Animal Spirits Podcast - Talk Your Book: The State of the Housing Market

Episode Date: June 11, 2021

On today's show the guys talk with Logan Mohtashami, lead analyst at Housing Wire.    Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain position, and the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. We have Logan Motoshami on in the show in just a few minutes. But before we get to him, I wanted to read an email that just came in. I just recently decided to sell my condo in Arizona. It's a too bad, too bad. Decent area, but nothing special. Reach out to Zillow, Open Door, and Redfin to see what they would offer. Zillow came in at 317 in March.

The others were in that range. I talked to realtors and they all felt I should list for $3.50. With Zillow, the offer expires after 30 days, but you can ask for a new one. I was just about to go live with my listing with the agent and asked Zillow to update my offer. Now, keep in mind, this is just 30 days later, a new offer of 388. So this was 317, 30 days later, 388. I closed with them last Friday. What's crazy is that the Zestimit never went above 354K. Not sure how individuals can compete if companies like Zillow start paying well above market. So we get into this with Logan a little bit.

We asked them about these eye buyers. It's interesting that people, even in a seller's market, are still reaching out to these places just because of the convenience factor. That's kind of surprising to me. I would assume people would say, I'm going to try to go for a bunch of offers over asking and see what happens, but this is just easier, right? Or why not just list it yourself? Right.

Yeah. Do the for sale. This has got to be the perfect environment for sale by owner, right? So one of the things that we spoke about with Logan was just the lack of supply. And Rick Palacios Jr. tweeted this morning, new home sales fell in May, year over year and month over month. The theme of the month was sales declined by builder design. So he showed a chart. The may drop in new home sales is not demand driven. The average finished inventory is down 82% year over year. We'll share this chart in the show notes, but it's showing. the number of unsold, finished new homes per community, and there are none. They're just none. Right.

So this means the builders have pulled back or people have pulled back, probably builders pulling back and slowing down. What this tells me, though, is that this is going to make housing prices go higher probably, right? This isn't like a good sign. No, no, no. This is a bad sign. It's not a good sign. And one of the things that we spoke about with Logan was like, where are the builders?

If they're not building, people say they're not building. I mean, they are building. What are they doing? They're publicly traded companies. They are building. But what they're not doing is they're not overbuilding. right and Logan made a good point like they're not a public utility and they're not looking out for the greater good they're trying to make money when we had the boom in the 1950s I always I always come back

to this book by David Halberstam called the 50s that whole housing boom where they just made these communities out of nowhere like these cookie cutter communities sprung up everywhere and that was not how home builders that decided to make this happen it was the government I think that's how Long Island was built the first town here I believe after World War II was a place called Levittown yeah yeah that bad is something about that in the book actually it was it's pretty interesting chapter, but that's the thing. Like, people complain about the, like, the builders are doing fine right now. Their margins are fine.

They're making money. What is the incentive for them to build more? It's got to be on the government to do it. So that just means, as we get into it, Logan, this dream of ours that they're going to build more houses to meet this demand is never going to come true. Look at charts of all the home builders, palti, toll, all of them. They're all doing pretty well for themselves. And so I guess the fear is that they're going to overbuild just as demand dries up or so or interest

rates go up and they're just not going to do it. Right. So they're going to take their time and they know that they have a backlog, probably of people. And if someone drops out, there's always going to be someone else to step in. So Logan has been like a very vocal housing bull. And hearing him get concerned makes me even more concerned. Right. Him saying, yes, I saw this coming, but this is unhealthy. So this is not a bubble, but this is an unhealthy market right now. I think he said that he was expecting somewhere in the neighborhood of 25% home price appreciation between 2020 and 2024, and we basically got it all already. Right.

It's already been front-loaded. And he's saying, like, worst-case scenario, housing prices could continue to go up double digits for a few years. And that's actually a bad thing. We don't want that because that just makes everyone angry. I honestly don't know what the answer is. I mean, the only answer is higher interest rates, right? That's got to be it.

