WEBVTT - Are We About to See the Shortest Housing Cycle Ever? 0:00:10.080 --> 0:00:13.360 Hello, and welcome to another episode of the Odd Thoughts Podcast. 0:00:13.520 --> 0:00:14.840 I'm Tracy Alloway. 0:00:14.720 --> 0:00:15.880 And I'm Joe Wisenthal. 0:00:16.079 --> 0:00:18.959 Joe, do you remember this time last year some of 0:00:19.000 --> 0:00:21.200 the discourse around the housing market. 0:00:21.320 --> 0:00:21.880 Yeah, of course. 0:00:21.920 --> 0:00:24.200 I mean this was like really like when people were 0:00:24.239 --> 0:00:26.560 like waking up to these sort of like eye popping 0:00:26.640 --> 0:00:29.880 mortgage rates, at least by recent standards, you know, zoom out. 0:00:29.880 --> 0:00:31.640 Maybe not that high, but by recent standard, like, oh, 0:00:31.680 --> 0:00:36.440 this is it. Housing is sort of over crash. Prices plunge, 0:00:36.560 --> 0:00:37.279 We're back. 0:00:37.479 --> 0:00:41.000 That's exactly it. So we had a really historic run 0:00:41.120 --> 0:00:45.240 up in benchmark interest rates and those were translating into 0:00:45.440 --> 0:00:48.720 higher mortgage rates, and everyone thought that this was going 0:00:48.760 --> 0:00:52.480 to lead to a you know in some people thought 0:00:52.760 --> 0:00:55.920 it would be a house price collapse. Others thought it 0:00:55.960 --> 0:01:00.760 would be some sort of impact, something signific one way 0:01:00.840 --> 0:01:05.160 or the other. And yet fast forward twelve months. I'm 0:01:05.160 --> 0:01:08.560 looking at the case, Chiller intokes. We had like a 0:01:08.680 --> 0:01:13.479 tiny dip, you know, relatively small going into the end 0:01:13.480 --> 0:01:16.320 of last year, and now house prices are rising again. 0:01:16.440 --> 0:01:20.160 We basically hit like the shortest housing bear market ever. 0:01:20.480 --> 0:01:24.200 We did really tiny dipping prices. Every index you mentioned, 0:01:24.240 --> 0:01:26.840 I saw some other one just yesterday, like one of 0:01:26.920 --> 0:01:29.800 those like National like Freddy Ones. I don't know, that's 0:01:29.880 --> 0:01:33.360 like rocketing up again. Obviously we know that like the 0:01:33.440 --> 0:01:36.119 homebuilders sort of like slammed the brake. So it's like, okay, 0:01:36.160 --> 0:01:40.520 here's prices following buyers drop out, homebuilders get crushed, their 0:01:40.560 --> 0:01:42.360 stocks are is we've been talking about on a bunch 0:01:42.360 --> 0:01:44.920 of recent episodes. They're like basically at all time high. 0:01:44.959 --> 0:01:49.120 So somehow this huge repricing of mortgages did not cause 0:01:49.160 --> 0:01:52.560 the housing bear market that many but not everyone expected. 0:01:52.800 --> 0:01:55.320 Yeah, and I mean it's bad news if you were 0:01:55.520 --> 0:01:58.520 hoping that house prices would collapse that you could finally 0:01:58.720 --> 0:02:02.640 enter the market, news if you are a homeowner potentially. 0:02:03.240 --> 0:02:07.280 But anyway, you remember we talked to a guest last year, 0:02:07.360 --> 0:02:10.880 I think it was last October, and the idea is basically, 0:02:11.400 --> 0:02:15.360 we were getting this really weird housing market with rates 0:02:15.400 --> 0:02:19.000 going up, but house price is actually not that vulnerable 0:02:19.040 --> 0:02:21.600 to a decline. And I think that scenario has more 0:02:21.680 --> 0:02:22.640 or less panned. 0:02:22.400 --> 0:02:25.680 Out totally and it's been the theme of a few episodes, 0:02:25.720 --> 0:02:29.040 but it is totally true. Which is that a precondition 0:02:29.240 --> 0:02:32.840 so to speak of like a real housing downturn is 0:02:32.919 --> 0:02:36.799 unemployment and the existence of forced sellers, and so it's 0:02:36.840 --> 0:02:39.240 not a very good time to buy. But also very 0:02:39.280 --> 0:02:41.800 few people are forced sellers other than I think we 0:02:41.960 --> 0:02:44.320 like talked about, you know, their divorces and things like that, 0:02:44.960 --> 0:02:47.400 or people who have to move for their work. And 0:02:47.560 --> 0:02:50.880 you know, this has manifested itself, not just in firm prices, 0:02:51.080 --> 0:02:54.240 but like no housing inventory, and the people who track 0:02:54.360 --> 0:02:57.280 levels of housing inventory, it's like record lows are close 0:02:57.320 --> 0:02:59.959 to it. And so yeah, demand has dropped with high 0:03:00.160 --> 0:03:03.519 high mortgage raise, but so is supply and you get 0:03:03.520 --> 0:03:04.799 your price stability. 