Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Jill. Why isn't thal Joe.
Speaker 2: There's been this very long running now it feels, conversation
Speaker 2: about the health of the American consumer. Yes, you've seen
Speaker 2: all that commentary, right, So you see these headlines that
Speaker 2: are like consumer debt at a record high, and you
Speaker 2: see some of the sentiment surveys which have for the
Speaker 2: past two years been coming in pretty bad. They started
Speaker 2: to look kind of bad when all the tariffs were announced. Again,
Speaker 2: they've improved a bit since then. And yet consumers seem to,
Speaker 2: you know, pretty much keep doing what they've been doing
Speaker 2: for a long time, which is spending, buying houses, things
Speaker 2: like that.
Speaker 3: Well, they're spending, for sure, But this is the thing.
Speaker 4: There's all this dismal sentiment data everywhere you look, and
Speaker 4: yet by and large, you know, you read like CEOs,
Speaker 4: you look at the retail data, et cetera.
Speaker 3: It's not like that terrible.
Speaker 4: Companies seem to be doing fine, but there are pockets
Speaker 4: of the economy clearly that are softening.
Speaker 3: There is rising.
Speaker 4: Inventory of homes. This is like one of the huge
Speaker 4: stories in the economy. So there are clear areas where
Speaker 4: high rates and stuff are having in effect. But to
Speaker 4: your point, like it has not been some sort of
Speaker 4: linear story of people are depressed in the economies.
Speaker 2: Farm But you're right, we have seen some signs of softening,
Speaker 2: So you know, we have to ask is it going
Speaker 2: to be different this time? Is it the start of
Speaker 2: some sort of real deterioration in the health of the
Speaker 2: US consumer. I have also seen some very interesting stats recently,
Speaker 2: specifically about consumer lending and mortgages and things like that.
Speaker 2: I've seen, for instance, that existing home sales are down
Speaker 2: one point nine percent year to date and have recorded
Speaker 2: the lowest volumes by count at this point in the
Speaker 2: year since two thousand and nine. And when you hear those,
Speaker 2: you know, since two thousand and nine dates, you start
Speaker 2: to get a little worried.
Speaker 3: Right, this is definitely the case.
Speaker 4: I saw something I think it was from Redfin they
Speaker 4: said there was a record gap between sellers and buyers
Speaker 4: in the housing market right now. Look, this is one
Speaker 4: area where the high rates environment, Like, there's clearly something
Speaker 4: going on. We haven't gotten like big you know, when
Speaker 4: rates shot up in like twenty late twenty twenty one
Speaker 4: or whatever that was. Do you know, by the way,
Speaker 4: twenty this occurred to me last night. Twenty one is
Speaker 4: kind of a long time ago, Like I know, I
Speaker 4: was thinking about this last night because it's sort of
Speaker 4: a cliche to point out that the pandemic twenty twenty
Speaker 4: was long time ago. But some of those really pivotal
Speaker 4: years where we got the surge of the raid hikes,
Speaker 4: we got the surgeon inflation, even that's starting to fade
Speaker 4: into history a little bit. I don't know, maybe just
Speaker 4: last night I was think about getting.
Speaker 2: Old and Joe, time is a flat circle. That's all
Speaker 2: I'm going.
Speaker 4: But there's something like, you know, house prices didn't fall
Speaker 4: off cliff when rates were high dramatically, which was a
Speaker 4: surprise to some Like some people thought, Okay, they're hugging
Speaker 4: rates dramatically. The housing market is going to be affected.
Speaker 4: The housing market is the US economy. Therefore the US
Speaker 4: economy will fall off the cliff. That did not happen.
Speaker 4: But there has been this slow down and lately we've
Speaker 4: been seeing like, okay, like rates are still high, even
Speaker 4: with talk of raid cuts, et cetera. They're still high
Speaker 4: and there's clearly this sort of accumulation of household inventory,
Speaker 4: these imbalances that are emerging. I don't know, maybe we
Speaker 4: will get price to clients.
Speaker 3: What's going to happen.
Speaker 2: Well, I'm glad you brought that up, because we actually
Speaker 2: do have the perfect guest. We're going to be speaking
Speaker 2: with someone who was very, very correct in calling that
Speaker 2: we wouldn't see a massive house price.
Speaker 3: I thought it was wrong.
Speaker 4: I didn't say it at the time, but he came
Speaker 4: on the podcast like, we're not going to say and
Speaker 4: I was like, there's no way.
Speaker 3: I'm glad I didn't say. This is why I never get.
Speaker 4: Anything wrong, because I don't state prediction because you don't
Speaker 4: have opinions. But as a matter of professional accountability, when
Speaker 4: we were interviewing him, in my head, I was skeptical.
Speaker 2: All right, well that's a big maya coupla from Joe. Okay,
Speaker 2: without further ado, then we are going to be speaking
Speaker 2: with Morgan Stanley housing strategist Jim Egan. He's been on
Speaker 2: the show quite a few times before. And here's where
Speaker 2: I produce my disclaimer, which is that stat that I
Speaker 2: just quoted about existing home sales actually came from one
Speaker 2: of his recent notes. So, Jim, welcome back to the show.
Speaker 5: Thank you so much for having me back. It's an
Speaker 5: honor to be here.
