Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal.
Speaker 1: Joe, do you remember this time last year some of
Speaker 1: the discourse around the housing market.
Speaker 2: Yeah, of course.
Speaker 3: I mean this was like really like when people were
Speaker 3: like waking up to these sort of like eye popping
Speaker 3: mortgage rates, at least by recent standards, you know, zoom out.
Speaker 3: Maybe not that high, but by recent standard, like, oh,
Speaker 3: this is it. Housing is sort of over crash. Prices plunge,
Speaker 3: We're back.
Speaker 1: That's exactly it. So we had a really historic run
Speaker 1: up in benchmark interest rates and those were translating into
Speaker 1: higher mortgage rates, and everyone thought that this was going
Speaker 1: to lead to a you know in some people thought
Speaker 1: it would be a house price collapse. Others thought it
Speaker 1: would be some sort of impact, something signific one way
Speaker 1: or the other. And yet fast forward twelve months. I'm
Speaker 1: looking at the case, Chiller intokes. We had like a
Speaker 1: tiny dip, you know, relatively small going into the end
Speaker 1: of last year, and now house prices are rising again.
Speaker 3: We basically hit like the shortest housing bear market ever.
Speaker 3: We did really tiny dipping prices. Every index you mentioned,
Speaker 3: I saw some other one just yesterday, like one of
Speaker 3: those like National like Freddy Ones. I don't know, that's
Speaker 3: like rocketing up again. Obviously we know that like the
Speaker 3: homebuilders sort of like slammed the brake. So it's like, okay,
Speaker 3: here's prices following buyers drop out, homebuilders get crushed, their
Speaker 3: stocks are is we've been talking about on a bunch
Speaker 3: of recent episodes. They're like basically at all time high.
Speaker 3: So somehow this huge repricing of mortgages did not cause
Speaker 3: the housing bear market that many but not everyone expected.
Speaker 1: Yeah, and I mean it's bad news if you were
Speaker 1: hoping that house prices would collapse that you could finally
Speaker 1: enter the market, news if you are a homeowner potentially.
Speaker 1: But anyway, you remember we talked to a guest last year,
Speaker 1: I think it was last October, and the idea is basically,
Speaker 1: we were getting this really weird housing market with rates
Speaker 1: going up, but house price is actually not that vulnerable
Speaker 1: to a decline. And I think that scenario has more
Speaker 1: or less panned.
Speaker 3: Out totally and it's been the theme of a few episodes,
Speaker 3: but it is totally true. Which is that a precondition
Speaker 3: so to speak of like a real housing downturn is
Speaker 3: unemployment and the existence of forced sellers, and so it's
Speaker 3: not a very good time to buy. But also very
Speaker 3: few people are forced sellers other than I think we
Speaker 3: like talked about, you know, their divorces and things like that,
Speaker 3: or people who have to move for their work. And
Speaker 3: you know, this has manifested itself, not just in firm prices,
Speaker 3: but like no housing inventory, and the people who track
Speaker 3: levels of housing inventory, it's like record lows are close
Speaker 3: to it. And so yeah, demand has dropped with high
Speaker 3: high mortgage raise, but so is supply and you get
Speaker 3: your price stability.
Speaker 2: That's right.
Speaker 1: So on this episode, I am very pleased to say
Speaker 1: we're going to be doing a checkup of the weird
Speaker 1: housing market. Let's put it that way. We're going to
Speaker 1: be speaking again with Jim Egan. He is, of course
Speaker 1: the US housing strategist over at Morgan Stanley. So, Jim,
Speaker 1: thank you so much for coming back on all thoughts.
Speaker 2: Thank you for having me back. It's a pleasure to
Speaker 2: be here.
Speaker 1: So since we last spoke, I've been following your research
Speaker 1: and your thesis when we spoke was this idea of
Speaker 1: basically a subdued impact on house prices, maybe less housing
Speaker 1: activity itself. Since then, you've sort of ratcheted down your
Speaker 1: expectations for house prices and then ratcheted them back up,
Speaker 1: not by a huge degree, I should say, but walk
Speaker 1: us through what the past ten months or eight months
Speaker 1: or so have been like from your perspective, trying to
Speaker 1: gauge what's going on here?
Speaker 2: Right, So, I think you two both brought up a
Speaker 2: lot of kind of the key underlying points for how
Speaker 2: we think about the housing market, our general framework, we
Speaker 2: like to call it our four pillared framework, where we're
Speaker 2: talking about demand for shelter, supply of shelter, the affordability
Speaker 2: of the US housing market, and the availability of mortgage credit.