And that slows things down for a little bit and people think twice. and that at least the prices don't fall, but at least they flatline a little bit. Maybe this is a terrible idea. I'm just throwing it out there. I haven't given this a second thought. What if the government starts subsidizing home builders or just saying, like, we'll backstop here or something. Just start, just turn this big in on start building. I think that'd be great. It's obviously not coming up and that would take a long time to happen. So like any of the YIMB stuff like that pipe dream is just, it's never going to happen, I think. All right. Well, here is our conversation with Logan Motishami.

We've been getting more questions than ever on the housing market this year. And we've tried to touch on it from a bunch of different angles. We wanted to kind of bring it all together and just do a state of the housing market. And we couldn't think of a better person to lead us through the discussion than Logan Motishami, lead analyst at Housing Warrior. His secondary job is dunking on housing bears on Twitter. We just wanted to go through the whole housing market and see if we can set people straight about where we are. Because we get questions that run the gamut from,

I don't want to miss out because things could keep going higher or things are going to crash. and this is crazy. So why don't you throw to Logan the most commonly asked question that we get? I'd be curious to hear what this take is on that. Okay, by far the most, and this is throughout the entire podcast, hey guys, I'm saving for a house. I want to buy a house in the next two to five years. What should I do with that savings?

Should I take a little more risk? Should I put it in something that's safe? What do I do with that money? What do you think? If this is anything regarding toward housing, I've always had the same answer to this. Housing is the cost of shelter to your own capacity. and debt. And when home buyers are ready, they buy. I think there's like this mythical lore that there's like these marginal people of scale on the sidelines waiting to buy a home. And that last

year was a really good example. For many years, we've had the housing bubble boys who said home prices are going to crash 30, 40, 50, 50, 60 percent. Then COVID came. So everybody went all in on the crash. And within five, six weeks, Americans kept buying homes. And more Americans have bought homes in 2020 or 2021 with mortgages than any period from 2008 to 2019, which was the weakest housing recovery ever. So it makes sense because they look at it at a shelter. How everybody kind of thinks about it is like an investment. Home buyers don't look at it in that way. Typically home buyers now make good money. So they're ready to go. And it's just a payment that they're buying. They're sleeping with that every night. They're waking up every morning. So I think there's this almost a myth that there's these marginal

buyers all waiting and I don't even consider them like serious homebuyers. You should never ask another adult if you should buy a house. You're a grown-up. You don't live with your parents anymore. You make that decision on your own. You don't let a bank or somebody on TV tell you, oh, home prices could fall 50%. Wait until December and see what happens. Like Susie Orman said, no, people buy homes a shelter. And if the last two years hasn't shown you this, that's on you then. So I think that's a good lead into something that a lot of people are worried about right now is we get a lot of people in certain cities saying, hey, the professional buyers are coming in and buying up everything. And we've seen contradictory stories there in terms of some market

say it's like 20% in some of these bigger cities where you're having professionals come in. How much is the demand actually being driven by those professionals? And it probably matters, I guess, what area of the country are in. But how much of that demand is being sucked up by them? Well, if you look at the sales from investors or cash buyers, they're typically been roughly around the same levels for many years. So they are historically higher than what they have been, but in reality terms, it's really simple.

Look at mortgage purchase application data. It kind of bottomed out in 2014. It's been rising every year. Primary resident home buyers drive this market. When that goes down, sales go down in big scale terms. Cash buyers actually have been falling throughout the other expansion just because the distress sales were coming in lower. So that's what they're looking for.

So it's not as big as people think. You just have to look at it as that we have millions and millions and millions of people. They just want to buy a home to live in. So there is no people say, well, Black Rock is buying up all the homes. They bought 200,000 homes in the last seven years. There's over like 50 million homes bought. Come on. Hey, Logan, could you clear this up?

What is a cash buyer? What does that even mean? We were having some debate. What does that mean? It could be a primary resident person buying a house. It could be an investor. It could be somebody looking to buy just a rent. property for yield. I mean, that's one question I get. Why aren't investors selling in this?