Speaker 2: I'm going to start, Actually, I'm going to go back
Speaker 2: in time for a second. Let's just start. Why has
Speaker 2: the American consumer been so resilient? And it's kind of
Speaker 2: funny because you see people even talking about it still.
Speaker 2: So we just had corporate earnings and there was this
Speaker 2: funny comment from the AMEX CEO where he basically said,
Speaker 2: our card members say they don't have any confidence in
Speaker 2: the economy, but they keep spending, which is pretty funny
Speaker 2: to me. But why this strength?
Speaker 5: Yeah, So I think there are a number of different
Speaker 5: things driving the underlying strength in the consumer. We do
Speaker 5: a lot of work across our debt analysts and Morgan
Speaker 5: Stanley Research with our economists to kind of try to
Speaker 5: tie these positive macro numbers to some of the things
Speaker 5: we're seeing on a more micro level. Look the unemployment rate.
Speaker 5: We're at four point two percent, very low unemployment rate.
Speaker 5: It's been low for a few years now. And on
Speaker 5: top of that, you've had an incredible amount of wealth growth.
Speaker 5: There's been volatility in markets recently, but whether it's home
Speaker 5: prices at record highs and the record amount of equity
Speaker 5: that homeowners and sixty five percent of Americans are homeowners.
Speaker 5: The equity that they have in their home, or the
Speaker 5: wealth they've been able to gain from appreciating financial assets.
Speaker 5: That's contributed to consumer's ability to spend.
Speaker 4: These tracks completely with me because I'm anxious about this
Speaker 4: date of the economy. I read all the headlines like
Speaker 4: everyone else. But you know, like I owned a home,
Speaker 4: I bought a home, I have my retirement account. It
Speaker 4: seems to be doing fine despite my anxiety. I don't
Speaker 4: think I'm like changing my behavior anyway.
Speaker 5: And I think another piece to that when we think
Speaker 5: about just the consumer balance sheet, one of the statistics
Speaker 5: that gets quoted all the time is the just debt
Speaker 5: service ratios debt service to income. It's above where it
Speaker 5: wasn't twenty twenty one, but it's still it's so of
Speaker 5: the lowest levels we've seen in the past couple decades.
Speaker 5: The capital c consumer, the holistic balance sheet of the
Speaker 5: consumer that still looks healthy. We don't think that the
Speaker 5: consumer holistically is over levered. There might be some pockets
Speaker 5: of pressure, but we don't think they're in aggregate overlevered.
Speaker 2: Yeah, so this is exactly what I wanted to ask
Speaker 2: you because one of the things that I've been sort
Speaker 2: of internalizing from recent years is this idea that the
Speaker 2: aggregate hides a lot of stuff happening in the tails. Right,
Speaker 2: And the question, I guess is always when the tails
Speaker 2: start getting fat enough that they start affecting the whole.
Speaker 2: And this is one reason why your recent research really
Speaker 2: caught my interest and I actually wrote it up in
Speaker 2: the All Thoughts newsletter. But you are starting to see
Speaker 2: some pockets of strain. Describe what you're examining right now.
Speaker 5: Yes, so thank you for writing that up.
Speaker 2: Visibility was very much No, thank you for producing it, honestly.
Speaker 5: And I think what we're seeing and this is something
Speaker 5: as part of my role at Morgan Stanley, I work
Speaker 5: on the teams that look at auto credit, within asset
Speaker 5: back securities, credit cards, all of those other consumer products.
Speaker 5: And one of the i'll call it apparent contradictions that
Speaker 5: we were seeing was the macro consumer data that we
Speaker 5: were just discussing, incredibly healthy consumer keeps spending and then
Speaker 5: we're seeing delinquencies climb, delinquencies climbing with the unemployment rate
Speaker 5: as low as it was. That was something that we
Speaker 5: had been asked to explain a fair amount of times.
Speaker 5: We're trying to find better data to explain, and so
Speaker 5: the impetus behind that report was to kind of say, look,
Speaker 5: subprime auto delinquencies have been climbing to a point where
Speaker 5: they're higher now than they've been at any point. I
Speaker 5: mean some metrics there above where they were in two
Speaker 5: thousand and eight, two thousand and nine at their prior peaks.
Speaker 5: Now there's some apples to apples issues there, but you'll
Speaker 5: see those numbers. Prime auto delinquencies have started climbing. Unsecured
Speaker 5: consumer delinquencies are up. They're not at local highs, but
Speaker 5: they're up. And so from a pockets perspective, we are
Speaker 5: seeing a little bit of those delinquencies climb.
Speaker 2: I just want to explain the terms really quickly, but
Speaker 2: what's the official definition of delinquency.
Speaker 5: So delinquency as we're talking about it here is somebody
Speaker 5: who is thirty days past due on their loan. So
Speaker 5: we'll either talk about it in terms of thirty days
Speaker 5: or sometimes sixty plus days. But you've missed at least
Speaker 5: one or two payments on a debt instrument, whether that's
Speaker 5: an auto loan, we'll look at it for mortgages, credit cards,
Speaker 5: and so on and so forth.