0:03:05.000 --> 0:03:05.440 That's right. 0:03:05.560 --> 0:03:08.160 So on this episode, I am very pleased to say 0:03:08.240 --> 0:03:11.080 we're going to be doing a checkup of the weird 0:03:11.240 --> 0:03:13.800 housing market. Let's put it that way. We're going to 0:03:13.800 --> 0:03:16.080 be speaking again with Jim Egan. He is, of course 0:03:16.320 --> 0:03:19.960 the US housing strategist over at Morgan Stanley. So, Jim, 0:03:20.160 --> 0:03:22.040 thank you so much for coming back on all thoughts. 0:03:22.280 --> 0:03:24.000 Thank you for having me back. It's a pleasure to 0:03:24.000 --> 0:03:24.280 be here. 0:03:24.760 --> 0:03:28.119 So since we last spoke, I've been following your research 0:03:28.280 --> 0:03:32.680 and your thesis when we spoke was this idea of 0:03:32.960 --> 0:03:38.280 basically a subdued impact on house prices, maybe less housing 0:03:38.360 --> 0:03:42.800 activity itself. Since then, you've sort of ratcheted down your 0:03:42.840 --> 0:03:46.080 expectations for house prices and then ratcheted them back up, 0:03:46.200 --> 0:03:49.080 not by a huge degree, I should say, but walk 0:03:49.160 --> 0:03:52.040 us through what the past ten months or eight months 0:03:52.120 --> 0:03:54.960 or so have been like from your perspective, trying to 0:03:55.000 --> 0:03:56.160 gauge what's going on here? 0:03:56.960 --> 0:03:59.040 Right, So, I think you two both brought up a 0:03:59.040 --> 0:04:02.160 lot of kind of the key underlying points for how 0:04:02.200 --> 0:04:05.160 we think about the housing market, our general framework, we 0:04:05.320 --> 0:04:07.280 like to call it our four pillared framework, where we're 0:04:07.280 --> 0:04:11.280 talking about demand for shelter, supply of shelter, the affordability 0:04:11.320 --> 0:04:14.600 of the US housing market, and the availability of mortgage credit. 0:04:15.000 --> 0:04:17.320 But a lot of what's been going on has been 0:04:17.360 --> 0:04:22.000 this kind of juxtaposition between supply and affordability. Mortgage rates 0:04:22.080 --> 0:04:26.320 move incredibly higher, and we see affordability deteriorate at a 0:04:26.360 --> 0:04:29.479 pace unlike anything that we've ever really seen in twenty 0:04:29.520 --> 0:04:33.120 twenty two. But the key question to ask on the 0:04:33.120 --> 0:04:37.360 back of that is who's affordability actually just deteriorated. And 0:04:37.560 --> 0:04:39.720 the structure of the mortgage market this time around is 0:04:39.800 --> 0:04:44.400 such that you have what we'll call strong hands, a 0:04:44.440 --> 0:04:47.000 lot of homeowners were able to either buy their home 0:04:47.120 --> 0:04:49.919 or refinance their mortgage at record low rates, and so 0:04:50.040 --> 0:04:53.600 they have these thirty year fixed rate mortgages where they're 0:04:53.600 --> 0:04:57.520 just incentivized not to list their home for sale. And so, Joe, 0:04:57.520 --> 0:05:00.880 you mentioned that inventories are close to historic. We have 0:05:00.960 --> 0:05:03.920 existing listings going back over forty years, and we're pretty 0:05:03.960 --> 0:05:06.880 much at the lows right now. And so if you 0:05:07.000 --> 0:05:11.640 don't have those homes listed for sale, then all of 0:05:11.640 --> 0:05:16.000 a sudden, despite the fact that affordability might theoretically warrant 0:05:16.040 --> 0:05:19.760 lower home prices, homeowners aren't willing to sell or they're 0:05:19.800 --> 0:05:23.320 not forced to sell into those lower home prices that 0:05:23.360 --> 0:05:25.640 affordability might theoretically warrant. 