Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe Wise. Joe, there's nothing
Speaker 1: better than a good chart. Let's see what chart do
Speaker 1: you have for us today? What chart are you going
Speaker 1: to ask listeners to visualize in their minds since they
Speaker 1: can't actually probably like look at it right now, what
Speaker 1: chart should they be thinking about. I actually have a
Speaker 1: bunch in mind, like there are some extreme charts at
Speaker 1: the moment, given everything that's been happening with markets. I'm
Speaker 1: thinking in particular, you know, bond market volatility, what we
Speaker 1: saw with sterling and guilts very recently. But if you're
Speaker 1: looking for the most interesting charts at the moment, I
Speaker 1: gotta say, I really think the housing market and the
Speaker 1: mortgage market are where it's at. I completely agree with you.
Speaker 1: And you know, like, look, the FED is raising rates
Speaker 1: to slow down the economy to beat inflation, but the
Speaker 1: number one sector of the economy that's most sensitive to
Speaker 1: rate very directly is housing. And so you just see
Speaker 1: some insane charts. We've been posting a bunch, but if
Speaker 1: you know, you know, look at the price of a
Speaker 1: new thirty year mortgage, just like through the roof compared
Speaker 1: to six months ago. So many things like that, And
Speaker 1: you know, housing is so crucial right to the overall economy.
Speaker 1: Everyone wants to buy one or wants to live in one.
Speaker 1: And what does it mean when these numbers are moving
Speaker 1: so fast so hard? Right, Well, everyone also has an
Speaker 1: opinion on warehousing is going. But you know, you mentioned
Speaker 1: a couple of those charts you can look at pretty
Speaker 1: much anything, Like the pure acceleration in mortgage rates has
Speaker 1: been unprecedented, The spread between mortgages and the tenure U S.
Speaker 1: Treasury is now at a record, Housing affordabilities at a
Speaker 1: record though, Like there are so many you can choose from,
Speaker 1: but it really feels like, given the unusual nous of
Speaker 1: the situation and what we're seeing in some of these charts,
Speaker 1: it feels like there's a lot of uncertainties. So, yes,
Speaker 1: everyone would expect higher interest rates to have a negative
Speaker 1: impact on the housing market, but we've also been talking
Speaker 1: about how there's low inventory and you know, there's a
Speaker 1: structural need for more housing in the US, so maybe
Speaker 1: things are different this time. It's a really weird market
Speaker 1: because you know, I think everybody is still kind of
Speaker 1: scarred from the Great Financial crisis, and you see these
Speaker 1: huge moves. You know, well, our house prices don't they
Speaker 1: have to fall off a cliff. And yet if no
Speaker 1: one is forced to sell, what's going to happen? Is
Speaker 1: the housing market just gonna go away, like no transactions
Speaker 1: except for people who like you know, get divorced or
Speaker 1: like have to prove or something like that. Like seriously,
Speaker 1: it seems like a possibility. So much weirdness. You know,
Speaker 1: pull up a chart of like how many people are
Speaker 1: refined their mortgage. I mean it's basically the closest thing
Speaker 1: you find to like zero and a chart like no
Speaker 1: one is refined with mortgages that yeah at seven percent
Speaker 1: or whatever. I thought you were going to mention the reats,
Speaker 1: which is another good chart as well. So there are
Speaker 1: big questions about this market and it does. Yeah. And
Speaker 1: the other thing going on is you have a lot
Speaker 1: of people talking about market structure issues, so how mortgage
Speaker 1: rates are actually set, what's going on in the market
Speaker 1: for mortgage backed securities. A lot of people have been saying, oh,
Speaker 1: there's you know, it's broken, there's something going on. So
Speaker 1: I am very pleased to say we are going to
Speaker 1: get into all of these issues, or at least try to,
Speaker 1: because there is a lot of uncertainty, and we really
Speaker 1: do have the perfect guest. Let's do it. I'm really excited.
Speaker 1: I have so many questions. Let's get god. Okay, we
Speaker 1: are going to be speaking with Jim Egan. He is
Speaker 1: Morgan Stanley's US housing strategist and does some great research
Speaker 1: on all of these topics. So, Jim, thank you so
Speaker 1: much for coming on. Thank you so much for having me.
Speaker 1: It's an honor to be here. So maybe just to
Speaker 1: begin with, we should talk about is this environment that unusual?
Speaker 1: You know, you've been analyzing US housing for a very
Speaker 1: very long time. When you look at what's going on today,
Speaker 1: how remarkable is it too? I would say that a
Speaker 1: lot of these statistics that we use to cast things
Speaker 1: like housing activity, and by that we mean home sales
Speaker 1: or housing starts, as well as home prices, are at
Speaker 1: levels that we either haven't seen before, or if we've
Speaker 1: seen them, we haven't seen them for decades. I think
Speaker 1: you've already mentioned a few of the pretty important aspects
Speaker 1: of this, like when we think about the housing market
Speaker 1: and taking a step back, we have a four pillared
Speaker 1: view supply and demand, affordability and credit availability. Those first
Speaker 1: two we kind of think they're the larger structural, kind
Speaker 1: of underlying tides of the housing market. It's difficult to
Speaker 1: change them so much on a month to month or
Speaker 1: a year to year basis. Affordability and availability are those
Speaker 1: dials that determine kind of the shorter term changes to prices,
Speaker 1: to activity. And I think just to highlight one of them,
Speaker 1: housing affordability. It's deteriorating. Not only is affordability itself at
Speaker 1: a level we haven't seen in at least the past
Speaker 1: thirty to forty years when we're comfortable with the data,
Speaker 1: but the pace with which it's deteriorating. If we look
Speaker 1: at it over the past three months, over the past
Speaker 1: six months, over the past twelve months, we've never seen
Speaker 1: affordability deteriorate this quickly in the housing market. So how
Speaker 1: is it that housing prices are going to crash? Because
Speaker 1: if the price of a new thirty year mortgage in
Speaker 1: many cases, I mean, like I want to look it
Speaker 1: up because I wrote about it last week, but I think,
Speaker 1: like fifty a huge jump. Like what is would you?
Speaker 1: All right, let's start with that question, a what how
Speaker 1: do you? What is the jump or the decline and
Speaker 1: affordability like, how would you convey it what we've seen
Speaker 1: and how does how is like the market not going
Speaker 1: to crash with such an affordability shock. I think that's
Speaker 1: an incredibly important question because it is something we get
Speaker 1: asked so frequently as people they're short, like their memories
Speaker 1: go back to the Great Financial Crisis and they're seeing
Speaker 1: not similar trends and affordability deterioration. But that's the last
Speaker 1: time things were this significant, right, And so I think
Speaker 1: first of all, you asked the tent to the affordability deterioration.
