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Speaker 1: The U S economy is firing on just about all cylinders.

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Speaker 1: We say just about because one of the few sectors

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Speaker 1: that isn't doing so well is the housing market. Purchases

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Speaker 1: are slowing down, builders aren't building so much, and some

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Speaker 1: people are even reluctant to post their properties for sale.

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Speaker 1: Should we blame mediocre wage gains? Is it the Federal

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Speaker 1: Reserve's fault for raising interest rates? Or is something bigger

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Speaker 1: going on? Welcome to Benchmark. I'm Scott Landman, economics editor

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Speaker 1: with Bloomberg News in Washington. Ten years after the global

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Speaker 1: financial crisis, America's housing market has come back somewhat, though

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Speaker 1: nothing like the gang buster's pace in the two thousands,

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Speaker 1: which was fueled by subprime lending and lax regulation, but

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Speaker 1: it seems to be stuck in slow gear compared with

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Speaker 1: the rest of the economy. In fact, for four out

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Speaker 1: of five recent quarters, the residential real estate market has

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Speaker 1: actually dragged down the pace of GDP growth. Later on

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Speaker 1: the program, we'll talk about whether this cooling in the

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Speaker 1: housing market will spread and help trigger a recession like

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Speaker 1: it did in two thousand seven. But first, let's dig

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Speaker 1: into the details of why housing is slowing down. In

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Speaker 1: the US. Pressant Gopaul is a reporter in Bloomberg's Boston bureau.

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Speaker 1: He's been covering the national real estate market since two

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Speaker 1: thousand four. Pressant, thanks for being with us on Benchmark.

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Speaker 1: Great to be here. So Pressant, what's the number one

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Speaker 1: culprit behind this housing slowdown? Affordability? I'd say, but the

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Speaker 1: big change is mortgage rates. And how have those mortgage

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Speaker 1: rates changed? Okay, so you know a year ago rates

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Speaker 1: were probably if you think about your typical thirty year

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Speaker 1: fixed rate mortgage, it was about a percentage point cheaper

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Speaker 1: a year ago. So a lot of folks would say, hey,

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Speaker 1: mortgage rates are still affordable. Yes, that's true if you

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Speaker 1: look at it from a historic perspective. But think about

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Speaker 1: the fact that we have these home prices where they are,

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Speaker 1: and baked into those home prices are even lower mortgage rates.

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Speaker 1: So as rates rise, uh, you know, there's a potential

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Speaker 1: to maybe puncture the bubble a little bit. And why

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Speaker 1: has affordability become such an issue? Well, you know, if

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Speaker 1: you think about the kind of gains and home prices

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Speaker 1: we've had now for years, they have way of outpaced incomes.

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Speaker 1: So if you have sort of year upon year of um,

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Speaker 1: you know, in some areas skyrocketing home prices and wage

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Speaker 1: gains that are now are picking up a little bit,

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Speaker 1: but still are nowhere near uh you know, seventy eight, nine, ten, eleven,

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Speaker 1: twelve percent year and your gains. And then you layer

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Speaker 1: on top of that jump in mortgage rates. Um, you

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Speaker 1: could see how affordability becomes an issue. But it's not

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Speaker 1: just the increases in you know, the prices that have

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Speaker 1: been an issue for home buyers. It's that there's just

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Speaker 1: so few homes on the market. Why is that right?

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Speaker 1: So builders coming out of the downturn, we're a little

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Speaker 1: battle scarred, so they were reluctant to kind of uh

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Speaker 1: sort of go gangbusters and build the way they did

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Speaker 1: in the last cycle. So they've been sort of, you know,

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Speaker 1: building modestly, and they were building more on the higher

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Speaker 1: end and really where the demand is is on the

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Speaker 1: lower end, and that they were just aren't enough starter

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Speaker 1: homes in this country. So folks trying to leave their

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Speaker 1: apartments and you know, get their first house are going

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Speaker 1: onto the market and they're finding you know, houses you know,

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Speaker 1: excuse my French, like crappy houses that are you know,

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Speaker 1: houses in terrible shape, you know, maybe in their price

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Speaker 1: range or you know, just nothing. So that's really the issue.

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Speaker 1: And it's not just builders not really building at the lower,

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Speaker 1: more affordable end, but it's people that won't even leave

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Speaker 1: their houses after they've been living in them for a

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Speaker 1: long time. You've written about this, right, yeah. I did

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Speaker 1: a story about baby boomers and in the generation older

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Speaker 1: than that sort of hanging on, aging in place. So there,

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Speaker 1: you know, why why move and sort of enter this

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Speaker 1: crazy housing market? You know, why not just kind of

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Speaker 1: stay where you are and add onto your house, etcetera.

