Moody's Talks - Inside Economics - Higher Rates and House Price Angst

Episode Date: March 18, 2022

Mark and Cris welcome two guests from Zelman & Associates, Ivy Zelman, CEO and Dennis McGill, Director of Research to discuss the state of housing and mortgage markets.Full episode transcriptFollow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight.  Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by one of my co-hosts, Chris DeReedies. Chris, how are you? Going well. Thanks, Mark. How are you? What's the deal? Ryan has bailed on us. Ryan Sweets, the other co-host, and he, I think a lot of stuff going on at home today. So we'll miss it. I blame the yield curve. You do? Why? Yeah, it's narrowing. He's not a big believer in the yield curve. I think it's just a That scared him off, do you? Yeah. Avoiding the issue. I don't.

That doesn't sound like Ryan. Stuff doesn't scare Ryan off. Yeah. I think he's actually more scared about that, the bet we have on housing starts, which we're definitely going to come back to, Chris, Mr. DeRee. Oh, yeah. You should be scared. We had a great number.

Okay, we'll come back to that. I'll come back. Yeah. And I should say, Chris, obviously, is the deputy chief economist, but we've got two guests. today, Ivy Zellman and Dennis McGill, and we'll come back and introduce the two of them shortly. We go way back with both. I'm going to ask Ivy how many years back we go, but we go back a lot of years. So it's good to have them on. And they are the very best on housing, housing finance. Other than you, Chris, I should say, you're pretty good yourself. I'm a big idea.

I'm a lot of the time. We're aligned in our forecast. So a lot to talk about. A lot to talk about. Okay. But before we go down the housing path, I think it's apropos, obviously, the related, the Fed met this past week, the FMC meeting, a big meeting. Maybe you could give us a sense of how you think that meeting went. What's the story in that meeting? Chris? Yeah, they had a lot to say. So just to summarize, so the Federal Open Market Committee met on Wednesday and raised the target Fed funds rate by 25 basis points to a range of 25 to 50 basis points. points, right? So this is the first rate hike in three years. So that's, that is significant. And really, if I can summarize, we'll get into some of the details, but a summary of the tone, they signal essentially that they're all in fighting inflation, that they're even willing to sacrifice growth to fight inflation. That is the number one most pressing issue at this time. So they signal they're going to, not only do they hike now, but they're going to continue to hike, according to the dot plot, which is a summary of all the members of the committee and their views on where the

Fed funds rate and inflation and GDP are going to end up over the next couple of years. They're signaling that the Fed's funds rate would end at 1.9% by the end of this year. That's the median. So we're talking six more hikes at one at every meeting of a quarter point. So again, fairly aggressive stance, large change for what we saw in December. So clearly they are concerned about inflation. They also indicated that they do expect to reduce their balance sheet in coming months. They didn't specify when exactly that will be, but I would imagine it's going to be within the next one, three months would be my guess.

That they'll start to reduce some of the holdings they have in treasuries and mortgage-backed securities. They just stopped purchasing, what, a couple weeks ago. So they're not going to switch gears here. What else did they have to have to? They did mention the invasion of Ukraine by Russia as being certainly a human tragedy, economic concern as well, injecting a large degree of uncertainty into the U.S. economic outlook. So that's something that they're watching. And it might be a reason why they're taking this certainly wait and see approach. They're not going to commit to anything just yet in terms of a very aggressive monetary policy. because there are these cross currents when it comes to inflation, growth, oil prices, so any number of factors here. One last thing, I'll just summarize the economic projections that they gave because there was a fairly

significant revision to their outlook here. They cut their GDP forecast for 2022 to 2.8% from 4%. So that's pretty significant. That is, they had forecasted 4% at the last meeting back in December. And there was no real significant change. The unemployment rate outlook, though, so they still see a very strong labor market. It's really just this reduction in growth. And then perhaps the largest change or most obvious changes around their views on inflation.

For 2022, they expect PC inflation to come in at around 4.3% versus forecast of 2.6% in December. So upgraded significantly the view there. And then even in 2023, they expect that inflation will still be relatively high at 2.7%. And so that's an indication of, again, the view that the inflation is pressing, it's going to take some real effort to get it back down. A couple things. One, they kind of hit it right down the fairway, and they, with regard to market expectations. So before the meeting, investors thought, hey, they're going to raise rates seven times this year. One at each FOMC meeting, there's seven to go, and they're going to get seven, and we'll get to 1.9 percent by the end of the

year, and that they will give us some sense of balance sheet reduction, you know, sometime, kind of mid-year. And I think the market reaction was first negative. You saw stock prices sell off bond yields rise, but then by the end of the day, stock prices had fully recovered, and bond yields had come right back in. So it felt like, you know, they just nailed what the market was expecting. So nothing, it was hawkish, no doubt, you know, obviously, very hawkish. But that was well anticipated by market participants. Would you agree with that observation? Yeah, I would say so.