Speaker 1: Home prices each of the past sixteen months would have
Speaker 1: been a record in year over year growth if we
Speaker 1: were comparing it to two thousand and four and two
Speaker 1: thousand five. We have significantly surpassed that. When you add
Speaker 1: mortgage rates up over three basis point since the beginning
Speaker 1: of the year, those things are going to combine to
Speaker 1: lead to the monthly mortgage payment on the median priced
Speaker 1: home up over fifty year over year. If we include
Speaker 1: incomes the kind of third variable on that affordability calculation,
Speaker 1: we're only a forty six percent year over year. So
Speaker 1: we've deteriorated incredibly substantially. The GFC that year over year
Speaker 1: deterioration never exceeded thirty We capped out in the twenties.
Speaker 1: But why we think home prices aren't going to crash here,
Speaker 1: Why we do think this time is different is because
Speaker 1: the question we have to ask after affordability deterioration is
Speaker 1: whose affordability just deteriorated. The structure of the mortgage market
Speaker 1: itself is very different today than when we compare it
Speaker 1: to two thousand four to two thousand and seven. If
Speaker 1: I were to just take one specific aspect of it,
Speaker 1: it's the overwhelming percentage of mortgages that are fixed rate.
Speaker 1: We think that over of the outstanding mortgage market is
Speaker 1: fixed rate. We were much more heavily skewed towards adjustable
Speaker 1: rate mortgages in the early two thousand's, and so as
Speaker 1: mortgage rates went higher, the monthly payment for current homeowners
Speaker 1: was resetting higher as well this time around, especially when
Speaker 1: you consider the record amount of mortgage regination volumes, the
Speaker 1: fact that we broke that for a new record amount
Speaker 1: of mortgage reginations, most of these homeowners were able to
Speaker 1: either buy their home or we finance their mortgage at
Speaker 1: historically low rates. Their affordability is locked in for thirty years.
Speaker 1: They're not seeing affordability deteriorate. This deterioration is coming for
Speaker 1: first time homebuyers perspective home buyers. That's where this sits.
Speaker 1: It's always the first time home buyers that seemed to
Speaker 1: be in the worst place, it feels like. But this
Speaker 1: is actually something I wanted to ask you. So, given
Speaker 1: the preponderance of fixed rate do higher rates basically just
Speaker 1: mean that people who got a good deal are going
Speaker 1: to be reluctant to sell, especially at a time when
Speaker 1: you know prices might be softening, but definitely at a
Speaker 1: time when they know that if they're going to take out,
Speaker 1: you know, another mortgage, it's going to be at a
Speaker 1: higher rate. Absolutely, and it's something we refer to as
Speaker 1: the lock in effect. They're kind of locked in at
Speaker 1: their current homes at these lower rates. And we mentioned
Speaker 1: housing activity versus home prices earlier. We do think this
Speaker 1: is going to lead to a different evolution of those
Speaker 1: two kind of paths of the housing market. Current homeowners
Speaker 1: in order to sell their home, and a lot of instances,
Speaker 1: would have to take out a mortgage that might be
Speaker 1: two dred fifty bases points higher than their current mortgage.
Speaker 1: That becomes prohibitively expensive when you combine it with how
Speaker 1: much equity they have in their homes. They're just not
Speaker 1: going to be willing to sell their home at the
Speaker 1: lower price point that might be more affordable for the
Speaker 1: first time home buyer. So what we think we're already seeing,
Speaker 1: what we anticipate continuing to see going forward, is that
Speaker 1: the inventory, the listings of existing homes available for sale.
Speaker 1: We have that data going back for single unit homes
Speaker 1: to the early nineties. It was never lower than it
Speaker 1: was in earlier this year. We've been increasing just a
Speaker 1: very little bit off the bottom for the past three months.
Speaker 1: But we think that they're going to keep listings tight,
Speaker 1: which will keep home prices more supported. Like if we
Speaker 1: think about Kase Shiller probably the most frequently quoted home
Speaker 1: price index, it uses something called to repeat sales methodology,
Speaker 1: So when a home is transacted, it looks at the
Speaker 1: last time that home was transacted, and so if we're
Speaker 1: not going to be selling those homes at lower prices
Speaker 1: than they were purchased, that's going to help support home
Speaker 1: price activity. But on the other side of this, it
Speaker 1: means that that existing homeowner is also not buying another
Speaker 1: home after they sell theirs, which we think is going
Speaker 1: to kind of exacerbate the decrease in sales volumes. So
Speaker 1: you can see a sharp drop in sales without necessarily
Speaker 1: that corresponding drop at home prices. So it's really I mean, obviously,
Speaker 1: if you're looking at the the first time home buyer,
Speaker 1: this is not a pleasant time. So it's a bad
Speaker 1: time to buy a home. It's a bad time to
Speaker 1: sell a home. So just for renters too, for homeowners,
Speaker 1: for renters, for everyone really, and it seems like it's
Speaker 1: a really bad time to be a broker or realtor.
Speaker 1: It seems like that is the space that's going to
Speaker 1: sort of like bear the burden of adjustment. You know.
Speaker 1: It's just interesting, getting back to like the price question.
Speaker 1: The two things that it seems like, going back to
Speaker 1: the housing crash that really for sales were a these
Speaker 1: mortgage resets, So suddenly affordable affordable mortgage becomes a less
Speaker 1: affordable mortgage and a deteriorating labor market. So if you
Speaker 1: get laid off and you don't have much equity in
Speaker 1: your home, you kind of have to sell it. It's
Speaker 1: neither of those are currently in place. We agree with
Speaker 1: that statement completely, right, I think that, And we've talked
Speaker 1: about affordability. The other pillar that was kind of the
Speaker 1: short term dial that we focus on is credit availability. Yeah.
Speaker 1: I think when people hear credit availability, especially with the GFC,
Speaker 1: in your mind, you go towards the borrow or characteristic
Speaker 1: piece of that. You go towards FICO scores, loan to
Speaker 1: value ratios, debt to income ratios. Right, the kind of
Speaker 1: characteristics that we like to think of when we're thinking
Speaker 1: about the probability of a mortgage defaulting or something along
Speaker 1: those lines, right eether the likelihood that it will prepay.
Speaker 1: On the other side of that, we don't capture the
Speaker 1: product aspect, the product risk aspect of credit availability as much.