I'm sorry. What I mean is when people say cash buyers, does that mean that they are literally buying the house without a mortgage? Yes. That is a full 100% cash offer. Where are these people getting cash? Man, you got lots of money out there. What's the asset shortage? There's a lot of money out there. And historically, it's usually been around 10%, but it's been trending around 20% for the last few years. three-month average right now is about 23%. So yeah, people have homes. Now, how I explain this is that think about you get nothing in cash, CDs, bonds. Rental yield means something to people. So if they buy something with cash, you can diversify your portfolio and get some kind of yield off of it. That's why I don't think big investors have ever sold, because in a low rate environment,

that's the only thing where you can get any kind of return. Now, it's not as big as people think. I think 38% of all homes in America don't even have a mortgage. So it's just that demand is a little bit better. I think there's the confusion. Like you see these stories about 30 people going to a homes. Remember, 2020 existing home sales ended at $5.64 million. That is only $130,000 more than what we had in 2017 levels. This is an inventory crunch.

So people think it's like a credit boom. No. This is why like my tone, especially in a lot of interviews I give, recently is that this is a very unhealthy housing market because inventories are too low. We might only be up year over year just a little bit in existing home sales and we could have like 13 to 18% home appreciation. That is not a healthy market under any circumstances. And this is like the big fear, the big fear of housing in years 2020 to 2024. Inventory has been falling every year since 2014. Mortgage purchase applications has been rising.

But now you're running into the best housing demographic. patch ever in history and you have the lowest mortgage rates ever in history. So if that inventory channel keeps on continuing, you're going to have an inventory storage. Now, I thought it'd be more of a 2022 to 2023 story, but COVID has accelerated a lot of things. And we have this. And none of this is healthy. None of this is good for anything. And it's not that demand is week. It's a first rule problem. Americans make enough money. They can buy homes. But you should not be competing with 10 or 12, 13 people for a house. That's not how it's. it's supposed to be. Now, thankfully, because it's not a credit boom, it's not a housing

level. In time, inventory should rise. If you look at purchase application data from 2002 to 2005, it looks a lot different than what we've seen from like 2018 to 2021. So there's no credit boom here. And in time, inventory should increase. Home price growth should slow down. If I am wrong on this, then demand is actually much better than I thought. I don't think anybody else has been more bullish on housing during this period than me. So it's just a very very unhealthy housing market on the existing. I'm in second place on that one on housing. You brought up a good point that I've been thinking about too. If you are a person who owns rental homes and you've seen this huge rise in equity, you could make out pretty good right now

and sell and potentially do a lot better, but they're not. And I guess your point is where else you're going to put the money? So that's something that I guess you'd think maybe some supply would come there, but it's not. Yeah, rent's going to pick up. If wage inflation is supposed to really pick up on the lower end, guess what? Landlords could charge more rent. So, the kind of the slight deflationary aspect of shelter inflation that we saw in COVID is quickly going to reverse itself. This is your best case for core CPI to be above 2% for a while. And rents could pick up in a low interest rate environment. If you're looking for that kind of yield, then yes, that makes sense. Because a lot of people ask, why don't all these people sell

where they're going to put their money? Why are the home builders so slow to respond? I was listening to Ali Wolf yesterday with Joe and Tracy. And it's like they're still so, messed up from 08. Are they ever going to come to market? What's going on? I have such a different take than anybody on Twitter on this. We overbuilt homes from 2002 to 2005. We had an 82% crash in new home sales. That's not even the worst part of it. We had the weakest housing recovery ever at history. New home sales missed in 2013. They missed in 2014. They missed in 2015 and then 2018 happened. Five percent mortgage rates created a supply spike, one of the builder CEOs, it's the worst fourth quarter since the

great financial crisis. That's during a longest economic and job expansion in history. The builders are here to make money for themselves. They're not here to cure the existing home sales markets, inventory problems. That's their biggest competitor. So everybody keeps on saying the same thing. We have to build more homes. We have to build more homes. Building homes are expensive. Construction productivity is terrible in America. So the builders are here. And another aspect of housing that's really unhealthy is that they're pushing in so much price inflation because they can't. In the previous expansion, people thought that the builders benefited because inventory was never low. We had enough homes to grow sales. So where does it come from if they're not

building? Where does inventory come from? It's not going to come. Oh, great. Unless you have the federal government come in and deficit finance this, the builders are only going to build off the demand curve. That's a pipe dream, right? That we're going to get a bunch of new homes being built because the builders are doing fine right now the way things are. Yeah. Why are they building? Materials too expensive right now? Everything is expensive.