0:05:25.920 --> 0:05:29.680 Of the inventory that exists, how much of it is 0:05:29.960 --> 0:05:32.320 people who are selling for some reason or another. Because 0:05:32.320 --> 0:05:36.040 there's some selling, it's none versus the role of new supplies. 0:05:36.040 --> 0:05:37.960 So basically new homes. 0:05:38.400 --> 0:05:40.400 When we think of inventory, we break it down across 0:05:40.600 --> 0:05:44.000 three lines, right, existing listings, new home builds, and then 0:05:44.040 --> 0:05:46.240 you have kind of what we call the shadow inventory. 0:05:46.440 --> 0:05:49.800 This is distressed this is your forced sellers, this is foreclosures. Right, 0:05:49.839 --> 0:05:51.920 We're going to put that to the side for this conversation, 0:05:52.000 --> 0:05:55.359 because we do think that mortgage credit standards that fourth pillar. 0:05:55.640 --> 0:05:58.320 They've been so robust, they've remained so tight in the 0:05:58.360 --> 0:06:00.919 aftermath of the Great Financial Crisis, that we just don't 0:06:00.960 --> 0:06:05.800 necessarily see a substantial increase in defaults and foreclosures coming 0:06:06.080 --> 0:06:08.720 now from a new home sales perspective versus an existing 0:06:08.720 --> 0:06:11.719 home sales perspective, a new listing's perspective versus an existing 0:06:11.720 --> 0:06:16.160 listings perspective, this is still largely going to be an 0:06:16.240 --> 0:06:21.080 existing listings market right new home sales. One of the 0:06:21.160 --> 0:06:23.360 characteristics over the past six months of this year has 0:06:23.360 --> 0:06:25.760 been the fact that new home sales have made up 0:06:25.760 --> 0:06:29.960 a larger percentage of total transaction volumes since two thousand 0:06:30.000 --> 0:06:34.520 and six versus existing However, that just means they've climbed 0:06:34.560 --> 0:06:37.679 back to about twenty percent of transaction volumes, So existing 0:06:37.680 --> 0:06:41.560 listings are still call it, eighty percent of those monthly transactions, 0:06:41.600 --> 0:06:44.640 even if those listings are kind of running at forty 0:06:44.720 --> 0:06:45.159 year lows. 0:06:45.920 --> 0:06:48.800 So one of the interesting things that's happened in recent 0:06:48.839 --> 0:06:52.680 months is the home builders seem to have really ramped 0:06:52.800 --> 0:06:55.640 up activity, which is somewhat unusual because you would assume 0:06:55.640 --> 0:06:58.920 with interest rates going up, their cost of capital would 0:06:59.000 --> 0:07:03.120 be increasing, and yet it seems that supply is still 0:07:03.160 --> 0:07:06.080 so tight that everyone wants to get in on building 0:07:06.120 --> 0:07:09.239 new houses. How big of a surprise has that been 0:07:09.279 --> 0:07:14.000 for you? And would you expect the new home building 0:07:14.200 --> 0:07:17.080 response to moderate at some point? 0:07:17.520 --> 0:07:19.520 So I think if we take a little bit of 0:07:19.560 --> 0:07:21.800 a step back and look at the total starts figures, 0:07:21.840 --> 0:07:23.560 because I agree, if we look at some of the 0:07:23.560 --> 0:07:26.160 housing data that's come across in the past month, the 0:07:26.200 --> 0:07:29.400 past two months, I'd say that the three data points 0:07:29.560 --> 0:07:32.800 if you wanted to grab an optimistic housing view, would 0:07:32.800 --> 0:07:35.240 be do home sales? Wait, what's optimistic? 0:07:35.680 --> 0:07:38.400 Yeah, I don't even I don't even know what the 0:07:38.400 --> 0:07:39.880 optimistic side is anymore. 0:07:40.040 --> 0:07:42.320 That's a good question, I guess if you want to 0:07:42.360 --> 0:07:44.440 say that we're going to enter I don't even want 0:07:44.480 --> 0:07:47.960 to call it a V shaped recovery, but a significant 0:07:48.000 --> 0:07:51.160 increase in housing activity and then potentially even an increase 0:07:51.200 --> 0:07:54.120 in home prices on the back of that, as opposed 0:07:54.160 --> 0:07:56.960 to maybe an L shape. Have we found the bottom 0:07:57.000 --> 0:08:00.840 and we're moving or another leg down? Okay, So if 0:08:00.840 --> 0:08:04.640 you wanted to grab a we're entering a recovery activity? 