Speaker 1: And that's what you just hit on. Right. You have
Speaker 1: this proliferation like the subprime mortgage back securities market, for instance,
Speaker 1: that got so large in two thousand four to two
Speaker 1: thousand seven. First of all, that market doesn't exist anymore,
Speaker 1: but a big characteristic of that market where things we
Speaker 1: called or short reset arms that were fixed at lower
Speaker 1: rates for two or three years before adjusting for the
Speaker 1: final twenty seven or twenty eight years of that mortgage
Speaker 1: is life. Those products made up a significant chunk of
Speaker 1: the mortgage market back then. They almost effectively do not
Speaker 1: exist today. And when you think about what that inherently
Speaker 1: asks owner to do, a mortgage to borrower to do
Speaker 1: is in month twenty five or thirty seven, when that
Speaker 1: payments about to change to a place that could be unaffordable,
Speaker 1: especially as the unemployment rate is creeping up and they
Speaker 1: may not have that income anymore. They need to be
Speaker 1: able to refinance that mortgage. If credit standards are tightening
Speaker 1: at the same time, if home prices have flattened out,
Speaker 1: if they've started to come down a little bit, and
Speaker 1: all of a sudden there isn't excess equity in the house,
Speaker 1: all of a sudden, that refinance is not going to
Speaker 1: be feasible for that borrow where and they're effectively in
Speaker 1: a place where it's going to be very difficult for
Speaker 1: them to make that monthly payment. Because those products don't
Speaker 1: exist anymore. You just do not have those resets. You
Speaker 1: don't have a homeowner that's reliance upon the credit availability
Speaker 1: environment going forward, and credit availability it tightened, we gave
Speaker 1: up six years worth of easing in the six months
Speaker 1: after the onset of COVID in March, where at the
Speaker 1: tightest levels we've been in effectively twenty years. And if anything,
Speaker 1: because of risk weighted asset stresses at large banks, we
Speaker 1: think the pathroom here might even be towards tighter lending standards.
Speaker 1: So the equality of mortgage credit is incredibly healthy. UM,
Speaker 1: we don't think that because of the lack of reliance
Speaker 1: of homeowners on the ability to refinance, we don't know
Speaker 1: that's going to force them into defaults and foreclosures. But
Speaker 1: that also means that we think that the risk of
Speaker 1: a dramatic increase to defaults and foreclosures that could we
Speaker 1: think about what could bring home prices down. It's those
Speaker 1: distressed transactions, those forced sellers. UM. Divorce is very distressing.
Speaker 1: I want to get into distress sellers. But just before
Speaker 1: we do. The other thing I think about when I
Speaker 1: think about pre two thousand eight housing and the subprime
Speaker 1: crisis is I think about inventory, and the housing market
Speaker 1: was so hot, credit, as you just described, was so ample.
Speaker 1: Everyone could get alone. You know, there are all those
Speaker 1: scenes from that big short movie about going down to
Speaker 1: Florida and everyone has like five properties. But the other
Speaker 1: thing I think about is just lots of homes getting
Speaker 1: built in that environment. How are you viewing the inventor
Speaker 1: or question at the moment and how does that feed
Speaker 1: into your housing forecasts. We think it's one of, if
Speaker 1: not the most important statistic right now. When we think
Speaker 1: about inventories, we view it from from three angles. There's
Speaker 1: you mentioned homebuilding, there's the new inventory, there's the listing
Speaker 1: we talked about, the lack in effect existing inventories, and
Speaker 1: then there's what we call shadow inventory or distressed Those
Speaker 1: are those defaults and foreclosures. That's what you would need
Speaker 1: to really provide kind of downward momentum for big year
Speaker 1: over year decreases and home prices. As I mentioned, because
Speaker 1: of credit availability, who we don't think that last piece
Speaker 1: is going to play a material role in this cycle.
Speaker 1: So you think about the other two existing inventories. We
Speaker 1: already mentioned the lack in effect. One statistic that we've
Speaker 1: been thrown or we've been discussing a lot recently is
Speaker 1: months of supply. Now, months of supply has been despite
Speaker 1: how low inventories are, the fastest increasing piece of the
Speaker 1: inventory metric universe, if you will, And the reason for
Speaker 1: that is because it's it's an equation. The numerators inventories
Speaker 1: started to increase a little bit from their all time lows,
Speaker 1: the denominator of sales sales volumes have already pulled back materially. Right.
Speaker 1: So months of supply is the number of months that
Speaker 1: it would take for the existing inventory to get sold
Speaker 1: at the current sales pace, exactly. And if we think
Speaker 1: about the absolute level of months of supply right now,
Speaker 1: we're sitting right around four. And that's total months of
Speaker 1: supply for units for sale for both existing and new
Speaker 1: versus total new and existing home sales, right, and that
Speaker 1: number the general rule of them is if you're below
Speaker 1: six months of supply, then that's a tight inventory market. Right.
Speaker 1: That is theoretically going to be a seller's market because
Speaker 1: there's more demand than there is supply of those homes.
Speaker 1: And that historically has seemed to hold true. If we
Speaker 1: look at total months of supply going back to today,
Speaker 1: whenever months of supply has been below six, and again
Speaker 1: we're at four right now. Home prices have continued to
Speaker 1: be climbing six months forward, and that is one hundred
Speaker 1: that has been the case of the time. How low
Speaker 1: could it go? So I'm just looking at the last
Speaker 1: and you know, this is what's so fun about how
Speaker 1: is it is there's just a million ways to slice
Speaker 1: and dice this, But I'm just looking at the last.
Speaker 1: Like existing home sales for August seasonally adjusted annualized rate
Speaker 1: four point eight million, but like that's a still bit
Speaker 1: higher than uh, you know, that's higher than it was
Speaker 1: in couldn't continue to go substantially lower from here? And
Speaker 1: if this divergence that you're talking about where activity and
Speaker 1: prices diverged, how extreme could that get? Yes, so we
Speaker 1: do think that it will continue to go lower from
Speaker 1: here with current homeowners locked in with affordability pressures for
Speaker 1: from new home buyers. In fact, if we look at
Speaker 1: the affordability deterioration, we comp that to the Great Financial Crisis.
Speaker 1: It's been worse, it's been faster. But if we kind
Speaker 1: of index both periods to win the affordability deterioration really started,
Speaker 1: we're out pacing the Great Financial Crisis to the downside
Speaker 1: in terms of how fast sales have have fallen. We
Speaker 1: think that the conditions that we've talked about could allow
Speaker 1: that to remain the case for at least the next
Speaker 1: six to twelve months. Our existing home sales forecast in
Speaker 1: our base case have us falling basically to below levels,
Speaker 1: so not getting We don't think that the peak to
Speaker 1: trough will be as substantial as it was during the
Speaker 1: Great Financial Crisis, so we're not entertaining those levels. But
Speaker 1: you mentioned right now we can see it coming down
Speaker 1: about levels in the base case. What kind of supply
Speaker 1: response would you expect from the home builders in this
Speaker 1: kind of environment. So you know, people have been talking
Speaker 1: about the US being structurally short on housing for many
Speaker 1: years now, but at the same time interest rates are
Speaker 1: going up. There's this big question mark over the future
Speaker 1: of the market. As we've been discussing, would you expect
Speaker 1: them to ramp up production in that environment? It seems unlikely.
