:45:33,000 Speaker 1: and this has come up in a number of conversations 856 00:45:33,000 --> 00:45:35,840 Speaker 1: at this point, is the idea of the marginal buyer 857 00:45:36,120 --> 00:45:38,320 Speaker 1: of a lot of bonds. So in this case, mortgage 858 00:45:38,360 --> 00:45:41,160 Speaker 1: bonds just not being there anymore. And it's sort of 859 00:45:41,200 --> 00:45:45,000 Speaker 1: a similar story for for treasuries too. But when it 860 00:45:45,040 --> 00:45:48,759 Speaker 1: comes to mbs, that's feeding into the rates, right, and 861 00:45:48,840 --> 00:45:51,400 Speaker 1: so you can sort of almost draw a direct line 862 00:45:51,440 --> 00:45:57,200 Speaker 1: between higher capital requirements and standards to the massive shooting 863 00:45:57,280 --> 00:45:59,239 Speaker 1: up of mortgage rates that we've seen well, you know, 864 00:45:59,320 --> 00:46:02,160 Speaker 1: and to the extend that mbs are a sort of 865 00:46:02,360 --> 00:46:05,680 Speaker 1: bet on low volatility. You know, the FED doesn't care 866 00:46:05,719 --> 00:46:08,640 Speaker 1: about you know, the feed is not a profit seeking entity, 867 00:46:09,040 --> 00:46:11,200 Speaker 1: I guess it technically, I don't know. Maybe for political 868 00:46:11,280 --> 00:46:13,960 Speaker 1: reasons wants to have some money to remit to the treasury, 869 00:46:13,960 --> 00:46:16,799 Speaker 1: but that's not why the fit exists. And so it 870 00:46:16,840 --> 00:46:22,719 Speaker 1: could absorb that volatility, whereas when it's in quantity, that 871 00:46:22,880 --> 00:46:26,240 Speaker 1: is that is a that volatility has to be priced. 872 00:46:26,280 --> 00:46:28,400 Speaker 1: And so you see that spread and it's really wild 873 00:46:28,440 --> 00:46:31,200 Speaker 1: because so you just look at the spread of thirty 874 00:46:31,239 --> 00:46:35,200 Speaker 1: your mortgages versus treasuries, and it's quickly spiked up to 875 00:46:35,200 --> 00:46:38,040 Speaker 1: where we saw like March, when the entire financial system 876 00:46:38,120 --> 00:46:40,680 Speaker 1: like briefly when nuts. We're gonna have to put together 877 00:46:40,760 --> 00:46:42,960 Speaker 1: some of these charts. I think, yeah, let's make a 878 00:46:43,040 --> 00:46:46,480 Speaker 1: chart list. A a charticle should go along with this episode. 879 00:46:46,680 --> 00:46:48,640 Speaker 1: Shall we leave it there? Let's leave it there? Okay, 880 00:46:48,760 --> 00:46:51,440 Speaker 1: This has been another episode of the All Thoughts podcast 881 00:46:51,520 --> 00:46:53,960 Speaker 1: on Tracy Halloway. You can follow me on Twitter at 882 00:46:54,000 --> 00:46:56,720 Speaker 1: Tracy Halloway and I'm Joe Isn't though. You can follow 883 00:46:56,719 --> 00:47:00,520 Speaker 1: me on Twitter at the Stalwart, follow our producer on Twitter, 884 00:47:00,640 --> 00:47:04,799 Speaker 1: Dash Bennett He's at dashbot. And Carmen Rodriguez She's at 885 00:47:04,880 --> 00:47:07,400 Speaker 1: Carmen Armann. And check out all of our podcasts at 886 00:47:07,400 --> 00:47:10,760 Speaker 1: Bloomberg under the handle at podcasts. Thanks for listening,