WEBVTT - This Is What 7% Mortgages Will Do To the Housing Market 0:00:10.000 --> 0:00:13.240 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.320 --> 0:00:16.759 I'm Tracy Alloway and I'm Joe Wise. Joe, there's nothing 0:00:16.800 --> 0:00:20.159 better than a good chart. Let's see what chart do 0:00:20.160 --> 0:00:22.000 you have for us today? What chart are you going 0:00:22.040 --> 0:00:25.360 to ask listeners to visualize in their minds since they 0:00:25.360 --> 0:00:27.800 can't actually probably like look at it right now, what 0:00:28.080 --> 0:00:30.080 chart should they be thinking about. I actually have a 0:00:30.120 --> 0:00:33.479 bunch in mind, like there are some extreme charts at 0:00:33.479 --> 0:00:36.279 the moment, given everything that's been happening with markets. I'm 0:00:36.320 --> 0:00:39.280 thinking in particular, you know, bond market volatility, what we 0:00:39.280 --> 0:00:43.200 saw with sterling and guilts very recently. But if you're 0:00:43.280 --> 0:00:46.000 looking for the most interesting charts at the moment, I 0:00:46.040 --> 0:00:49.159 gotta say, I really think the housing market and the 0:00:49.200 --> 0:00:53.000 mortgage market are where it's at. I completely agree with you. 0:00:53.120 --> 0:00:56.120 And you know, like, look, the FED is raising rates 0:00:56.200 --> 0:01:00.320 to slow down the economy to beat inflation, but the 0:01:00.400 --> 0:01:04.240 number one sector of the economy that's most sensitive to 0:01:04.360 --> 0:01:06.759 rate very directly is housing. And so you just see 0:01:06.800 --> 0:01:09.920 some insane charts. We've been posting a bunch, but if 0:01:09.959 --> 0:01:11.720 you know, you know, look at the price of a 0:01:11.760 --> 0:01:14.360 new thirty year mortgage, just like through the roof compared 0:01:14.400 --> 0:01:17.399 to six months ago. So many things like that, And 0:01:17.480 --> 0:01:20.679 you know, housing is so crucial right to the overall economy. 0:01:20.720 --> 0:01:22.800 Everyone wants to buy one or wants to live in one. 0:01:23.240 --> 0:01:26.280 And what does it mean when these numbers are moving 0:01:26.400 --> 0:01:29.560 so fast so hard? Right, Well, everyone also has an 0:01:29.560 --> 0:01:33.160 opinion on warehousing is going. But you know, you mentioned 0:01:33.200 --> 0:01:35.040 a couple of those charts you can look at pretty 0:01:35.120 --> 0:01:39.240 much anything, Like the pure acceleration in mortgage rates has 0:01:39.280 --> 0:01:43.679 been unprecedented, The spread between mortgages and the tenure U S. 0:01:43.720 --> 0:01:47.400 Treasury is now at a record, Housing affordabilities at a 0:01:47.440 --> 0:01:50.320 record though, Like there are so many you can choose from, 0:01:50.360 --> 0:01:54.760 but it really feels like, given the unusual nous of 0:01:54.760 --> 0:01:58.000 the situation and what we're seeing in some of these charts, 0:01:58.240 --> 0:02:00.480 it feels like there's a lot of uncertainties. So, yes, 0:02:00.560 --> 0:02:03.800 everyone would expect higher interest rates to have a negative 0:02:03.840 --> 0:02:06.760 impact on the housing market, but we've also been talking 0:02:06.760 --> 0:02:09.880 about how there's low inventory and you know, there's a 0:02:09.960 --> 0:02:13.200 structural need for more housing in the US, so maybe 0:02:13.200 --> 0:02:15.520 things are different this time. It's a really weird market 0:02:15.639 --> 0:02:18.560 because you know, I think everybody is still kind of 0:02:18.600 --> 0:02:21.560 scarred from the Great Financial crisis, and you see these 0:02:21.680 --> 0:02:24.680 huge moves. You know, well, our house prices don't they 0:02:24.680 --> 0:02:26.960 have to fall off a cliff. And yet if no 0:02:27.040 --> 0:02:29.720 one is forced to sell, what's going to happen? Is 0:02:29.800 --> 0:02:32.440 the housing market just gonna go away, like no transactions 0:02:32.520 --> 0:02:35.240 except for people who like you know, get divorced or 0:02:35.240 --> 0:02:37.280 like have to prove or something like that. Like seriously, 0:02:37.320 --> 0:02:41.120 it seems like a possibility. So much weirdness. You know, 0:02:41.160 --> 0:02:42.760 pull up a chart of like how many people are 0:02:42.760 --> 0:02:45.400 refined their mortgage. I mean it's basically the closest thing 0:02:45.440 --> 0:02:47.480 you find to like zero and a chart like no 0:02:47.480 --> 0:02:51.360 one is refined with mortgages that yeah at seven percent 0:02:51.480 --> 0:02:53.240 or whatever. I thought you were going to mention the reats, 0:02:53.360 --> 0:02:56.000 which is another good chart as well. So there are 0:02:56.040 --> 0:02:59.079 big questions about this market and it does. Yeah. And 0:02:59.200 --> 0:03:00.799 the other thing going on is you have a lot 0:03:00.800 --> 0:03:04.680 of people talking about market structure issues, so how mortgage 0:03:04.760 --> 0:03:07.200 rates are actually set, what's going on in the market 0:03:07.240 --> 0:03:10.760 for mortgage backed securities. A lot of people have been saying, oh, 0:03:10.800 --> 0:03:13.880 there's you know, it's broken, there's something going on. So 0:03:14.080 --> 0:03:15.960 I am very pleased to say we are going to 0:03:16.000 --> 0:03:19.200 get into all of these issues, or at least try to, 0:03:19.280 --> 0:03:21.280 because there is a lot of uncertainty, and we really 0:03:21.320 --> 0:03:24.160 do have the perfect guest. Let's do it. I'm really excited. 0:03:24.160 --> 0:03:26.600 I have so many questions. Let's get god. Okay, we 0:03:26.639 --> 0:03:29.920 are going to be speaking with Jim Egan. He is 0:03:30.080 --> 0:03:34.480 Morgan Stanley's US housing strategist and does some great research 0:03:34.639 --> 0:03:36.760 on all of these topics. So, Jim, thank you so 0:03:36.840 --> 0:03:39.200 much for coming on. Thank you so much for having me. 0:03:39.240 --> 0:03:41.760 It's an honor to be here. So maybe just to 0:03:41.800 --> 0:03:46.600 begin with, we should talk about is this environment that unusual? 0:03:46.800 --> 0:03:49.960 You know, you've been analyzing US housing for a very 0:03:50.040 --> 0:03:52.880 very long time. When you look at what's going on today, 0:03:53.200 --> 0:03:56.480 how remarkable is it too? I would say that a 0:03:56.600 --> 0:04:00.640 lot of these statistics that we use to cast things 0:04:00.680 --> 0:04:03.680 like housing activity, and by that we mean home sales 0:04:03.800 --> 0:04:06.880 or housing starts, as well as home prices, are at 0:04:06.960 --> 0:04:09.920 levels that we either haven't seen before, or if we've 0:04:09.920 --> 0:04:12.480 seen them, we haven't seen them for decades. I think 0:04:12.840 --> 0:04:15.760 you've already mentioned a few of the pretty important aspects 0:04:15.800 --> 0:04:18.640 of this, like when we think about the housing market 0:04:18.720 --> 0:04:20.720 and taking a step back, we have a four pillared 0:04:20.760 --> 0:04:26.400 view supply and demand, affordability and credit availability. Those first 0:04:26.440 --> 0:04:30.040 two we kind of think they're the larger structural, kind 0:04:30.040 --> 0:04:33.560 of underlying tides of the housing market. It's difficult to 0:04:33.680 --> 0:04:35.560 change them so much on a month to month or 0:04:35.560 --> 0:04:39.480 a year to year basis. Affordability and availability are those 0:04:39.520 --> 0:04:43.239 dials that determine kind of the shorter term changes to prices, 0:04:43.240 --> 0:04:46.560 to activity. And I think just to highlight one of them, 0:04:46.880 --> 0:04:51.800 housing affordability. It's deteriorating. Not only is affordability itself at 0:04:51.800 --> 0:04:54.120 a level we haven't seen in at least the past 0:04:54.200 --> 0:04:56.760 thirty to forty years when we're comfortable with the data, 0:04:57.120 --> 0:05:00.120 but the pace with which it's deteriorating. If we look 0:05:00.160 --> 0:05:02.440 at it over the past three months, over the past 0:05:02.520 --> 0:05:05.960 six months, over the past twelve months, we've never seen 0:05:06.600 --> 0:05:12.040 affordability deteriorate this quickly in the housing market. So how 0:05:12.160 --> 0:05:14.520 is it that housing prices are going to crash? Because 0:05:14.800 --> 0:05:17.240 if the price of a new thirty year mortgage in 0:05:17.279 --> 0:05:20.040 many cases, I mean, like I want to look it 0:05:20.120 --> 0:05:21.760 up because I wrote about it last week, but I think, 0:05:21.800 --> 