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Speaker 1: And so that's what a lot of people are are doing,

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Speaker 1: and as a result, there are fewer listings on the market,

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Speaker 1: and you know, you know, I wrote actually about a

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Speaker 1: guy who was in Philadelphia, a twenty something who was

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Speaker 1: riding on his bike knocking on older people's doors trying

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Speaker 1: to get them to sell their houses. I don't think

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Speaker 1: it actually works, but that that shows how desperate things are.

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Speaker 1: And you know, the other issue now you have is

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Speaker 1: when when mortgage rates rise, there's a lock in effect,

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Speaker 1: so people who uh, you know, people just don't want

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Speaker 1: to give up their great rate. Maybe they refinanced and

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Speaker 1: they got below four, so why sell and then have

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Speaker 1: to take on a higher orgite rate. Another issue that

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Speaker 1: we've heard about is the new tax law which went

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Speaker 1: into effect in January. Of course, it's called the Tax

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Speaker 1: Cuts and Jobs Act. It did cut some taxes, but

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Speaker 1: it actually went in the other direction when it came

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Speaker 1: to the deductions that people could take for mortgage interest

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Speaker 1: and property taxes, and those have been pretty favorable to

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Speaker 1: people in high cost areas, high tax areas, such as

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Speaker 1: the New York City region. How has this played a

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Speaker 1: role in the housing market this year? Right, So there

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Speaker 1: are some benefits to people who are who are wealthier,

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Speaker 1: you know, people in businesses, but so so there that

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Speaker 1: that's a positive. But if you look at the housing market,

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Speaker 1: what it's done, it seems to be doing is driving

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Speaker 1: people out of these areas with very high taxes. You know,

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Speaker 1: Westchester County is sort of it's probably the place with

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Speaker 1: the highest property taxes in the entire country. That's you know,

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Speaker 1: just north of New York City, so that people there

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Speaker 1: don't don't want to live there. I'm hearing about people

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Speaker 1: who are now buying in Connecticut, which is the market

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Speaker 1: that was really in terrible shape. Buying there because the

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Speaker 1: taxes in Westchester are too high. Other people are just

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Speaker 1: sort of looking to establish residents in in in Florida

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Speaker 1: where there no there no income taxes, and you know,

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Speaker 1: the property taxes are a lot lower. So that's driving

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Speaker 1: some wealthier people to maybe buy their retirement house early.

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Speaker 1: Let's go back to some of the issues facing builders.

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Speaker 1: You know, something that we often hear about. It tends

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Speaker 1: to be more of a local story, but you add

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Speaker 1: it all up and it can really have a national impact.

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Speaker 1: Our our zoning laws or zoning rules at the local level,

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Speaker 1: how does that affect how builders built and how much

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Speaker 1: they can build and what kind of houses they can build. So,

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Speaker 1: you know, thinking about where a lot of the development happens.

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Speaker 1: It's actually you can build in cities does tend to

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Speaker 1: be very dense developments, and but there's a limitation often

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Speaker 1: on how much you can build in the city. And

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Speaker 1: it's it's usually quite expensive to build in the city,

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Speaker 1: but further out in the suburbs and beyond that, and

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Speaker 1: the excerpts, residents don't like dense development. So they they

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Speaker 1: don't like it because they think it brings it adds

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Speaker 1: more you know, kids to the schools and traffic and

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Speaker 1: and just headaches, and so they just don't want it.

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Speaker 1: So there's been I think, sort of a resistance to

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Speaker 1: to do what probably would make some sense, um, just

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Speaker 1: just to bring in more affordable housing. Is this why

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Speaker 1: builders have to build large houses in the suburbs and

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Speaker 1: excerbs and not, you know, they can't split up the

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Speaker 1: lots into smaller lots and maybe build at you know,

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Speaker 1: the four fifty thousand dollar houses instead of the one

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Speaker 1: one million dollar house. Yeah, I was just talking to

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Speaker 1: the builder, was saying exactly that. So they're saying that,

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Speaker 1: you know, they'd like to do a townhouse development, you know,

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Speaker 1: just more dense development. But in some towns they actually

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Speaker 1: craft zoning laws in such a way that it sort

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Speaker 1: of directs development to larger houses and things like that.

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Speaker 1: The ways you can write it so it just only

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Speaker 1: a large houseworks. So that that's kind of what they're

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Speaker 1: up against in some places. And what about the labor

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Speaker 1: situation with home builders? Is the tight job market and

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Speaker 1: the Trump Administration's cracked down on undocumented immigrants having an

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Speaker 1: impact on developers ability to you know, to keep building,

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Speaker 1: to build the houses that even that they're they're already

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Speaker 1: planning to build. I can't tell you for sure what

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Speaker 1: I just hear builders talk about how the labor crisis

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Speaker 1: keeps getting worse, and you know, there was you know

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Speaker 1: that you can imagine that a lot of people are

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Speaker 1: in this environment from from Mexico in particular, UM may

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Speaker 1: not be eager to kind of come into the country

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Speaker 1: and take the risks of getting deported. So yeah, I

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Speaker 1: mean that only exacerbates the problem. You know, you have

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Speaker 1: this real desperate need for labor right now, and builders

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Speaker 1: are saying they would build more if they if they

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Speaker 1: had it. So person we we've talked about a whole

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Speaker 1: range of issues affecting the housing market here. You've covered

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Speaker 1: this industry, as we said, for more than a decade.

