1 00:00:11,400 --> 00:00:14,640 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,720 --> 00:00:16,079 Speaker 1: I'm Tracy Alloway. 3 00:00:15,800 --> 00:00:16,959 Speaker 2: And I'm Joe Wisenthal. 4 00:00:17,360 --> 00:00:21,680 Speaker 1: Joe, did you see that National Association of Homebuilders survey? 5 00:00:22,200 --> 00:00:22,840 Speaker 2: Uh? 6 00:00:22,920 --> 00:00:23,400 Speaker 3: It was bad. 7 00:00:23,440 --> 00:00:25,400 Speaker 2: I actually didn't see the number, but I think it 8 00:00:25,480 --> 00:00:25,840 Speaker 2: was bad. 9 00:00:25,880 --> 00:00:30,640 Speaker 1: Right, Yeah, it wasn't great. So the sentiment of the 10 00:00:30,640 --> 00:00:36,040 Speaker 1: homebuilders is falling, which is kind of noteworthy because towards 11 00:00:36,080 --> 00:00:38,960 Speaker 1: the beginning of the year we saw a little bit 12 00:00:38,960 --> 00:00:40,680 Speaker 1: of a pick up, a little bit of optimism, and 13 00:00:40,720 --> 00:00:44,440 Speaker 1: we did see some new construction and that started to 14 00:00:44,479 --> 00:00:48,839 Speaker 1: feed into overall housing supply. But fast forward to October 15 00:00:49,200 --> 00:00:53,120 Speaker 1: twenty twenty three, rates are going up again, and it 16 00:00:53,200 --> 00:00:56,560 Speaker 1: seems like this is finally starting to have something of 17 00:00:56,600 --> 00:00:59,360 Speaker 1: a negative impact on how home builders are actually feeling. 18 00:01:00,080 --> 00:01:02,360 Speaker 2: Are recording this, as you say, rates going up, We 19 00:01:02,400 --> 00:01:05,959 Speaker 2: were recording this on October seventeenth. Just today, we have 20 00:01:06,120 --> 00:01:09,240 Speaker 2: the ten year yield back over four point eight percent 21 00:01:09,400 --> 00:01:12,840 Speaker 2: right at the time we're talking. That is basically at 22 00:01:12,880 --> 00:01:14,800 Speaker 2: the highs of the cycle. We had dipped for a 23 00:01:14,840 --> 00:01:18,240 Speaker 2: little while. And yeah, you mentioned that home builder sentiment number, 24 00:01:18,280 --> 00:01:20,959 Speaker 2: and that was like the interesting story with housing has 25 00:01:20,959 --> 00:01:24,840 Speaker 2: been resilience, right, resilience and prices, et cetera. Even the 26 00:01:24,880 --> 00:01:27,280 Speaker 2: homebuilders had like picked up a bid in the second 27 00:01:27,360 --> 00:01:29,319 Speaker 2: in the first half of the year, but we were 28 00:01:29,319 --> 00:01:32,600 Speaker 2: actually really heading back down, not far off those lows 29 00:01:32,600 --> 00:01:34,120 Speaker 2: that we saw at the end of twenty twenty two. 30 00:01:34,319 --> 00:01:37,280 Speaker 1: Yeah, and meanwhile, mortgage rates, which of course are sort 31 00:01:37,319 --> 00:01:40,720 Speaker 1: of priced off of treasuries, are getting close to eight percent. 32 00:01:41,280 --> 00:01:44,600 Speaker 1: That's the highest level I think since something like two thousand. 33 00:01:44,800 --> 00:01:47,080 Speaker 1: So we have to discuss this. And you know, the 34 00:01:47,200 --> 00:01:50,040 Speaker 1: last couple times we dug into the housing market, we 35 00:01:50,080 --> 00:01:54,520 Speaker 1: spoke with Morgan Stanley's US housing strategist Jim Egan. In fact, 36 00:01:54,640 --> 00:01:57,400 Speaker 1: we spoke to him for the first time in October 37 00:01:57,440 --> 00:02:00,080 Speaker 1: of last year in an episode that we call well, 38 00:02:00,240 --> 00:02:02,560 Speaker 1: here's what seven percent mortgage rates will do to the 39 00:02:02,600 --> 00:02:05,400 Speaker 1: housing market. So now twelve months later, we're just gonna 40 00:02:05,440 --> 00:02:07,600 Speaker 1: do here's what eight percent mortgage rates will do to 41 00:02:07,640 --> 00:02:08,360 Speaker 1: the housing market. 42 00:02:08,520 --> 00:02:10,320 Speaker 2: Here we got, Yeah, we just don't one percent at 43 00:02:10,360 --> 00:02:12,120 Speaker 2: a time. We'll just keep having Jim back. 44 00:02:11,919 --> 00:02:16,120 Speaker 1: On that's right. But actually, on a serious note, one 45 00:02:16,120 --> 00:02:19,000 Speaker 1: of the reasons we like talking to Jim Egan is 46 00:02:19,040 --> 00:02:21,440 Speaker 1: that he was a bit of an outlier when we 47 00:02:21,480 --> 00:02:23,560 Speaker 1: first had him on. You know, when mortgage rates were 48 00:02:23,600 --> 00:02:26,520 Speaker 1: shooting up, a lot of people were predicting this really 49 00:02:26,520 --> 00:02:30,960 Speaker 1: big housing crash, and meanwhile Jim was forecasting a slight 50 00:02:31,080 --> 00:02:34,640 Speaker 1: dip basically followed by a rise, which is exactly what 51 00:02:34,800 --> 00:02:37,480 Speaker 1: we saw happen. And he was kind of early to 52 00:02:37,520 --> 00:02:40,399 Speaker 1: that whole lock in idea that you see everywhere now, 53 00:02:40,480 --> 00:02:43,320 Speaker 1: So the notion that people who are lucky enough to 54 00:02:43,440 --> 00:02:46,960 Speaker 1: have locked in mortgages when rates were at essentially zero 55 00:02:47,280 --> 00:02:49,880 Speaker 1: are now going to be very reluctant to move and 56 00:02:49,960 --> 00:02:53,240 Speaker 1: take on a higher mortgage cost, and so that basically 57 00:02:53,280 --> 00:02:57,359 Speaker 1: helped provide a floor on prices. So we liked talking 58 00:02:57,360 --> 00:02:59,519 Speaker 1: to Jim, and we thought, even though we spoke to 59 00:02:59,600 --> 00:03:02,320 Speaker 1: him one over the summer, given that rates are shooting 60 00:03:02,400 --> 00:03:04,480 Speaker 1: up even more, we should definitely do it again. 61 00:03:04,720 --> 00:03:05,600 Speaker 2: I'm excited about it. 62 00:03:05,680 --> 00:03:08,240 Speaker 1: Let's do it all right, Jim, welcome back to the show. 63 00:03:08,639 --> 00:03:10,600 Speaker 3: Thank you so much for having me. It is an 64 00:03:10,600 --> 00:03:11,600 Speaker 3: honor to be asked back. 65 00:03:12,680 --> 00:03:16,399 Speaker 1: Third time's the best time. Okay. So, you know, we've 66 00:03:16,440 --> 00:03:19,720 Speaker 1: spoken a lot to you about what higher rates mean 67 00:03:19,800 --> 00:03:22,200 Speaker 1: for housing in the short term, and as I said 68 00:03:22,200 --> 00:03:24,400 Speaker 1: in the intro, you were early to that whole lock 69 00:03:24,480 --> 00:03:27,720 Speaker 1: in idea. But I guess let's just jump into it. 70 00:03:28,040 --> 00:03:31,120 Speaker 1: If we assume that higher for longer is here to 71 00:03:31,200 --> 00:03:34,400 Speaker 1: stay for the foreseeable future, what does that mean for 72 00:03:34,480 --> 00:03:36,840 Speaker 1: housing over a longer term horizon? 73 00:03:37,640 --> 00:03:40,040 Speaker 3: Sure, And I think that the way that you're characterizing 74 00:03:40,040 --> 00:03:44,520 Speaker 3: this is important, right We have to disaggregate the short 75 00:03:44,600 --> 00:03:48,160 Speaker 3: term impact of this most recent increase in rates versus 76 00:03:48,400 --> 00:03:52,760 Speaker 3: a longer term impact here. Now, what I will caveat 77 00:03:52,800 --> 00:03:55,360 Speaker 3: some of these comments by saying is that currently we're 78 00:03:55,360 --> 00:03:59,320 Speaker 3: not forecasting rates to remain at these elevated levels for 79 00:03:59,640 --> 00:04:01,960 Speaker 3: the law longer term. We do think that the tenure 80 00:04:02,000 --> 00:04:03,560 Speaker 3: will come down through the middle of next year, and 81 00:04:03,560 --> 00:04:05,680 Speaker 3: we think that mortgage rates will come down as part 82 00:04:05,720 --> 00:04:08,680 Speaker 3: of that. But given what's happened to rates, that is 83 00:04:08,760 --> 00:04:12,080 Speaker 3: a very important question right now. And I think this 84 00:04:12,160 --> 00:04:16,440 Speaker 3: starts with affordability, right We talked about affordability on this 85 00:04:16,480 --> 00:04:19,360 Speaker 3: podcast when I was able to visit previous to this, 86 00:04:19,520 --> 00:04:22,159 Speaker 3: and one of the things that characterized twenty twenty two 87 00:04:23,040 --> 00:04:26,479 Speaker 3: was just an historic, at least through the history of 88 00:04:26,480 --> 00:04:29,880 Speaker 3: our data, a decline or a deterioration and affordability that 89 00:04:29,920 --> 00:04:32,640 Speaker 3: we hadn't seen year over year changes were three times 90 00:04:32,720 --> 00:04:35,320 Speaker 3: worse than what we witnessed during the Great Financial Crisis 91 00:04:35,360 --> 00:04:40,920 Speaker 3: and earlier this year, affordability stopped deteriorating at those paces 92 00:04:41,040 --> 00:04:43,640 Speaker 3: some shorter term affordability metrics. If we look at it 93 00:04:43,640 --> 00:04:47,479 Speaker 3: over three months, over six months, affordability was actually improving. 94 00:04:48,400 --> 00:04:49,800 Speaker 3: That's no longer the case, right. 95 00:04:49,680 --> 00:04:52,840 Speaker 1: It was a blit basically along with the like tiny, 96 00:04:52,960 --> 00:04:55,040 Speaker 1: tiny dip in house prices. 97 00:04:54,680 --> 00:04:57,720 Speaker 3: Exactly, and if mortgage rates were to stay at eight 98 00:04:57,720 --> 00:05:01,360 Speaker 3: percent for a longer period of time, affordability deterioration would 99 00:05:01,400 --> 00:05:04,320 Speaker 3: return back to a place that we haven't seen in 100 00:05:04,480 --> 00:05:08,760 Speaker 3: decades in the twenty twenty two period. Notwithstanding, it's pretty incredible, 101 00:05:08,880 --> 00:05:13,640 Speaker 3: just you know, tugget percentage points can sometimes be abstract. 