Speaker 4: So this is really important though, because in the aggregate
Speaker 4: things are mostly fine, but we're seeing this rise across
Speaker 4: different categories, which is not entirely intuitive. So what you're
Speaker 4: saying is that there are these tails, there are these
Speaker 4: sources of stress, but that they're not a function of
Speaker 4: credit worthiness.
Speaker 5: What are they a function of might not be a
Speaker 5: function of aggregate credit worthiness, And that's when it comes
Speaker 5: into looking at these statistics that we need to use
Speaker 5: to think about just kind of broadly, how the economy,
Speaker 5: how the consumer is going to move forward. But I
Speaker 5: mentioned debt service ratios right when we think about what's
Speaker 5: brought debts service ratio is down to kind of some
Speaker 5: of the lowest levels we've seen in decades. The mortgage
Speaker 5: market plays a big role. The largest piece of debt
Speaker 5: on any household balance sheet that owns a home is
Speaker 5: almost certainly going to be that mortgage. And the lock
Speaker 5: in effect that we've heard in the housing market, that's
Speaker 5: a function of the fact that a majority, an overwhelming majority,
Speaker 5: of mortgage debt in this country thirty or fixed rate mortgages.
Speaker 5: Most of those borrowers were able to take out that
Speaker 5: mortgage at historically low rates. In twenty twenty, twenty twenty one,
Speaker 5: the effective rate on the outstanding right now four percent,
Speaker 5: prevailing mortgage rates six point eight six point nine percent
Speaker 5: as we're in this studio today. So when you think
Speaker 5: about two thirds of the country or homeowners, their effective
Speaker 5: rates at four percent are dragging down that payment. Only
Speaker 5: sixty percent of homeowners even have a mortgage, so forty
Speaker 5: percent own their home free and clear any debt. They're
Speaker 5: not contributing to the numerator. And the thirty five percent
Speaker 5: of households that are renters rents don't count as debt
Speaker 5: service in these equations. They're contributing to the denominator in
Speaker 5: terms of the income piece of this calculation, but they're
Speaker 5: not adding to the service piece, right and or the
Speaker 5: debt service piece, And so that's all helping to drag
Speaker 5: this down and potentially missing a few pockets of specific
Speaker 5: borrowers that are under a lot more pressure than those
Speaker 5: aggregate numbers would suggest.
Speaker 4: Just to be clear, so is the story that the
Speaker 4: stress is building basically among the unfortunate people who have
Speaker 4: a mortgage, but don't have a Zerbier mortgage.
Speaker 5: I think when we started to see delinquencies climb, and
Speaker 5: this is two to three years ago, we started to
Speaker 5: see it subprime borrowers, and those tend to be borrowers
Speaker 5: who in this post GFC past fifteen years, lending standards
Speaker 5: have been tighter, more likely to be renters. We're not
Speaker 5: capturing rent, and so their payments are getting tougher. But
Speaker 5: then to your point, now, over the past twelve to
Speaker 5: eighteen months, now prime delinquencies are moving higher. These are
Speaker 5: households that are much more likely to be homeowners. And
Speaker 5: what we think we're seeing there is exactly the dynamic
Speaker 5: you're talking about. Right, If you bought a home prior
Speaker 5: to twenty twenty one, Let's say you bought in twenty
Speaker 5: sixteen median priced home percent down prevailing mortgage rates at
Speaker 5: the time, that was a thirty year fixed rate mortgage.
Speaker 5: Most homeowners who bought at that time refinanced at record
Speaker 5: lows in twenty twenty twenty twenty one. And if we
Speaker 5: just assume that their incomes have been growing along the
Speaker 5: levels that median household incomes have been growing for the
Speaker 5: past nine to ten years, their monthly payment is a
Speaker 5: share of their income is eight to nine percent. Today.
Speaker 5: Anybody who bought before twenty twenty one, that median household,
Speaker 5: we think that payment is probably below twelve percent. If
Speaker 5: you bought the past three years, as rates moved materially higher,
Speaker 5: your monthly payment as a percentage of your income median
Speaker 5: household probably twenty four to twenty six percent.
Speaker 3: This is like the most important state in the world.
Speaker 2: Yeah, this is like you have the haves and half
Speaker 2: knots of renters versus homeowners, but you also have the
Speaker 2: have and have nots in homeowners themselves.
Speaker 5: Yes, and so we think that the Joint Center for
Speaker 5: Housing Studies at Harvard right, they have some great statistics
Speaker 5: on affordability, and they will qualify thirty percent of your
Speaker 5: income as the threshold for are you cost burdened on shelter,
Speaker 5: So twenty four to twenty six percent. We're not saying
Speaker 5: that those homeowners are cost burdened, but they're spending two
Speaker 5: to three times more of their monthly paycheck on that
Speaker 5: mortgage than somebody who was fortunate enough to buy prior
Speaker 5: to twenty twenty one, which you'd think has to be
Speaker 5: crowding out something and maybe that's it hasn't been spending
Speaker 5: that that's clearly been the case from the data that
Speaker 5: we talked about earlier, but maybe it's these marginal payments
Speaker 5: on other debt service products.