Speaker 1: We agree with the final piece of that statement. We
Speaker 1: do think that it is unlikely right now. We agree
Speaker 1: structurally short supply right now, we have estimates on that.
Speaker 1: We wanted to be conservative two million units underbuilt. If
Speaker 1: we wanted to be a little bit more aggressive in
Speaker 1: our assumptions, we can get that numbered six million units underbuild.
Speaker 1: You would think that that would call for a higher
Speaker 1: rate of home building. And by the way, those estimates
Speaker 1: are for both single unit and multi unit housing holistically.
Speaker 1: But we're seeing some interesting dynamics there. Builders have been
Speaker 1: responding to what had been record growth and home prices,
Speaker 1: this tight inventory environment. Building single unit building in particular
Speaker 1: increased pretty spectacularly in the immediate aftermath of COVID. In fact,
Speaker 1: we hit all time lows. The data there goes back
Speaker 1: to that we use in kind of the winter of
Speaker 1: So this was kind of a final pop after almost
Speaker 1: a decade of growth in building volumes. But now we
Speaker 1: we've plateaued, and you mentioned a little bit earlier, Tracy,
Speaker 1: the difference in building volumes today versus the great financial crisis.
Speaker 1: Let's level set with what that decade of growth and
Speaker 1: building has where that's brought us. If I look at
Speaker 1: twelve months trailing single unit starts, we're only back to levels.
Speaker 1: So we haven't crossed the two thousand We haven't. We
Speaker 1: haven't gotten to two thousand two or the real building
Speaker 1: pop in oh, four oh five or six. But because
Speaker 1: of things like supply chain issues we talked about labor
Speaker 1: market issues very briefly earlier. The units under construction, we
Speaker 1: pay so much attention to starts. We pay so much
Speaker 1: attention to completions, the time in between those when the
Speaker 1: shovel's broken ground, but you haven't finished the home yet.
Speaker 1: Because of these backlogs, single unit starts back to levels,
Speaker 1: units under construction back to two thousand four levels, so
Speaker 1: you do have a little bit of a backlog that
Speaker 1: needs to be cleared. We do think that this is
Speaker 1: going to when you combine it with affordability pressures when
Speaker 1: you can buy, which is exaggerated by the mortgage rate moves.
Speaker 1: We think this is going to lead builders to pull back.
Speaker 1: We think single IT starts are going to come down
Speaker 1: pretty sharply in the fourth quarter. We think they're gonna
Speaker 1: be downe compared to so so we don't think that
Speaker 1: it's as strong environment for that behavior. Yeah, I'm looking
Speaker 1: at the well, I'm actually I pulled up a chart
Speaker 1: of multi family units under currently under construction. It's one
Speaker 1: of the few lines in housing that is still like
Speaker 1: a straight up right because I guess it's just so
Speaker 1: slow with the process of building all these things that
Speaker 1: they're still they're still getting done. I guess if you
Speaker 1: start a new construction, you finish it we'd like to
Speaker 1: believe that it once you break ground, that you're going
Speaker 1: to make your way towards finishing and at least some
Speaker 1: point in the future. And you're right, the multi unit
Speaker 1: under construction that there's one of the charts we see
Speaker 1: pretty frequently is total units under construction is finally passed
Speaker 1: the Great Financial Crisis, And we do think that you
Speaker 1: have to take a step back and look at this
Speaker 1: single unit versus multi unit narrative. Single unit, as I
Speaker 1: mentioned back to oh four multi unit, I believe the
Speaker 1: numbers back to where it was in the ninety's it
Speaker 1: is looking now looking at single family. Um, yeah, it
Speaker 1: looks like I guess back to for you know, I
Speaker 1: was in Dallas recently and the number of multi family
Speaker 1: homes being like that happened built there, and it's just
Speaker 1: crazy compared to what it used to be. It used
Speaker 1: to all be single family. But anyway, since we're talking
Speaker 1: about supply, one thing that has come up on the
Speaker 1: show at various times is the idea of a certain
Speaker 1: cohort of homeowners, the baby boomers, many many of whom
Speaker 1: bought their houses at relatively low prices, and have seen
Speaker 1: them appreciate the idea that you know, eventually, let me
Speaker 1: think how to phrase this. Eventually they're going to pass
Speaker 1: on um maybe you know, they'll retire or have to
Speaker 1: go to nursing homes or something will force that inventory
Speaker 1: to get unlocked. Is that something that you're keeping an
Speaker 1: eye on. Yes. From a demographic perspective on the housing market,
Speaker 1: we spend a lot of time talking about millennials and
Speaker 1: Gen Z and the demand that they're going to represent
Speaker 1: as they roll through. We do think that you need
Speaker 1: to start focusing on the baby boomers. When we look
Speaker 1: at the percentage of homes of owned homes that are
Speaker 1: held by people over the age of sixty from two
Speaker 1: thousand twelve, it is a very consistent number. It's roughly
Speaker 1: the housing stock it oscillates between from two thousand twelve
Speaker 1: to today. It's gone from to roughly thirty one out
Speaker 1: of every three homes in this country is held by
Speaker 1: somebody over the age of sixty five. When we look
Speaker 1: at how long they've owned those homes, over of them,
Speaker 1: roughly fifty four moved in before the year two thousand.
Speaker 1: So when we think about our activity forecasts, we think
Speaker 1: sales are going to fall for the dynamics we've discussed.
Speaker 1: We think prices are going to be more protected. That
Speaker 1: doesn't mean that they won't turn a little bit negative
Speaker 1: year over year. But when we think about what are
Speaker 1: the stresses to that scenario, it's where could an uneconomic seller,
Speaker 1: if you will work at an uneconomic seller, evolve from.
Speaker 1: And we do highlight this group as one of those
Speaker 1: potential and economic sellers. They have a lot of equity
Speaker 1: in their home if they owned a home. They own
Speaker 1: a home today, odds are I mean, we know that
Speaker 1: over half of them moved in before two thousands. They
Speaker 1: own that home. In two thousand and eight, they saw
Speaker 1: the property, the value of their property fall, they saw
Speaker 1: it stay below its original value for almost a decade.
Speaker 1: Perhaps as headlines come through, they're going to be more
Speaker 1: willing to sell that property at a lower price point
Speaker 1: than we expect given the lock and effect that we've
Speaker 1: talked about. Now, the counter argument there is aging in place.