Yeah. Okay. Second, our forecast is a little bit less hawkish. So let me ask you this. Before the Fed met, we were forecasting four rate increases in 2020. 22, not seven. What do you, you know, we're going to do a forecast year pretty soon, you know, for the, for the month of April coming up a couple weeks from now.

What are you, what you're thinking around what the Fed's going to do now. And obviously this forecast is what the Fed will do, not necessarily what you think they should do, but, you know, what will they do? Do you think, is it three more rate hikes now or six more rate hikes for the remainder of the year? So that's a pretty big gap between our forecast and the market forecast and the Fed's forecast. It is. My view at this point is five, right? I increase it. I think there's going to be another one,

but I think you have so many cross currents. I'm not ready to commit to a very aggressive policy. And if you look at the history of the dot plots and how accurate they were in projecting how many rate heights the Fed actually conducted, at least over the last five years or so, they've always come in stronger than what actually happens, right? So dot plots indicate very aggressive policy and then what, in reality, the Fed is never quite able to get up to that. And as you're saying, your forecast is wrong, Chris, that's what you're saying. Oh, yeah, their forecast is. What they said in a nice, like, roundabout way, but their forecast is wrong. Well, you know, they use some language there to color it. There's lots of uncertainty. You're thinking is, well, data-driven. They're right about growth,

they're right about inflation, but you think inflation will moderate sufficient. sufficiently enough, growth will slow sufficiently that we need another four rate hikes this year, not another six rate hikes this year, which in the grand scheme of things, you know, I'm not sure. I would debate it, you know, thank you very much. And also on the balance sheet, you said that they, and I think they indicated strongly that they would begin allowing the balance sheet to wind down. So they bought all these treasuries, they bought all these mortgage securities, to bring down long-term interest rates. They stopped buying not too long ago, but at the May meeting,

the next meeting, it's likely they're going to announce that they're going to now allow the balance sheet to run off, meaning the securities on the balance sheet will mature. Maybe there'll be some prepayment on the mortgage securities, they'll allow that to happen. And if you do the arithmetic, the balance sheet will run off by about $100 billion a month, you know, and that's kind of sort of, they were pretty point blank about that. They were going to do that. So it sounds like that's where we're headed. Yeah, I don't think they gave the specifics on the timing because they want to allow themselves some freedom there. But yeah, I think that's reading between the lines. I think that's what they, what they end up. Okay, good. This is a good point to bring in our guests

because the next part of the, the next logical thing to talk about is mortgage rates. And I am very curious, you know, what Ivy and Dennis think about the path for mortgage rates going forward in the context of what the Fed did. So, Ivy, it's good to have you. Ivy Zellman, good to see you. Hi. Thanks for having me. Yeah. Having us.

How long has it been since we, how long have we known each other? Or would you rather not say for both our sakes? I think that it's got to be at least 25 years. I think it has. I was going to say that too, 25 years, yeah. Yeah, we had the pleasure of being on the infamous Lewis Ruekeiser Wall Street. week show for those that are old enough to remember. Kind of the Oprah of Wall Street back then.

I don't know about you, Ivy, but I was like quaking in my boots. Were you nervous when that? Oh, yeah. Oh, yeah. It's like, yeah. And you were so good. I remember you were, I remember, Dennis, you, I don't know if I ever told you, we ever talked about this, but Ivy was pumping Louis Rukheiser before the show, basically

wanted to know what his first question was going to be. Do you remember this, Ivy? Do you remember this? You don't remember. I remember I was very nervous. And she was trying to figure it out. And he would not tell her. He goes, nope, I'm not telling you.

You've got to be ready for any question that's coming. It was so, it was like the Pope. He flew, if I, am I not sure. I hope I'm not making this up, Ivy, but it was a studio somewhere in like the middle of Maryland between D.C. and Baltimore. And he flew in on a helicopter. He landed. He came into his office in the studio.

and we all would sit around and if he got his monologue written in time, we'd go live. No, is that right? Yeah, we'd go live. And if he didn't get it written in time, no, no, it was the other way around. If he could write it in time, if he wrote it in time, we would tape it. And if he couldn't get it written in time, we would go live, right? So we're all praying that he gets it done so that we could tape it. But no, no, it went live. We went live. And it was fun, right? Absolutely. It was a lot of fun. I had the pleasure of being on more than once, and I can tell you in my 20s, late 20s, it was such an frightening experience, but also an incredible one. Yeah, that was, he was a good guy. Interesting fellow. So tell me about your path, Ivy. I mean, you have this wonderful company with all these great folks, and, you know, you've made such an impact on the housing and housing finance industries.