0:05:25.560 like fifty a huge jump. Like what is would you? 0:05:25.560 --> 0:05:28.520 All right, let's start with that question, a what how 0:05:28.560 --> 0:05:31.240 do you? What is the jump or the decline and 0:05:31.279 --> 0:05:34.280 affordability like, how would you convey it what we've seen 0:05:34.760 --> 0:05:37.599 and how does how is like the market not going 0:05:37.680 --> 0:05:41.440 to crash with such an affordability shock. I think that's 0:05:41.560 --> 0:05:44.680 an incredibly important question because it is something we get 0:05:44.720 --> 0:05:48.200 asked so frequently as people they're short, like their memories 0:05:48.360 --> 0:05:51.400 go back to the Great Financial Crisis and they're seeing 0:05:52.240 --> 0:05:55.320 not similar trends and affordability deterioration. But that's the last 0:05:55.360 --> 0:05:57.839 time things were this significant, right, And so I think 0:05:58.279 --> 0:06:01.440 first of all, you asked the tent to the affordability deterioration. 0:06:03.040 --> 0:06:06.360 Home prices each of the past sixteen months would have 0:06:06.400 --> 0:06:08.480 been a record in year over year growth if we 0:06:08.480 --> 0:06:10.520 were comparing it to two thousand and four and two 0:06:10.520 --> 0:06:15.279 thousand five. We have significantly surpassed that. When you add 0:06:15.360 --> 0:06:18.080 mortgage rates up over three basis point since the beginning 0:06:18.080 --> 0:06:19.919 of the year, those things are going to combine to 0:06:20.160 --> 0:06:22.559 lead to the monthly mortgage payment on the median priced 0:06:22.560 --> 0:06:26.440 home up over fifty year over year. If we include 0:06:26.440 --> 0:06:29.560 incomes the kind of third variable on that affordability calculation, 0:06:30.400 --> 0:06:33.120 we're only a forty six percent year over year. So 0:06:33.360 --> 0:06:37.360 we've deteriorated incredibly substantially. The GFC that year over year 0:06:37.360 --> 0:06:41.400 deterioration never exceeded thirty We capped out in the twenties. 0:06:41.920 --> 0:06:45.480 But why we think home prices aren't going to crash here, 0:06:45.560 --> 0:06:48.480 Why we do think this time is different is because 0:06:48.520 --> 0:06:51.479 the question we have to ask after affordability deterioration is 0:06:52.040 --> 0:06:57.040 whose affordability just deteriorated. The structure of the mortgage market 0:06:57.080 --> 0:06:59.760 itself is very different today than when we compare it 0:06:59.760 --> 0:07:01.480 to two thousand four to two thousand and seven. If 0:07:01.480 --> 0:07:04.719 I were to just take one specific aspect of it, 0:07:04.720 --> 0:07:07.960 it's the overwhelming percentage of mortgages that are fixed rate. 0:07:08.600 --> 0:07:11.120 We think that over of the outstanding mortgage market is 0:07:11.120 --> 0:07:14.800 fixed rate. We were much more heavily skewed towards adjustable 0:07:14.840 --> 0:07:17.440 rate mortgages in the early two thousand's, and so as 0:07:17.480 --> 0:07:21.040 mortgage rates went higher, the monthly payment for current homeowners 0:07:21.080 --> 0:07:24.400 was resetting higher as well this time around, especially when 0:07:24.400 --> 0:07:28.560 you consider the record amount of mortgage regination volumes, the 0:07:28.600 --> 0:07:31.280 fact that we broke that for a new record amount 0:07:31.280 --> 0:07:34.160 of mortgage reginations, most of these homeowners were able to 0:07:34.200 --> 0:07:36.960 either buy their home or we finance their mortgage at 0:07:37.000 --> 0:07:41.440 historically low rates. Their affordability is locked in for thirty years. 