Speaker 1: That trend has happened a lot more frequently. People are
Speaker 1: living longer, they're living in their homes longer. We don't
Speaker 1: expect this supply to be a factor in our price
Speaker 1: forecasts for at least another decade, but if that would
Speaker 1: have come up sooner, that's where we kind of get
Speaker 1: into more of a bearer case, and that would provide
Speaker 1: more pressure on home prices than we're currently expecting. Before
Speaker 1: I forget just on the home prices question itself, some
Speaker 1: of these indusicries have shown some declines, right, yes, And
Speaker 1: when we think about home prices, there are a lot
Speaker 1: of different industries, a lot of different ways to interpret
Speaker 1: the indusseries. And so I think that we actually just
Speaker 1: revised our home price forecast down the last week, and
Speaker 1: one of the things that precipitated that we talked about
Speaker 1: your rear home prices. Month over month home prices for
Speaker 1: Case Shiller turns negative in July. First time that's happened
Speaker 1: since on a seasonally adjusted basis, I believe, since two
Speaker 1: thousand twelve. First time that happened in a decade. Now.
Speaker 1: We already thought the pace of growth was gonna slow.
Speaker 1: We just expected that to happen in September. It's happening
Speaker 1: a little early, and it's happening in certain parts of
Speaker 1: the country more so than others. California we're seeing price
Speaker 1: declines on a month over month basis. Denver, Seattle, Portland.
Speaker 1: Those are some of the bigger, especially case Shiller M says,
Speaker 1: that are already showing that month over month price decrease,
Speaker 1: and in some instances you're seeing three or four percentage
Speaker 1: points down, you're over year even in those metros were
Speaker 1: still up nine. These are some places that have seen
Speaker 1: it up much more spectacularly. But that second derivative, if
Speaker 1: you will, is changing and the pace of that decreases
Speaker 1: a ccelerating and that should continue to happen as we
Speaker 1: go into the back half of this year the first
Speaker 1: half of next year. So why shouldn't someone look at
Speaker 1: that say, oh, it's happening. The price declined, Like, why
Speaker 1: is that not a signal of actual like sustained declines.
Speaker 1: So the reason that we don't think it's a signal
Speaker 1: for actual sustained declines is because a for true home
Speaker 1: price declines to to be dramatically in excess of what
Speaker 1: we're forecasting. So so year over year eight ten plus
Speaker 1: per cent um, we think you would need to stress.
Speaker 1: You need forced sellers that really need to hit a
Speaker 1: lower bit on their home. You've mentioned kind of the
Speaker 1: things that we typically look at from a turnover perspective,
Speaker 1: death and divorce other metrics that would make you forced
Speaker 1: to sell a home that can be roughly five percent
Speaker 1: of the housing market. That that's that's not enough of
Speaker 1: a of a metric for us to really weigh on
Speaker 1: home prices. But the other pieces is supply listings of
Speaker 1: homes is so tight if people aren't willing to sell
Speaker 1: into the kind of depressed demand that we're talking about.
Speaker 1: What we think you're going to see is a market
Speaker 1: that kind of stalls out here, right, and that that
Speaker 1: will lead national home prices to show a little bit
Speaker 1: of weakness. Our forecast of down three percent year over
Speaker 1: year December three, Like, the negative headline attached to that
Speaker 1: is that's down seven percent from today. Okay, the positive
Speaker 1: headline attached to that is that only brings home prices
Speaker 1: back to January. Crazy it's been up until very recently,
Speaker 1: and that brings you back to January, which is thirty
Speaker 1: above March. So you changed your forecast relatively recently. I
Speaker 1: think you're looking for I mean basically flat or something
Speaker 1: like that, and you changed it to minus three percent.
Speaker 1: As you just mentioned, what was the sort of tipping
Speaker 1: point that you saw on the market that made you
Speaker 1: hit the button on that. Yes, So I think the
Speaker 1: fact that we saw home prices turned negative a little
Speaker 1: bit earlier than we thought they would, sales volumes were
Speaker 1: coming in a little bit weaker than our forecasts had expected,
Speaker 1: but forward looking expectations changed as well. Like when we
Speaker 1: think about research at Morgan Stanley, we're taking into account
Speaker 1: what all of our various teams are saying. Our US
Speaker 1: economics team, given the persistence of inflation, they recently raised
Speaker 1: their call for monetary tightening, adding basis points worth of
Speaker 1: hikes to the November, December and January meetings. Are US
Speaker 1: interest rate strategists on the back of that, raised their
Speaker 1: forecast for the tenure, so they raised their forecast fifty
Speaker 1: basis points. In December, they raised its seventy basis points
Speaker 1: to three point seven five for the middle of next year.
Speaker 1: That changes where we think mortgage rates could be throughout
Speaker 1: next year, which means that the deterioration we've seen an
Speaker 1: affordability there won't be any real relief next year now.
Speaker 1: And so we were expecting that perhaps kind of during
Speaker 1: the spring selling season next year that was providing a
Speaker 1: little bit more support. That support is now absent. So
Speaker 1: this actually leads really nicely into something that Joe and
Speaker 1: I wanted to ask you about, which is when interest
Speaker 1: rates go up, how does that actually feed into mortgage rates? Because,
Speaker 1: as we mentioned at the beginning, you know, we have
Speaker 1: seen this unprecedented rise in mortgage rates. I think the
Speaker 1: average thirty years at like almost seven percent in the
Speaker 1: US now six point seven five something like that, and
Speaker 1: there's this huge spread between tenure treasury yields and mortgage
Speaker 1: rates again something else that's at a record. What's going
Speaker 1: on here? Why does it seem like mortgage rates are
Speaker 1: increasing at an even faster pace than benchmark interest rates.
Speaker 1: I think there's there's a couple of reasons for why
Speaker 1: that spread that you're talking about between mortgage rates and
Speaker 1: treasury rates has increased, And one of them is, if
Speaker 1: you're a mortgage backed securities investor, your structurally short rate volatility.
Speaker 1: And not only have mortgage rates or interest rates moved higher,
Speaker 1: but volatility has been incredibly high the day to day,
Speaker 1: week to week swings we're seeing in the tenure treasury
Speaker 1: Like that volatility would in and of itself kind of
Speaker 1: weigh a little bit on the spread that we're talking about.