Speaker 2: So one of the results of having a lot of
Speaker 2: people locked into mortgage rates that maybe they got before
Speaker 2: everything went up by quite a lot is the lock
Speaker 2: in effect and the idea that people don't want to
Speaker 2: move houses because they'd have to get a new mortgage
Speaker 2: and then they would end up potentially cost burdened. And
Speaker 2: I'm curious if we're still seeing an impact from that
Speaker 2: particular or as much of an impact from that particular dynamic,
Speaker 2: or are we at the point now where people are
Speaker 2: thinking like, well, maybe mortgage rates aren't going down anytime soon,
Speaker 2: and so I'm just going to bite the bullet and
Speaker 2: do something new.
Speaker 5: So, if I were to take a ten thousand foot
Speaker 5: view and answer your question, the locket effect is clearly
Speaker 5: still playing a role. Right If we look at overall
Speaker 5: inventory levels as a share of the outstanding housing market,
Speaker 5: the chart still looks like there's a TYPEO given how
Speaker 5: low inventories are. But I can't sit here like I
Speaker 5: have been able to in the past and say we're
Speaker 5: at historically low inventories, right, we are starting to see
Speaker 5: to the point that you're making. We are starting to
Speaker 5: see four sale inventory volumes move higher. Year over year,
Speaker 5: inventory volumes are up almost it's almost eighteen consecutive months,
Speaker 5: now almost a year and a half. They're up almost
Speaker 5: twenty percent from those lows. And while that's still below
Speaker 5: where we were we are in the fourth quarter of
Speaker 5: twenty nineteen, below where we were when rates picked up
Speaker 5: massively and inventories kind of retrenched, that's still a pretty
Speaker 5: healthy increase where we're starting to see a little bit
Speaker 5: more supply come on the market here, despite the fact
Speaker 5: that the lock in effect remains two hundred and fifty selling.
Speaker 4: Is it just eventually, like, what is the source of
Speaker 4: the inventory? Is it the people who have needed to
Speaker 4: sell for a while are finally capitulating and you're not what,
Speaker 4: I finally.
Speaker 3: Got to sell this house.
Speaker 4: Is it that there are some marginal buyers who have
Speaker 4: dropped out because they've been waiting. I don't know what
Speaker 4: is the source of this inventory? And this is the
Speaker 4: longest inventory growth since the GFC.
Speaker 5: It's the highest percentage change when I look at year
Speaker 5: over year growth. But we just saw with the most
Speaker 5: recent data that came in, it's now the biggest it's
Speaker 5: been on a year over your basis since the GFC.
Speaker 5: It's also the second largest it's spin in the history
Speaker 5: of the data, which goes back to the early second
Speaker 5: nineteen eighties.
Speaker 3: What streak a year over year growth?
Speaker 1: Oh?
Speaker 5: Okay, Like just in terms of how much we're up now,
Speaker 5: the question as to who is selling i'd argue probably
Speaker 5: one of the more important questions in the housing market
Speaker 5: right now. Yeah, so it's a question we're trying to answer,
Speaker 5: but it's one that's a little bit more difficult to answer.
Speaker 5: We can identify at this point where the inventory is
Speaker 5: picking up more. Right You look in states like Florida
Speaker 5: has some of the steepest increases. Texas has had some
Speaker 5: pretty steep increases, and we get a lot of questions,
Speaker 5: For instance, in Florida, cost of insurance increasing, Are the
Speaker 5: ancillary costs of home ownership? Is that forcing inventory? We
Speaker 5: don't know if that's the case. We can't empirically prove
Speaker 5: that right now, but I think you combine that with
Speaker 5: twenty twenty one was a long time.
Speaker 4: Ago Yeah, this was my realization last night that actually
Speaker 4: twenty twenty one was not yesterday.
Speaker 5: Yes, and these people have been lack of effect has
Speaker 5: had people stuck in their homes in a lot of
Speaker 5: instances for probably longer than they wanted to be. Growing
Speaker 5: families both in terms of number of children as well
Speaker 5: as larger children, like just growing needs for more space,
Speaker 5: if those for lack of a better word, if those
Speaker 5: dreams have been delayed, like maybe the realization that rates
Speaker 5: might not come down all that much, maybe it's time
Speaker 5: to do that. And home prices are up fifty percent
Speaker 5: since March of twenty twenty, Like over the past five years,
Speaker 5: you have a fifty percent growth in home prices. It's
Speaker 5: perhaps those homeowners with that equity might be just a
Speaker 5: little like marginally more willing to list.
Speaker 3: And the economics to make a little bit more. Yeah,
Speaker 3: this is yeah.
Speaker 2: Wait, can you talk a little bit more Since we're
Speaker 2: all about digging into the aggregate and finding the different
Speaker 2: tales here, can you talk a little bit more about
Speaker 2: the different pockets and geographical differences between what you're seeing
Speaker 2: in supply and home prices.