0:07:42.400 --> 0:07:46.080 They're not seeing affordability deteriorate. This deterioration is coming for 0:07:46.720 --> 0:07:49.800 first time homebuyers perspective home buyers. That's where this sits. 0:07:50.000 --> 0:07:52.640 It's always the first time home buyers that seemed to 0:07:52.640 --> 0:07:54.760 be in the worst place, it feels like. But this 0:07:54.840 --> 0:07:57.440 is actually something I wanted to ask you. So, given 0:07:57.480 --> 0:08:02.360 the preponderance of fixed rate do higher rates basically just 0:08:02.440 --> 0:08:05.520 mean that people who got a good deal are going 0:08:05.560 --> 0:08:08.640 to be reluctant to sell, especially at a time when 0:08:08.680 --> 0:08:11.640 you know prices might be softening, but definitely at a 0:08:11.680 --> 0:08:13.960 time when they know that if they're going to take out, 0:08:14.040 --> 0:08:15.680 you know, another mortgage, it's going to be at a 0:08:15.720 --> 0:08:18.800 higher rate. Absolutely, and it's something we refer to as 0:08:18.840 --> 0:08:20.800 the lock in effect. They're kind of locked in at 0:08:20.800 --> 0:08:24.400 their current homes at these lower rates. And we mentioned 0:08:24.440 --> 0:08:27.480 housing activity versus home prices earlier. We do think this 0:08:27.560 --> 0:08:30.000 is going to lead to a different evolution of those 0:08:30.040 --> 0:08:33.520 two kind of paths of the housing market. Current homeowners 0:08:33.880 --> 0:08:35.800 in order to sell their home, and a lot of instances, 0:08:35.840 --> 0:08:37.640 would have to take out a mortgage that might be 0:08:37.679 --> 0:08:41.599 two dred fifty bases points higher than their current mortgage. 0:08:42.000 --> 0:08:44.760 That becomes prohibitively expensive when you combine it with how 0:08:44.840 --> 0:08:48.320 much equity they have in their homes. They're just not 0:08:48.400 --> 0:08:51.120 going to be willing to sell their home at the 0:08:51.160 --> 0:08:53.760 lower price point that might be more affordable for the 0:08:53.800 --> 0:08:56.880 first time home buyer. So what we think we're already seeing, 0:08:56.960 --> 0:09:00.240 what we anticipate continuing to see going forward, is that 0:09:00.320 --> 0:09:03.760 the inventory, the listings of existing homes available for sale. 0:09:03.880 --> 0:09:06.280 We have that data going back for single unit homes 0:09:06.480 --> 0:09:10.240 to the early nineties. It was never lower than it 0:09:10.320 --> 0:09:13.800 was in earlier this year. We've been increasing just a 0:09:13.920 --> 0:09:16.200 very little bit off the bottom for the past three months. 0:09:16.559 --> 0:09:18.680 But we think that they're going to keep listings tight, 0:09:19.120 --> 0:09:22.440 which will keep home prices more supported. Like if we 0:09:22.440 --> 0:09:25.719 think about Kase Shiller probably the most frequently quoted home 0:09:25.720 --> 0:09:29.040 price index, it uses something called to repeat sales methodology, 0:09:29.160 --> 0:09:30.680 So when a home is transacted, it looks at the 0:09:30.720 --> 0:09:32.960 last time that home was transacted, and so if we're 0:09:33.000 --> 0:09:36.080 not going to be selling those homes at lower prices 0:09:36.080 --> 0:09:39.360 than they were purchased, that's going to help support home 0:09:39.360 --> 0:09:42.800 price activity. But on the other side of this, it 0:09:42.840 --> 0:09:45.720 means that that existing homeowner is also not buying another 0:09:45.760 --> 0:09:47.880 home after they sell theirs, which we think is going 0:09:47.920 --> 0:09:51.280 to kind of exacerbate the decrease in sales volumes. So 0:09:51.320 --> 0:09:54.600 you can see a sharp drop in sales without necessarily 0:09:54.679 --> 0:09:59.119 that corresponding drop at home prices. So it's really I mean, obviously, 0:09:59.120 --> 0:10:01.360 if you're looking at the the first time home buyer, 0:10:01.440 --> 0:10:03.440 this is not a pleasant time. So it's a bad 0:10:03.480 --> 0:10:05.160 time to buy a home. It's a bad time to 0:10:05.240 --> 0:10:11.000 sell a home. So just for renters too, for homeowners, 0:10:11.040 --> 0:10:13.000 for renters, for everyone really, and it seems like it's 0:10:13.000 --> 0:10:15.640 a really bad time to be a broker or realtor. 0:10:15.720 --> 0:10:18.200 It seems like that is the space that's going to 0:10:18.320 --> 0:10:20.680 sort of like bear the burden of adjustment. You know. 0:10:20.720 --> 0:10:23.800 It's just interesting, getting back to like the price question. 