Speaker 2: But a lot of what's been going on has been
Speaker 2: this kind of juxtaposition between supply and affordability. Mortgage rates
Speaker 2: move incredibly higher, and we see affordability deteriorate at a
Speaker 2: pace unlike anything that we've ever really seen in twenty
Speaker 2: twenty two. But the key question to ask on the
Speaker 2: back of that is who's affordability actually just deteriorated. And
Speaker 2: the structure of the mortgage market this time around is
Speaker 2: such that you have what we'll call strong hands, a
Speaker 2: lot of homeowners were able to either buy their home
Speaker 2: or refinance their mortgage at record low rates, and so
Speaker 2: they have these thirty year fixed rate mortgages where they're
Speaker 2: just incentivized not to list their home for sale. And so, Joe,
Speaker 2: you mentioned that inventories are close to historic. We have
Speaker 2: existing listings going back over forty years, and we're pretty
Speaker 2: much at the lows right now. And so if you
Speaker 2: don't have those homes listed for sale, then all of
Speaker 2: a sudden, despite the fact that affordability might theoretically warrant
Speaker 2: lower home prices, homeowners aren't willing to sell or they're
Speaker 2: not forced to sell into those lower home prices that
Speaker 2: affordability might theoretically warrant.
Speaker 3: Of the inventory that exists, how much of it is
Speaker 3: people who are selling for some reason or another. Because
Speaker 3: there's some selling, it's none versus the role of new supplies.
Speaker 3: So basically new homes.
Speaker 2: When we think of inventory, we break it down across
Speaker 2: three lines, right, existing listings, new home builds, and then
Speaker 2: you have kind of what we call the shadow inventory.
Speaker 2: This is distressed this is your forced sellers, this is foreclosures. Right,
Speaker 2: We're going to put that to the side for this conversation,
Speaker 2: because we do think that mortgage credit standards that fourth pillar.
Speaker 2: They've been so robust, they've remained so tight in the
Speaker 2: aftermath of the Great Financial Crisis, that we just don't
Speaker 2: necessarily see a substantial increase in defaults and foreclosures coming
Speaker 2: now from a new home sales perspective versus an existing
Speaker 2: home sales perspective, a new listing's perspective versus an existing
Speaker 2: listings perspective, this is still largely going to be an
Speaker 2: existing listings market right new home sales. One of the
Speaker 2: characteristics over the past six months of this year has
Speaker 2: been the fact that new home sales have made up
Speaker 2: a larger percentage of total transaction volumes since two thousand
Speaker 2: and six versus existing However, that just means they've climbed
Speaker 2: back to about twenty percent of transaction volumes, So existing
Speaker 2: listings are still call it, eighty percent of those monthly transactions,
Speaker 2: even if those listings are kind of running at forty
Speaker 2: year lows.
Speaker 1: So one of the interesting things that's happened in recent
Speaker 1: months is the home builders seem to have really ramped
Speaker 1: up activity, which is somewhat unusual because you would assume
Speaker 1: with interest rates going up, their cost of capital would
Speaker 1: be increasing, and yet it seems that supply is still
Speaker 1: so tight that everyone wants to get in on building
Speaker 1: new houses. How big of a surprise has that been
Speaker 1: for you? And would you expect the new home building
Speaker 1: response to moderate at some point?
Speaker 2: So I think if we take a little bit of
Speaker 2: a step back and look at the total starts figures,
Speaker 2: because I agree, if we look at some of the
Speaker 2: housing data that's come across in the past month, the
Speaker 2: past two months, I'd say that the three data points
Speaker 2: if you wanted to grab an optimistic housing view, would
Speaker 2: be do home sales? Wait, what's optimistic?
Speaker 3: Yeah, I don't even I don't even know what the
Speaker 3: optimistic side is anymore.
Speaker 2: That's a good question, I guess if you want to
Speaker 2: say that we're going to enter I don't even want
Speaker 2: to call it a V shaped recovery, but a significant
Speaker 2: increase in housing activity and then potentially even an increase
Speaker 2: in home prices on the back of that, as opposed
Speaker 2: to maybe an L shape. Have we found the bottom
Speaker 2: and we're moving or another leg down? Okay, So if
Speaker 2: you wanted to grab a we're entering a recovery activity?
Speaker 2: Is going to increase. Sales and starts are going to increase,
Speaker 2: Prices are going to increase. By the way, these are
Speaker 2: not our forecasts. You would grab new home sales, you
Speaker 2: would grab housing starts, and you would grab home builder confidence. Right,
Speaker 2: those are the ones that have been increasing. I mentioned
Speaker 2: already new home sales making up a larger share of
Speaker 2: transactions than really any point since two thousand and six
Speaker 2: to begin this year, that we think, in part is
Speaker 2: helping home builder confidence increase. It's climbed every single month
Speaker 2: for the first six months of this year after falling
Speaker 2: in every single month with twenty twenty two. But one
Speaker 2: thing that we would say here is a growth in
Speaker 2: new home sales is not necessarily indicative of a growth
Speaker 2: in the overall demand for shelter. That housing starts number,
Speaker 2: we think we have to take a step back and
Speaker 2: look at it in terms of single unit and multi unit. Right,
Speaker 2: single unit starts have historically made up call it, seventy
Speaker 2: to eighty percent of that number. They're a slightly smaller
Speaker 2: share of that total number now, as multi unit has
Speaker 2: made up a bigger share from peak in this cycle.