Speaker 1: But I think the other aspect to this is who
Speaker 1: are your buyers of mortgage backed securities who kind of
Speaker 1: supports that that mortgage rate. For the past couple of
Speaker 1: years of FED has been an incredibly large buyer quantitative easing,
Speaker 1: they were directly buying mortgages. They're no longer buying mortgages
Speaker 1: thanks because of risk weighted asset pressures. They're no longer
Speaker 1: going to be buying conventional kind of Fannie and Freddie
Speaker 1: mortgages going forward, what we're seeing from a dollar perspective,
Speaker 1: across currency perspective might make it a little bit more
Speaker 1: difficult for overseas investors to be buying mortgages. And so
Speaker 1: when when you have so many of what have been
Speaker 1: your larger buyers over the past couple of years, for
Speaker 1: various reasons, not as willing and able to step into
Speaker 1: the market right now, combined with the rate volatility we've seen,
Speaker 1: or perhaps even exaggerated by the rate volatility we've seen,
Speaker 1: that can kind of lead to that gap in spreads.
Speaker 1: There's a certain irony that post GFC capital requirements are
Speaker 1: now like leading to higher mortgage rates and potentially causing
Speaker 1: an affordability issue. Isn't there too? There is you know,
Speaker 1: this is the part of the interview where I say,
Speaker 1: could you clarify for our audience, But what I actually
Speaker 1: mean is to clarify for me. Can you walk through though,
Speaker 1: why MBS investor is structurally short rate volatility specifically? How
Speaker 1: does that work? Yeah, it's basically because of, for better
Speaker 1: or worse than, the freely prepayable nature of mortgage marketing
Speaker 1: in the United States. Right as rates rally, as as
Speaker 1: interest rates come down, as mortgage rates follow them down,
Speaker 1: your homeowner is going to be much more likely to
Speaker 1: prepay that mortgage returning principle to the investor in a
Speaker 1: lower rate environment where their ability to invest it is challenged. Um,
Speaker 1: as mortgage rates go higher, all of a sudden, that
Speaker 1: mortgage backed security that you bought but you had an
Speaker 1: expected duration on it's going to be longer as people
Speaker 1: are more incentivized or locked in to stay in their
Speaker 1: home right now. And that that's kind of the tip
Speaker 1: of the iceberg for that. Okay, I have another mortgage
Speaker 1: rate financing question, and the Mortgage Brokers Association, you know,
Speaker 1: their mortgage applications data came out and I saw that
Speaker 1: REFI activity is down, and my question is why is
Speaker 1: it not down a percent? How is there anyone still
Speaker 1: refining a mortgage today? Who is who? Like I've refined
Speaker 1: a mortgage, but that was a few years ago, un
Speaker 1: rage fund Like, who's refining today? That is a fantastic question.
Speaker 1: And we think that harkening back to kind of the
Speaker 1: beginning of our conversation, it feeds into how much of
Speaker 1: the housing market, in the mortgage market are at levels
Speaker 1: that we haven't seen before. So borrowers are out of
Speaker 1: the money to refinance, so you're thinking that should be zero, Right,
Speaker 1: They're more out of the money than than they've probably
Speaker 1: ever been on a weight at average basis. But on
Speaker 1: the other side, homeowners have more equity in their homes
Speaker 1: than they've ever had before. And so if we're talking
Speaker 1: about a borrower, who if you bought a home with
Speaker 1: a down and home prices are up almost over the
Speaker 1: past two and a half years, you can take a
Speaker 1: little bit of that equity out of your home. So
Speaker 1: that goes into the refight index that takeing. Yes, so
Speaker 1: REFI as a combination of both rate and term, So
Speaker 1: people who just refinanced to get a lower mortgage, right,
Speaker 1: but also the cash out what you've got is he.
Speaker 1: So you mentioned MBS investors being structurally short volatility, which
Speaker 1: makes me want to ask about where are the g
Speaker 1: s c s nowadays? Like they used to be a
Speaker 1: big market stabilizer. No, it's stabilizing force right in the market,
Speaker 1: and it seems like they're sort of not there anymore.
Speaker 1: To put it mildly, I think that they're like when
Speaker 1: we walk through the buyer bases earlier, they weren't one
Speaker 1: of the buyers that I mentioned, right, and so that
Speaker 1: puts more of an onus on those other buyer bases,
Speaker 1: and some of them are stepping back for those reasons
Speaker 1: we alluded to. Can we talk a little bit more
Speaker 1: about speaking of a buyer stepping back? How do you
Speaker 1: quantify the significant you know, so rate volatility is one
Speaker 1: contributor to the widening spread between mortgages and treasuries, and
Speaker 1: then the other one is, you know, the FED was
Speaker 1: hoovering up a lot of nbs for a long time
Speaker 1: and now it's not and it's going into quantitative tightening mode.
Speaker 1: How do you quantify that or think about the effect
Speaker 1: of the Fed's role in mortgage as so J back O,
Speaker 1: who is our cohead of Securit Test Products research. He
Speaker 1: runs our agency NBS research team. One of the things
Speaker 1: that that he's done a great job of with respect
Speaker 1: to when the FED has been involved, when the FED
Speaker 1: hasn't been involved, is kind of looking at we talked
Speaker 1: about this mortgage spread, kind of looking at how the
Speaker 1: mortgage basis has moved or what level it's existed at
Speaker 1: depending on the behavior of the FED over time. Right,
Speaker 1: Because when the FED is buying, when you have this
Speaker 1: large buyer stepping into the market, like that spread show
Speaker 1: be tighter. You have a lot of this demand there.
Speaker 1: When they're not buying, that spread should be wider, right,
Speaker 1: And so that's that's definitely something that we keep in
Speaker 1: mind in terms of thinking about what that mortgage spread
Speaker 1: has looked like over time and accounting for what the
Speaker 1: FET is doing at different points in time. So I
Speaker 1: have a slightly weird question just going back to supply,
Speaker 1: but I bought a very old house this year which
Speaker 1: just had one of those like energy efficiency things done
Speaker 1: on it, and we got like the lowest score possible
Speaker 1: because there's absolutely no insulation. How much do technological advances
Speaker 1: in housing like potentially drive supply? Like I'm thinking you know,
Speaker 1: if everyone decides, O, energy prices are so high, I
Speaker 1: want a really energy efficient house with solar panels on
Speaker 1: it and that sort of thing. Could that drive like
Speaker 1: a new round of activity. Congratulations on the home parks,
Speaker 1: thank you as I watch heating oil prices go up
Speaker 1: from starting to doubt myself but fix. But I would
Speaker 1: view it less as a desire to trade up for
Speaker 1: a more energy efficient home, if you will, especially given
Speaker 1: what's happened at home prices and mortgage rates right now,
Speaker 1: and perhaps more of a willingness of that homeowner too.