0:10:24.240 --> 0:10:27.040 The two things that it seems like, going back to 0:10:27.080 --> 0:10:30.280 the housing crash that really for sales were a these 0:10:30.320 --> 0:10:34.760 mortgage resets, So suddenly affordable affordable mortgage becomes a less 0:10:34.760 --> 0:10:39.840 affordable mortgage and a deteriorating labor market. So if you 0:10:40.040 --> 0:10:42.040 get laid off and you don't have much equity in 0:10:42.040 --> 0:10:44.719 your home, you kind of have to sell it. It's 0:10:44.920 --> 0:10:47.600 neither of those are currently in place. We agree with 0:10:47.640 --> 0:10:51.120 that statement completely, right, I think that, And we've talked 0:10:51.120 --> 0:10:53.760 about affordability. The other pillar that was kind of the 0:10:53.800 --> 0:10:56.880 short term dial that we focus on is credit availability. Yeah. 0:10:56.920 --> 0:11:01.200 I think when people hear credit availability, especially with the GFC, 0:11:01.640 --> 0:11:04.800 in your mind, you go towards the borrow or characteristic 0:11:04.840 --> 0:11:06.920 piece of that. You go towards FICO scores, loan to 0:11:06.960 --> 0:11:09.600 value ratios, debt to income ratios. Right, the kind of 0:11:09.679 --> 0:11:12.920 characteristics that we like to think of when we're thinking 0:11:12.960 --> 0:11:15.400 about the probability of a mortgage defaulting or something along 0:11:15.400 --> 0:11:17.320 those lines, right eether the likelihood that it will prepay. 0:11:17.360 --> 0:11:19.720 On the other side of that, we don't capture the 0:11:19.760 --> 0:11:24.000 product aspect, the product risk aspect of credit availability as much. 0:11:24.200 --> 0:11:26.079 And that's what you just hit on. Right. You have 0:11:26.200 --> 0:11:30.439 this proliferation like the subprime mortgage back securities market, for instance, 0:11:30.800 --> 0:11:32.800 that got so large in two thousand four to two 0:11:32.800 --> 0:11:35.920 thousand seven. First of all, that market doesn't exist anymore, 0:11:36.200 --> 0:11:38.720 but a big characteristic of that market where things we 0:11:38.760 --> 0:11:43.680 called or short reset arms that were fixed at lower 0:11:43.760 --> 0:11:46.280 rates for two or three years before adjusting for the 0:11:46.280 --> 0:11:48.560 final twenty seven or twenty eight years of that mortgage 0:11:48.600 --> 0:11:51.199 is life. Those products made up a significant chunk of 0:11:51.200 --> 0:11:54.400 the mortgage market back then. They almost effectively do not 0:11:54.480 --> 0:11:58.359 exist today. And when you think about what that inherently 0:11:58.480 --> 0:12:01.800 asks owner to do, a mortgage to borrower to do 0:12:02.360 --> 0:12:05.120 is in month twenty five or thirty seven, when that 0:12:05.160 --> 0:12:07.360 payments about to change to a place that could be unaffordable, 0:12:07.440 --> 0:12:09.240 especially as the unemployment rate is creeping up and they 0:12:09.280 --> 0:12:11.760 may not have that income anymore. They need to be 0:12:11.800 --> 0:12:15.240 able to refinance that mortgage. If credit standards are tightening 0:12:15.280 --> 0:12:17.640 at the same time, if home prices have flattened out, 0:12:17.640 --> 0:12:19.040 if they've started to come down a little bit, and 0:12:19.080 --> 0:12:21.880 all of a sudden there isn't excess equity in the house, 0:12:22.360 --> 0:12:24.360 all of a sudden, that refinance is not going to 0:12:24.400 --> 0:12:26.880 be feasible for that borrow where and they're effectively in 0:12:26.960 --> 0:12:29.120 a place where it's going to be very difficult for 0:12:29.160 --> 0:12:31.840 them to make that monthly payment. Because those products don't 0:12:31.840 --> 0:12:34.360 exist anymore. You just do not have those resets. You 0:12:34.400 --> 0:12:38.199 don't have a homeowner that's reliance upon the credit availability 0:12:38.240 --> 0:12:42.680 environment going forward, and credit availability it tightened, we gave 0:12:42.760 --> 0:12:45.480 up six years worth of easing in the six months 0:12:45.679 --> 0:12:48.560 after the onset of COVID in March, where at the 0:12:48.559 --> 0:12:52.760 tightest levels we've been in effectively twenty years. And if anything, 0:12:53.360 --> 0:12:57.120 because of risk weighted asset stresses at large banks, we 0:12:57.160 --> 0:12:59.520 think the pathroom here might even be towards tighter lending standards. 