Speaker 2: In April of twenty twenty two, single unit starts are
Speaker 2: down over twenty percent now. The rate of that decline
Speaker 2: has slowed in recent months, and one of the reasons
Speaker 2: that we think that builders are also turning a little
Speaker 2: bit more optimistic is the backlog of homes under construction
Speaker 2: has been able to clear that built throughout last year
Speaker 2: supply chain issues related to the pandemic labor constraints. It
Speaker 2: just took longer to finish homes. As starts have come down.
Speaker 2: Units under construction have come down from peak. Units under
Speaker 2: construction are down about one hundred and twenty five one
Speaker 2: hundred and thirty thousand units. That's not the case on
Speaker 2: the five plus unit construction side. Units under construction continue
Speaker 2: to grow and the numbers that have beat expectations recently.
Speaker 2: We still think that multi unit is driving the bus.
Speaker 3: There.
Speaker 2: May of this year, remove all seasonal adjustments. May of
Speaker 2: this year we saw more five plus unit starts than
Speaker 2: any month since nineteen eighty six. Wow.
Speaker 3: I think it was this conversation that we had last year,
Speaker 3: and I learned like a bunch of terms that I
Speaker 3: had only pretended to know before, like headship raids and
Speaker 3: how you measure household formation. So I really appreciate you
Speaker 3: I really appreciated that because I finally got to learn
Speaker 3: a few things. But one of the things that we
Speaker 3: did see, especially during the sort of like the pandemic boom,
Speaker 3: weirdly enough the twenty twenty one the sort of surgeon
Speaker 3: household formation, people leaving their roommates, people moving out of
Speaker 3: you know, maybe moving out of their parents' house, like
Speaker 3: the sort of like twenty tense cliche of like living
Speaker 3: in your parents' basement, et cetera. What are we seeing
Speaker 3: in like current trends of household formation.
Speaker 2: I think that's one of the key questions to where
Speaker 2: we're moving going forward. And I will caveat this by saying,
Speaker 2: the data here is a little lagged. We are starting
Speaker 2: to see it slow. Okay, for all the trends that
Speaker 2: you just mentioned, household formation really increased over the course
Speaker 2: of the past three years. If I was on this
Speaker 2: podcast in twenty nineteen and we were talking about demographics, yeah,
Speaker 2: and what they would have meant for household formation going forward,
Speaker 2: we would have said that demographics warrant one point three
Speaker 2: to one point four million formations per year for at
Speaker 2: least the next five Okay, the last three years, we've
Speaker 2: seen something closer to one point eight wow million.
Speaker 1: Wow.
Speaker 2: Yeah, you mentioned headship rates. If we don't think that
Speaker 2: headship rates systemically should have moved higher, they certainly have
Speaker 2: over the last three years. But if you don't think
Speaker 2: that longer term they're moving higher, that means that we've
Speaker 2: pulled forward. If our original numbers were somewhere close to correct,
Speaker 2: call it one point two to one point five million households.
Speaker 2: Just real quickly.
Speaker 3: I know, I said I learned last year on the
Speaker 3: podcast what headship rates are, and now I forget what's
Speaker 3: a headship rate again?
Speaker 2: So a head ship rate, when you look at the population,
Speaker 2: you break it down by whatever cohorts you want to.
Speaker 2: Let's just do it by age, okay, right. So a
Speaker 2: headship rate is if you take everybody who's call it
Speaker 2: twenty five to twenty nine years old. Picture At twenty
Speaker 2: five year old, they're living in an apartment with three
Speaker 2: other people, the headship rate of that very small four
Speaker 2: person cohort twenty five percent. Right. If all of them
Speaker 2: moved to their own apartments all of a sudden, you
Speaker 2: have oh four people heading exactly, okay, right, And so
Speaker 2: typically headship rates for that early to mid twenties, you're
Speaker 2: talking twenty five ish percent, and through your late twenties
Speaker 2: early to mid thirties they climbed to the fifty five
Speaker 2: percent where.
Speaker 3: They The household formation is a verb and headship rate
Speaker 3: is a noun kind of or stock versus flow maybe
Speaker 3: one way to think the stock versus full Okay.
Speaker 1: Yes, so I realized I should have asked you this
Speaker 1: directly at the beginning of the conversation. But what is
Speaker 1: your base forecast for house prices?
Speaker 2: Yes, and so you did talk about a little bit
Speaker 2: of oscillation and what we were calling for. When I
Speaker 2: came on in October, we had brought our end of
Speaker 2: twenty twenty three number down to minus three percent year
Speaker 2: over year. We have just raised that we're back to
Speaker 2: flat zero point zero by the end of the year.
Speaker 2: And that is despite the fact that we continue to
Speaker 2: see in our forecasts a handful of months of negative
Speaker 2: year over year prints. We just did so the case
Speaker 2: Shiller number for June it's two months lagged. It's April data.
Speaker 2: It's the first time they've turned negative year over year
Speaker 2: since twenty twelve. We think that's going to be short lived.
Speaker 2: It's going to be a couple months, it was only
Speaker 2: about twenty four basis points negative, and we think by
Speaker 2: the end of the year we're going to be back
Speaker 2: to flat.
Speaker 3: I just want to say when you when we hit
Speaker 3: you on in October, you were there was an out
Speaker 3: of content.