Speaker 1: Maybe remove some of the equity, like we talked about
Speaker 1: from that from that home, there's a lot of that
Speaker 1: equity there, and perhaps spend that on their current house
Speaker 1: to kind of improve the efficiency that you just sort
Speaker 1: of anticipated. My question, could the lock in environment where
Speaker 1: it just like I and you see people talk about
Speaker 1: this all the time. It's like I can't move anywhere
Speaker 1: because I don't want to give up my mortgage and
Speaker 1: markets terrible. Could that sustain renovation activity? And because I
Speaker 1: think renovation activity also really kicked into a high gear
Speaker 1: during the pandemic and everyone was stuck at home, is
Speaker 1: like I gotta like you know, fix my whatever so
Speaker 1: that I living my home lot more. But could that
Speaker 1: lock in have that same effect? That is certainly an
Speaker 1: option that could happen. Right now, do you think about
Speaker 1: how we typically talk about, oh, this is a entry
Speaker 1: level home and then you have your move up home buyer,
Speaker 1: and if we've made it much more difficult to kind
Speaker 1: of progress along that path, then you're kind of looking
Speaker 1: at your current house and saying, well, what do I
Speaker 1: need to do to this house to make it more
Speaker 1: accommodative of how my lifestyle is going to evolve, how
Speaker 1: my family might be evolving, how my trends and work
Speaker 1: from home might be evolving, you know. So speaking staying
Speaker 1: on this supply and demand question, can you talk a
Speaker 1: little bit about and we were talking about the boomers earlier,
Speaker 1: but you say, you know, there's a lot of interest
Speaker 1: in millennial home buyers or maybe Gen Z homebuyers. What
Speaker 1: is household formation? What is the process that drives household formation?
Speaker 1: And my understanding is I think it's spiked quite a bit,
Speaker 1: but I don't, you know, it's not I don't have
Speaker 1: a sense of what it actually is or why it
Speaker 1: would spike due to COVID, But what is household formation,
Speaker 1: what drives it, and how is the change and that
Speaker 1: going to affect the market going forward? Absolutely. So when
Speaker 1: I mentioned the or pillars at the top, one of
Speaker 1: them was demand. And when I say demand in this context,
Speaker 1: I mean household formations. Okay, that is the metric we're
Speaker 1: looking at. So to talk about household formations, let's talk
Speaker 1: about how we define a household would be great if
Speaker 1: you will, right, and so basically, a household is a
Speaker 1: a unit living together in a in a shelter. It
Speaker 1: can be ownership or rentship. I like to use an
Speaker 1: example where you basically have four people that just kind
Speaker 1: of maybe they graduated from college, they moved to let's
Speaker 1: say New York City where we're sitting right now, right
Speaker 1: and they live in one apartment. They are one household
Speaker 1: when they moved, when they graduated, when they moved to
Speaker 1: the city, that that was a formation of a household
Speaker 1: because as part of their parents household before that, they
Speaker 1: didn't count as one. So you have one household formation.
Speaker 1: What we're really going to be talking about his headship rights.
Speaker 1: That's the percentage of any group, cohort of the population.
Speaker 1: How you choose to define it, we're defining it by
Speaker 1: age here that heads their own household. So this this
Speaker 1: group of people, their headship rates four of them in
Speaker 1: one household. Two years later they all moved into their
Speaker 1: own apartment. We now have four households. Formation would be three.
Speaker 1: We went from one to four. It's a net figure,
Speaker 1: and the headship rate for this very small cohort is
Speaker 1: ad So when we think about how household formations are
Speaker 1: going to evolve, we're looking at how those headship rates evolved,
Speaker 1: in particular by age. The steepest part of that slope
Speaker 1: is as people move through their twenties and early thirties,
Speaker 1: kind of branching out on their own, starting with a
Speaker 1: heavier roommate environment towards a lesser roommate environment in general.
Speaker 1: And that's why there's so much focus on millennials and
Speaker 1: gen Zsa. You mentioned how much we've seen recently the
Speaker 1: headship rate, the percentage of people in there four, their
Speaker 1: head ship rate was close to fifty year lows, and
Speaker 1: that's for a number of reasons. Did we hear a
Speaker 1: lot of discussion about things like student loan debt, the
Speaker 1: fact that a lot of these this generation graduated into
Speaker 1: a recession, making it a little bit more difficult to
Speaker 1: kind of form your own household, like those kinds of
Speaker 1: taking on excess roommates moving into your parents basements. That
Speaker 1: that brought them down to fifty year loss. But household
Speaker 1: formations were still coming in above long run average because
Speaker 1: you had such a large group of people moving through
Speaker 1: the age cohorts that were so important for household formations.
Speaker 1: So the rate at which they were the forming were lower,
Speaker 1: but the number of people so helpful. This is like
Speaker 1: answering questions have been too embarrassed to ask for years.
Speaker 1: This is is exactly why. So then what happened in
Speaker 1: that caused So I think that you had a couple
Speaker 1: of dynamics that we're playing out in one that helped
Speaker 1: cause the spike. I think A you had the pandemic,
Speaker 1: which two reasons you had a kind of risk aversion
Speaker 1: people not wanting to live in such densely populated areas
Speaker 1: where in a lot of instances you kind of might
Speaker 1: more likely to have roomates. They want to live in
Speaker 1: less densely populated areas, more likely to have single family housing.
Speaker 1: We tracked home prices by zip code, population density, the
Speaker 1: gap between suburbs and less densely populated urban areas versus
Speaker 1: densely populated urban areas gapped out over the course of
Speaker 1: to the largest we'd ever seen. And again that data
Speaker 1: goes back late eighties or ninies, but so risk aversion
Speaker 1: work from home allowed them to make that move. And
Speaker 1: then we've talked a lot about mortgage rates. As mortgage
Speaker 1: rates were falling to all time lows, the buying power
Speaker 1: of this cohort is now much more substantial, and so
Speaker 1: that kind of just exaggerates their ability to kind of
Speaker 1: to drive home prices up there and to afford buying
Speaker 1: homes before we had this record growth in home prices
Speaker 1: at the same time leaving these densely populated areas, rents
Speaker 1: coming down. That also enabled people who weren't necessarily making
Speaker 1: that move out to kind of decrease their roommate counts.
Speaker 1: And so you had household formations from that perspective in
Speaker 1: terms of going from two or three roommates to living
Speaker 1: by yourself, and informations from going from a renter in
Speaker 1: a roommated situation in a densely populated area to kind
Speaker 1: of the less densely populated areas. So that took us
Speaker 1: from above long run average to well above long run average, Tracy,
Speaker 1: I had totally forgotten that was such a big story.