0:13:00.080 --> 0:13:04.480 So the equality of mortgage credit is incredibly healthy. UM, 0:13:04.520 --> 0:13:07.760 we don't think that because of the lack of reliance 0:13:07.760 --> 0:13:09.880 of homeowners on the ability to refinance, we don't know 0:13:09.920 --> 0:13:12.120 that's going to force them into defaults and foreclosures. But 0:13:12.160 --> 0:13:14.160 that also means that we think that the risk of 0:13:14.160 --> 0:13:17.400 a dramatic increase to defaults and foreclosures that could we 0:13:17.400 --> 0:13:19.679 think about what could bring home prices down. It's those 0:13:19.720 --> 0:13:28.000 distressed transactions, those forced sellers. UM. Divorce is very distressing. 0:13:28.400 --> 0:13:31.360 I want to get into distress sellers. But just before 0:13:31.360 --> 0:13:33.520 we do. The other thing I think about when I 0:13:33.559 --> 0:13:37.400 think about pre two thousand eight housing and the subprime 0:13:37.440 --> 0:13:40.800 crisis is I think about inventory, and the housing market 0:13:40.920 --> 0:13:44.320 was so hot, credit, as you just described, was so ample. 0:13:44.480 --> 0:13:46.520 Everyone could get alone. You know, there are all those 0:13:46.520 --> 0:13:49.480 scenes from that big short movie about going down to 0:13:49.520 --> 0:13:52.760 Florida and everyone has like five properties. But the other 0:13:52.800 --> 0:13:55.120 thing I think about is just lots of homes getting 0:13:55.120 --> 0:13:59.960 built in that environment. How are you viewing the inventor 0:14:00.080 --> 0:14:02.559 or question at the moment and how does that feed 0:14:02.600 --> 0:14:06.600 into your housing forecasts. We think it's one of, if 0:14:06.640 --> 0:14:09.240 not the most important statistic right now. When we think 0:14:09.280 --> 0:14:13.720 about inventories, we view it from from three angles. There's 0:14:13.800 --> 0:14:17.080 you mentioned homebuilding, there's the new inventory, there's the listing 0:14:17.080 --> 0:14:19.800 we talked about, the lack in effect existing inventories, and 0:14:19.840 --> 0:14:22.840 then there's what we call shadow inventory or distressed Those 0:14:22.840 --> 0:14:25.400 are those defaults and foreclosures. That's what you would need 0:14:25.680 --> 0:14:28.560 to really provide kind of downward momentum for big year 0:14:28.600 --> 0:14:31.160 over year decreases and home prices. As I mentioned, because 0:14:31.160 --> 0:14:33.480 of credit availability, who we don't think that last piece 0:14:33.520 --> 0:14:35.440 is going to play a material role in this cycle. 0:14:35.520 --> 0:14:39.400 So you think about the other two existing inventories. We 0:14:39.440 --> 0:14:43.400 already mentioned the lack in effect. One statistic that we've 0:14:43.440 --> 0:14:46.600 been thrown or we've been discussing a lot recently is 0:14:46.600 --> 0:14:50.400 months of supply. Now, months of supply has been despite 0:14:50.400 --> 0:14:55.280 how low inventories are, the fastest increasing piece of the 0:14:55.320 --> 0:14:57.600 inventory metric universe, if you will, And the reason for 0:14:57.640 --> 0:15:01.120 that is because it's it's an equation. The numerators inventories 0:15:01.480 --> 0:15:04.800 started to increase a little bit from their all time lows, 0:15:04.960 --> 0:15:09.240 the denominator of sales sales volumes have already pulled back materially. Right. 0:15:09.320 --> 0:15:12.960 So months of supply is the number of months that 0:15:13.040 --> 0:15:16.080 it would take for the existing inventory to get sold 0:15:16.200 --> 0:15:20.160 at the current sales pace, exactly. And if we think 0:15:20.160 --> 0:15:22.360 about the absolute level of months of supply right now, 0:15:22.560 --> 0:15:25.160 we're sitting right around four. And that's total months of 0:15:25.160 --> 0:15:27.840 supply for units for sale for both existing and new 0:15:28.040 --> 0:15:31.480 versus total new and existing home sales, right, and that 0:15:31.600 --> 0:15:34.360 number the general rule of them is if you're below 0:15:34.920 --> 0:15:38.480 six months of supply, then that's a tight inventory market. Right. 0:15:38.520 --> 0:15:42.040 That is theoretically going to be a seller's market because 0:15:42.040 --> 0:15:44.920 there's more demand than there is supply of those homes. 