102 00:05:14,080 --> 00:05:18,279 Speaker 3: But our colleague Michael McDonough regularly posts this chart, and 103 00:05:18,320 --> 00:05:21,000 Speaker 3: this was about a month ago so or even higher 104 00:05:21,080 --> 00:05:23,359 Speaker 3: than we were before. But he posted this chart showing 105 00:05:23,360 --> 00:05:25,919 Speaker 3: like a median house with a thirty year mortgage just 106 00:05:25,920 --> 00:05:27,800 Speaker 3: sort of really standard. You know, a few years ago, 107 00:05:28,000 --> 00:05:30,720 Speaker 3: a monthly payment might be like about one thousand. It 108 00:05:30,800 --> 00:05:33,680 Speaker 3: is up to twenty three hundred as of according to 109 00:05:33,920 --> 00:05:36,480 Speaker 3: a typical thirty year mortgage rate. But there versus March 110 00:05:36,480 --> 00:05:38,520 Speaker 3: twenty twenty when we were at the lows and probably 111 00:05:38,560 --> 00:05:41,040 Speaker 3: not a lot of people got mortgages. Nonetheless, like when 112 00:05:41,080 --> 00:05:42,800 Speaker 3: you put those numbers in, I mean, it's just an 113 00:05:42,800 --> 00:05:46,839 Speaker 3: extraordinary affordability shock. It's incredible, Like one of the numbers 114 00:05:46,839 --> 00:05:49,240 Speaker 3: that we were looking at recently, not relative to March 115 00:05:49,279 --> 00:05:51,839 Speaker 3: twenty twenty. But to put it into context, the extent 116 00:05:51,920 --> 00:05:54,760 Speaker 3: to which we've seen mortgage rates increase, the payments up 117 00:05:54,800 --> 00:05:57,440 Speaker 3: over one hundred and twenty percent since the lows and 118 00:05:57,480 --> 00:06:00,400 Speaker 3: mortgage rates that we saw in the early part of 119 00:06:00,440 --> 00:06:03,880 Speaker 3: twenty twenty two. And you've mentioned the lock and effect 120 00:06:03,880 --> 00:06:06,680 Speaker 3: that is kind of a well discussed topic at this 121 00:06:06,720 --> 00:06:10,320 Speaker 3: point in time, and yes it's still present. But when 122 00:06:10,360 --> 00:06:12,559 Speaker 3: we think about the longer term impacts of this move, 123 00:06:13,400 --> 00:06:16,160 Speaker 3: the move from twenty twenty two saw almost a four 124 00:06:16,279 --> 00:06:18,960 Speaker 3: hundred basis point increase from three percent to seven percent. 125 00:06:19,160 --> 00:06:22,200 Speaker 3: When first time you invited Yeah onto this podcast. That 126 00:06:22,240 --> 00:06:25,320 Speaker 3: took a lot of homeowners, a lot of mortgaged homeowners, 127 00:06:25,640 --> 00:06:28,680 Speaker 3: from sort of at the money around the prevailing mortgage 128 00:06:28,720 --> 00:06:31,080 Speaker 3: rate to deeply out of the money locked into their 129 00:06:31,120 --> 00:06:35,400 Speaker 3: mortgage payment. The move now up to eight percent mortgage rates, 130 00:06:36,560 --> 00:06:41,080 Speaker 3: it's not capturing the same quantum of marginal homeowner and 131 00:06:41,160 --> 00:06:44,719 Speaker 3: so the impact on things like supply, the impact on demand, 132 00:06:44,800 --> 00:06:47,560 Speaker 3: especially that the rate of change is not going to 133 00:06:47,560 --> 00:06:50,080 Speaker 3: be the same this time around than it was in 134 00:06:50,120 --> 00:06:50,920 Speaker 3: twenty twenty two. 135 00:06:52,080 --> 00:06:53,760 Speaker 1: Sorry, can you explain that a little bit further? 136 00:06:54,160 --> 00:06:56,839 Speaker 3: Right? So, as borrowers were moving further and further out 137 00:06:56,839 --> 00:06:59,799 Speaker 3: of the money in twenty twenty two, we saw specifically 138 00:06:59,800 --> 00:07:03,320 Speaker 3: the listings of homes available for sale fall to right, 139 00:07:03,360 --> 00:07:05,360 Speaker 3: far and away the lowest level we have on record, 140 00:07:05,560 --> 00:07:07,919 Speaker 3: right where we have that data going back over forty years, 141 00:07:08,320 --> 00:07:10,560 Speaker 3: never lower by our metrics. Hit a low in May 142 00:07:10,640 --> 00:07:13,880 Speaker 3: of twenty twenty two. Right now, as rates kind of 143 00:07:14,640 --> 00:07:16,880 Speaker 3: held flat, maybe improved a little bit at those levels, 144 00:07:17,080 --> 00:07:19,480 Speaker 3: you started to see inventory pick up a little bit. 145 00:07:19,840 --> 00:07:22,240 Speaker 3: As rates have gone back to eight percent. We're testing 146 00:07:22,280 --> 00:07:25,000 Speaker 3: those lows again, but it's going to be difficult given 147 00:07:25,000 --> 00:07:28,000 Speaker 3: that you're not moving hundreds of thousands or millions of 148 00:07:28,000 --> 00:07:29,480 Speaker 3: homeowners out of the money. 149 00:07:29,640 --> 00:07:32,560 Speaker 2: So the lock in effect is just like there, It 150 00:07:32,640 --> 00:07:35,880 Speaker 2: still exists, It worsens it, but the change is not 151 00:07:36,000 --> 00:07:39,160 Speaker 2: as dramatic and as significant as supply curtailing. Is that 152 00:07:39,200 --> 00:07:39,760 Speaker 2: initial move. 153 00:07:39,920 --> 00:07:43,040 Speaker 1: It's like reverse convex exactly. 154 00:07:43,320 --> 00:07:45,160 Speaker 3: And I would also say the lock and effect. While 155 00:07:45,160 --> 00:07:47,160 Speaker 3: it's enormous spigger than we've seen in a long time, 156 00:07:47,200 --> 00:07:50,200 Speaker 3: and it's still with us, it is going to be 157 00:07:50,280 --> 00:07:55,040 Speaker 3: slowly eroding as we move forward. Right, mortgagees pay down 158 00:07:55,640 --> 00:07:58,000 Speaker 3: at right now about every year two to two and 159 00:07:58,040 --> 00:08:01,280 Speaker 3: a half percentage points of these low rate mortgages are 160 00:08:01,360 --> 00:08:05,000 Speaker 3: paying off their amortizing. And some of these low coupon borrowers, 161 00:08:05,280 --> 00:08:08,600 Speaker 3: for reasons other than economic incentives, would call it turnover 162 00:08:08,960 --> 00:08:11,720 Speaker 3: like they are refinancing, right, so they're coming down. 163 00:08:11,840 --> 00:08:14,400 Speaker 2: This is a point tracy that like Connor Sen has 164 00:08:14,400 --> 00:08:17,200 Speaker 2: been making in some Bloomberg opinion columns, etc. Which is 165 00:08:17,240 --> 00:08:20,720 Speaker 2: that like every year we get, even if it's marginal, 166 00:08:20,840 --> 00:08:23,560 Speaker 2: we do get a little bit further away from that 167 00:08:23,680 --> 00:08:27,280 Speaker 2: sort of peak refinancing period, and so do have a 168 00:08:27,400 --> 00:08:31,720 Speaker 2: little bit of marginal pressure. So you know that supply 169 00:08:31,800 --> 00:08:34,000 Speaker 2: constraining pressure. It does fade adventure. 170 00:08:34,280 --> 00:08:39,160 Speaker 1: But I mean just on the actual mortgage rate. Jim, 171 00:08:39,200 --> 00:08:41,720 Speaker 1: you have a great chart in your research report, your 172 00:08:41,800 --> 00:08:43,640 Speaker 1: latest one. I don't have it directly in front of me, 173 00:08:43,679 --> 00:08:45,520 Speaker 1: but I'll try to describe it. Where you show the 174 00:08:45,600 --> 00:08:49,959 Speaker 1: effective mortgage rate versus I guess the rate of new 175 00:08:50,040 --> 00:08:53,319 Speaker 1: mortgages being made, and there's just a huge gap at 176 00:08:53,320 --> 00:08:55,600 Speaker 1: the moment. So most people who have a mortgage in 177 00:08:55,640 --> 00:08:59,760 Speaker 1: the US are not paying eight percent currently or anywhere 178 00:08:59,760 --> 00:09:02,920 Speaker 1: near it. Really, I mean, that seems like a pretty 179 00:09:02,920 --> 00:09:06,200 Speaker 1: big gap. And even if some of those mortgages are 180 00:09:06,280 --> 00:09:11,679 Speaker 1: rolling off eventually, it just seems really really slow. 181 00:09:11,720 --> 00:09:14,320 Speaker 3: Correct the effective rate of mortgages in the United States, 182 00:09:14,360 --> 00:09:16,800 Speaker 3: the outstanding balance is somewhere between three point six three 183 00:09:16,840 --> 00:09:19,840 Speaker 3: point seven percent right now, as we've said in this podcast, 184 00:09:19,840 --> 00:09:23,440 Speaker 3: the prevailing rate is approaching eight percent. That is a 185 00:09:23,480 --> 00:09:26,839 Speaker 3: gigantic gap that we haven't seen in decades, over forty 186 00:09:26,920 --> 00:09:29,640 Speaker 3: years at this point in time. And so even though 187 00:09:29,640 --> 00:09:32,600 Speaker 3: it's eroding, you're right, Tracy, it's eroding on the margins. 188 00:09:32,679 --> 00:09:35,000 Speaker 3: We don't think that what you're going to see is 189 00:09:35,200 --> 00:09:38,559 Speaker 3: an increase in inventory. You're certainly not going to see 190 00:09:38,840 --> 00:09:42,520 Speaker 3: a significant increase in inventory. But the rise in rates 191 00:09:42,520 --> 00:09:45,679 Speaker 3: in twenty twenty two led to a significant pullback in inventory. 192 00:09:46,080 --> 00:09:47,680 Speaker 3: Right now, what we think you're going to see is 193 00:09:48,040 --> 00:09:51,080 Speaker 3: much more of a marginal pullback that is one of 194 00:09:51,080 --> 00:09:54,040 Speaker 3: the shorter term impacts that we're seeing right now. The 195 00:09:54,080 --> 00:09:57,720 Speaker 3: shorter term reaction to this. You mentioned the homebuilder's confidence 196 00:09:57,720 --> 00:09:59,840 Speaker 3: index this morning. There was a lot of weakness there. 197 00:10:00,160 --> 00:10:03,040 Speaker 3: Supply has pulled back a little bit after easing in 198 00:10:03,080 --> 00:10:05,160 Speaker 3: the later parts of twenty two the early parts of 199 00:10:05,160 --> 00:10:07,520 Speaker 3: twenty three. We do think in the very short term 200 00:10:07,520 --> 00:10:10,240 Speaker 3: that provides a little bit of upward pressure on home prices. 