0:08:04.720 --> 0:08:07.080 Is going to increase. Sales and starts are going to increase, 0:08:07.200 --> 0:08:09.000 Prices are going to increase. By the way, these are 0:08:09.000 --> 0:08:11.720 not our forecasts. You would grab new home sales, you 0:08:11.760 --> 0:08:14.400 would grab housing starts, and you would grab home builder confidence. Right, 0:08:14.400 --> 0:08:16.760 those are the ones that have been increasing. I mentioned 0:08:16.800 --> 0:08:19.440 already new home sales making up a larger share of 0:08:19.480 --> 0:08:22.320 transactions than really any point since two thousand and six 0:08:22.400 --> 0:08:25.920 to begin this year, that we think, in part is 0:08:26.040 --> 0:08:29.240 helping home builder confidence increase. It's climbed every single month 0:08:29.520 --> 0:08:31.320 for the first six months of this year after falling 0:08:31.600 --> 0:08:34.480 in every single month with twenty twenty two. But one 0:08:34.520 --> 0:08:36.360 thing that we would say here is a growth in 0:08:36.440 --> 0:08:40.880 new home sales is not necessarily indicative of a growth 0:08:40.920 --> 0:08:45.839 in the overall demand for shelter. That housing starts number, 0:08:46.440 --> 0:08:47.880 we think we have to take a step back and 0:08:47.920 --> 0:08:50.559 look at it in terms of single unit and multi unit. Right, 0:08:50.640 --> 0:08:54.040 single unit starts have historically made up call it, seventy 0:08:54.080 --> 0:08:57.120 to eighty percent of that number. They're a slightly smaller 0:08:57.120 --> 0:08:59.040 share of that total number now, as multi unit has 0:08:59.040 --> 0:09:01.840 made up a bigger share from peak in this cycle. 0:09:02.000 --> 0:09:04.719 In April of twenty twenty two, single unit starts are 0:09:04.720 --> 0:09:08.880 down over twenty percent now. The rate of that decline 0:09:08.920 --> 0:09:11.959 has slowed in recent months, and one of the reasons 0:09:11.960 --> 0:09:14.640 that we think that builders are also turning a little 0:09:14.640 --> 0:09:17.800 bit more optimistic is the backlog of homes under construction 0:09:17.840 --> 0:09:21.480 has been able to clear that built throughout last year 0:09:21.920 --> 0:09:25.840 supply chain issues related to the pandemic labor constraints. It 0:09:25.920 --> 0:09:29.400 just took longer to finish homes. As starts have come down. 0:09:29.559 --> 0:09:32.280 Units under construction have come down from peak. Units under 0:09:32.280 --> 0:09:34.400 construction are down about one hundred and twenty five one 0:09:34.440 --> 0:09:38.040 hundred and thirty thousand units. That's not the case on 0:09:38.120 --> 0:09:41.600 the five plus unit construction side. Units under construction continue 0:09:41.640 --> 0:09:46.040 to grow and the numbers that have beat expectations recently. 0:09:46.480 --> 0:09:48.320 We still think that multi unit is driving the bus. 0:09:48.320 --> 0:09:48.560 There. 0:09:49.040 --> 0:09:52.360 May of this year, remove all seasonal adjustments. May of 0:09:52.400 --> 0:09:55.000 this year we saw more five plus unit starts than 0:09:55.040 --> 0:09:57.560 any month since nineteen eighty six. Wow. 0:09:58.400 --> 0:10:01.240 I think it was this conversation that we had last year, 0:10:01.280 --> 0:10:03.200 and I learned like a bunch of terms that I 0:10:03.200 --> 0:10:06.800 had only pretended to know before, like headship raids and 0:10:06.840 --> 0:10:09.360 how you measure household formation. So I really appreciate you 0:10:09.520 --> 0:10:11.560 I really appreciated that because I finally got to learn 0:10:11.920 --> 0:10:13.920 a few things. But one of the things that we 0:10:14.000 --> 0:10:18.440 did see, especially during the sort of like the pandemic boom, 0:10:18.440 --> 0:10:21.400 weirdly enough the twenty twenty one the sort of surgeon 0:10:21.440 --> 0:10:25.520 household formation, people leaving their roommates, people moving out of 0:10:25.559 --> 0:10:27.440 you know, maybe moving out of their parents' house, like 0:10:27.480 --> 0:10:29.920 the sort of like twenty tense cliche of like living 0:10:29.920 --> 0:10:32.600 in your parents' basement, et cetera. What are we seeing 0:10:32.600 --> 0:10:35.400 in like current trends of household formation. 