I mean, regulation costs, land costs. And then on top of this, whatever lumber prices. But remember, the builders, profit margins are doing great. I always tell people, people, like, this was a legitimate question. Everyone was saying there's no way new home sales can grow. Housing starts could grow because lumber prices. Paper, rock, scissors, rates beat lumber, always.

Because all they care about is demand. So they're going to push as enough profit margins as they can. during this period because who knows? To me, personally, the housing market looks a lot different when rates are above 4% than it does 3%. Let me ask this. So we're talking about builders aren't building, but then what are they doing? I mean, can we be specific? How much are they building and how behind are they? What are they actually doing? They're building enough to make their sales grow and make money. End of story. The existing home sales market is this massive market that's their biggest competitor. So now they're like, oh, there's finally an inventory crunch in the existing

home sales market, let's make as much money as we possibly can. But why are they responded to demand? What am I missing? It takes too long. Construction product. It takes forever to build a new home. It's not like you could roll out 3D printing and get this out. It is simply the one sector of the United States economy that has no productivity growth is construction. So it just takes a lot of time. We built our last home. And this is in 2017, before all this labor shortage and supply crunch happened. I can't even imagine how painful a process it is now. It was painful when we did it. Yeah. So imagine right now the builders are going, whoa, we've made a lot of men. Do I really want to

extend out? Because if 2018 didn't show people that, whoa, the builders are mindful of this. They don't want what happened in 2018 to happen again. Because guess what? Where were the builder stocks? All of them are down 30% plus from their recent highs. So they're in the business of making money. They're not here to build homes for the existing home sale. You talk about how unhealthy it is. Who do you think is in a worst position? position as a home buyer. Someone who's building and dealing with higher cost or someone who is in the existing home market and they're getting overbid by 20 or 30 grand. Who's hurting more? Existing home buyers are in like the worst spot. Okay. Again, first world,

even with the higher cost, if you're building new, you're doing a little better. You can at least lock things in or whatever. Yeah, first world problem, but still, you should not be competing. I mean, I've seen people who put 20, 30% down, they're ready to go. They're like the 11th or 12th bid on the house. There's nothing good about. this housing market when it's like this. And again, what do buyers say like, fuck it? I can't do this. I think you already see it.

Now, let me explain how I see the market right now. Purchase application data year over year day. That's how you want to track this. So it's really the second week of January to the first week of May. I do two COVID-19 adjustments on here. So you take away the really strong growth, bring it down. We're only up maybe mid single digits. That means we're only going to grow a little bit higher.

If we're supposed to have this really big demand, that data line, would pick up traction. It's not. So we're stuck. And being stuck is a problem because if sales aren't really growing and we see 10, 15, 18 percent home price gains, my fear is that this happens like every year. But I think right now we're starting to see people going, hey, a little bit. I mean, just a little bit. Nothing drastic out here. We're still going to have more sales this year than last year. But some people are just dropping back. It's just that inventory is so low that you can almost have flat sales at 10% growth, price growth. There's nothing good about that.

So the number one thing for me is to see that total inventory level start to get back to like 2019 levels, a couple hundred thousand higher, even if that means existing home sales goes flat for like two years. You've got to create some kind of balance because you're not getting help from the builders. Higher rates will do the trick. It's not going to happen in 2021. So hopefully we get some breathing room because the price growth that we're seeing on here is not good whatsoever.

Ben and I were talking about this on the show this week that let's just say that collectively people are like, all right, I'm backing off. And home prices pull in a little bit. Don't you think that even at the first 5% decline? Like I feel like the ceiling or the floor, I should say, is so much higher because there's still so many people that are going to jump on a 5, 10% pullback if we even get it that much. Here's the thing. We've never had a negative pullback since 2012. Now, 5% mortgage rates created real home prices to go negative, just into inflation. That's like tiny, but nominal home prices still grew. But so this idea that they're going to come back 20%, that's a pipe dream.