201 00:10:10,480 --> 00:10:11,800 Speaker 3: Our base case for the end of the year was 202 00:10:11,880 --> 00:10:14,520 Speaker 3: zero percent. Our bual case was plus five. We're moving 203 00:10:14,679 --> 00:10:16,400 Speaker 3: towards that bowl case. That's where we think we're going 204 00:10:16,440 --> 00:10:18,199 Speaker 3: to end up. But that's just the short term. That's 205 00:10:18,240 --> 00:10:19,920 Speaker 3: not the longer term rates we're to stay. 206 00:10:19,720 --> 00:10:21,760 Speaker 2: Here, So I want to obviously we want to get 207 00:10:21,760 --> 00:10:24,439 Speaker 2: into the longer term, but just one more sort of 208 00:10:24,520 --> 00:10:27,079 Speaker 2: question on the short term. So on the supply side, 209 00:10:27,480 --> 00:10:30,000 Speaker 2: the move from seven to eight percent is not nearly 210 00:10:30,000 --> 00:10:32,280 Speaker 2: as dramatic as say the move from three percent to 211 00:10:32,440 --> 00:10:35,120 Speaker 2: seven percent. We are maybe moving for every day we 212 00:10:35,160 --> 00:10:37,120 Speaker 2: get a little bit further away from the low and yield. 213 00:10:37,720 --> 00:10:41,840 Speaker 2: What is the short term demand side impact? And you know, 214 00:10:41,960 --> 00:10:46,080 Speaker 2: just right now today October seventeenth, twenty twenty three, what 215 00:10:46,160 --> 00:10:48,280 Speaker 2: does eight percent mortgage mean for demand. 216 00:10:49,000 --> 00:10:51,439 Speaker 3: It's going to mean that demand is weaker. 217 00:10:52,000 --> 00:10:52,200 Speaker 1: Right. 218 00:10:52,600 --> 00:10:55,040 Speaker 3: We just talked about the percentage increase in the monthly 219 00:10:55,080 --> 00:10:58,600 Speaker 3: payment on those mortgages, right, But the question is how 220 00:10:58,679 --> 00:11:01,120 Speaker 3: much weaker can demand get. In the same way that 221 00:11:01,240 --> 00:11:04,280 Speaker 3: the increase in mortgage rates isn't going to have the 222 00:11:04,320 --> 00:11:07,960 Speaker 3: same marginal impact on supply, we also think that it 223 00:11:08,040 --> 00:11:10,120 Speaker 3: will be hard for it to have the same marginal 224 00:11:10,160 --> 00:11:15,280 Speaker 3: impact on demand. There is a modicum of people that 225 00:11:15,520 --> 00:11:19,080 Speaker 3: will need to buy homes even at this challenged level 226 00:11:19,080 --> 00:11:22,240 Speaker 3: of affordability. When we look at again kind of the 227 00:11:22,240 --> 00:11:24,160 Speaker 3: turnover rates of the housing market, one way that we 228 00:11:24,280 --> 00:11:27,680 Speaker 3: estimated that in recent research was existing home sales versus 229 00:11:27,679 --> 00:11:31,439 Speaker 3: the total ownership stock of the housing market. That rate 230 00:11:31,480 --> 00:11:34,240 Speaker 3: has already fallen to the lows that we experienced during 231 00:11:34,240 --> 00:11:36,640 Speaker 3: the Great Financial Crisis. The existing home sales are higher 232 00:11:36,679 --> 00:11:39,960 Speaker 3: than that low point, but the housing stock is also larger, right, 233 00:11:40,000 --> 00:11:42,280 Speaker 3: And so while that doesn't mean that sales can't fall 234 00:11:42,320 --> 00:11:45,320 Speaker 3: further from here, we think that the sharp declines that 235 00:11:45,360 --> 00:12:01,880 Speaker 3: we witnessed in twenty twenty two, those are behind us. 236 00:12:04,440 --> 00:12:07,720 Speaker 1: So maybe just from a longer term perspective, if we 237 00:12:07,760 --> 00:12:10,080 Speaker 1: could zoom in a little bit on the supply question, 238 00:12:10,120 --> 00:12:12,360 Speaker 1: because I feel like this is probably at this point 239 00:12:12,360 --> 00:12:15,280 Speaker 1: the lynchpin around which a lot of the prices are 240 00:12:15,320 --> 00:12:19,280 Speaker 1: going to sort of revolve. But you know, mortgage rates 241 00:12:19,520 --> 00:12:24,200 Speaker 1: clearly starting to have a negative impact on home builder sentiment. 242 00:12:24,360 --> 00:12:27,160 Speaker 1: But on the other hand, if we have higher rates 243 00:12:27,640 --> 00:12:32,480 Speaker 1: for a longer time, is there the potential for home 244 00:12:32,480 --> 00:12:35,959 Speaker 1: builders and people in general, I guess, just to get 245 00:12:36,200 --> 00:12:39,360 Speaker 1: used to it and to you know, have confidence that 246 00:12:39,400 --> 00:12:42,760 Speaker 1: they can start building again. Like I guess another way 247 00:12:42,760 --> 00:12:46,560 Speaker 1: of asking this is what sort of decisions go into 248 00:12:46,760 --> 00:12:51,160 Speaker 1: home builders on whether they decide to ramp up construction 249 00:12:51,240 --> 00:12:51,720 Speaker 1: and supply. 250 00:12:52,320 --> 00:12:55,560 Speaker 3: So I think that one thing that we're going to need, 251 00:12:55,720 --> 00:12:59,960 Speaker 3: I think you're alluding to this is just less volatile 252 00:13:00,640 --> 00:13:04,359 Speaker 3: in the rate and market overall. We need more certainty 253 00:13:04,760 --> 00:13:06,679 Speaker 3: and where this is going to be on a go 254 00:13:06,760 --> 00:13:10,600 Speaker 3: forward basis. And I think when we think about single 255 00:13:10,679 --> 00:13:13,240 Speaker 3: unit starts, housing starts in general, but single unit starts 256 00:13:13,280 --> 00:13:16,040 Speaker 3: kind of home building in particular, I think we're dealing 257 00:13:16,080 --> 00:13:18,880 Speaker 3: with kind of a big headwind and a big tailwind 258 00:13:18,920 --> 00:13:20,800 Speaker 3: at the same time, and we're trying to figure out 259 00:13:20,840 --> 00:13:23,360 Speaker 3: how those two opposing forces are going to move forward. 260 00:13:23,400 --> 00:13:27,800 Speaker 3: We've been talking about the headwind affordability is incredibly challenged. 261 00:13:28,320 --> 00:13:31,040 Speaker 3: The tailwind piece of this is that there is a 262 00:13:31,080 --> 00:13:34,679 Speaker 3: pretty significant shortage of housing in the United States. That's 263 00:13:34,679 --> 00:13:37,120 Speaker 3: more than just the listing of homes for sale. We 264 00:13:37,360 --> 00:13:39,839 Speaker 3: don't believe that we've been building enough homes over the 265 00:13:39,880 --> 00:13:43,360 Speaker 3: course of the past fifteen years. I can be conservative 266 00:13:43,360 --> 00:13:45,880 Speaker 3: with my assumptions and get to roughly a two million 267 00:13:45,960 --> 00:13:48,800 Speaker 3: unit shortage. I can be more aggressive and say that 268 00:13:48,840 --> 00:13:51,040 Speaker 3: we might be six million units. Shy, we think that 269 00:13:51,080 --> 00:13:54,839 Speaker 3: the truth lies somewhere in that range. And by the way, 270 00:13:54,880 --> 00:13:57,200 Speaker 3: that's a total of single unit and multi unit housing. 271 00:13:57,600 --> 00:14:02,000 Speaker 3: But that shortage should theory be a tailwind in a 272 00:14:02,040 --> 00:14:06,400 Speaker 3: world in which maybe not affordability starts improving, but at 273 00:14:06,480 --> 00:14:10,400 Speaker 3: least the marginal volatility in that metric comes right. 274 00:14:10,280 --> 00:14:13,080 Speaker 1: Or maybe it stabilizes so that people can at least make, 275 00:14:13,240 --> 00:14:16,359 Speaker 1: you know, decisions about their longer term finances. 276 00:14:16,440 --> 00:14:17,320 Speaker 3: That's a good way to put it. 277 00:14:17,880 --> 00:14:20,960 Speaker 2: What what what are the factors in your model that 278 00:14:21,000 --> 00:14:23,760 Speaker 2: would you know determine say, like, okay, it could be 279 00:14:23,760 --> 00:14:26,080 Speaker 2: two million, six million, Like what are the variables that 280 00:14:26,720 --> 00:14:28,840 Speaker 2: did go to that range? 281 00:14:29,160 --> 00:14:32,000 Speaker 3: So if I started on the higher end of yes, right, 282 00:14:32,560 --> 00:14:34,680 Speaker 3: we think a lot about the marginal demand for shelter. 283 00:14:34,920 --> 00:14:38,000 Speaker 3: We forecast household formations. We've discussed the kind of dynamics 284 00:14:38,040 --> 00:14:38,720 Speaker 3: of that in the past. 285 00:14:38,760 --> 00:14:42,520 Speaker 2: You've taught me what these words mean, headship rates, head 286 00:14:42,560 --> 00:14:44,920 Speaker 2: ship rates in household. Do we need a headship I 287 00:14:45,000 --> 00:14:47,520 Speaker 2: learned from Jim Egan. Now, people got to go back 288 00:14:47,520 --> 00:14:49,400 Speaker 2: and listen to the last time, which is when he 289 00:14:49,480 --> 00:14:52,280 Speaker 2: explained to me what he explained also on the first time. 290 00:14:52,640 --> 00:14:54,000 Speaker 2: We're going to make it. Go back and listen. 291 00:14:55,080 --> 00:14:57,360 Speaker 3: But so we have that marginal demand, okay, and then 292 00:14:57,360 --> 00:14:58,240 Speaker 3: we have marginal supply. 293 00:14:58,360 --> 00:14:58,480 Speaker 1: Right. 294 00:14:58,480 --> 00:15:01,240 Speaker 3: It's the addition of both single unit multi unit housing, 295 00:15:01,360 --> 00:15:04,160 Speaker 3: all new units that come on on an annual basis. 296 00:15:04,200 --> 00:15:07,160 Speaker 3: You control a little bit for the obsolescence of old housing. 