0:10:36.960 --> 0:10:39.840 I think that's one of the key questions to where 0:10:39.840 --> 0:10:43.280 we're moving going forward. And I will caveat this by saying, 0:10:43.600 --> 0:10:47.280 the data here is a little lagged. We are starting 0:10:47.360 --> 0:10:50.079 to see it slow. Okay, for all the trends that 0:10:50.120 --> 0:10:53.760 you just mentioned, household formation really increased over the course 0:10:53.800 --> 0:10:56.920 of the past three years. If I was on this 0:10:56.960 --> 0:11:00.480 podcast in twenty nineteen and we were talking about demographics, yeah, 0:11:00.480 --> 0:11:03.920 and what they would have meant for household formation going forward, 0:11:04.280 --> 0:11:09.000 we would have said that demographics warrant one point three 0:11:09.040 --> 0:11:11.680 to one point four million formations per year for at 0:11:11.760 --> 0:11:15.040 least the next five Okay, the last three years, we've 0:11:15.080 --> 0:11:18.120 seen something closer to one point eight wow million. 0:11:18.320 --> 0:11:18.520 Wow. 0:11:18.920 --> 0:11:21.520 Yeah, you mentioned headship rates. If we don't think that 0:11:21.559 --> 0:11:24.680 headship rates systemically should have moved higher, they certainly have 0:11:24.760 --> 0:11:27.040 over the last three years. But if you don't think 0:11:27.040 --> 0:11:29.800 that longer term they're moving higher, that means that we've 0:11:29.800 --> 0:11:33.000 pulled forward. If our original numbers were somewhere close to correct, 0:11:33.280 --> 0:11:35.880 call it one point two to one point five million households. 0:11:36.360 --> 0:11:37.120 Just real quickly. 0:11:37.200 --> 0:11:39.080 I know, I said I learned last year on the 0:11:39.120 --> 0:11:41.959 podcast what headship rates are, and now I forget what's 0:11:42.000 --> 0:11:42.960 a headship rate again? 0:11:43.160 --> 0:11:45.680 So a head ship rate, when you look at the population, 0:11:45.800 --> 0:11:47.400 you break it down by whatever cohorts you want to. 0:11:47.480 --> 0:11:49.440 Let's just do it by age, okay, right. So a 0:11:49.440 --> 0:11:51.360 headship rate is if you take everybody who's call it 0:11:51.400 --> 0:11:54.040 twenty five to twenty nine years old. Picture At twenty 0:11:54.040 --> 0:11:56.000 five year old, they're living in an apartment with three 0:11:56.040 --> 0:11:58.360 other people, the headship rate of that very small four 0:11:58.360 --> 0:12:01.720 person cohort twenty five percent. Right. If all of them 0:12:01.760 --> 0:12:04.040 moved to their own apartments all of a sudden, you 0:12:04.120 --> 0:12:08.679 have oh four people heading exactly, okay, right, And so 0:12:08.720 --> 0:12:12.000 typically headship rates for that early to mid twenties, you're 0:12:12.040 --> 0:12:15.560 talking twenty five ish percent, and through your late twenties 0:12:15.600 --> 0:12:18.000 early to mid thirties they climbed to the fifty five 0:12:18.080 --> 0:12:18.800 percent where. 0:12:18.600 --> 0:12:21.760 They The household formation is a verb and headship rate 0:12:21.840 --> 0:12:24.040 is a noun kind of or stock versus flow maybe 0:12:24.040 --> 0:12:25.880 one way to think the stock versus full Okay. 0:12:25.720 --> 0:12:28.160 Yes, so I realized I should have asked you this 0:12:28.360 --> 0:12:30.560 directly at the beginning of the conversation. But what is 0:12:30.600 --> 0:12:32.720 your base forecast for house prices? 