Speaker 5: Yes, So we've been trying to figure out what are
Speaker 5: the most because we talk about home prices nationally, the
Speaker 5: housing market is so hyper local that those national numbers
Speaker 5: are helpful, but they don't describe the dynamics that are
Speaker 5: going on at the ground level at any individual place
Speaker 5: in the country. Right. And so when we look at
Speaker 5: the growth and inventory, looking at it year over years,
Speaker 5: looking at it since the fourth quarter of twenty nineteen
Speaker 5: before the pandemic started, you're seeing the sharpest increases in
Speaker 5: the South, right, Like you've seen it in Florida, You've
Speaker 5: seen it in Texas, a couple of states that show
Speaker 5: up a little bit more on the year over year numbers,
Speaker 5: or Colorado, North Carolina. When we look at the implications
Speaker 5: from home price perspective, what we've seen to be more
Speaker 5: at least statistically significant for now are places where either
Speaker 5: those inventory levels are higher highest compared to the fourth
Speaker 5: quarter of twenty nineteen, which you have New Orleans eleven
Speaker 5: of the top fourteen msas from that perspective, or in
Speaker 5: Florida or Texas, and that's where you're seeing softer year
Speaker 5: over year home price growth, or in some instances where
Speaker 5: you are actually seeing prices come down on a year
Speaker 5: over year basis. The other side of that coin is
Speaker 5: the Northeast. It's New York, it's New England, it's the
Speaker 5: northern Midwest. Those are places where inventories are still falling.
Speaker 5: Inventories are far shy of where they were in the
Speaker 5: fourth quarter of twenty nineteen. And to put all of
Speaker 5: these percentages into context, rationally, inventories are down. I believe
Speaker 5: it's twenty eight percent from the fourth quarter of twenty nineteen.
Speaker 5: So to talk about places where inventories are actually up
Speaker 5: relative to fourty twenty nineteen, that is an outlier relative
Speaker 5: to national numbers.
Speaker 4: This conversation wasn't on the record, but I'm going to
Speaker 4: quot him anyway. I was trying to my friend Connor
Speaker 4: saying he writes for Bloomberg Opinion. Hopefully it doesn't mind
Speaker 4: me quoting him. We're talking about this phenomenon of the
Speaker 4: fact that inventories are very tight in the Northeast, and
Speaker 4: one of the things that he said was that, And again,
Speaker 4: I don't think he told this to me for publication,
Speaker 4: but maybe he's written about it.
Speaker 3: So I'm just going to take a risk.
Speaker 4: That it's okay to quote him from a chat that
Speaker 4: I had with him. But I want to give him credit,
Speaker 4: but that there's this natural, long standing migratory pattern in
Speaker 4: the US of people moving essentially to the sun belt
Speaker 4: from the northern and that the way he characterized it
Speaker 4: to me is like imagine a university town in which
Speaker 4: suddenly for a few years no one moves out of
Speaker 4: the town after graduation. How inventories would rapidly diminish, And
Speaker 4: that because of the lock in, the mortgage lock in,
Speaker 4: you're not getting the same sort of migration out of
Speaker 4: the cold areas to the southern areas, and so people
Speaker 4: are stuck in the cold areas basically, and that is
Speaker 4: does that resonate as a reason for why vacancy rates
Speaker 4: would be very low or inventory rates in the northeast
Speaker 4: would be very low right now?
Speaker 5: So from the data that we've looked at, is common
Speaker 5: around the migratory patterns. They didn't start in COVID when
Speaker 5: people moved to the southeast. They were happening before that.
Speaker 5: That makes sense to me. I don't have the specific
Speaker 5: numbers to completely agree with that as a research channelist
Speaker 5: on air, but what I can say as well, which
Speaker 5: could be contributing to that, we've talked demographics in the past. Yeah,
Speaker 5: and one of the underlying trends in the housing market
Speaker 5: has been the fact that we're now at a place
Speaker 5: where over one out of every three homes, over thirty
Speaker 5: three percent of the housing market is owned by people
Speaker 5: over the age of sixty five. And when you look
Speaker 5: at where yes, there's Florida, and there's Arizona, and there's
Speaker 5: South Carolina. But when you look at where they're more
Speaker 5: concentrated as a percentage of the housing stock in particular,
Speaker 5: it's in the Northeast. It's New York, it's in New England.
Speaker 5: And we've rerun this analysis posts the pandemic, their tendency
Speaker 5: to agent place has continued to get more and more prevalent.
Speaker 5: So I think you combine some of these trends and
Speaker 5: this is what you're left with.
Speaker 2: Yeah, the Northeast is nice. I'm just going to put
Speaker 2: that out there. Nothing wrong with the Northeast. Okay, So
Speaker 2: we're talking about an increase in delinquencies, a slight pickup
Speaker 2: even in prime borrowers, but we're not saying foreclosures yet,
Speaker 2: and I think that's an important differentiator. But what would
Speaker 2: you expect to be a sort of catalyst I guess
Speaker 2: for things getting worse. And since we keep bringing up
Speaker 2: the Great Financial Crisis in this conversation, I mean back
Speaker 2: then people were two indebted, too overlevered, and when house
Speaker 2: prices started to fall, they couldn't keep up and everything
Speaker 2: basically collapse. But to your point earlier, we don't really
Speaker 2: have that level of indebtedness anymore. So what's the catalyst, right?
Speaker 5: So, I think there are a few things going on.
Speaker 5: Another piece to the different levels of leverage today versus
Speaker 5: back then was the fact of the types of leverage
Speaker 5: we were giving borrowers. According to data from I believe
Speaker 5: it's the FAHFA, ninety two and a half percent of
Speaker 5: mortgage balances in the country right now are fixed rate.