Speaker 2: I mean, yeah, it was.
Speaker 3: I think it was a lot of credits.
Speaker 1: It got a lot of pushback, and then it turned
Speaker 1: into the consensus space.
Speaker 3: But like it really did, like at the time, this
Speaker 3: was it was a real out of consensus called and
Speaker 3: I think that we should like sort of take a
Speaker 3: moment to recognize and that's you know, that's how I
Speaker 3: have you back. But that was like at the time
Speaker 3: you people must have thought you were crazy.
Speaker 1: Listeners can't see Jim's face, but he's thinking how to
Speaker 1: Reswand first.
Speaker 2: Of all, thank you. There were certainly a lot of
Speaker 2: conversations in the fourth quarter of last year that asked
Speaker 2: why we weren't calling for home prices to fall further. Yeah,
Speaker 2: I would say that you made the comment that it
Speaker 2: moved towards consensus. It certainly did. And I don't think
Speaker 2: that our zero percent call by the end of the
Speaker 2: year is too far from consensus right now.
Speaker 1: So what's the biggest wild card or risk factor in
Speaker 1: your outlook at the moment, because I know you mentioned
Speaker 1: that you have this sort of four pillar way of
Speaker 1: looking at the housing market. I think the four factors
Speaker 1: are supplied demand, affordability, and credit availability. And then there's
Speaker 1: also this question of unemployment, which seems to be a
Speaker 1: big one sort of hovering over the industry or the
Speaker 1: market as a whole. So what are you looking at
Speaker 1: as the biggest risk factor to your outlook, Tracy?
Speaker 2: I think you mentioned a really good factor here from
Speaker 2: the unemployment perspective, But I want to take a step
Speaker 2: back and frame this in terms of the risks to
Speaker 2: the call to the upside and the risks to the
Speaker 2: call to the downside. We do think that if we're wrong,
Speaker 2: it's because home prices ended up climbing more than we
Speaker 2: expect by the end of the year. And we think
Speaker 2: that because look, affordability still remains incredibly low, close to
Speaker 2: multi decade lows. And so if you were to see
Speaker 2: affordability start to improve, and perhaps it improves because maybe
Speaker 2: we get more of a soft landing than we're expecting,
Speaker 2: Maybe the labor market starts to slow down, doesn't necessarily
Speaker 2: fall off a cliff. Maybe inflation really starts to slow down,
Speaker 2: and all of a sudden you get a world in
Speaker 2: which perhaps the Fed can start cutting earlier than people
Speaker 2: expect rates start to come down. Affordability is largely a
Speaker 2: three prong declaration. It's incomes, it's rates, and it's home prices.
Speaker 2: And if rates start to come down, yes, affordability going
Speaker 2: to be very difficult for that to get back to
Speaker 2: where we were in the twenty twenty twenty twenty one timeframe.
Speaker 2: But if people start seeing five and a half percent
Speaker 2: mortgage rates as opposed to seven, that could bring more
Speaker 2: people off the sidelines, and supply is still going to
Speaker 2: be low. Jaybackau and our agency MBS team calculates something
Speaker 2: called the truly Refinanciable Index, and I do think this
Speaker 2: is one of the more important numbers in our forecast,
Speaker 2: or at least interesting. It measures what percentage of the
Speaker 2: mortgage universe has at least a twenty five basis point
Speaker 2: incentive to refinance at any given point in time, given
Speaker 2: where prevailing rates are. As we're sitting here today, it's
Speaker 2: less than two percent of the universe. If mortgage rates
Speaker 2: would rally all the way to four percent, that is
Speaker 2: nowhere close to our forecasts by they if they get
Speaker 2: to six percent by the middle of next year, we
Speaker 2: think that would be roughly in line with expectations. They
Speaker 2: might be higher than that. But if they get to
Speaker 2: four percent, that truly refinancible index only climbs to twenty
Speaker 2: one percent of the mortgage market. Seventy nine percent of
Speaker 2: mortgage homeowners have a mortgage rate of three and a
Speaker 2: half percent. They're not to be incentivized to list their
Speaker 2: homes as these rates start to come down. So you
Speaker 2: could get this demand reaction into what is still an
Speaker 2: incredibly tight supply environment that leads to upside risk to
Speaker 2: our call.
Speaker 3: Interesting, So the demand variable just seems way more potent
Speaker 3: than the supply variable on the upside, on the upside downside, Yeah,
Speaker 3: now we're looking at supply. Okay, if you don't necessarily
Speaker 3: see an improvement in affordability, if you do get a
Speaker 3: harder landing than we think, if the unemployment rate picks up,
Speaker 3: and so all of a sudden, you do have issues
Speaker 3: that remain there from the demand side, and you have
Speaker 3: some impetus for supply to start being delivered into this
Speaker 3: lower demand environment. That's where you could start to see
Speaker 3: on prices come down because of where lending standards have been.
Speaker 3: We don't think it's going to be defaults and foreclosures.