Yeah, this is the stock market theory, that the velocity of margin debt moves up and down with stocks, that somehow this works in the housing market and the velocity of inventory is just not the same. So the people who are buying homes in this cycle are legit. They're at top of the economic food chain. The people who- Nobody panic sells their house. No, nobody.

That's why I like to use the margin debt thing with housing. Stocks go up, stocks go down, margin goes up, margin goes down. Housing doesn't have that. Like, some people are talking about the housing bubble. A bubble is a disconnection from fundamentals, whatever. Prices have to go back to the start. That means 2012 was the start of the second bubble. You're looking at an 80% price decline in a calendar year. No, that's not how it works. You're asking rich, educated, skilled people to sell their houses at a 20, 30, 40, 50% discount. It doesn't work that way. people should have figured this out last year. When COVID happened, everyone is like, I'm just taking my house off the market.

We talked about this. Logan, you talk about an unhealthy market? Talk about like the relocation story that people from wealthy parts of the country are moving to Idaho and really causing shitstorms for local people. I mean, I use the Idaho thesis recently in one of my articles. Like a one bedroom condo in my neighborhood is $500,000. You can buy a home in Idaho for that much. So people that are leaving.

Now, remember, we have big. state cities moving to smaller. So it doesn't take much to move the marketplace. That's where I think the new home sales has really benefited is that big state money. You look at these things, it's not that expensive at all. Like it might be expensive in the local neighborhood, but they're like, hey, I could bring in like 20, 30, 40, 50, 60, even cash and buy a new home two or three times a size of what I have here in California or New York. So that's the moving theory where ages 30 to 39 are going to be big here. Again, some people have money. The new home buyer is typically older and wealthier. They can move into other places. And that's the problem because those areas

never had the population growth to really expand the construction in those areas. So again, that's another thing to worry about because like Montana's up like, whatever, like 25% on home prices. So my fear is that we start to look like Australia, Canada, New Zealand, We're these unprecedented real home price gains because the U.S. is nowhere close to these countries. And that's the fear because, again, there's enough demand to keep things stable. That's why I use the term replacement buyers. I hate using the term boom because I got to show a credit boom. We don't have a credit boom.

We just have very low inventory. Prices are decelerating too much. Like I thought the five-year period from 2020 to 2024, if we just had 23% price gains, it would be great. We got through this period of times. we're already there in year two. So hopefully, because there's no credit boom, things slow down and then prices start to cool down a bit. Inventory increases. For me, it's the days on market. We don't want days on market in the teenager area. We want days on market above 30 days like it used to be. And then you create some balance. And hopefully that happens, even if it means existing home sales

doesn't do anything for one or two years, that's fine because we got to get this inventory thing up. And to your point about, I've had a few people email me saying they assume it works perfectly that if you raise rates and home prices will go down and I have to tell people, yes, in a textbook, it works like that. But when you have demand, it doesn't necessarily work that. If rates go to 4%, all of a sudden, housing prices are going to fall a little bit. I mean, I guess the best case scenario would almost be if they're flat or the rate of change steps going up. But I think you're right. You said, never ask another adult if you should buy a home because it's such a personal decision. But let's say you're in the market right now. You don't necessarily have to move.

you want to move, yourself, if you're in the situation, would you wait like 12 months and just say, you know what, I'm going to wait until it cools off? We do be in that situation where if I don't have to, I'm not going to. If I'm ready to go, I'm going to go. Now, if I can't get the house, I get outbid. I mean, that's, see, this is a very strong concept. Your fellow Americans are outbidding you. Remember this whole student loan debt crisis we talked about last year, how everybody said all Americans are four. They can't buy homes. Look what's happening here. Your fellow Americans are outbidding you because they make more money than you and they have more financial assets. So you want to buy the house. So people are thinking, I'm just going to wait.