Speaker 5: Most of those are thirty or fixed rate back two
Speaker 5: thousand and five, two thousand and six, almost an ARM
Speaker 5: era and adjustable rate mortgages and not just adjustable rates
Speaker 5: short reset arms with teaser rates option arm mortgages that
Speaker 5: could negatively amortize, so the balance of your mortgage could
Speaker 5: get bigger over the first couple of years of that product.
Speaker 5: Those were payments that as we hit kind of an
Speaker 5: economic hiccup, unemployment rate picks up, money becomes a little
Speaker 5: bit more tight, and then your mortgage payment ratchets higher.
Speaker 5: That makes it even more difficult for you to make
Speaker 5: that monthly payment. We don't have that this time. Not
Speaker 5: only that the home ownership rate back then was over
Speaker 5: sixty nine percent. Today, I believe it's sixty five point
Speaker 5: one as we walk in here. Four percentage points does
Speaker 5: not sound huge given how big the United States is.
Speaker 5: From a household perspective, that means that we have four
Speaker 5: to five million fewer homeowners than we would have if
Speaker 5: the home ownership rate was over sixty nine percent. So
Speaker 5: your marginal homeowner is a lot cleaner from that perspective
Speaker 5: that they're not necessarily going to see, certainly not going
Speaker 5: to see that changing mortgage payment that's going to drive
Speaker 5: things there. And because of our experience seventeen years ago,
Speaker 5: now mortgage servicers have a much more varied toolkit at
Speaker 5: their disposal to prevent them. We'll call them foreclosure mitigation options, modifications.
Speaker 2: In the life loan workouts.
Speaker 5: Basically, so it's difficult for us to foresee a place
Speaker 5: where mortgage foreclosures pick up too significantly in the forecast horizon.
Speaker 3: Could we see national home price declines.
Speaker 5: We could, We're talking about inventory increasing. Demand has not
Speaker 5: increased alongside inventory. Affordability is still very, very challenged. And
Speaker 5: I mean we mentioned one point nine percent decrease here
Speaker 5: to date from an existing home sales perspective. As supply
Speaker 5: increases and demand stays flat, sometimes it's just as simple
Speaker 5: as looking at the supply and demand piece. We've started
Speaker 5: to see home price appreciation decelerate four point one to
Speaker 5: three point four percent just over the past two months,
Speaker 5: twenty five percent. A quarter of the largest one hundred
Speaker 5: msas in the country are already seeing home price declines.
Speaker 5: I don't think it's out of the realm of possibilities
Speaker 5: for this imbalance of supply and demand to take us
Speaker 5: through zero percent. I think that what we're talking about
Speaker 5: from how healthy mortgage credit is the locked in home
Speaker 5: buyer doesn't need to sell at lower prices. I don't
Speaker 5: see a true home price correction. That's not in our
Speaker 5: base case. That's not in our bare case. But we
Speaker 5: do have a bare case of negative three percent home
Speaker 5: prices by the end of this year. Base cases plus
Speaker 5: two decelerating from here. It's slowing growth, but it's still
Speaker 5: positive on the national level. But I think there is
Speaker 5: a realistic bare case where we go below here over something.
Speaker 2: Can you talk maybe a little bit about the wealth effect,
Speaker 2: because if we're talking about like how important it is
Speaker 2: that people have locked in mortgages at low rates, or
Speaker 2: maybe they have big portfolios of stocks and bonds, maybe
Speaker 2: they're a baby boomer and kind of luck down in
Speaker 2: their wealth building lives, that seems like a big factor.
Speaker 2: And in the current environment, we've had some volatility, although
Speaker 2: things are looking better as we record this on June twelfth,
Speaker 2: So I'm just curious, like, how do you start to
Speaker 2: look at how people feel about their actual financial assets
Speaker 2: and financial position when it comes to making decisions about
Speaker 2: home ownership or whether they should move and things like that.
Speaker 5: Yeah, and it's that piece of it. The wealth effect
Speaker 5: in particular is something that our economists have been talking
Speaker 5: about a lot to talk through just how confident the
Speaker 5: consumer has been in spending over the past quarters, over
Speaker 5: the past couple of years, and so when they think
Speaker 5: about the consumer's ability to keep spending going forward, whether
Speaker 5: it's smaller purchases or larger home purchases durable goods, they
Speaker 5: are looking more at the financial aspect piece of this.
Speaker 5: When we look at the growth in wealth in this cycle,
Speaker 5: it's been more on the financial assets side than it's
Speaker 5: been on the real estate side of things, which has
Speaker 5: the housing strategist, with home prices at record highs, took
Speaker 5: me a couple seconds looking at those numbers to see
Speaker 5: that that's what that is kind of what's going on underneath.
Speaker 5: And so when they think about the borrowers' ability or
Speaker 5: the borrowers willingness and by borrow I should say consumer's
Speaker 5: willingness to keep making those expenditures. They are looking at equities,
Speaker 5: they're looking at financial assets, and they're looking at the
Speaker 5: volatility there, but they do think we need a pretty
Speaker 5: healthy correction for it to really impact that in a
Speaker 5: material way.
Speaker 4: It's interesting, like when I think about wealth effect sometimes
Speaker 4: I think of it psychologically.