Speaker 3: You anticipated where I was going to ask, because I imagine,
Speaker 3: so we're at like three point six percent unemployment, Like
Speaker 3: you know, there's a world where like it goes over
Speaker 3: four and a half. Yeah, I don't know, but like
Speaker 3: I imagine that let's say that went up to five percent
Speaker 3: in a recession, that that would have much less of
Speaker 3: an impact on housing supply than an equivalent move in
Speaker 3: the year two thousand and seven, with so many of
Speaker 3: the ninja loans and variants.
Speaker 2: I couldn't have said it better myself. Like one of
Speaker 2: the huge differences you mentioned ninja loans just the overall
Speaker 2: structure of the mortgage market, the percentage of the mortgage
Speaker 2: market that were adjustable rate. You had mortgages that were
Speaker 2: resetting into a lower home price environment had a tighter
Speaker 2: lending standard environment, so that monthly payment was increasing. Those
Speaker 2: homeowners effectively needed to refinance that mortgage, and it was
Speaker 2: really difficult for them to access that credit, which meant
Speaker 2: a larger a large share of mortgages falling to Linquin.
Speaker 2: This time around, not only do you not have that
Speaker 2: lending environment, you have a much stronger just mortgage base.
Speaker 2: On top of that, services have a much more robust toolkit,
Speaker 2: if you will, for closure mitigation, options, modifications, servicers working
Speaker 2: to help borrowers stay in their homes. That wasn't something
Speaker 2: that we as an industry had had a whole lot
Speaker 2: of experience with in two thousand and eight. Services are
Speaker 2: much more comfortable with that now, right.
Speaker 3: I forgot like all those stories of like people trying
Speaker 3: to get their banks on the phone, even I just.
Speaker 1: God, yeah, I just had big flashbacks to writing a
Speaker 1: lot about like the hamp modification program post two thousand
Speaker 1: and eight. But like now we have blueprints for doing
Speaker 1: these sort of modifications or like loan forget, not forgiveness,
Speaker 1: but the modificing.
Speaker 3: Yeah, somehow to stave off the like the wastefulness and
Speaker 3: the costliness of a foreclosure.
Speaker 2: Yeah.
Speaker 1: But since you mentioned banks and credit availability, we have
Speaker 1: seen some banking drama this year, and there was some
Speaker 1: talk initially that concerns around bank portfolios and maybe banks
Speaker 1: preparing for higher capital regulation or requirements was going to
Speaker 1: lead to less willingness to underwrite mortgage credit. Is there
Speaker 1: any evidence that we're seeing that or is that something
Speaker 1: that's on your radar.
Speaker 2: It is definitively on our radar. We've done a lot
Speaker 2: of work under an umbrella that we've kind of called
Speaker 2: a new regime for bank assets. For the reasons that
Speaker 2: you're mentioning, we do anticipate more regulation either being proposed
Speaker 2: or announced through the end of this year. Where regulations
Speaker 2: like LCR liquidity coverage ratios t lack total loss absorbing capital,
Speaker 2: banks away from the gesips having to have their mark
Speaker 2: to market losses on available for sale securities moving through
Speaker 2: to their regulatory capital which they could have opted out
Speaker 2: of up until what we believe these proposals will look like.
Speaker 2: All of that, we think means they have to hold
Speaker 2: more cash. Effectively, they have to have a higher level
Speaker 2: of liquidity. It means they're going to have less dollars
Speaker 2: to lend. It also means they're probably going to be
Speaker 2: looking a little bit more shorter duration on the asset side,
Speaker 2: and banks by a lot of mortgage backed securities. By
Speaker 2: our estimates, banks hold about thirty three percent of the
Speaker 2: agency MBS universe. They buy that as longer duration assets,
Speaker 2: so we do think that that's going to impact mortgage
Speaker 2: rates from that perspective. When we originally thought through this,
Speaker 2: again Jay back out of the agency strategist, he went
Speaker 2: underweight mortgages because this is a structural change to bank
Speaker 2: demand for mortgages on a go forward basis. But valuations
Speaker 2: matter as well, so we're neutral at this point. Mortgages
Speaker 2: did sell off, and so we think that at this
Speaker 2: point they're effectively fair value. But that is how we
Speaker 2: kind of have to think about affordability moving forward. And
Speaker 2: then from a credit availability perspective, if you ask where
Speaker 2: from a four pillar perspective we were in that outlook
Speaker 2: the last time I was here versus now, I would
Speaker 2: have told you that we probably expected lending standards to ease,
Speaker 2: at least on the margin over the course of twenty
Speaker 2: twenty three. We no longer believe that lending standards. We think,
Speaker 2: if anything, they'll stay tight, probably going to tighten from here.
Speaker 2: Some of the credit availability indices are already showing a
Speaker 2: little of that behavior, but lending standards have remained so
Speaker 2: tight for fifteen years. The question is really how much
Speaker 2: tighter can they get.
Speaker 3: I want to talk about another dynamic of this sort
Speaker 3: of pandemic housing boom. You know, we talked about the
Speaker 3: surge and household formation and roommates no longer being roommates
Speaker 3: and people moving out of their family's homes. The other
Speaker 3: thing we saw is people with high incomes leaving cities
Speaker 3: and going into markets in which they had above average income.