Speaker 1: The suburbs verse the city is that was like such
Speaker 1: a big thing. Yeah, I think a number of people
Speaker 1: have moved back into the city now, not me though
Speaker 1: I'm in the country, um sort of. Anyway, you mentioned
Speaker 1: millennials there, and we've been talking a lot about housing affordability,
Speaker 1: and there has been this discussion about whether or not,
Speaker 1: you know, people that have massive student debt might have
Speaker 1: difficulty saving in the current environment, whether or not they'll
Speaker 1: be able to afford houses in the future. There's also
Speaker 1: a thing that crops up every once in a while
Speaker 1: where people talk about, well, maybe a lot of younger
Speaker 1: people don't want to own home simply because they might
Speaker 1: be into you know, apartments that come with lots of
Speaker 1: amenities like pools and movie rooms and things like that.
Speaker 1: What's your impression of, I guess, the American dream or
Speaker 1: the viability of the American dream at the moment. Do
Speaker 1: people still want to own houses? As you know, affordability
Speaker 1: really comes into question anytime we've seen kind of like
Speaker 1: the the softer almost survey based data, it still points
Speaker 1: towards people wanting to own homes. I do think that
Speaker 1: affordability pressures that credit availability like, Yes, we think it's
Speaker 1: probably moving tighter in the in the short term, But
Speaker 1: even if it starts to move wider, some of the
Speaker 1: regulations have been put into place post the GFC make
Speaker 1: it unlikely that we're going to see lending standards ease
Speaker 1: to anywhere close to what we saw in two thousand seven.
Speaker 1: I say that to imply that right now the home
Speaker 1: ownership break is between sixty five and sixties six percent.
Speaker 1: We don't see it going back to like we saw
Speaker 1: back in the early two thousand's. We do think that
Speaker 1: there's still a desire to own homes, the step towards
Speaker 1: owning homes occurring a little bit later in people's lives.
Speaker 1: But we also think that single family rentorship, which I
Speaker 1: think has become a much more talked about topic over
Speaker 1: the course of the past ten of fifteen years, and
Speaker 1: largely due to the institutional ownership of those homes. Um
Speaker 1: we think that that's going to become, or we think
Speaker 1: it always has been and will continue to be, kind
Speaker 1: of another pillar of of housing of shelter in this country.
Speaker 1: So we talked a little bit about your forecast for
Speaker 1: next year, which is the minus three decline in home prices.
Speaker 1: What's the variable that you are most closely watching that
Speaker 1: could change that outlook? Supply? We are watching inventories, if supply,
Speaker 1: if uneconomic sellers come from areas that we're not expecting.
Speaker 1: If supply increases faster than we think it will, then
Speaker 1: all of a sudden, the likelihood that you have people
Speaker 1: willing to sell into what we already think will be
Speaker 1: a meager demand environment increases, and that likelihood would then
Speaker 1: bring home prices lower. So that's the number one variable
Speaker 1: we're looking at all right. Well, Jim Egan, it was
Speaker 1: lovely having you on all thoughts. Thank you so much
Speaker 1: for taking the time to walk us through household formations
Speaker 1: and mortgage as I asked about like five questions that
Speaker 1: I was like to embarrassed to ask for, like you know,
Speaker 1: over the last ten years. So I've ship you coming
Speaker 1: out and answering them clarifying. I actually I feel like
Speaker 1: I understand the few things. Thank you for having me on.
Speaker 1: It was a lot of them. Yeah, that was great, well, Joe,
Speaker 1: I thought that was fascinating just to sort of like
Speaker 1: really lay out how unusual this current moment is and
Speaker 1: how we're sort of like breaking records on a lot
Speaker 1: of housing market indicators or you know, like structural rates
Speaker 1: and things like that. The other thing that stood out
Speaker 1: to me was just that lock in Yes. Well, you know,
Speaker 1: it's funny like University of Michigan, I think in their
Speaker 1: economic Sentiment, they asked these questions like is it a
Speaker 1: good time to buy? Or is it a good time?
Speaker 1: And these people say these days they say no. And
Speaker 1: then the other question they say, is this a good
Speaker 1: time to sell? And that was really high up until
Speaker 1: recently because it's like a seller's market, but that's plunged.
Speaker 1: So we have a very weird situation in which it's
Speaker 1: a it's a it's neither a seller's market nor a
Speaker 1: buyer's market, which means we're just going to get this
Speaker 1: like freeze where there's just not much transactions. And look,
Speaker 1: I don't know what's gonna happen with prices, but I
Speaker 1: find this idea compelling that if if supply doesn't shoot up,
Speaker 1: it's hard to get a big drop in prices. Yeah.
Speaker 1: I think that kind of goes to Jim's final point
Speaker 1: as well about it's sort of all about supply and
Speaker 1: inventory at the moment. The other thing that I found interesting,
Speaker 1: and this has come up in a number of conversations
Speaker 1: at this point, is the idea of the marginal buyer
Speaker 1: of a lot of bonds. So in this case, mortgage
Speaker 1: bonds just not being there anymore. And it's sort of
Speaker 1: a similar story for for treasuries too. But when it
Speaker 1: comes to mbs, that's feeding into the rates, right, and
Speaker 1: so you can sort of almost draw a direct line
Speaker 1: between higher capital requirements and standards to the massive shooting
Speaker 1: up of mortgage rates that we've seen well, you know,
Speaker 1: and to the extend that mbs are a sort of
Speaker 1: bet on low volatility. You know, the FED doesn't care
Speaker 1: about you know, the feed is not a profit seeking entity,
Speaker 1: I guess it technically, I don't know. Maybe for political
Speaker 1: reasons wants to have some money to remit to the treasury,
Speaker 1: but that's not why the fit exists. And so it
Speaker 1: could absorb that volatility, whereas when it's in quantity, that
Speaker 1: is that is a that volatility has to be priced.
Speaker 1: And so you see that spread and it's really wild
Speaker 1: because so you just look at the spread of thirty
Speaker 1: your mortgages versus treasuries, and it's quickly spiked up to
Speaker 1: where we saw like March, when the entire financial system
Speaker 1: like briefly when nuts. We're gonna have to put together
Speaker 1: some of these charts. I think, yeah, let's make a
Speaker 1: chart list. A a charticle should go along with this episode.
Speaker 1: Shall we leave it there? Let's leave it there? Okay,
Speaker 1: This has been another episode of the All Thoughts podcast
Speaker 1: on Tracy Halloway. You can follow me on Twitter at
Speaker 1: Tracy Halloway and I'm Joe Isn't though. You can follow
Speaker 1: me on Twitter at the Stalwart, follow our producer on Twitter,
Speaker 1: Dash Bennett He's at dashbot. And Carmen Rodriguez She's at
Speaker 1: Carmen Armann. And check out all of our podcasts at
Speaker 1: Bloomberg under the handle at podcasts. Thanks for listening,