297 00:15:07,680 --> 00:15:11,320 Speaker 3: And the difficulty with an equilibrium calculation is I could 298 00:15:11,360 --> 00:15:13,280 Speaker 3: cherry pick and start in two thousand and nine at 299 00:15:13,320 --> 00:15:15,240 Speaker 3: the bottom of the GFC when home builders were really 300 00:15:15,280 --> 00:15:18,080 Speaker 3: pulling back and said that the shortage is enormous. Or 301 00:15:18,120 --> 00:15:19,560 Speaker 3: I could go back to two thousand, I could go 302 00:15:19,560 --> 00:15:21,320 Speaker 3: back to nineteen ninety. I don't know exactly where to 303 00:15:21,320 --> 00:15:24,560 Speaker 3: start that calculation, but going back over several decades you 304 00:15:24,600 --> 00:15:27,920 Speaker 3: get to a roughly a six million number. But on 305 00:15:27,960 --> 00:15:30,480 Speaker 3: the shorter end of this, if we're saying that the 306 00:15:30,520 --> 00:15:33,760 Speaker 3: marginal demand for shelter has exceeded the marginal supply of shelter, 307 00:15:34,160 --> 00:15:36,520 Speaker 3: one way to prove that would be our vacancy rates 308 00:15:36,520 --> 00:15:39,120 Speaker 3: coming down. People are living somewhere, the households are forming, 309 00:15:39,600 --> 00:15:42,640 Speaker 3: and so vacancy rates have both owner vacancy rates and 310 00:15:42,680 --> 00:15:46,360 Speaker 3: rental vacancy rates have come down significantly throughout this But 311 00:15:46,400 --> 00:15:47,800 Speaker 3: if I were to look at that and say, well, 312 00:15:48,440 --> 00:15:50,600 Speaker 3: what would it take how much shelter would it take 313 00:15:50,720 --> 00:15:53,360 Speaker 3: for us to get back to a long run equilibrium 314 00:15:53,440 --> 00:15:56,640 Speaker 3: vacancy rate or a long run average vacancy rate if 315 00:15:56,680 --> 00:15:59,680 Speaker 3: you will, And that's more like two million units across 316 00:15:59,680 --> 00:16:03,240 Speaker 3: the board. And so we think that the truth lies 317 00:16:03,640 --> 00:16:07,040 Speaker 3: somewhere in that range. We know it's a pretty big range, 318 00:16:07,040 --> 00:16:10,440 Speaker 3: but they're both pretty big numbers for an overall supply shortage. 319 00:16:10,680 --> 00:16:14,920 Speaker 1: Actually, this reminds me since you mentioned vacancy rates. You know, 320 00:16:15,000 --> 00:16:17,240 Speaker 1: one of the interesting things that happened over the past 321 00:16:17,320 --> 00:16:19,800 Speaker 1: year or two was this idea that maybe buying a 322 00:16:19,840 --> 00:16:23,520 Speaker 1: house is an inflation hedge. So if you can lock 323 00:16:23,600 --> 00:16:27,080 Speaker 1: in your cost you know that your landlord isn't going 324 00:16:27,120 --> 00:16:28,600 Speaker 1: to send you a letter once a year and say 325 00:16:28,640 --> 00:16:31,400 Speaker 1: I'm raising rent by five or ten percent or whatever. 326 00:16:31,920 --> 00:16:34,840 Speaker 1: And so that was said to be driving some of 327 00:16:34,840 --> 00:16:38,800 Speaker 1: the demand. As mortgage rates continue to go up, would 328 00:16:38,800 --> 00:16:42,760 Speaker 1: you expect people to maybe start to go back to renting, 329 00:16:42,800 --> 00:16:46,600 Speaker 1: although I realized that like rent itself might not necessarily 330 00:16:46,640 --> 00:16:49,360 Speaker 1: be a great option. But you know, if inflation is 331 00:16:49,440 --> 00:16:52,520 Speaker 1: starting to cool a little bit, then maybe some of 332 00:16:52,520 --> 00:16:54,120 Speaker 1: that dynamic begins to reverse. 333 00:16:54,960 --> 00:16:56,640 Speaker 3: I like the way that you kind of phrased that 334 00:16:56,760 --> 00:17:01,400 Speaker 3: juxtaposition from the household or the consumers perspective, and I 335 00:17:01,440 --> 00:17:03,960 Speaker 3: do think that as rates go up, Look, even as 336 00:17:04,280 --> 00:17:08,439 Speaker 3: rents have climbed in most places, most geographies across the country, 337 00:17:08,440 --> 00:17:12,080 Speaker 3: it's still more affordable to rent than it is to 338 00:17:12,320 --> 00:17:14,480 Speaker 3: own a home. And the climb in mortgage rates is 339 00:17:14,520 --> 00:17:20,440 Speaker 3: contributing to that as well, And so could on the margins, 340 00:17:20,560 --> 00:17:26,440 Speaker 3: you see more households elect to remain renters than buy 341 00:17:26,480 --> 00:17:29,280 Speaker 3: into the as you put it, the inflation hedge, the 342 00:17:29,320 --> 00:17:33,040 Speaker 3: locking in of that shelter payment as opposed to receiving 343 00:17:33,080 --> 00:17:35,800 Speaker 3: those every twelve or twenty four months. Rent increases. Sure, 344 00:17:35,800 --> 00:17:40,880 Speaker 3: on the margins that that would make sense, but anecdotally. 345 00:17:41,680 --> 00:17:43,440 Speaker 1: Is probably a small percentage. 346 00:17:43,600 --> 00:17:47,760 Speaker 2: Yeah, but it is true that right now, like the 347 00:17:47,800 --> 00:17:51,080 Speaker 2: rent versus by calculators, like at various times in some 348 00:17:51,280 --> 00:17:53,840 Speaker 2: market like oh you should rent, or sometimes by like 349 00:17:54,440 --> 00:17:58,439 Speaker 2: they're over, there's way in the dial towards rent right now, right, yes, okay, 350 00:17:59,040 --> 00:18:02,520 Speaker 2: So what else? I mean, what changes the dynamic? I mean, 351 00:18:02,520 --> 00:18:04,719 Speaker 2: I mean the other thing that of course could change, 352 00:18:04,760 --> 00:18:07,680 Speaker 2: but none of us really know. I mean, there could 353 00:18:07,720 --> 00:18:11,280 Speaker 2: be like the sort of miraculous disinflation, right and suddenly 354 00:18:11,320 --> 00:18:14,399 Speaker 2: it's like, oh, it's all transitory and everything's fine, and 355 00:18:14,440 --> 00:18:16,879 Speaker 2: then the FED like cuts rates and then mortgages. But 356 00:18:17,000 --> 00:18:19,440 Speaker 2: let's just say, you know, we can all dream that 357 00:18:19,440 --> 00:18:21,840 Speaker 2: that would be the scenario. But outside of that, like 358 00:18:22,280 --> 00:18:24,600 Speaker 2: what gives. 359 00:18:24,520 --> 00:18:30,000 Speaker 3: So so the soft landing scenario, yeah, off the table 360 00:18:30,080 --> 00:18:33,720 Speaker 3: rates coming down in an other healthy economy. Right, What 361 00:18:33,760 --> 00:18:37,360 Speaker 3: we're trying to figure out is just where could supply 362 00:18:37,720 --> 00:18:38,240 Speaker 3: come from? 363 00:18:38,320 --> 00:18:38,560 Speaker 1: Yes? 364 00:18:38,760 --> 00:18:43,080 Speaker 3: Right, I think we've referenced the longer term impact of 365 00:18:43,400 --> 00:18:46,000 Speaker 3: eight percent mortgage rates, and I haven't spoken to any 366 00:18:46,040 --> 00:18:49,720 Speaker 3: potential impacts from a quantitative perspective. But if we think 367 00:18:49,720 --> 00:18:52,600 Speaker 3: that it's going to keep demand capped right, the drops 368 00:18:53,040 --> 00:18:55,280 Speaker 3: can't be as significant as they were in twenty twenty two, 369 00:18:55,320 --> 00:18:57,320 Speaker 3: or at least we don't think they will be. But 370 00:18:57,400 --> 00:18:59,280 Speaker 3: we do think that you can talk about a higher 371 00:18:59,280 --> 00:19:01,720 Speaker 3: for longer rate and environment in terms of just kind 372 00:19:01,720 --> 00:19:05,960 Speaker 3: of preventing sales from really climbing. Then we have to 373 00:19:06,000 --> 00:19:10,640 Speaker 3: become super focused on this low inventory, this low supply environment, 374 00:19:10,640 --> 00:19:15,120 Speaker 3: because a growth and supply for any reason will lead 375 00:19:15,160 --> 00:19:17,679 Speaker 3: to weakness in home prices. If we look at our 376 00:19:17,720 --> 00:19:19,960 Speaker 3: models and just put in a five percent increase for 377 00:19:20,000 --> 00:19:22,360 Speaker 3: next year, and we were increasing by more than five 378 00:19:22,359 --> 00:19:24,359 Speaker 3: percent in that period after May twenty twenty two that 379 00:19:24,400 --> 00:19:26,680 Speaker 3: I mentioned, just a five percent increase, if we assume 380 00:19:26,760 --> 00:19:30,080 Speaker 3: no growth in sales or no growth in transaction volumes, 381 00:19:30,560 --> 00:19:32,520 Speaker 3: our models would say that home prices are down five 382 00:19:32,520 --> 00:19:35,320 Speaker 3: percent by the end of next year. That's not our forecast. 383 00:19:35,320 --> 00:19:37,520 Speaker 3: As I stated, higher for longer is not our base case, 384 00:19:37,560 --> 00:19:39,240 Speaker 3: or mortgage rates at eight percent for the entirety of 385 00:19:39,240 --> 00:19:42,840 Speaker 3: next year is not our base case. But that means 386 00:19:42,840 --> 00:19:46,119 Speaker 3: that we're That means that that inventory becomes something that 387 00:19:46,160 --> 00:19:50,120 Speaker 3: we have to be hyper focused on. And so where 388 00:19:50,160 --> 00:19:53,760 Speaker 3: could that come from? Could it come from potentially the 389 00:19:53,920 --> 00:19:56,879 Speaker 3: erosion of the lock and effect that we discussed, maybe 390 00:19:56,880 --> 00:19:59,560 Speaker 3: on the margins, Tracy, as you pointed out, we're still very, 391 00:19:59,640 --> 00:20:01,680 Speaker 3: very fun away from prevailing mortgage, right, so that would 392 00:20:01,760 --> 00:20:04,880 Speaker 3: just be on the margins. I believe I've discussed older 393 00:20:04,880 --> 00:20:07,600 Speaker 3: homeowners on this podcast before. One out of every three 394 00:20:07,600 --> 00:20:10,440 Speaker 3: homes is owned by somebody over sixty five. Over fifty 395 00:20:10,480 --> 00:20:12,520 Speaker 3: percent of those homeowners bought their home before the year 396 00:20:12,560 --> 00:20:15,480 Speaker 3: two thousand. They have a lot of equity there. Perhaps 397 00:20:15,480 --> 00:20:17,760 Speaker 3: they could be listing. The general trend has been more 398 00:20:17,800 --> 00:20:19,280 Speaker 3: towards aging in place, so we don't think it's going 399 00:20:19,320 --> 00:20:21,480 Speaker 3: to come from there, but that's what we're trying to 400 00:20:21,520 --> 00:20:24,399 Speaker 3: figure out. If rates are going to stay elevated, we 401 00:20:24,480 --> 00:20:27,240 Speaker 3: think that demand will remain tepid, and if that's the case, 402 00:20:28,000 --> 00:20:31,040 Speaker 3: any marginal supply would weigh on home prices. 