Speaker 3: So if you're working for Facebook or something and suddenly
Speaker 3: you can like go live you know, in Arizona or
Speaker 3: Utah or whatever, and suddenly you're the highest paid person
Speaker 3: in the area, you can outbid all the locals for homes. Obviously,
Speaker 3: like that wave ended, probably reversing a little bit, and
Speaker 3: then some companies like, no, we actually don't want you
Speaker 3: out in the middle of nowhere. Come back to the office, Ecerea.
Speaker 3: How much did that sort of just stort things and
Speaker 3: contribute to price appreciation? And how much is this sort
Speaker 3: of like I guess it's like ameliorating some of that
Speaker 3: wave like affecting the market now.
Speaker 2: So from a contribute to price appreciation perspective, if you
Speaker 2: ask me the one data point I really want to
Speaker 2: know for home prices six or twelve months forward, it's supply.
Speaker 2: If you ask me five years forward, it's population migration
Speaker 2: and where people are moving. But if you think about
Speaker 2: what happened when at the outset of COVID, it was
Speaker 2: almost a perfect storm from a home price perspective, where
Speaker 2: you had this demand people their ability to work from home,
Speaker 2: maybe their desire to get a little bit more space
Speaker 2: leave densely crowded areas. I think I mentioned this last
Speaker 2: time I was on but the home price appreciation between
Speaker 2: less densely populated zip codes and more densely populated zip
Speaker 2: codes bifurcated in a way that we'd never really seen
Speaker 2: in our data going back to the late eighties early nineties,
Speaker 2: because not only did you have that demand, but with
Speaker 2: mortgage rates coming down to historical lows now all of
Speaker 2: a sudden, the buying power of that demand is increased
Speaker 2: and supply was racing to all time lows. And so
Speaker 2: you kind of had this three pronged demand plus buying
Speaker 2: power of demand plus tight supply leading to real incredible
Speaker 2: home priz croak in some of those areas.
Speaker 1: Since we're throwing out sort of idiosyncratic things here, can
Speaker 1: I ask about airbnb supply And this is something that
Speaker 1: has been cropping up lately. People talking about like, oh, well,
Speaker 1: no one wants to stay at an airbnb anymore. It's
Speaker 1: too much hassle, it's too expensive, you have to clean
Speaker 1: up the entire apartment or house before here how to leave.
Speaker 1: I've never stayed in an airbnb, by the way, so
Speaker 1: I have no idea. People are talking about that as
Speaker 1: a potential source of marginal supply. So if airbnb hosts
Speaker 1: can no longer get people coming into their properties, maybe
Speaker 1: they just decide to sell. Is that at all something
Speaker 1: that you're looking out for, or is that maybe wishful
Speaker 1: thinking on the part of people who are hoping for
Speaker 1: a flood of supply to come into the market so
Speaker 1: they can finally buy.
Speaker 2: Look, I think that's an important question because something that
Speaker 2: I hit earlier on the downside is where could supply
Speaker 2: come from? And we're constantly trying to figure out if
Speaker 2: there's some pocket of homes that could hit in a
Speaker 2: lower demand environment, a challenged affordability environment. And one question
Speaker 2: that comes up has been are these kind of individual
Speaker 2: investors who maybe bought homes for short term rentals, could
Speaker 2: they become that supply? And I don't have the exact
Speaker 2: numbers in terms of how much supply that could really
Speaker 2: represent when we look at the mortgages holistically that were
Speaker 2: originated over the course of the past three years, it's
Speaker 2: a lot of fixed rate paper, it's a lot of
Speaker 2: really low interest rate paper. You've locked in a very
Speaker 2: low cost of shelter, even if it's not your primary shelter.
Speaker 2: You have an elevated amount of equity in that home.
Speaker 2: Perhaps you're not seeing the rental demand that you might
Speaker 2: otherwise see, but it's not necessarily something that we think
Speaker 2: is going to end up being enough supply. We're targeting
Speaker 2: a few other areas that we think might end up
Speaker 2: materializing as that potential supply that does drive our barecase.
Speaker 3: Now speaking of idiosyncratic things, and again maybe it's not
Speaker 3: enough to move the dial, But what about the eye buyers?
Speaker 3: And I remember there are all these stories about like,
Speaker 3: you know, we even talked about it recently on an
Speaker 3: episode with Greg Jensen, which is like people had these
Speaker 3: algorithms and everyone's like, oh, these are the real suckers.
Speaker 2: They'll buy anything at any price.
Speaker 3: Did that really move the dial in your view? Like
Speaker 3: how much of a are you thinking about things like that?
Speaker 3: Disappearance of the eye buyers?
Speaker 2: Any numbers that we can see about the amount of
Speaker 2: homes that have been purchased. Kind of on the institutional side,
Speaker 2: I think if you look at the markets, and this
Speaker 2: is more broadly not just eye buyers, but if you
Speaker 2: look at the markets where institutional investors have been a
Speaker 2: little bit more active over the past few years, those
Speaker 2: also tend to be some of the markets that saw
Speaker 2: the highest degree of home price appreciation. So did that
Speaker 2: demand maybe lead to home prices increasing a little bit
Speaker 2: more than they otherwise would perhaps perhaps on the margins.