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Speaker 1: How does it look to you now compared with say,

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Speaker 1: in in the you know, the boom times in the

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Speaker 1: mid two thousands, Is it going to pick up from here?

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Speaker 1: I know you can't make predictions, uh or these constraints

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Speaker 1: kind of really here to stay for for quite a while.

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Speaker 1: It's a little hard to say. I mean I covered

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Speaker 1: actually I was covering the housing market during the boom

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Speaker 1: last time around, and then I covered the crash and

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Speaker 1: I remember during the boom that you know, I wrote

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Speaker 1: actually a series of stories for this paper in New

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Speaker 1: Jersey about how this could be a bubble, and I

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Speaker 1: got so much pushback from the industry. They just didn't

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Speaker 1: believe that this could happen. And then you know, lo

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Speaker 1: and behold, maybe six months after my series, home prices

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Speaker 1: started to soften. Um. Now we're in a situation where, um,

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Speaker 1: I think there's a general kind of understanding that the

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Speaker 1: market is changing. I think I think maybe we learned

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Speaker 1: something from the crash, But in some ways, so much

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Speaker 1: of real estate is psychological. So if people start believing

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Speaker 1: that we're heading for, you know, a downturn, it could

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Speaker 1: it could bring on some of that. So so, you know,

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Speaker 1: it's hard to really know where things are heading. It's

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Speaker 1: hard to know. But for the latest news on the

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Speaker 1: housing market, Prashant, they should definitely follow your stories closely. Prashanco, Paul,

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Speaker 1: thank you so much for joining us on Benchmark. Thanks Scott.

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Speaker 1: Now for a broader perspective, we're joined by Elena Satyava.

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Speaker 1: She's a senior economist Bloomberg Economics in New York. Lena,

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Speaker 1: welcome back to Benchmark. Thank you. Jelia we just heard

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Speaker 1: from Prussian Kopal all sorts of reasons why the housing

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Speaker 1: market is not doing so well right now. How would

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Speaker 1: you sum up the reasons for this underperformance in housing.

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Speaker 1: I would say it's a case with many things in

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Speaker 1: the economy, there is no one single explanation. I think

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Speaker 1: the housing sector sluggishness stems from both supply and demand,

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Speaker 1: and I think that the most recent underperformance is likely

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Speaker 1: a result of a back up in rates and mortgage rates.

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Speaker 1: They went up by about a full percentage points points

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Speaker 1: since the beginning of the year, similar to what happened

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Speaker 1: back into douzen thir team when we had the tape

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Speaker 1: at Tantrum, So rates arose quite rapidly after Chairman Bernanke

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Speaker 1: spoke and spoke the market, so that the long the

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Speaker 1: long term yields went up and with them went up

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Speaker 1: the mortgage rates, and we saw or a consistent decline

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Speaker 1: in home sales following that episode. I think after this

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Speaker 1: time the increase in mortgage rates this time around, we're

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Speaker 1: gonna see a streak of weak economic data this year

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Speaker 1: in terms of sales and starts, and that will filter

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Speaker 1: into residential investment in GDP. However, despite all this short

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Speaker 1: term reasons. I think there are some structural changes in

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Speaker 1: the housing market, and there is significant shortage of labor,

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Speaker 1: for sure, and it's been a problem, and that has

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Speaker 1: been holding down the pace of housing starts in this cycle.

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Speaker 1: I think that is definitely into the the issues. But

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Speaker 1: I would also like to mention low productivity growth in

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Speaker 1: the residential construction sector, particularly in the single family housing,

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Speaker 1: So that's been an issue for white some time, and

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Speaker 1: I think that is also holding down the pace of

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Speaker 1: residential investment in this cycle. And there's been a structural

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Speaker 1: change in terms of how households organized, so people cohabiting

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Speaker 1: much more in this cycle, and it's actually not the

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Speaker 1: very cyclical thing. It's more of a structural change. And

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Speaker 1: I think there is some data from the Pure Research

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Speaker 1: Center and that shows that about the third of all

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Speaker 1: twenty to twenty nine year olds lived with their parents

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Speaker 1: or grandparents into thousand and sixteen. That is almost three

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Speaker 1: times as many as back in So So so millennials

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Speaker 1: living in their parents basement. That still hasn't changed a