403 00:20:31,560 --> 00:20:34,159 Speaker 1: Oh yeah, that reminds me. There was Actually there was 404 00:20:34,640 --> 00:20:39,000 Speaker 1: a very interesting Barkley's note, so from one of your competitors. 405 00:20:39,000 --> 00:20:41,240 Speaker 1: I'm sorry, we're cheating on you with other banks, but 406 00:20:41,800 --> 00:20:48,119 Speaker 1: the headline was basically, oh this was this is my headline. Okay, 407 00:20:48,160 --> 00:20:50,840 Speaker 1: well whatever, it captured the thrust of the note. The 408 00:20:50,880 --> 00:20:53,960 Speaker 1: headline of the summary that I wrote was Barkley says, 409 00:20:54,000 --> 00:20:57,240 Speaker 1: blame the boomers for surging house prices. And the idea 410 00:20:57,320 --> 00:21:00,760 Speaker 1: here was that you have a lot of this generation 411 00:21:01,080 --> 00:21:05,400 Speaker 1: who are choosing to stay in place, they don't want 412 00:21:05,440 --> 00:21:08,040 Speaker 1: to move in to nursing homes, and then that is 413 00:21:08,200 --> 00:21:13,240 Speaker 1: also affecting Joe headship rates and helping provide a floor 414 00:21:13,840 --> 00:21:16,480 Speaker 1: on house prices. I don't want to, you know, ask 415 00:21:16,520 --> 00:21:19,560 Speaker 1: you to talk about a competitor's research, but like, maybe 416 00:21:19,560 --> 00:21:22,119 Speaker 1: you can talk a little bit more about that dynamic, 417 00:21:22,200 --> 00:21:25,639 Speaker 1: like how much of the current resilience in housing is 418 00:21:25,680 --> 00:21:29,600 Speaker 1: coming from a large generation of people who want to 419 00:21:29,680 --> 00:21:32,639 Speaker 1: stay where they are, and it might even be you know, 420 00:21:32,760 --> 00:21:35,040 Speaker 1: downsizing but still moving into new houses. 421 00:21:36,320 --> 00:21:41,320 Speaker 3: I think it is an incredibly important point. We talked 422 00:21:41,320 --> 00:21:45,440 Speaker 3: so much about headship rates and household formations, and it 423 00:21:45,560 --> 00:21:49,480 Speaker 3: drives the conversation towards millennials and Gen Z because they're 424 00:21:49,480 --> 00:21:51,720 Speaker 3: the ones that are moving through their late twenties, their 425 00:21:51,760 --> 00:21:55,080 Speaker 3: early to mid thirties, and those age cohorts that have 426 00:21:55,200 --> 00:21:58,080 Speaker 3: been so significant in driving the marginal demand for shelter. 427 00:21:58,480 --> 00:22:01,360 Speaker 3: I think the reason that we haven't been as focused 428 00:22:01,440 --> 00:22:06,080 Speaker 3: on older age cohorts as an industry is because historically 429 00:22:06,160 --> 00:22:09,920 Speaker 3: they just haven't been that large. The boomer generation moving 430 00:22:09,920 --> 00:22:14,199 Speaker 3: into this age cohort is really driving kind of differentiated 431 00:22:14,480 --> 00:22:17,439 Speaker 3: housing dynamics. If we look at the percentage of homes 432 00:22:17,600 --> 00:22:19,959 Speaker 3: that are owned by people over sixty five from nineteen 433 00:22:20,040 --> 00:22:24,320 Speaker 3: eighty to twenty twelve, it is a very consistent twenty 434 00:22:24,320 --> 00:22:28,560 Speaker 3: five percent. The oscillations are really small. As I mentioned 435 00:22:28,560 --> 00:22:31,400 Speaker 3: a little bit earlier, it's gone up to thirty three 436 00:22:31,440 --> 00:22:34,119 Speaker 3: percent from twenty twelve to today. Given some of the 437 00:22:34,119 --> 00:22:37,200 Speaker 3: demographic forecasts from our economics team, it's only going to 438 00:22:37,280 --> 00:22:42,440 Speaker 3: move higher right now. And that trend has been aging 439 00:22:42,520 --> 00:22:46,080 Speaker 3: in place. While older homeowners do move from time to time, 440 00:22:46,119 --> 00:22:48,280 Speaker 3: when they do move, they tend to move to very 441 00:22:48,320 --> 00:22:52,920 Speaker 3: similar places Florida, Arizona, South Carolina. For the most part, 442 00:22:52,960 --> 00:22:55,160 Speaker 3: they do stay where they are. They age in place. 443 00:22:55,160 --> 00:22:58,080 Speaker 3: They are the least mobile age cohort in our population. 444 00:22:58,840 --> 00:23:00,840 Speaker 3: I talked about listings being at the lowest levels we've 445 00:23:00,880 --> 00:23:03,879 Speaker 3: seen in forty years. The truth is in twenty eighteen 446 00:23:03,920 --> 00:23:07,119 Speaker 3: twenty nineteen they were close to forty year lows. And 447 00:23:07,160 --> 00:23:09,760 Speaker 3: one of the reasons behind that, we think is this 448 00:23:09,920 --> 00:23:13,600 Speaker 3: aging boomer population. What share of housing they're taking up 449 00:23:13,920 --> 00:23:17,879 Speaker 3: now from twenty twenty to now, it has dramatically fallen 450 00:23:17,880 --> 00:23:20,600 Speaker 3: in and very much reset those lows. But this was 451 00:23:20,640 --> 00:23:39,680 Speaker 3: a conversation that we're having pre code Chase. 452 00:23:39,720 --> 00:23:41,199 Speaker 2: You know what I just thought about, maybe it's kind 453 00:23:41,240 --> 00:23:44,080 Speaker 2: of tenuous. You know, we had that conversation with Julia 454 00:23:44,200 --> 00:23:48,119 Speaker 2: Coronado about like inelastic demand as a big aspect of 455 00:23:48,280 --> 00:23:51,040 Speaker 2: this economy these days, and so it's interesting. This is 456 00:23:51,080 --> 00:23:52,960 Speaker 2: obviously sort of different than we were talking about the 457 00:23:53,119 --> 00:23:56,160 Speaker 2: energy and the energy transition and public spending, but it's 458 00:23:56,200 --> 00:24:00,000 Speaker 2: interesting to think about these inelastic forces in the econom 459 00:24:00,160 --> 00:24:01,679 Speaker 2: me and so to the extent that there is this 460 00:24:01,760 --> 00:24:07,240 Speaker 2: sort of large and growing share of homeowners who's would 461 00:24:07,560 --> 00:24:09,639 Speaker 2: the likes of which we've never seen, or getting older, 462 00:24:09,640 --> 00:24:13,280 Speaker 2: it's like another aspect of this economy that's sort of inelastic, 463 00:24:13,359 --> 00:24:17,200 Speaker 2: this function that's like not part of the cycle totally. 464 00:24:17,240 --> 00:24:19,920 Speaker 1: It also reminds me of the idea that a lot 465 00:24:19,960 --> 00:24:23,480 Speaker 1: of economics is about looking at the aggregate data, see 466 00:24:23,480 --> 00:24:26,280 Speaker 1: a single number, but within that number you can have 467 00:24:26,320 --> 00:24:29,159 Speaker 1: a bunch of disparate groups. And it feels and I 468 00:24:29,160 --> 00:24:31,840 Speaker 1: think Julia made this point too, it feels like the 469 00:24:31,920 --> 00:24:34,639 Speaker 1: disparity between some of those groups has really been growing. 470 00:24:34,680 --> 00:24:37,960 Speaker 1: So you have younger people who absolutely cannot get on 471 00:24:38,000 --> 00:24:40,639 Speaker 1: the housing ladder at the moment due to affordability, and 472 00:24:40,680 --> 00:24:44,920 Speaker 1: then you have basically completely priced insensitive baby boomers. 473 00:24:45,240 --> 00:24:47,960 Speaker 2: Right many have either they owned their home outright or 474 00:24:48,000 --> 00:24:50,639 Speaker 2: they're you know, completely you know, have a three percent 475 00:24:50,680 --> 00:24:53,199 Speaker 2: mortgage that's locked in for a long time. So the 476 00:24:53,280 --> 00:24:56,520 Speaker 2: thing that I'm taking away from your view on the 477 00:24:56,560 --> 00:24:59,320 Speaker 2: sort of like higher for longer rate scenario, and I 478 00:24:59,359 --> 00:25:02,760 Speaker 2: get you see Rach maybe coming down at some point 479 00:25:02,920 --> 00:25:06,359 Speaker 2: a little bit next year, is that there's not a 480 00:25:06,400 --> 00:25:08,680 Speaker 2: lot of upside with price at this point. Like we're 481 00:25:08,760 --> 00:25:12,160 Speaker 2: sort of like even under like the sort of benign scenario, 482 00:25:12,560 --> 00:25:14,879 Speaker 2: we're really sort of like hitting up against the ceiling 483 00:25:14,880 --> 00:25:16,640 Speaker 2: of price potential for housing here. 484 00:25:17,280 --> 00:25:20,240 Speaker 3: If rates stay at these elevated levels. I would agree 485 00:25:20,280 --> 00:25:22,920 Speaker 3: with that statement. Yeah, shorter term, I think from now 486 00:25:23,040 --> 00:25:24,960 Speaker 3: till the end of the year, a little bit more upside. 487 00:25:25,119 --> 00:25:27,280 Speaker 2: Yeah, but that's probably like a month and a half, 488 00:25:27,359 --> 00:25:29,919 Speaker 2: a couple months there. But then but in terms of 489 00:25:30,000 --> 00:25:33,399 Speaker 2: like the medium term, there's really like we just can't keep. 490 00:25:33,280 --> 00:25:37,480 Speaker 3: Pushing from here over the medium term. If rates stay 491 00:25:37,520 --> 00:25:39,840 Speaker 3: at these levels, we think the demand will remain pretty tepid, 492 00:25:40,880 --> 00:25:44,800 Speaker 3: which means that we are reliant upon supply remaining near 493 00:25:44,920 --> 00:25:47,520 Speaker 3: historic loths to keep home prices at these levels. And 494 00:25:47,560 --> 00:25:49,880 Speaker 3: if you start to get any little bit of give there, 495 00:25:49,880 --> 00:25:52,200 Speaker 3: and we were already seeing that from May of twenty 496 00:25:52,240 --> 00:25:54,720 Speaker 3: twenty two through the beginning part of this year, if 497 00:25:54,720 --> 00:25:58,600 Speaker 3: you start to see that again, that's going to the 498 00:25:59,119 --> 00:26:02,679 Speaker 3: rate of change moving off of these lows. We do 499 00:26:02,720 --> 00:26:04,480 Speaker 3: think that's going to have a negative implication for home 500 00:26:04,480 --> 00:26:05,160 Speaker 3: prices next year. 501 00:26:05,920 --> 00:26:08,960 Speaker 1: There was one other bit of analyst research that I 502 00:26:09,040 --> 00:26:11,760 Speaker 1: was reading ahead of this. This one was from Goldman 503 00:26:11,840 --> 00:26:15,879 Speaker 1: Sachs and they were commemorating the it's been sixteen years 504 00:26:15,880 --> 00:26:18,760 Speaker 1: since the housing crash, I guess. But one thing they 505 00:26:18,760 --> 00:26:22,160 Speaker 1: pointed out about the current market is that it seems 506 00:26:22,200 --> 00:26:27,160 Speaker 1: like borrowers homeowners are stretching on their mortgage payments relative 507 00:26:27,400 --> 00:26:30,240 Speaker 1: to income. So if you look at debt to income 508 00:26:30,320 --> 00:26:35,080 Speaker 1: ratios for people who have mortgages, they've been deteriorating for 509 00:26:35,119 --> 00:26:38,160 Speaker 1: a while. Now, you know, no one is really concerned 510 00:26:38,840 --> 00:26:41,440 Speaker 1: as far as I know, about a repeat of two 511 00:26:41,440 --> 00:26:43,359 Speaker 1: thousand and seven, two thousand and eight. I think. The 512 00:26:43,400 --> 00:26:46,040 Speaker 1: common argument is that the leverage is simply not there. 