0:15:45.360 --> 0:15:49.000 And that historically has seemed to hold true. If we 0:15:49.040 --> 0:15:52.400 look at total months of supply going back to today, 0:15:52.800 --> 0:15:55.200 whenever months of supply has been below six, and again 0:15:55.200 --> 0:15:58.480 we're at four right now. Home prices have continued to 0:15:58.520 --> 0:16:00.840 be climbing six months forward, and that is one hundred 0:16:00.840 --> 0:16:05.000 that has been the case of the time. How low 0:16:05.400 --> 0:16:07.560 could it go? So I'm just looking at the last 0:16:07.840 --> 0:16:09.360 and you know, this is what's so fun about how 0:16:09.440 --> 0:16:11.200 is it is there's just a million ways to slice 0:16:11.200 --> 0:16:13.000 and dice this, But I'm just looking at the last. 0:16:13.040 --> 0:16:17.360 Like existing home sales for August seasonally adjusted annualized rate 0:16:17.400 --> 0:16:20.000 four point eight million, but like that's a still bit 0:16:20.080 --> 0:16:22.640 higher than uh, you know, that's higher than it was 0:16:22.680 --> 0:16:26.640 in couldn't continue to go substantially lower from here? And 0:16:26.840 --> 0:16:30.000 if this divergence that you're talking about where activity and 0:16:30.120 --> 0:16:33.440 prices diverged, how extreme could that get? Yes, so we 0:16:33.560 --> 0:16:35.360 do think that it will continue to go lower from 0:16:35.360 --> 0:16:39.280 here with current homeowners locked in with affordability pressures for 0:16:39.720 --> 0:16:42.160 from new home buyers. In fact, if we look at 0:16:42.200 --> 0:16:46.360 the affordability deterioration, we comp that to the Great Financial Crisis. 0:16:46.440 --> 0:16:49.160 It's been worse, it's been faster. But if we kind 0:16:49.160 --> 0:16:53.080 of index both periods to win the affordability deterioration really started, 0:16:53.480 --> 0:16:56.200 we're out pacing the Great Financial Crisis to the downside 0:16:56.520 --> 0:16:59.040 in terms of how fast sales have have fallen. We 0:16:59.120 --> 0:17:02.760 think that the conditions that we've talked about could allow 0:17:02.800 --> 0:17:05.040 that to remain the case for at least the next 0:17:05.440 --> 0:17:07.919 six to twelve months. Our existing home sales forecast in 0:17:07.920 --> 0:17:12.359 our base case have us falling basically to below levels, 0:17:12.400 --> 0:17:13.960 so not getting We don't think that the peak to 0:17:14.040 --> 0:17:16.040 trough will be as substantial as it was during the 0:17:16.040 --> 0:17:19.119 Great Financial Crisis, so we're not entertaining those levels. But 0:17:19.160 --> 0:17:22.600 you mentioned right now we can see it coming down 0:17:22.640 --> 0:17:42.000 about levels in the base case. What kind of supply 0:17:42.200 --> 0:17:45.400 response would you expect from the home builders in this 0:17:45.520 --> 0:17:48.840 kind of environment. So you know, people have been talking 0:17:48.880 --> 0:17:51.880 about the US being structurally short on housing for many 0:17:51.960 --> 0:17:54.320 years now, but at the same time interest rates are 0:17:54.359 --> 0:17:57.280 going up. There's this big question mark over the future 0:17:57.320 --> 0:18:00.920 of the market. As we've been discussing, would you expect 0:18:00.920 --> 0:18:04.320 them to ramp up production in that environment? It seems unlikely. 0:18:04.480 --> 0:18:06.359 We agree with the final piece of that statement. We 0:18:06.400 --> 0:18:08.879 do think that it is unlikely right now. We agree 0:18:09.200 --> 0:18:12.600 structurally short supply right now, we have estimates on that. 0:18:12.720 --> 0:18:15.959 We wanted to be conservative two million units underbuilt. If 0:18:15.960 --> 0:18:17.480 we wanted to be a little bit more aggressive in 0:18:17.480 --> 0:18:20.920 our assumptions, we can get that numbered six million units underbuild. 0:18:21.080 --> 0:18:24.919 You would think that that would call for a higher 0:18:25.560 --> 0:18:27.080 rate of home building. And by the way, those estimates 0:18:27.119 --> 0:18:30.120 are for both single unit and multi unit housing holistically. 