0:12:32.880 --> 0:12:34.840 Yes, and so you did talk about a little bit 0:12:34.840 --> 0:12:36.920 of oscillation and what we were calling for. When I 0:12:36.960 --> 0:12:39.200 came on in October, we had brought our end of 0:12:39.240 --> 0:12:42.240 twenty twenty three number down to minus three percent year 0:12:42.240 --> 0:12:44.800 over year. We have just raised that we're back to 0:12:45.440 --> 0:12:47.840 flat zero point zero by the end of the year. 0:12:48.200 --> 0:12:51.320 And that is despite the fact that we continue to 0:12:51.360 --> 0:12:54.360 see in our forecasts a handful of months of negative 0:12:54.400 --> 0:12:57.040 year over year prints. We just did so the case 0:12:57.040 --> 0:13:00.920 Shiller number for June it's two months lagged. It's April data. 0:13:01.120 --> 0:13:03.280 It's the first time they've turned negative year over year 0:13:03.600 --> 0:13:06.520 since twenty twelve. We think that's going to be short lived. 0:13:06.559 --> 0:13:07.920 It's going to be a couple months, it was only 0:13:07.920 --> 0:13:10.559 about twenty four basis points negative, and we think by 0:13:10.559 --> 0:13:12.240 the end of the year we're going to be back 0:13:12.240 --> 0:13:12.680 to flat. 0:13:13.000 --> 0:13:15.360 I just want to say when you when we hit 0:13:15.400 --> 0:13:17.400 you on in October, you were there was an out 0:13:17.440 --> 0:13:17.839 of content. 0:13:17.880 --> 0:13:18.760 I mean, yeah, it was. 0:13:19.200 --> 0:13:21.160 I think it was a lot of credits. 0:13:20.840 --> 0:13:23.079 It got a lot of pushback, and then it turned 0:13:23.120 --> 0:13:24.360 into the consensus space. 0:13:24.400 --> 0:13:27.520 But like it really did, like at the time, this 0:13:27.640 --> 0:13:29.520 was it was a real out of consensus called and 0:13:29.559 --> 0:13:31.280 I think that we should like sort of take a 0:13:31.320 --> 0:13:33.920 moment to recognize and that's you know, that's how I 0:13:33.960 --> 0:13:35.720 have you back. But that was like at the time 0:13:35.800 --> 0:13:41.160 you people must have thought you were crazy. 0:13:41.920 --> 0:13:45.760 Listeners can't see Jim's face, but he's thinking how to 0:13:45.840 --> 0:13:47.960 Reswand first. 0:13:47.720 --> 0:13:50.480 Of all, thank you. There were certainly a lot of 0:13:50.520 --> 0:13:54.840 conversations in the fourth quarter of last year that asked 0:13:54.960 --> 0:13:58.520 why we weren't calling for home prices to fall further. Yeah, 0:13:58.640 --> 0:14:01.720 I would say that you made the comment that it 0:14:01.760 --> 0:14:05.640 moved towards consensus. It certainly did. And I don't think 0:14:05.840 --> 0:14:08.280 that our zero percent call by the end of the 0:14:08.320 --> 0:14:13.040 year is too far from consensus right now. 0:14:27.280 --> 0:14:30.920 So what's the biggest wild card or risk factor in 0:14:30.960 --> 0:14:33.760 your outlook at the moment, because I know you mentioned 0:14:33.760 --> 0:14:36.200 that you have this sort of four pillar way of 0:14:36.280 --> 0:14:39.520 looking at the housing market. I think the four factors 0:14:39.520 --> 0:14:44.480 are supplied demand, affordability, and credit availability. And then there's 0:14:44.520 --> 0:14:49.400 also this question of unemployment, which seems to be a 0:14:49.440 --> 0:14:53.240 big one sort of hovering over the industry or the 0:14:53.280 --> 0:14:55.560 market as a whole. So what are you looking at 0:14:55.560 --> 0:14:58.400 as the biggest risk factor to your outlook, Tracy? 0:14:58.440 --> 0:15:00.920 I think you mentioned a really good factor here from 0:15:01.000 --> 0:15:03.200 the unemployment perspective, But I want to take a step 0:15:03.240 --> 0:15:06.000 back and frame this in terms of the risks to 0:15:06.040 --> 0:15:08.040 the call to the upside and the risks to the 0:15:08.040 --> 0:15:11.560 call to the downside. We do think that if we're wrong, 0:15:11.760 --> 0:15:14.560 it's because home prices ended up climbing more than we 0:15:14.600 --> 0:15:16.560 expect by the end of the year. And we think 0:15:16.640 --> 0:15:21.120 that because look, affordability still remains incredibly low, close to 0:15:21.200 --> 0:15:25.040 multi decade lows. And so if you were to see 0:15:26.160 --> 0:15:30.320 affordability start to improve, and perhaps it improves because maybe 0:15:30.320 --> 0:15:32.360 we get more of a soft landing than we're expecting, 0:15:32.760 --> 0:15:35.720 Maybe the labor market starts to slow down, doesn't necessarily 0:15:35.720 --> 0:15:39.280 fall off a cliff. Maybe inflation really starts to slow down, 0:15:39.320 --> 0:15:40.720 and all of a sudden you get a world in 0:15:40.760 --> 0:15:43.800 which perhaps the Fed can start cutting earlier than people 0:15:43.840 --> 0:15:47.200 expect rates start to come down. Affordability is largely a 0:15:47.200 --> 0:15:51.160 three prong declaration. It's incomes, it's rates, and it's home prices. 