513 00:26:46,640 --> 00:26:49,560 Speaker 1: Mortgage standards are a lot higher, there's a lot more 514 00:26:49,600 --> 00:26:53,919 Speaker 1: scrutiny of borrowers. But does it matter if things like 515 00:26:54,080 --> 00:26:58,040 Speaker 1: debt to income ratios start to get stretched? I mean 516 00:26:58,080 --> 00:27:02,320 Speaker 1: going back to the affordability point, like, does affordability matter 517 00:27:02,400 --> 00:27:03,600 Speaker 1: and how does it play out? 518 00:27:04,119 --> 00:27:07,200 Speaker 3: Yes, debt to income matters when we look at things 519 00:27:07,240 --> 00:27:11,360 Speaker 3: like delinquency rates looking at performance on an underlying mortgage basis, 520 00:27:11,720 --> 00:27:13,960 Speaker 3: the higher that debt to income is, the more likely 521 00:27:13,960 --> 00:27:16,560 Speaker 3: it is that you're going to see higher levels of delinquency. 522 00:27:16,600 --> 00:27:19,520 Speaker 3: Of course, controlling for all these other factors, when we 523 00:27:19,560 --> 00:27:23,840 Speaker 3: think of mortgage credit availability and our housing framework, we 524 00:27:23,880 --> 00:27:26,200 Speaker 3: try to distill all this information that comes in through 525 00:27:26,240 --> 00:27:29,679 Speaker 3: our four pillar lens that demands supply, the affordability as 526 00:27:29,720 --> 00:27:32,399 Speaker 3: housing market and mortgage credit availability. It's important enough to 527 00:27:32,440 --> 00:27:34,560 Speaker 3: be one of those pillars. We like to think of 528 00:27:34,600 --> 00:27:38,000 Speaker 3: it through two lenses, borrower risk and product risk. Both 529 00:27:38,080 --> 00:27:40,840 Speaker 3: of them are important. Borrow or risk, I think, is 530 00:27:40,840 --> 00:27:44,800 Speaker 3: how we typically default to thinking about lending standards, credit scores, 531 00:27:45,280 --> 00:27:48,680 Speaker 3: loan to value ratios, debt to income ratios. If debt 532 00:27:48,680 --> 00:27:52,080 Speaker 3: income ratios are increasing, that borrow or risk is picking up. Now. 533 00:27:52,119 --> 00:27:54,200 Speaker 3: Credit overlays are important. Who are you giving the high 534 00:27:54,240 --> 00:27:54,959 Speaker 3: DTI mortgage? 535 00:27:54,960 --> 00:27:55,120 Speaker 1: Two? 536 00:27:55,160 --> 00:27:56,960 Speaker 3: Is it a high credit score borrower? Is it on 537 00:27:57,000 --> 00:28:00,119 Speaker 3: a lower LTV loan? All of those things matter, But 538 00:28:00,160 --> 00:28:01,879 Speaker 3: I think we also have to focus on the product 539 00:28:02,000 --> 00:28:04,240 Speaker 3: risk piece of this. And by product risk, we're talking 540 00:28:04,280 --> 00:28:07,080 Speaker 3: about the difference between kind of your thirty year fixed 541 00:28:07,160 --> 00:28:10,040 Speaker 3: rate mortgage and some of the products that proliferated a 542 00:28:10,040 --> 00:28:12,560 Speaker 3: little bit more in the early two thousands. Talk about 543 00:28:12,560 --> 00:28:13,360 Speaker 3: the difference. 544 00:28:13,119 --> 00:28:15,880 Speaker 1: Floating rates, option arms, that sort of thing. 545 00:28:16,240 --> 00:28:19,960 Speaker 3: Option arms those negatively amortizing mortgages that really don't exist anymore, 546 00:28:20,000 --> 00:28:22,800 Speaker 3: and the qualifying mortgage definition has kind of labeled them 547 00:28:22,800 --> 00:28:26,640 Speaker 3: almost a toxic mortgage product. Short reset arms, so arms 548 00:28:26,640 --> 00:28:28,560 Speaker 3: that had a two or three year fixed period with 549 00:28:28,560 --> 00:28:30,880 Speaker 3: a low teaser rate that stepped up to a much 550 00:28:30,960 --> 00:28:35,240 Speaker 3: higher payment. I think overlaying those easing borrower lending standards 551 00:28:35,240 --> 00:28:37,760 Speaker 3: like the TTI that you talked about with some of 552 00:28:37,800 --> 00:28:40,600 Speaker 3: those product risks was one of the things that was 553 00:28:40,680 --> 00:28:44,000 Speaker 3: kind of endemic of what happened in the early two thousands, 554 00:28:44,040 --> 00:28:46,360 Speaker 3: and that product risk has been more or less completely 555 00:28:46,680 --> 00:28:49,320 Speaker 3: eliminated from the market this time around, and so that's 556 00:28:49,360 --> 00:28:50,720 Speaker 3: one of the reasons why we think we're on much 557 00:28:50,760 --> 00:28:53,880 Speaker 3: healthier footing there, why you won't see as much kind 558 00:28:53,920 --> 00:28:57,000 Speaker 3: of true distress or defaults in this cycle. One of 559 00:28:57,000 --> 00:28:59,600 Speaker 3: the things that keeps kind of home prices a lot 560 00:28:59,640 --> 00:29:02,760 Speaker 3: more tected. One of the things that underpinned our view 561 00:29:02,800 --> 00:29:05,080 Speaker 3: the first time I came on this in October of 562 00:29:05,120 --> 00:29:06,720 Speaker 3: last year, as well, the fact that you weren't going 563 00:29:06,720 --> 00:29:08,360 Speaker 3: to see these forced transactions. 564 00:29:08,440 --> 00:29:11,440 Speaker 2: Yeah, well, so I'm gonna just sort of ask Tracy's 565 00:29:11,480 --> 00:29:14,719 Speaker 2: question even more like on this force transaction, because that's 566 00:29:14,720 --> 00:29:16,800 Speaker 2: where my head went, Like, you know, two thousand and seven, 567 00:29:16,800 --> 00:29:19,440 Speaker 2: two thousand and eight, this financial crisis, but we also 568 00:29:19,520 --> 00:29:21,120 Speaker 2: just had a lot of a big recession. A lot 569 00:29:21,120 --> 00:29:23,400 Speaker 2: of people lost their jobs, and when people lose their jobs, 570 00:29:24,040 --> 00:29:26,480 Speaker 2: you know, they can't make their mortgage payment, et cetera. 571 00:29:26,560 --> 00:29:29,320 Speaker 2: And then you have the foreclosure sales. Let's say we 572 00:29:29,360 --> 00:29:33,280 Speaker 2: actually get this recession that everyone has been missed correctly 573 00:29:33,360 --> 00:29:36,320 Speaker 2: forecasting for however, for long eventually. 574 00:29:36,040 --> 00:29:38,400 Speaker 1: Say miss correctly is that a that's a. 575 00:29:38,360 --> 00:29:42,000 Speaker 2: Word right, incorrectly, incorrectly, incorrectly mis forecasting. 576 00:29:42,160 --> 00:29:44,360 Speaker 1: There we go incorrectly, I like it, I think we 577 00:29:44,400 --> 00:29:45,040 Speaker 1: should use it. 578 00:29:45,240 --> 00:29:48,880 Speaker 2: Everyone's been missed correctly forecasting. Let's say we get some 579 00:29:48,960 --> 00:29:52,880 Speaker 2: kind of recession and unemployment goes from you know, just 580 00:29:52,920 --> 00:29:55,000 Speaker 2: some four percent to like five and a half or 581 00:29:55,040 --> 00:29:57,840 Speaker 2: six percent something like. Let's say we get a normal recession. 582 00:29:58,120 --> 00:30:02,520 Speaker 2: What does that do to supply given the other dynamic 583 00:30:02,680 --> 00:30:05,360 Speaker 2: of how many houses are not owned by people who 584 00:30:05,400 --> 00:30:06,320 Speaker 2: have a mortgage. 585 00:30:06,360 --> 00:30:08,960 Speaker 3: So it wouldn't be good. And if I could give 586 00:30:09,120 --> 00:30:12,360 Speaker 3: a quick shout out to our US economist Hell Center, 587 00:30:12,400 --> 00:30:14,800 Speaker 3: who has been calling for a soft landing for quite 588 00:30:14,800 --> 00:30:17,840 Speaker 3: some time now, not everyone got a missing correctly, Okay, 589 00:30:18,000 --> 00:30:20,240 Speaker 3: but I think that there are two things we have 590 00:30:20,280 --> 00:30:22,640 Speaker 3: to keep in mind when thinking about what that could 591 00:30:22,680 --> 00:30:28,160 Speaker 3: mean for supply and for this involuntary supply, if you will. 592 00:30:28,640 --> 00:30:33,360 Speaker 3: One is consumer's payment priority. One of the axioms that 593 00:30:33,440 --> 00:30:36,080 Speaker 3: kind of came out of the last crisis was well, 594 00:30:36,120 --> 00:30:37,800 Speaker 3: you can sleep in your car, but you can't drive 595 00:30:37,800 --> 00:30:38,520 Speaker 3: your house to work. 596 00:30:38,560 --> 00:30:40,760 Speaker 1: To kind of speak to the idea, I remember that. 597 00:30:41,080 --> 00:30:44,240 Speaker 1: I also remember there were these securitization bankers post two 598 00:30:44,280 --> 00:30:46,760 Speaker 1: thousand and eight who were making the same argument for 599 00:30:46,960 --> 00:30:51,440 Speaker 1: securitizations of phones, and they were saying of like phone loans, 600 00:30:51,480 --> 00:30:54,160 Speaker 1: and they're basically saying like, well, you know, you can 601 00:30:54,160 --> 00:30:57,840 Speaker 1: sleep in your car, but you definitely like need your phone. 