Speaker 2: But one thing we'd say is that it doesn't appear
Speaker 2: as if the number of homes purchased was really that
Speaker 2: large a percentage, at least as far as the total
Speaker 2: housing market is concerned. And then, Joe, to your point
Speaker 2: about that demand perhaps not being there. Demand has been
Speaker 2: pretty weak. The bifurcated housing view that we talked about
Speaker 2: from last year was a function of sales volumes coming down,
Speaker 2: but home price is not following because supply has been
Speaker 2: so low. And so here we're thinking it's another world
Speaker 2: in which look, as long as supply remains contained, this
Speaker 2: is just another piece of that weaker demand part.
Speaker 1: Right, I have to ask again on the topic of
Speaker 1: idiosyncratic factors. But I remember we spoke to you about
Speaker 1: this the last time you were on but baby boomers
Speaker 1: and the idea that baby boomers own a lot of houses,
Speaker 1: in some cases multiple houses that they might be using
Speaker 1: for additional income. What are the prospects that that supply
Speaker 1: gets freed up anytime soon? And I think your answer
Speaker 1: to this last time was not within the next decade.
Speaker 1: But has anything changed?
Speaker 2: I mean, that's our bair case. You've hit it on
Speaker 2: the head. It is they own roughly a third of
Speaker 2: the housing stock. Not boomers in general, but people over
Speaker 2: the age of sixty five hold one third of all
Speaker 2: owned homes in the United States right now, and over
Speaker 2: fifty percent of them bought that home before the year
Speaker 2: two thousand. So you're talking about a homeowner who has
Speaker 2: seen an incredible amount of home price appreciation. They're also
Speaker 2: probably less likely to even have a mortgage attached to
Speaker 2: that home. So the whole lock and effect that we've
Speaker 2: been discussing doesn't necessarily apply in the same way to
Speaker 2: these homeowners. Another big difference, going back to that shadow
Speaker 2: inventory foreclosures between two thousand and six, two thousand and
Speaker 2: seven and today. Roughly sixty nine to seventy percent of
Speaker 2: owned homes back then had a mortgage attached to them.
Speaker 2: That's down to sixty one or sixty two percent today,
Speaker 2: and I think part of that's being driven by these
Speaker 2: older homeowners who've paid that off.
Speaker 3: So a huge chunk of the housing stock is unforeclosable
Speaker 3: under any economic environment because there is just no debt
Speaker 3: attached to it at all, Virtually unforeclosed, virtually.
Speaker 2: Unforclosable, okay exactly. And so we think that that's also
Speaker 2: contributing to the fact that foreclosures are going to remain
Speaker 2: low now. It it's our bare case, it's not our
Speaker 2: base case, because we're still seeing a trend towards aging
Speaker 2: in place. My grandfather's in his early nineties in Connecticut,
Speaker 2: and I know that he's not thinking about selling his
Speaker 2: home at any point in the near future. But they
Speaker 2: own more than enough homes to create a supply issue
Speaker 2: by the very definitions we just spoke about owning their
Speaker 2: homes before two thousand for instance, that means they own
Speaker 2: the home in two thousand and eight, they watched the
Speaker 2: value plummet. If we get a harder landing, if you
Speaker 2: start seeing unemployment rates take up. If you start seeing
Speaker 2: a little bit more weakness than we're expecting in home prices,
Speaker 2: perhaps they're going to be willing to start listing these
Speaker 2: homes at a larger clip or a faster clip than
Speaker 2: we're expecting. As you mentioned, in our base case ten
Speaker 2: to fifteen years, it will become supply at some point,
Speaker 2: but can really change dynamics if it becomes one to
Speaker 2: two years.
Speaker 1: So we talked about your arguments last year about the
Speaker 1: sort of frozen slash weird housing market, how that became consensus,
Speaker 1: and your base case for this year is for house
Speaker 1: prices to remain relatively flat. What are you looking out
Speaker 1: for for the rest of the year, like, what is
Speaker 1: top of mind for you?
Speaker 2: So I'm going to come back to supply and affordability.
Speaker 2: Why we've tweaked our forecasts is because of the fact
Speaker 2: that affordability historic levels of deterioration. It's still challenged, but
Speaker 2: affordability is no longer getting worse. In fact, over the
Speaker 2: past six months it's improved on the margins supply close
Speaker 2: to forty year lows. It's no longer setting new historic
Speaker 2: lows every month. You mentioned that kind of people who
Speaker 2: are forced to sell, death and divorce, maybe moving for jobs,
Speaker 2: or the turnover rate. It seems like from a supply perspective,
Speaker 2: we've kind of hit that, and so the rate of change,
Speaker 2: the direction of travel for those two metrics matter because
Speaker 2: of the lock and effect. We don't see supply increasing
Speaker 2: all that substantially moving forward. We don't think you have
Speaker 2: another leg down here. We don't see affordability improving hand
Speaker 2: over fist as we move forward, but we don't see
Speaker 2: a lot of deterioration moving forward from an affordability perspective either.