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Speaker 1: whole lot. Absolutely, that hasn't changed, and I think it's

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Speaker 1: not going to change that much. People always talk about

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Speaker 1: pentamp demand from this, I think that is changing very

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Speaker 1: slowly and it's still a big issue. And I do

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Speaker 1: see this in my neighborhood as well, just anecdotally, so

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Speaker 1: I think we're still going to see that happening and

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Speaker 1: holding down the pace of housing demand. When when you

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Speaker 1: talk about higher mortket rates, is there any sector of

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Speaker 1: the economy that's so sensitive to rising interest rates as

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Speaker 1: the housing market. The good example is always auto sales,

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Speaker 1: so they also fluctuate with changes in rates, but I

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Speaker 1: think housing is probably the best example of the most

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Speaker 1: interest rate sensitive sector. And it's pretty clear that the

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Speaker 1: Federal Reserve is likely to continue raising interest rates over

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Speaker 1: the next year or so. Correct. Look, they're not gonna

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Speaker 1: stop to safe housing, that's for sure, so they have

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Speaker 1: the dual mandate, they have their financial stability issues. So housing,

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Speaker 1: after all, is only four percent of the economy, so

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Speaker 1: I don't think that they will stop doing what they

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Speaker 1: are supposed to do just to save the housing sector. So,

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Speaker 1: in other words, you don't think that the slowdown in

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Speaker 1: the housing market is likely to trigger any major disruption

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Speaker 1: in the broader economy the way that it did in

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Speaker 1: the mid two thousands that led to the housing crisis,

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Speaker 1: Is that right? Not really, So housing did not play

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Speaker 1: significantrol on the way up this time around, and it's

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Speaker 1: probably not gonna miss things up on the way down.

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Speaker 1: The thing that I really like to look at is

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Speaker 1: something called household debt to income ratio that plunged after

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Speaker 1: the Great Recession, and it has not shown any signs

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Speaker 1: of a pick up in this cycle. So basically, households

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Speaker 1: are not over leveraging, and that what really cost the

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Speaker 1: last housing crisis to large degree, and this is not

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Speaker 1: going to be a factor this time around. But it

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Speaker 1: wasn't just households over leveraging. It was also that all

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Speaker 1: kinds of crazy financial products that Wall Street created and

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Speaker 1: lending standards had gotten pretty low, that there was these

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Speaker 1: kind of hidden weaknesses in the financial system. Do you

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Speaker 1: feel that regulators and the FED have gotten more control

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Speaker 1: over these issues and that that Wall Street hasn't gotten

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Speaker 1: quite as out there in in the products this time sure? Well,

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Speaker 1: obviously it's a much broader issue, and there are always

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Speaker 1: some unknown unknowns right that can cause the next crisis.

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Speaker 1: So nobody is going to guarantee this time is not

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Speaker 1: going to be an issue. But I think in terms

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Speaker 1: of how to compare the situation right now to what

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Speaker 1: we saw back in thousand five and leading to the

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Speaker 1: housing barts. It's definitely much better this time around than

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Speaker 1: The FED is really watching very closely the situation and

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Speaker 1: all the financial stability metrics, and the regulation, as you mentioned,

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Speaker 1: has definitely taken care of a lot of things that

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Speaker 1: went wrong back in douzen five six and going into

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Speaker 1: the recession. So you're saying, you, Lena, that it's a slowdown,

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Speaker 1: but it's going to be a boring slowdown this time right. Well,

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Speaker 1: the way to look at it is that residential investment

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Speaker 1: has added a few tenths of a percent to economic

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Speaker 1: growth each year since two thousand twelve, and residential investment

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Speaker 1: is projected to subtract this year from economic growth. And

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Speaker 1: this this will be the first year of residential investments

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Speaker 1: subtracting from growth since two thousand and ten. But again,

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Speaker 1: this will be a very small subtraction. It's not gonna

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Speaker 1: really change things, which is basically economic growth is wrong.

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Speaker 1: The economy remains a robust and consumers are leading growth

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Speaker 1: in the economy. All right, on that optimistic note, let's

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Speaker 1: end it there. Yelena Slativa, Senior US economist at Bloomberg

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Speaker 1: Economics in New York. Thanks so much for joining us

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Speaker 1: on Benchmark. Thank you, it's been a pleasure. Benchmark will

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Speaker 1: be back next week. Until then, you can find us

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Speaker 1: on the Bloomberg terminal, Bloomberg dot com, or Bloomberg app,

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Speaker 1: as well as podcast destinations such as at the podcast,

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Speaker 1: Spotify or wherever you listen. We'd love it if you

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Speaker 1: took the time to rate and review the show so

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Speaker 1: of Bloomberg Podcasts is Francesco Levy. Thanks for listening. See

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