602 00:30:57,840 --> 00:30:59,400 Speaker 1: You're never going to give up your phone, and so 603 00:30:59,480 --> 00:31:01,640 Speaker 1: it's completely safe. Sorry that was a tangent, but. 604 00:31:01,640 --> 00:31:02,520 Speaker 2: No, that's a good point. 605 00:31:02,640 --> 00:31:03,440 Speaker 1: Reminded me of it. 606 00:31:03,840 --> 00:31:05,640 Speaker 3: I think we would agree if we had the data 607 00:31:05,680 --> 00:31:07,719 Speaker 3: to prove it, the cell phone payments should be at 608 00:31:07,720 --> 00:31:10,320 Speaker 3: the top of the consumer payment priority waterfall. Just walking 609 00:31:10,360 --> 00:31:13,240 Speaker 3: here trying to avoid people that are just staring at 610 00:31:13,280 --> 00:31:16,080 Speaker 3: their phone, it has to be up there. Sorry that 611 00:31:16,200 --> 00:31:19,480 Speaker 3: was me, But one of the things we're seeing in 612 00:31:19,480 --> 00:31:22,840 Speaker 3: the data now, so looking at the abs side of 613 00:31:22,880 --> 00:31:25,120 Speaker 3: the world, we saw a pick up in subprime auto 614 00:31:25,120 --> 00:31:27,480 Speaker 3: delinquencies last year, okay, And one of the things that 615 00:31:27,520 --> 00:31:30,080 Speaker 3: we were saying from our team in Securitized Products research 616 00:31:30,200 --> 00:31:31,840 Speaker 3: was that we didn't think you were going to see 617 00:31:31,880 --> 00:31:35,560 Speaker 3: the same transmission from subprime delinquencies to prime delinquencies because 618 00:31:35,560 --> 00:31:37,640 Speaker 3: a lot of your prime borrowers tend to be homeowners, 619 00:31:37,640 --> 00:31:40,560 Speaker 3: and their shelter costs aren't increasing because of everything we've 620 00:31:40,600 --> 00:31:44,160 Speaker 3: talked about here. Flash forward to this year, prime delinquencies 621 00:31:44,200 --> 00:31:46,560 Speaker 3: start increasing a little bit much more than we certainly 622 00:31:46,600 --> 00:31:49,040 Speaker 3: expected them to. And if you look at the way 623 00:31:49,040 --> 00:31:52,040 Speaker 3: in which they're increasing, it's not this straight current thirty 624 00:31:52,360 --> 00:31:57,520 Speaker 3: sixty ninety day delinquency. It's maybe inflation's higher. Miss one payment, 625 00:31:57,720 --> 00:32:00,200 Speaker 3: but stay at thirty days delinquency for a while, miss 626 00:32:00,240 --> 00:32:02,520 Speaker 3: another payment, stay at sixty days delinquency for a while. 627 00:32:02,520 --> 00:32:04,840 Speaker 3: When we analyze transition rates, we're seeing that, and we 628 00:32:04,880 --> 00:32:07,080 Speaker 3: think one thing that could be happening here is these 629 00:32:07,120 --> 00:32:09,400 Speaker 3: borrowers are looking to protect the equity they have in 630 00:32:09,400 --> 00:32:12,760 Speaker 3: their home. They're looking to protect the very low cost 631 00:32:12,760 --> 00:32:14,960 Speaker 3: of shelter, the cost of financing of their home that 632 00:32:15,000 --> 00:32:17,320 Speaker 3: they have, and those things that might be leading to 633 00:32:17,360 --> 00:32:21,000 Speaker 3: a payment priority shift back towards mortgages, which we think 634 00:32:21,120 --> 00:32:23,560 Speaker 3: could protect us a little bit in the environment you're 635 00:32:23,600 --> 00:32:28,200 Speaker 3: talking about. But the second piece is the service or 636 00:32:28,200 --> 00:32:30,760 Speaker 3: toolkit is what we're calling it. Back in two thousand 637 00:32:30,800 --> 00:32:34,200 Speaker 3: and eight, the government, the government introduced the Home Affordable 638 00:32:34,200 --> 00:32:36,120 Speaker 3: Modification Program hamp hamp right. 639 00:32:36,320 --> 00:32:38,720 Speaker 1: I used to draw comics about hamp. 640 00:32:38,920 --> 00:32:40,840 Speaker 3: And it was really the first time that servicers had 641 00:32:40,840 --> 00:32:44,520 Speaker 3: to implement this big modification program across all these distress 642 00:32:44,560 --> 00:32:48,600 Speaker 3: and delinquent borrowers. Foreclosure mitigation options. If you will, borrowers 643 00:32:48,600 --> 00:32:54,320 Speaker 3: themselves weren't used to or weren't expecting kind of somebody 644 00:32:54,360 --> 00:32:56,600 Speaker 3: they owed money to to give them other options for 645 00:32:56,920 --> 00:33:00,640 Speaker 3: paying that. Flash forward fifteen years now, this servicers are 646 00:33:00,720 --> 00:33:04,200 Speaker 3: much more practiced at implementing these foreclosure mitigation options. Borrowers, 647 00:33:04,240 --> 00:33:06,120 Speaker 3: we believe, are much more likely to know they are 648 00:33:06,120 --> 00:33:09,640 Speaker 3: available to them. And so when we're actually looking at 649 00:33:09,840 --> 00:33:11,920 Speaker 3: some of our distress scenarios, when we look at like 650 00:33:11,920 --> 00:33:15,880 Speaker 3: non agency mortgage backed securities, we're taking delinquency and yes, 651 00:33:15,920 --> 00:33:17,960 Speaker 3: we're thinking about the rate at which those delinquent loans 652 00:33:17,960 --> 00:33:22,640 Speaker 3: can become distressed and foreclosures and that involuntary supply on 653 00:33:22,680 --> 00:33:25,320 Speaker 3: the market that shadow inventory. But we're also a little 654 00:33:25,360 --> 00:33:26,800 Speaker 3: bit more focused on the rate at which they become 655 00:33:26,800 --> 00:33:29,280 Speaker 3: modifications and what that means the cash flows too. But 656 00:33:29,320 --> 00:33:32,000 Speaker 3: if they become modifications, means they don't become supply on 657 00:33:32,000 --> 00:33:32,680 Speaker 3: the housing market. 658 00:33:33,400 --> 00:33:36,360 Speaker 1: I mean, it would be incredibly depressing if we had 659 00:33:36,400 --> 00:33:40,520 Speaker 1: experienced two thousand and eight and hadn't learned anything from 660 00:33:40,600 --> 00:33:44,760 Speaker 1: it in terms of mortgage modifications or actual risk management 661 00:33:45,200 --> 00:33:49,040 Speaker 1: for loaning money to would be homeowners. Jim, I just 662 00:33:49,120 --> 00:33:51,720 Speaker 1: have one last question, and I'm going to ask you 663 00:33:51,760 --> 00:33:55,200 Speaker 1: to I guess, like pretend to be an economist for 664 00:33:55,280 --> 00:33:59,120 Speaker 1: a second. But there is there is this open question 665 00:33:59,400 --> 00:34:02,920 Speaker 1: about the resilience of the housing market and what it 666 00:34:03,000 --> 00:34:06,360 Speaker 1: means for monetary policy, in the sense that with rates 667 00:34:06,400 --> 00:34:09,960 Speaker 1: going up, you might have expected to see more of 668 00:34:10,000 --> 00:34:12,839 Speaker 1: an impact on home prices and we haven't seen that. 669 00:34:12,920 --> 00:34:15,839 Speaker 1: And we've seen various FED speakers sort of scratching their 670 00:34:15,880 --> 00:34:19,279 Speaker 1: heads about this. The Richmond Fed's Tom Barkin was on 671 00:34:19,320 --> 00:34:22,960 Speaker 1: this podcast recently saying that it's been surprising to him 672 00:34:23,040 --> 00:34:26,480 Speaker 1: and maybe if it isn't and maybe if we aren't 673 00:34:26,520 --> 00:34:29,240 Speaker 1: seeing more of an impact on housing, maybe that means 674 00:34:29,440 --> 00:34:31,799 Speaker 1: the FED has to lean harder on other parts of 675 00:34:31,800 --> 00:34:34,560 Speaker 1: the economy. But I guess, you know, try to sum 676 00:34:34,560 --> 00:34:36,840 Speaker 1: it up for us, like what does it mean for 677 00:34:36,960 --> 00:34:41,040 Speaker 1: monetary policy, for inflation, for the economy in general that 678 00:34:41,160 --> 00:34:43,080 Speaker 1: housing has been this resilient. 679 00:34:43,880 --> 00:34:47,280 Speaker 3: So I think we have to take that through again 680 00:34:47,360 --> 00:34:52,759 Speaker 3: two different lenses. One, home prices have been very resilient, right, 681 00:34:53,200 --> 00:34:57,560 Speaker 3: Other pieces of the housing market have reacted to the 682 00:34:57,600 --> 00:35:01,120 Speaker 3: increase that we've seen in mortgage rates. Existing home sales 683 00:35:01,360 --> 00:35:04,240 Speaker 3: have fallen more than twice as quickly if we control 684 00:35:04,239 --> 00:35:07,680 Speaker 3: for affordability deterioration, more than twice as quickly as they 685 00:35:07,680 --> 00:35:11,000 Speaker 3: did during the Great Financial Crisis. Housing starts from their 686 00:35:11,040 --> 00:35:13,120 Speaker 3: peak in this cycle, in kind of April May of 687 00:35:13,160 --> 00:35:15,839 Speaker 3: twenty twenty two, single unit housing starts are down over 688 00:35:15,920 --> 00:35:19,160 Speaker 3: twenty percent. When we think about how the housing market 689 00:35:19,600 --> 00:35:22,040 Speaker 3: impacts the economy more broadly, when I work with our 690 00:35:22,080 --> 00:35:25,560 Speaker 3: economists at Morgan Stanley, they're just as if not more, 691 00:35:25,600 --> 00:35:28,120 Speaker 3: interested in how we're thinking about housing starts and how 692 00:35:28,160 --> 00:35:30,399 Speaker 3: we're thinking about sales volumes going forward. If you think 693 00:35:30,400 --> 00:35:33,360 Speaker 3: about the job creation from a housing start perspective, especially 694 00:35:33,400 --> 00:35:35,600 Speaker 3: a single unit housing start perspective, which creates more than 695 00:35:35,600 --> 00:35:37,960 Speaker 3: two times as many jobs as a multi unit housing 696 00:35:38,000 --> 00:35:39,800 Speaker 3: start does, and when you think about the amount of 697 00:35:39,840 --> 00:35:42,399 Speaker 3: money people spend, either when they just buy a home 698 00:35:42,640 --> 00:35:45,200 Speaker 3: or if they're preparing their home to sell like both 699 00:35:45,239 --> 00:35:47,560 Speaker 3: of those things have a real impact on the economy 700 00:35:47,600 --> 00:35:52,240 Speaker 3: that aren't necessarily as visible as the home price piece 701 00:35:52,280 --> 00:35:54,840 Speaker 3: of this, and the home price piece can certainly support 702 00:35:54,840 --> 00:35:58,480 Speaker 3: the consumer, especially the homeowning consumer, which is two thirds 703 00:35:58,520 --> 00:36:00,320 Speaker 3: of the market. The home ownership rate is still sixty 704 00:36:00,360 --> 00:36:02,680 Speaker 3: five to sixty six percent so there are certainly a 705 00:36:02,680 --> 00:36:04,720 Speaker 3: lot of different ways to think about this, and keeping 706 00:36:04,920 --> 00:36:09,439 Speaker 3: rates higher for longer will continue to weigh on those 707 00:36:09,600 --> 00:36:12,920 Speaker 3: sales and starts pieces of the market, and as we've discussed, 708 00:36:12,960 --> 00:36:15,719 Speaker 3: if we stay here, could actually start to weigh on 709 00:36:15,800 --> 00:36:16,560 Speaker 3: home prices too. 710 00:36:16,760 --> 00:36:18,640 Speaker 1: Yeah, this is a very good reminder that the housing 711 00:36:18,680 --> 00:36:21,040 Speaker 1: market is not a monolith and it's not just price. 