Speaker 3: It's like, oh, people like look at their.
Speaker 4: Investment portfolio and it's green, so I feel good and
Speaker 4: go out to dinner and take a vacation or whatever.
Speaker 4: But listening to you, it's just crazy. Like if you
Speaker 4: have a twenty nineteen or twenty twenty one vintage mortgage
Speaker 4: and you've been investing in the market for some time,
Speaker 4: regularly putting money in a four own K or maybe
Speaker 4: some taxable account. You have a very strong inflation hedge
Speaker 4: because you have this recurring payment that has not gone up,
Speaker 4: assuming it's fixed, and you're just sitting on this boatload
Speaker 4: of capital gains. That is just that's not psychological, that's real. Now,
Speaker 4: whether the degree to which you can monetize it is
Speaker 4: obviously questionable, because if everyone's trying to monetize it at
Speaker 4: the same time, that could shrink. But just on your
Speaker 4: paper like, that's great, that class of person who has
Speaker 4: that situation is just an extraordinary large cushion and margin
Speaker 4: and a sort of winning on every front right now.
Speaker 5: Yes, the households that were homeowners before the pandemic hit
Speaker 5: in March of twenty twenty or made what was probably
Speaker 5: a pretty scary decision to buy twenty or twenty twenty one,
Speaker 5: those are the households that, on the perspectives that we're
Speaker 5: talking about, to the points that you're making, we're really
Speaker 5: big winners here.
Speaker 3: Huge winners.
Speaker 4: Payments have stayed flat even at a time of galloping inflation.
Speaker 4: They're sitting on all these capital gains. There are wages
Speaker 4: that probably just assume they have a normal job, have
Speaker 4: gone up marginally. So just the nominal payment of the
Speaker 4: mortgage relative to how much they're pulling in is probably
Speaker 4: fallen over the last four plus years or however many.
Speaker 3: I mean, it's pretty nice.
Speaker 2: Well, since we're talking about people who lucked out in
Speaker 2: their wealth building, I want to go back to baby
Speaker 2: boomers for a second. So what if the narratives that
Speaker 2: we hear when we're talking about housing is this idea
Speaker 2: that one day the older generation is going to pass
Speaker 2: away and eventually a big segment of the housing market
Speaker 2: is going to become unlocked and available for sale, maybe
Speaker 2: at lower prices. Who knows. Is that still something that
Speaker 2: you're sort of incorporating into your longer term forecasts or
Speaker 2: have you seen anything change on that front. I guess
Speaker 2: in the year or so since we last spoke to you.
Speaker 5: So it is something we're still incorporating when we think
Speaker 5: about housing. Not over the next two to five years,
Speaker 5: but this is really a longer term, like this is
Speaker 5: a ten year plus aspect to this. But we very
Speaker 5: much subscribe to the narrative that we are underbuilt and
Speaker 5: undersupplied from us housing holistically, and we get asked the question, well,
Speaker 5: how do we fix the underbuilt aspect of this? Or
Speaker 5: how do we fix the aggregate undersupplied aspect of this,
Speaker 5: And it's we do come back to this. Right to
Speaker 5: the point I made earlier, more than one out of
Speaker 5: every three homes in this country is owned by somebody
Speaker 5: over sixty five. From nineteen eighty through twenty twelve, that
Speaker 5: was twenty five percent was effectively flat. It's increased pretty significantly.
Speaker 5: It's very regionally concentrated where those homes are owned. And
Speaker 5: eventually we do think that that's the supply that starts
Speaker 5: to help fix this, but it's an eventually thing, and
Speaker 5: not nearly in our two to five year forecast, horizing.
Speaker 2: And then the other thing I wanted to ask you
Speaker 2: is do you speak to home builders at all to
Speaker 2: try to get like a read on maybe new supply
Speaker 2: of housing coming onto the market. And I would be
Speaker 2: really curious what I guess the atmosphere is like right now,
Speaker 2: because on the one hand, you know, things seem okay,
Speaker 2: but on the other hand, you have a lot of
Speaker 2: uncertainty over the long term outlook, lots of policy questions
Speaker 2: and things like that, and I guess I'm wondering, like
Speaker 2: how they feel at the moment.
Speaker 5: So I don't want to attribute what I'm about to
Speaker 5: say specifically to homeowner commentary, but we do have to
Speaker 5: look through all of this when we think about our
Speaker 5: pillars of the housing market, the supply aspect of that,
Speaker 5: which is both existing listings, which we've talked a lot about, but.
Speaker 2: The builder commentary.
Speaker 5: Right, I don't want to ascribe this to homebuilder commentary,
Speaker 5: but what I do want to say when we look
Speaker 5: at the new supply of homes, single unit housing starts,
Speaker 5: building volumes. Look, we work closely with our economists, as
Speaker 5: I've been talking about in our policy team. Tariffs, right,
Speaker 5: effective tariff rate now elevated versus where it's been historically,
Speaker 5: even if it isn't as high as we might have
Speaker 5: feared earlier in April. The primary way that's going to
Speaker 5: flow through the housing market is, in our view, home building.
Speaker 5: The cost of goods to build homes going higher, immigration policies.