0:15:51.640 --> 0:15:55.520 And if rates start to come down, yes, affordability going 0:15:55.560 --> 0:15:57.360 to be very difficult for that to get back to 0:15:57.400 --> 0:16:01.880 where we were in the twenty twenty twenty twenty one timeframe. 0:16:02.600 --> 0:16:05.400 But if people start seeing five and a half percent 0:16:05.440 --> 0:16:08.240 mortgage rates as opposed to seven, that could bring more 0:16:08.240 --> 0:16:10.640 people off the sidelines, and supply is still going to 0:16:10.680 --> 0:16:14.080 be low. Jaybackau and our agency MBS team calculates something 0:16:14.080 --> 0:16:16.080 called the truly Refinanciable Index, and I do think this 0:16:16.160 --> 0:16:19.160 is one of the more important numbers in our forecast, 0:16:19.240 --> 0:16:22.400 or at least interesting. It measures what percentage of the 0:16:22.440 --> 0:16:25.280 mortgage universe has at least a twenty five basis point 0:16:25.280 --> 0:16:28.080 incentive to refinance at any given point in time, given 0:16:28.120 --> 0:16:31.880 where prevailing rates are. As we're sitting here today, it's 0:16:31.960 --> 0:16:35.680 less than two percent of the universe. If mortgage rates 0:16:35.680 --> 0:16:38.360 would rally all the way to four percent, that is 0:16:38.400 --> 0:16:41.320 nowhere close to our forecasts by they if they get 0:16:41.360 --> 0:16:43.280 to six percent by the middle of next year, we 0:16:43.320 --> 0:16:46.080 think that would be roughly in line with expectations. They 0:16:46.360 --> 0:16:48.240 might be higher than that. But if they get to 0:16:48.360 --> 0:16:52.760 four percent, that truly refinancible index only climbs to twenty 0:16:52.840 --> 0:16:55.760 one percent of the mortgage market. Seventy nine percent of 0:16:55.840 --> 0:16:58.480 mortgage homeowners have a mortgage rate of three and a 0:16:58.520 --> 0:17:01.280 half percent. They're not to be incentivized to list their 0:17:01.280 --> 0:17:03.480 homes as these rates start to come down. So you 0:17:03.480 --> 0:17:06.400 could get this demand reaction into what is still an 0:17:06.400 --> 0:17:10.480 incredibly tight supply environment that leads to upside risk to 0:17:10.520 --> 0:17:10.840 our call. 0:17:11.560 --> 0:17:16.560 Interesting, So the demand variable just seems way more potent 0:17:16.760 --> 0:17:20.840 than the supply variable on the upside, on the upside downside, Yeah, 0:17:20.920 --> 0:17:24.040 now we're looking at supply. Okay, if you don't necessarily 0:17:24.040 --> 0:17:27.800 see an improvement in affordability, if you do get a 0:17:27.840 --> 0:17:30.159 harder landing than we think, if the unemployment rate picks up, 0:17:30.320 --> 0:17:32.280 and so all of a sudden, you do have issues 0:17:32.960 --> 0:17:36.159 that remain there from the demand side, and you have 0:17:36.400 --> 0:17:40.479 some impetus for supply to start being delivered into this 0:17:40.640 --> 0:17:43.560 lower demand environment. That's where you could start to see 0:17:43.600 --> 0:17:47.000 on prices come down because of where lending standards have been. 0:17:47.440 --> 0:17:49.919 We don't think it's going to be defaults and foreclosures. 0:17:50.560 --> 0:17:53.480 You anticipated where I was going to ask, because I imagine, 0:17:53.520 --> 0:17:56.439 so we're at like three point six percent unemployment, Like 0:17:56.840 --> 0:17:59.440 you know, there's a world where like it goes over 0:17:59.520 --> 0:18:01.600 four and a half. Yeah, I don't know, but like 0:18:01.720 --> 0:18:05.159 I imagine that let's say that went up to five percent 0:18:05.200 --> 0:18:10.080 in a recession, that that would have much less of 0:18:10.119 --> 0:18:14.359 an impact on housing supply than an equivalent move in 0:18:14.359 --> 0:18:17.040 the year two thousand and seven, with so many of 0:18:17.080 --> 0:18:19.800 the ninja loans and variants. 