No, you're getting out bid. You simply don't make enough money to buy a house. Even though you are, you're qualified, you're good to go. This is the problem with an inventory crunch. So I think all these people want to buy a house. They can't. And that's why they're starting to say, I might wait, okay, you're wait because you can't win the bid. You want to win. You want a house. You just can't win. That is such a frustrating feeling for an American right now that they are ready to go. they make good money, they have down payments, everything, and they simply cannot beat anybody. Now, in time, especially the second half of 2021, we should see inventory increase. It might not be much, but anything helps compared to what we saw in the first six months

of the year. What do you make of companies like invitation homes and American homes for rent? Is that going to be a meaningful story? Maybe not today, 10 years now. Are people going to turn to renting a house? I think there's always going to be like one third of the population or a lifetime And then there's always the intermediate renting to eventually buy a home. So I think there's always going to be a marketplace for that. I know here in California, you can make $100 to $150,000 and you have no chance of buying a house. So there's going to be areas where rents, not even just low income, mid-income, high-income people will need shelter. Shelter is what matters. So there is a marketplace for that. But again, the builders are what they make their money off single-family homes.

Now you see this huge gap between single family homes and multifamily construction because that's where they make their margins at. So that's why they're pushing that. And they're pushing everything they can to make as much money now because eventually I think they're a little bit worried about if rates go up 1%. I don't have this kind of marketplace. Inventory goes up a little bit and they're going to go back into the competing for that buyer game. So they are absolutely hitting it out of the ballpark, increasing their profit margins. But the rental story, I think there's always going to be a portion of the. the society that are renters, even if they make good income, especially in the single family

residence, which hasn't really grown too much in the last five years. But again, shelter, you need it. It's not AMC stock. It's not anything like that. You have to find somewhere to live, especially when you have a job and make money. You're either homeless, you rent or you buy home. There's nothing else in between. Yeah, you have to live somewhere. The other one that's even smaller than the professional investors that's kind of coming up now is this eye buyer from Open Door and Zillow in these places. Do you think that has any chance of getting off the ground and making, obviously no one's having a problem selling their home now, but a lot of these places are still stepping in and making it easier and maybe making the process, because it's still a cumbersome

process to go through the Michael's least favorite thing in the world is title insurance and going to the whole process and all the paperwork involved. Do you see anything that ever getting off the ground or is that going to be a niche thing? In time, it should, but this is something that maybe seven to ten years from now, technology over time eventually wins. So, If you can make the process cheaper, faster, and make it more efficient and cost less money, the consumer will go to you. So I think there's a future in that area. It's just, it's like in its infancy right now.

And then we have to deal with COVID too. So I think there is going to be a future there. You just got to give it a little bit more time. All right. Let's talk about paying off a mortgage. Ben, why don't you lead this since you've been thinking about this a lot lately? I've had some conversations with people in the finance world lately and they're starting to change my mind a little. Obviously, this is, again, a personal kind of thing, but I've had a few people say, listen,

interest rates are so low and you get a tax break on the interest rates, why does it make sense for me to ever pay off my mortgage if I'm this financially savvy person and I can do something with that money, whether even if it's just renovating your current home and staying in it or taking that money and investing it somewhere else? Do you subscribe to that at all that, that this is the most intelligent form of debt you can take or are you just, you know, get the debt out of the way and don't worry about it? It makes sense to have a mortgage with a low. I mean, In a sense, a 30-year mortgage under 3% is the greatest inflation hedge ever. So in that context, it totally makes sense to take out a mortgage just for that availability.

However, I think there are groups of people that simply just want to pay off their house and never worry about it. Again, a personal choice. But again, you're not going to find a better inflation hedge than a mortgage under 3%. Now, especially if inflation picks up a little bit. Again, it goes to a personal, I mean, I paid off my rental home. I'm paying down my primary resident home. But it's a choice that people's own financials has the ability to do that or not do that. I don't know how many people have that ability to pay down their mortgage, especially if

they're in 20s, 30s or 40s, maybe in your 50s or 60s. Does this idea make sense? Assuming rates stay low, this is like the big if. Assuming rates stay low, why do you need $300,000, $400,000 of equity in your house every 10, 12 years you do a cash out refi to borrow cheap? Does something like that make sense? Well, here's the thing with the cash out refis. what we saw in the previous expansion was debt on debt transferring a lot of people just kept