Speaker 5: When we look at different sectors of the economy, the
Speaker 5: sector with the largest percentage of foreign born workers construction,
Speaker 5: so the cost and availability of labor also going to
Speaker 5: be contained. Home Builder confidence has been coming down this year,
Speaker 5: and when I look at all of the housing statistics
Speaker 5: that we forecast, what has been weakest in twenty twenty
Speaker 5: five is single unit housing starts. Over the first four
Speaker 5: months of the year. We're down seven percent versus where
Speaker 5: we were in the first four months of twenty twenty four.
Speaker 5: And we think that we are significantly underbuilt. So if
Speaker 5: we're going down and we're undersupplied, like we do, think
Speaker 5: that that from a home price perspective, provides a little
Speaker 5: bit of support.
Speaker 4: So we have widespread view that there are not enough
Speaker 4: homes either in the short term or in the long
Speaker 4: term in America, and the trends are going in the
Speaker 4: wrong direction.
Speaker 2: Awesome, all right, Well, on that happy note, Jim, thank
Speaker 2: you so much for coming back on Odd Lots. It
Speaker 2: was great as always.
Speaker 5: Thank you so much for having me.
Speaker 3: Thanks Jim, transat.
Speaker 1: Joe.
Speaker 2: That was such an interesting conversation and I always enjoy
Speaker 2: hearing from Jim. One thing I really like is that
Speaker 2: he has all the numbers like in his head. He's
Speaker 2: not looking anything up when we talk to him. He's
Speaker 2: just you know, I guess he thinks about them all
Speaker 2: day every day and so he remembers them. But I
Speaker 2: gotta say, like the number that sticks out to me
Speaker 2: is that variation between someone who bought their house in
Speaker 2: like twenty sixteen versus someone who bought it in twenty
Speaker 2: twenty four And I guess it's eight percent versus twenty
Speaker 2: six percent of their housing costs something like that. That
Speaker 2: is just insane, Tracy.
Speaker 4: I'm on the website Know Yourmeme dot Com right now
Speaker 4: because I am looking for the source of that meme
Speaker 4: of the girl whispering in the ear of the other girl,
Speaker 4: and I just keep imagining it.
Speaker 2: It's like he has a mortgage, right said he bought
Speaker 2: t has a Zurpiera mortgage.
Speaker 4: But like I always knew that intuitively by the way,
Speaker 4: it came from the movie Aquamarine.
Speaker 3: Which I had literally never heard of, and the one
Speaker 3: actress I didn't know that.
Speaker 4: Yeah I didn't and an actress named Jojo no last
Speaker 4: name is whispering to Emma Roberts. Anyway, I just thought
Speaker 4: I would say that now since I'm on the page,
Speaker 4: and maybe people would find that to be useful. But
Speaker 4: I did not appreciate quite. I mean, yeah, of course,
Speaker 4: I sort of intuitively understood that if you had locked
Speaker 4: in a mortgage at some point in the twenty tens
Speaker 4: or really nailed the timing and twenty twenty or twenty
Speaker 4: twenty one. That was great, But I don't think I
Speaker 4: had like quite appreciated just how massively that gap is.
Speaker 4: What is the prospect of that going to change anytime soon?
Speaker 4: Like there's going to be these two you know, this
Speaker 4: sort of division in society where it's like, hey, you
Speaker 4: have a lot of people living in homes and they
Speaker 4: don't have a mortgage because they're old and they've aged
Speaker 4: in place b than the lucky people who have this
Speaker 4: mortgage edge.
Speaker 2: And then everyone else, everyone who rents.
Speaker 4: Or because they had to buy in twenty twenty four
Speaker 4: or twenty twenty three because for whatever reason, and now
Speaker 4: they're paying a massive amount of their income in their
Speaker 4: mortgage paper.
Speaker 2: But I do think this is also a really great
Speaker 2: example of why it's important to look beyond the aggregates
Speaker 2: and the sort of you know, single average number and
Speaker 2: kind of dig into the tails.
Speaker 4: Well, just on this point too, a lot of like
Speaker 4: scare headlines or scare posts on Twitter. It's like, look
Speaker 4: at the surge in delinquencies or whatever, or versus two
Speaker 4: thousand and eight, two thousand and nine, and sort of touched
Speaker 4: on this, you know, one of the things that I
Speaker 4: do think is important to note, and Jim mentioned you
Speaker 4: know you have to be careful with apples to apples comparisons.
Speaker 4: Is that, like some of these effects can be magnified,
Speaker 4: not because there's like a massive deterioration and credit worthiness,
Speaker 4: but because there was so much extension of lending during
Speaker 4: the boom time, et cetera. Like you sort of have
Speaker 4: to be careful with some of these statistics because things
Speaker 4: can change.
Speaker 3: A lot for different reasons at different times.
Speaker 2: Anyway, No, I mean, the home ownership market is structured
Speaker 2: very different, really different to what it was in two
Speaker 2: thousand and eight. Oh, we should have asked about the
Speaker 2: gcs and Fanny and Freddie. Oh well, maybe next time
Speaker 2: we do that next time. Shall we leave it there
Speaker 2: for now?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Oudlots podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Jill Wisenthal. You can follow me at the Stalwart.
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