0:18:19.400 --> 0:18:22.440 I couldn't have said it better myself. Like one of 0:18:22.480 --> 0:18:26.480 the huge differences you mentioned ninja loans just the overall 0:18:26.480 --> 0:18:28.879 structure of the mortgage market, the percentage of the mortgage 0:18:28.880 --> 0:18:32.480 market that were adjustable rate. You had mortgages that were 0:18:32.600 --> 0:18:35.879 resetting into a lower home price environment had a tighter 0:18:35.960 --> 0:18:39.400 lending standard environment, so that monthly payment was increasing. Those 0:18:39.440 --> 0:18:43.119 homeowners effectively needed to refinance that mortgage, and it was 0:18:43.240 --> 0:18:47.000 really difficult for them to access that credit, which meant 0:18:47.600 --> 0:18:50.320 a larger a large share of mortgages falling to Linquin. 0:18:51.640 --> 0:18:54.840 This time around, not only do you not have that 0:18:55.040 --> 0:18:59.240 lending environment, you have a much stronger just mortgage base. 0:19:00.119 --> 0:19:03.760 On top of that, services have a much more robust toolkit, 0:19:03.880 --> 0:19:09.879 if you will, for closure mitigation, options, modifications, servicers working 0:19:09.920 --> 0:19:13.359 to help borrowers stay in their homes. That wasn't something 0:19:13.359 --> 0:19:15.000 that we as an industry had had a whole lot 0:19:15.000 --> 0:19:17.639 of experience with in two thousand and eight. Services are 0:19:17.720 --> 0:19:19.760 much more comfortable with that now, right. 0:19:19.880 --> 0:19:22.600 I forgot like all those stories of like people trying 0:19:22.640 --> 0:19:25.240 to get their banks on the phone, even I just. 0:19:25.160 --> 0:19:28.359 God, yeah, I just had big flashbacks to writing a 0:19:28.400 --> 0:19:32.240 lot about like the hamp modification program post two thousand 0:19:32.240 --> 0:19:35.359 and eight. But like now we have blueprints for doing 0:19:35.480 --> 0:19:39.760 these sort of modifications or like loan forget, not forgiveness, 0:19:39.800 --> 0:19:41.160 but the modificing. 0:19:41.359 --> 0:19:44.600 Yeah, somehow to stave off the like the wastefulness and 0:19:44.640 --> 0:19:46.159 the costliness of a foreclosure. 0:19:46.280 --> 0:19:46.560 Yeah. 0:19:46.560 --> 0:19:51.199 But since you mentioned banks and credit availability, we have 0:19:51.440 --> 0:19:56.720 seen some banking drama this year, and there was some 0:19:56.760 --> 0:20:03.119 talk initially that concerns around bank portfolios and maybe banks 0:20:03.160 --> 0:20:08.040 preparing for higher capital regulation or requirements was going to 0:20:08.200 --> 0:20:13.360 lead to less willingness to underwrite mortgage credit. Is there 0:20:13.920 --> 0:20:16.600 any evidence that we're seeing that or is that something 0:20:16.640 --> 0:20:17.560 that's on your radar. 0:20:18.200 --> 0:20:21.440 It is definitively on our radar. We've done a lot 0:20:21.480 --> 0:20:23.800 of work under an umbrella that we've kind of called 0:20:23.800 --> 0:20:26.840 a new regime for bank assets. For the reasons that 0:20:26.880 --> 0:20:32.400 you're mentioning, we do anticipate more regulation either being proposed 0:20:32.560 --> 0:20:35.960 or announced through the end of this year. Where regulations 0:20:36.040 --> 0:20:40.520 like LCR liquidity coverage ratios t lack total loss absorbing capital, 0:20:40.800 --> 0:20:44.640 banks away from the gesips having to have their mark 0:20:44.680 --> 0:20:48.160 to market losses on available for sale securities moving through 0:20:48.200 --> 0:20:50.880 to their regulatory capital which they could have opted out 0:20:50.960 --> 0:20:54.040 of up until what we believe these proposals will look like. 0:20:54.760 --> 0:20:57.359