Speaker 2: Those are the things that we're going to be tracking
Speaker 2: the most closely. But what does that mean. It means
Speaker 2: that from a housing activity perspective, a sales perspective, a
Speaker 2: starts perspective, we think the big legs down are behind us.
Speaker 2: We think we're kind of moving sideways here. The year
Speaker 2: over year comps are going to get a lot more
Speaker 2: attractive in the second half of twenty twenty three, in particular,
Speaker 2: in the fourth quarter, you're going to see some year
Speaker 2: over year growth. I think for the full year, existing
Speaker 2: home sales, housing starts, single unit housing starts are still
Speaker 2: going to be down ten to fifteen percent, but they're
Speaker 2: down twenty five percent through the first five months of
Speaker 2: the year, so that's a much a pretty significant improvement
Speaker 2: versus where we've been. Home prices they'll stay negative year
Speaker 2: over year for a couple months, they're going to keep
Speaker 2: growing month over month. By the end of the year
Speaker 2: will be flat. And the new home sales are the
Speaker 2: one statistic that we do think is going to show
Speaker 2: year over year growth simply because on a relative basis,
Speaker 2: they're the only game in town that luck and effect
Speaker 2: keeping existing inventory off the market.
Speaker 1: All right, well, Jim, thank you so much for coming
Speaker 1: back on odd Lots. Really appreciate it.
Speaker 2: Thank you very much for having me. Thanks Jim. That
Speaker 2: was great.
Speaker 1: So Joe, that was really interesting, and I really enjoyed
Speaker 1: being able to catch up with Jim, given that, you know,
Speaker 1: given the call last year was pretty out of consensus
Speaker 1: and then sort of became the de facto thing. One
Speaker 1: thing I hadn't realized was that stat about housing starts,
Speaker 1: like the differentiation between single housing versus multi I didn't
Speaker 1: realize it was so segmented.
Speaker 2: No, that's what I know.
Speaker 3: It's a really it's a pretty extraordinary start. And the
Speaker 3: fact that like rents have like really slowed, and yet
Speaker 3: at the same time multifamilies starts continued to be setting
Speaker 3: like these like monster numbers, is like kind of wild.
Speaker 3: I also just think that like the degree to which
Speaker 3: the housing market is much less frail than it was
Speaker 3: in two thousand and eight or the last time we
Speaker 3: had a bear market, because obviously, and we've talked about
Speaker 3: this on a couple episodes, like unemployment would of course
Speaker 3: be a driver of more supply, but if you don't
Speaker 3: have like bad underwriting and you don't have people at
Speaker 3: the brink. And his point about how now there's a
Speaker 3: sort of like modification infrastructure, like these are like huge
Speaker 3: things working against the sort of like bare case in housing.
Speaker 1: Yeah, and I mean I remember post two thousand and
Speaker 1: eight the stories about how some of the mortgage servicers
Speaker 1: just didn't have enough people to go through all the
Speaker 1: paperwork and it was just a massive mess. But now
Speaker 1: that infrastructure seems to be in place. The other thing
Speaker 1: I would say is, speaking of segmentation, I wonder it
Speaker 1: feels like the economy overall is just increasingly segmented between
Speaker 1: homeowners and on homeowners, and it really is. I know,
Speaker 1: he talked about affordability having increased to some degree, but
Speaker 1: it really does feel like it's getting increasingly hard to
Speaker 1: get on that housing ladder totally.
Speaker 3: It's like it could be for years to come, like
Speaker 3: in the year twenty thirty or the year twenty forty,
Speaker 3: Like there are still this huge divergence between like millennials
Speaker 3: who had a pre twenty twenty two mortgage and yeah, seriously,
Speaker 3: and yeah, I think you're right on, Like that's like
Speaker 3: a really interesting It moved so fast and so sharp,
Speaker 3: and some people are sitting on these like there's incredibly
Speaker 3: cheap loans and some people never see them, and that's
Speaker 3: going to weigh on people, and they like have these
Speaker 3: huge consequences that we have no idea about.
Speaker 1: Yeah, and that refine boom that we saw post twenty twenty.
Speaker 1: I also think the tail of it is incredibly long
Speaker 1: in some respects and probably unappreciated, because if you lock
Speaker 1: those lower housing costs in, you have them for years, yeah,
Speaker 1: years and years, while others do not. And so I
Speaker 1: think that's feeding some of the frustrations as well.
Speaker 3: And to his point, like you could have mortgage rates
Speaker 3: going back down to four percent, which is far outside
Speaker 3: of anyone's base case, like not even close, and even
Speaker 3: that no longer moves the dial that much because so
Speaker 3: many people have rates on some level locked in below
Speaker 3: that is pretty wild.
Speaker 1: Yeah, it is all right. Shall we leave it there.
Speaker 2: Let's leave it there.
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me on Twitter
Speaker 3: at the Stalwart, follow our producers Carmen Rodriguez at Carmen
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