on spending spending and they transferred their home equity to pay off their credit cards we don't see that anymore what we have a very very good loans loan quality low LTVs typically homeowners have very good cash flow they don't need the cash so now it's like when rates broke that lower it made sense for them to refinance the entire mortgage at a lower rate and get the cash out to do whatever they want I just don't think it's going to be a very big story especially if rates just go up a quarter or even half a percent. I think the cash out story for the most part is done. But again, cheap debt, fix your house, do whatever you want with it. It's just not the big scale story like it was in the previous expansion where that was just a lot of speculative debt,

debt on debt transfers. Home prices had to rise a certain level every year. It's like the exact opposite. We have very, very solid good homeowners, fixed low debt costs, rising wages, nested equity. It doesn't get any better than that. And they have very low debt payment costs. So some of them are taking advantage of that perfectly normal, perfectly fine to do whatever they want with the house or anything else. So Logan, 12 months from now, do you think we're going to look back in this period and say, wow, things got really crazy or is it just going to be more of the same in 12 months from now? I hope to God we look back and think this was crazy and that things are cooling down because this is a very dangerous spot to be in for housing. You have an inventory crutch.

You don't have that much growth in sales or credit and prices are blowing up much higher than it need to be. So be specific. Be specific. What's the danger? The danger is that for five years, you get 10 to 15 percent home price year-over-year growth and it bites away from future homebuyers affordability. Similar to what we saw in Canada, Australia, New Zealand, all these countries. Demand is so good that it doesn't allow the inventory levels to go up higher. I think that's not the case. We do not have a credit boom in America. Over time, inventory should increase. COVID created some a lot of major dislocations in this housing market. I don't even have a very high interest rate to see things change. 3.75% of higher should change the marketplace to

a degree where we create more inventory. We need people to have choices. The danger is not having enough choices in forcing people to play hungry, hungry hippo with one ball in the game. This is probably a multi-year process, maybe multi-decade, but you were ahead of the game and thinking of this is the demographic wave coming. Michael and I've been talking about too. This is millennials wanting to buy homes and that's driving a lot of this. But is there any evidence that the other side of that is going to happen eventually where baby boomers need to downsize potentially or use that equity they have in their home for retirement. Could we see that as a potential supply in the years ahead? The baby boomers haven't downsized much. But when you look at

housing now, you got first time home buyers, you got move up buyers, move down cash investors. Demand is stable. In time, the boomers will all die and they'll leave their house out. I mean, it's just simple. Why do we have near 10 million job openings? People think it's just the unemployment benefits. No, there are parts of this country that has no prime age labor force growth. Older people age, there's no Doreen Gray labor force. The boom. boomers will pass their homes off to either their family members or something. Any inventory increase is a positive because I don't look at this as an investment thesis or home prices.

Home prices rise like this, not good. We just need a balanced market where people have choices. This is not it. It's not like the housing bubble years where credit was booming and home prices and home sales. It's the exact opposite. We have good demographic demand replacement buyers. It's just an inventory crunch. And the builders are now also dealing with their price inflation.

pushing it up just to make as much money. So nothing about this is good. But hopefully in the next six to 12 months, inventory increases, we get a little bit of balance. Like I look at this and this. In these five years period, every year should have total new and existing home sales at least 6.2 million. If we go below that, something went wrong. So 2020 and 2021 is fine. Let's see if this price inflation actually takes some of the bite out if rates rise. But we just need to have more choices for Americans because nobody should be bidding with 10 or 15, 20 people for a house. And I do believe in time, it'll cure itself. I do believe home price rate of growth will slow down. So, Logan, back in during the GFC, one of the things that made this whole house of cars come

crashing down was all the derivatives that were being traded and all the leverage in the system. What are we seeing there today versus the problems back then? The number one thing is that capital leverage racial rule in 2004 that was allowed for 1 to 10 to go to 41. That's gone. There's no real. risk here. Freddie and Fannie, now this is a really positive story for the United States America. Because Freddie and Fannie were not publicly traded companies and we had this COVID crisis, there was no tightening of credit by them. The government actually did a great job stepping in creating liquidity and mortgages for everyone because they were not publicly traded