0:18:30.800 --> 0:18:35.000 But we're seeing some interesting dynamics there. Builders have been 0:18:35.080 --> 0:18:38.680 responding to what had been record growth and home prices, 0:18:39.040 --> 0:18:42.480 this tight inventory environment. Building single unit building in particular 0:18:42.560 --> 0:18:46.720 increased pretty spectacularly in the immediate aftermath of COVID. In fact, 0:18:46.920 --> 0:18:49.120 we hit all time lows. The data there goes back 0:18:49.160 --> 0:18:51.960 to that we use in kind of the winter of 0:18:52.960 --> 0:18:55.200 So this was kind of a final pop after almost 0:18:55.240 --> 0:19:00.119 a decade of growth in building volumes. But now we 0:19:00.119 --> 0:19:03.680 we've plateaued, and you mentioned a little bit earlier, Tracy, 0:19:04.600 --> 0:19:07.560 the difference in building volumes today versus the great financial crisis. 0:19:08.359 --> 0:19:10.720 Let's level set with what that decade of growth and 0:19:10.720 --> 0:19:13.480 building has where that's brought us. If I look at 0:19:13.520 --> 0:19:17.800 twelve months trailing single unit starts, we're only back to levels. 0:19:17.840 --> 0:19:19.800 So we haven't crossed the two thousand We haven't. We 0:19:19.800 --> 0:19:21.919 haven't gotten to two thousand two or the real building 0:19:21.960 --> 0:19:24.960 pop in oh, four oh five or six. But because 0:19:25.000 --> 0:19:27.560 of things like supply chain issues we talked about labor 0:19:27.560 --> 0:19:31.119 market issues very briefly earlier. The units under construction, we 0:19:31.160 --> 0:19:33.240 pay so much attention to starts. We pay so much 0:19:33.240 --> 0:19:37.200 attention to completions, the time in between those when the 0:19:37.200 --> 0:19:39.480 shovel's broken ground, but you haven't finished the home yet. 0:19:39.520 --> 0:19:43.080 Because of these backlogs, single unit starts back to levels, 0:19:43.320 --> 0:19:46.280 units under construction back to two thousand four levels, so 0:19:46.320 --> 0:19:47.879 you do have a little bit of a backlog that 0:19:47.920 --> 0:19:50.439 needs to be cleared. We do think that this is 0:19:50.480 --> 0:19:53.360 going to when you combine it with affordability pressures when 0:19:53.359 --> 0:19:57.280 you can buy, which is exaggerated by the mortgage rate moves. 0:19:57.560 --> 0:19:59.360 We think this is going to lead builders to pull back. 0:19:59.359 --> 0:20:01.280 We think single IT starts are going to come down 0:20:01.520 --> 0:20:03.680 pretty sharply in the fourth quarter. We think they're gonna 0:20:03.680 --> 0:20:07.960 be downe compared to so so we don't think that 0:20:08.040 --> 0:20:11.720 it's as strong environment for that behavior. Yeah, I'm looking 0:20:11.760 --> 0:20:13.840 at the well, I'm actually I pulled up a chart 0:20:13.880 --> 0:20:17.800 of multi family units under currently under construction. It's one 0:20:17.800 --> 0:20:20.199 of the few lines in housing that is still like 0:20:20.240 --> 0:20:22.480 a straight up right because I guess it's just so 0:20:22.520 --> 0:20:25.879 slow with the process of building all these things that 0:20:26.200 --> 0:20:28.280 they're still they're still getting done. I guess if you 0:20:28.280 --> 0:20:32.040 start a new construction, you finish it we'd like to 0:20:32.040 --> 0:20:34.040 believe that it once you break ground, that you're going 0:20:34.080 --> 0:20:36.119 to make your way towards finishing and at least some 0:20:36.160 --> 0:20:38.160 point in the future. And you're right, the multi unit 0:20:38.240 --> 0:20:41.560 under construction that there's one of the charts we see 0:20:41.560 --> 0:20:44.320 pretty frequently is total units under construction is finally passed 0:20:44.640 --> 0:20:47.359 the Great Financial Crisis, And we do think that you 0:20:47.400 --> 0:20:48.840 have to take a step back and look at this 0:20:48.960 --> 0:20:52.399 single unit versus multi unit narrative. Single unit, as I 0:20:52.440 --> 0:20:55.439 mentioned back to oh four multi unit, I believe the 0:20:55.480 --> 0:20:59.320 numbers back to where it was in the ninety's it 0:20:59.400 --> 0:21:03.480 is looking now looking at single family. Um, yeah, it 0:21:03.520 --> 0:21:05.879 looks like I guess back to for you know, I 0:21:05.920 --> 0:21:08.400 was in Dallas recently and the number of multi family 0:21:08.520 --> 0:21:11.720 homes being like that happened built there, and it's just 0:21:12.440 --> 0:21:14.160