712 00:36:21,600 --> 00:36:23,920 Speaker 1: Jim Egan, thank you so much for coming back on 713 00:36:23,960 --> 00:36:26,759 Speaker 1: all thoughts for the third time. Really appreciate it. We'll 714 00:36:26,800 --> 00:36:28,920 Speaker 1: have you back on again when mortgage rates hit nine 715 00:36:28,960 --> 00:36:30,879 Speaker 1: percent or. 716 00:36:30,880 --> 00:36:35,879 Speaker 2: Seven or seven either direction, either direction. For ever from 717 00:36:35,880 --> 00:36:36,600 Speaker 2: here on out. 718 00:36:36,560 --> 00:36:36,640 Speaker 1: We. 719 00:36:38,160 --> 00:36:38,719 Speaker 2: Chat with Jim. 720 00:36:39,040 --> 00:36:40,480 Speaker 3: Thank you so much for having me. 721 00:36:55,000 --> 00:36:57,799 Speaker 1: So Joe. Always great to catch up with Jim. There 722 00:36:57,840 --> 00:37:00,560 Speaker 1: were so many interesting things to pull out there. I mean, 723 00:37:00,640 --> 00:37:03,080 Speaker 1: one one thing that stuck out to me was that 724 00:37:03,200 --> 00:37:06,120 Speaker 1: baby boomer dynamic, which was kind of apparent even before 725 00:37:06,320 --> 00:37:08,480 Speaker 1: twenty twenty. So the idea that you could see some 726 00:37:08,560 --> 00:37:10,840 Speaker 1: of it in the data in twenty eighteen twenty nineteen, 727 00:37:11,400 --> 00:37:15,000 Speaker 1: so more of a structural or secular shift than a 728 00:37:15,040 --> 00:37:18,240 Speaker 1: cyclical one. I thought that was really interesting. And also 729 00:37:18,360 --> 00:37:21,439 Speaker 1: the point at the end about like, yes, we talk 730 00:37:21,520 --> 00:37:26,640 Speaker 1: about housing market resilience, but actually it's basically just price 731 00:37:26,840 --> 00:37:28,759 Speaker 1: at this point, and a lot of the activity that 732 00:37:28,760 --> 00:37:33,120 Speaker 1: you would associate with housing has been fairly weak, except 733 00:37:33,160 --> 00:37:34,920 Speaker 1: for you know, maybe there were a couple months earlier 734 00:37:34,920 --> 00:37:36,640 Speaker 1: in the year when it felt like things were starting 735 00:37:36,680 --> 00:37:39,279 Speaker 1: to improve, but other than that, it feels like things 736 00:37:39,280 --> 00:37:40,680 Speaker 1: have been deteriorating. 737 00:37:40,960 --> 00:37:43,960 Speaker 2: Yeah, I guess absolutely. I think the two takeaways for 738 00:37:44,120 --> 00:37:47,279 Speaker 2: me is that, you know, the move from three point 739 00:37:47,440 --> 00:37:49,799 Speaker 2: three percent or whatever it was to seven percent, like 740 00:37:49,840 --> 00:37:52,520 Speaker 2: that was the big move and moved higher from here, Yeah, 741 00:37:52,600 --> 00:37:55,280 Speaker 2: are going to the effect is going to be only marginal. 742 00:37:55,680 --> 00:37:59,160 Speaker 2: But also this idea that like, okay, home prices were 743 00:37:59,200 --> 00:38:02,319 Speaker 2: able to rie is during the first leg of this 744 00:38:02,360 --> 00:38:05,600 Speaker 2: affordability shock, but this idea that it can't really go 745 00:38:05,760 --> 00:38:08,520 Speaker 2: any further from here from a price perspective, and that 746 00:38:08,800 --> 00:38:12,240 Speaker 2: the only therefore variable that really is going to matter 747 00:38:12,320 --> 00:38:15,200 Speaker 2: is supply. And if supply starts to loosen a little bit, 748 00:38:15,480 --> 00:38:18,160 Speaker 2: and it might you know, at the margin, then that 749 00:38:18,440 --> 00:38:22,600 Speaker 2: starts to create the possibility at least of downside pressure 750 00:38:22,640 --> 00:38:23,240 Speaker 2: on prices. 751 00:38:23,400 --> 00:38:26,759 Speaker 1: Yeah, that was a stunning statistic that Jim had that 752 00:38:26,920 --> 00:38:30,560 Speaker 1: I think it was like, if there's a five percent 753 00:38:30,640 --> 00:38:33,360 Speaker 1: growth in inventory next year that would lead to a 754 00:38:33,400 --> 00:38:35,839 Speaker 1: five percent drop in home prices. Yeah, which it gives 755 00:38:35,840 --> 00:38:38,600 Speaker 1: you a pretty good idea of like how so much 756 00:38:38,640 --> 00:38:42,920 Speaker 1: of it currently rests on the lynchpin of unlocking inventory. 757 00:38:43,120 --> 00:38:45,480 Speaker 2: Yep, that's it. And however we get there so right, 758 00:38:45,600 --> 00:38:48,920 Speaker 2: so whether it's there's some marginal impact in theory if 759 00:38:48,920 --> 00:38:51,719 Speaker 2: there are layoffs, but even there, he noted, probably for 760 00:38:52,080 --> 00:38:57,239 Speaker 2: good that layoffs don't equal liquidations or foreclosures the way 761 00:38:57,239 --> 00:38:59,600 Speaker 2: they did in the pre Great Financial Crisis period, which 762 00:38:59,680 --> 00:39:03,040 Speaker 2: is a good thing. Whether it's obviously baby boomer, although 763 00:39:03,040 --> 00:39:06,840 Speaker 2: he does not see like some imminent demographic shift because 764 00:39:06,840 --> 00:39:09,160 Speaker 2: then there's not going to be some imminent change. So 765 00:39:09,600 --> 00:39:12,440 Speaker 2: you know, then there's the home builder component the new supply, 766 00:39:12,520 --> 00:39:14,399 Speaker 2: but we know they're pulling back. But it really does 767 00:39:14,440 --> 00:39:16,919 Speaker 2: seem to me it's like the supply variables are where 768 00:39:16,920 --> 00:39:18,680 Speaker 2: it's at from here, because we're sort of tapped out 769 00:39:18,680 --> 00:39:20,160 Speaker 2: on the demand variables totally. 770 00:39:20,200 --> 00:39:22,200 Speaker 1: The other thing that was really interesting was the idea 771 00:39:22,239 --> 00:39:26,319 Speaker 1: that maybe subordination of mortgages in people's like oh yeah, 772 00:39:26,360 --> 00:39:28,000 Speaker 1: references has kind of changed. 773 00:39:28,040 --> 00:39:30,400 Speaker 2: Right, I had right there. It's like, oh, you really 774 00:39:30,440 --> 00:39:32,440 Speaker 2: want to. I mean, no one wants to like before 775 00:39:32,560 --> 00:39:34,480 Speaker 2: closed up, of course, but if you have a three 776 00:39:34,560 --> 00:39:36,719 Speaker 2: percent more or three and a half percent more. 777 00:39:37,080 --> 00:39:39,239 Speaker 1: They really don't want to be exactly that. 778 00:39:39,239 --> 00:39:41,880 Speaker 2: You really don't because so I did think that was 779 00:39:41,880 --> 00:39:42,759 Speaker 2: an interesting point to see. 780 00:39:42,800 --> 00:39:45,360 Speaker 1: Yeah, so many things to pull out there. Shall we 781 00:39:45,440 --> 00:39:46,160 Speaker 1: leave it there for now? 782 00:39:46,200 --> 00:39:46,319 Speaker 3: Though? 783 00:39:46,400 --> 00:39:47,080 Speaker 2: Let's leave it there? 784 00:39:47,160 --> 00:39:50,440 Speaker 1: Okay. This has been another episode of the All Thoughts podcast. 785 00:39:50,640 --> 00:39:53,480 Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway 786 00:39:53,600 --> 00:39:54,799 Speaker 1: and I'm Joe Wisenthal. 787 00:39:54,840 --> 00:39:57,560 Speaker 2: You can follow me at the Stalwart. Follow our producers 788 00:39:57,600 --> 00:40:01,640 Speaker 2: Carmen Rodriguez at Carman Arman and Dashiel Bennett at Dashbot. 789 00:40:01,719 --> 00:40:04,520 Speaker 2: And thank you to our producer Moses Ondam. For more 790 00:40:04,520 --> 00:40:07,560 Speaker 2: Oddlots content, go to Bloomberg dot com slash odd Lots, 791 00:40:07,560 --> 00:40:10,799 Speaker 2: where we have a blog, transcripts and a newsletter and 792 00:40:10,920 --> 00:40:13,319 Speaker 2: you can chat twenty four to seven with fellow odd 793 00:40:13,440 --> 00:40:16,960 Speaker 2: Lots listeners about all these topics, including in our real 794 00:40:17,080 --> 00:40:20,920 Speaker 2: estate channel in the Discord Discord dot gg. Slash odd 795 00:40:21,000 --> 00:40:22,919 Speaker 2: Lots really fun place to hang out. 796 00:40:23,480 --> 00:40:26,000 Speaker 1: And if you enjoy Adlots, if you want us to 797 00:40:26,000 --> 00:40:29,160 Speaker 1: bring on Jim Egan for a fourth time, when morgat 798 00:40:29,239 --> 00:40:32,640 Speaker 1: rates inevitably go up or down, then please leave us 799 00:40:32,680 --> 00:40:36,440 Speaker 1: a positive review on your favorite podcast platform. Thanks for listening. 800 00:41:00,840 --> 00:41:02,800 Speaker 1: Was an E.