companies. If Freddie and Fannie become public, which I don't think they will, that changes in a sense where the stock market go down and they have to worry about profits forbearance. I don't think so, but it was a very positive for the United States of America that Freddie and Fannie were not publicly traded companies. We saw that, that we did not have the tight credit that some people, a lot of housing bears were wishing for that. It was only in a few sectors of the lending industry, which was like bank statement loans, some low down FHA products. Nothing major. The bulk of the ability to buy homes were still functional because the GSCs were in the government conservatorship. I think that's one of the things people miss about now is that, to your

point, people aren't like buying these houses to flip them. They're buying them to live in them. Exactly. Housing 10 years, 10 years is going to be 11 years by the end of the, and these are legit people. They don't go, oh, I'm up 100,000. I'm going to sell my house and tell my wife, we're just going to wait until the S&P 500 or S&P K Schiller next drops to the 200 day moving average and then we'll buy the house. It doesn't work that way. They're here. They're having kids. Their kids are going to school. They're in debt. They're in this property to live. That's not how an investor thinks, but that's how a homeowner thinks. They're in. They're stuck. Housing tenure from 1985 to 2007 was five years from 2008 to 2000. It's over 10 years. So that people are in. They're in it to win it. They're not here to flip it. Some people are, of course, there's always cash buyers looking to flip. These are not it. The majority of buyers in America are a primary resident and they just want it somewhere to live and raise their family. Excellent.

One more question. I made the point early on our podcast that I don't think that our government can really handle much higher rates. So do you think it's possible, barring inflation that just gets out of control, that mortgage rates will more or less stay relatively low for a long time anyway, that whatever, 4%, maybe 5% of that is kind of a ceiling that we can't really go much higher than that as it is because people won't be able to handle that. I cannot get the 10 year yield above 3%, or really 3.4, unless you do unbelievable major fiscal spending month after month after month. So the 10 year yield is anchored and it should stay low for a very long time. The positive is debt is cheap. What's it anchored by?

There's no way for our 10 year yield to like break over to 5 or 6%. We're just not that kind of growing inflationary economy. I mean, look, we've got some of the hottest prints in CPI, PPI and PCE and the 10 year yield is under 160. The fastest growth we've had in over like, what, 10 to 15 years, 10 year yield is under 160. Germany is still what negative rates, Japan is starting. This notion that bond yields or the MBS market as soon as the Fed stops buying, their mortgage rates are going to go to 6, 7%. No, this has been a downtrend since 1981. We're staying here like everyone else.

If we're a third world country in our currency collapse like El Salvador or something or we're in big, that's a different story, not the United States of America. Let me ask you this. Speaking of mortgage buying. So some people have said, why are they buying mortgages? The housing market is so hot. But George Perks has made the point that they're not buying mortgage bonds to prop up the housing market.

They're buying it to smooth out interest rate volatility. Can you talk about that? Because that's sort of, that's not English to me. Think about the marketplace. We want a stable marketplace to keep it simple. The Fed is here just to stabilize the market, not here to push down rates. Remember, we've had a channel on that 10 year yield and mortgage rates for the longest time. even when QE ended in 2014, mortgage rates were just moving back and forth.

They're just here to stabilize the market. They're not here really to push rates down so much lower. When the 10-year yield rises, if we do get over 2%, mortgage rates rise with it. So I think it's for some people, I understand this aspect. With our growth in inflation data, why is the 10-year yield at 160 or below 160? Look at the world right here. And we really break away from everyone else. I mean, we are never going to see this kind of growth data or inflation data altogether

one in 2021. That's the 2021 is going to be the peak rate of growth in GDP probably for a very long time. 10 year yield nowhere close to having a two-hand. So if they stopped by mortgage bonds, what do you think would happen? It could get a little bit volatile. You could get pricing either up or down and maybe in their minds an unhealthy fashion. I think that's what George wanted to relay to Twitter out here. So remember, it's not like if the 10 year yield was at like 6% and mortgage rates were at 3 or 4%. That's a different story. It's not the case. Rates, been below 5% since the early part of 2011. They've never really breached upon that. Don't overthink it. Bonds are low, mortgage rates are low. They've stayed here. That's where we're

out right now. Logan, this is great. Thank you so much for your time. Sure. My pleasure.