You know, everywhere I go, anyone I talk to, they talk about, you know, your work and Dennis's work and the company's work. So, you know, just an amazing success story. Can you just tell us a little bit about that? Sure. And thank you. Dennis and I have been together kind of glued at the hip for 22 years. And prior to Dennis joining me at Credit Suisse as a summer intern, I'll steal the thunder a little, but summer intern at Michigan, I started working at Solomon Brothers in 1990. And I did a two-year investment banking financial analyst's role and then moved into equity research. And I was fortunate because the lights were going to go out according to everyone because Solomon Brothers was going through a treasury scandal. We're in the middle of a recession. And there was openings.

And the investment bankers were like, you don't want to go on equity research. They're just monkeys. They just write what the management's tell them what to write. But there was a job and I could pay my rent. So that was the beginning of my career. and I spent another eight years at Solomon Brothers as the housing analyst running really home building and building product research for that silo and then went to Credit Suisse for a decade. And that's when Dennis and I later hooked up. I was there in late 97. That was after Smith Barney acquired Solomon Brothers. And I was let go because they had the number one ranked analyst at the time. I did surpass him the following year. So that was a bad choice. You surpass Dennis, you said.

Surpassed the number one ranked analyst at the time that Smith Barney chose. Oh, I see. Hired me. But recognizing that, you know, after several years at Credit Suisse and the market in 2000, you know, was just coming off of what were tech bubble-ish, you know, 2001, the housing market was benefiting at that time from the Fed easing. And the market started really becoming the darling after the tech rec. And our research was again really focused on builders and building product companies. But we sometimes stepped outside our lane. So that was early on when Dennis joined me as an

intern. And we started writing about the mortgage market and really continued to utilize what at the time was a Rolodex that I developed to not rely on publicly traded management teams to inform us. So I started talking to private home builders. And fortunately, back in the early 90s, I did this at Solomon Brothers. The industry is so fragmented across really all of the pieces of the puzzle, the ecosystem, that you can call a private home builder or talk to a private mortgage company, a private real estate broker, every aspect of it, and really learn what's going on. and I call it boots on the ground.

So we really continue to build that Rolodex to help inform our overall outlook. And we turned cautious, really more neutral, call it late 0405 over just concerns on affordability. But so really, I'll just summarize to not go on and on about what happened in the past about the housing market, but my team, Dennis and I leading sort of the charge,

it's really about deep dive thematic work and overlaying that work with proprietary surveys that allow us to say, are we still on track for our forecasts, our longer term forecast? And each month, when we're obtaining information from the C-suite executives that are partnering with us, we really could adjust and better confirm or moderate, adjust our forecast.

So it's really a unique business model because we really are not dependent just on data and economic models, but just live human beings that are, you know, I call it weeds in the trees and boots on the ground that we are really a beneficiary of that, of that partnership. And so you guys started a company. What's the, I always pronounce this wrong, eponymous, eponymous. It's Ivy Zellman and Associates. Did you know that word eponymous? That's you name something with your name. That's called it. It's called eponymous. Got it. New one for me.

I know that. Yeah, we started Zellman in October of 07 in the beginnings of the true storm of the GFC. Oh, wow. Good timing, guys. Oh, seven. Yeah. Right. And it's been quite a ride.

We recently sold a majority stake of the company in July of 2021 to Walker Dunlop, which is a public company, commercial financial lender, and investment sales. sales broker. They're now at the helm and we are operating pretty much autonomous, but working with them to find synergies and strategize on the future. So it's a pretty big inflection point after, you know, roughly 14 years of being independent. Yeah, excellent. Willie Walker, he's got his own podcast. You're going to have to tell me, you're going to have to let Willie know who's got the better podcast. I'm just saying, you know, yeah, but he's got a wonder, he actually does a really unlike me A lot of homework.

He does a lot of homework. He gets to a great moderator. He's a great moderator. That's a very, very good podcast. Something to really aspire to. So Dennis, you know,

Ivy, don't take offense to this, but Dennis looks like he's a, you know, like he's still in his 20s. Like what that heck is going on here? I know I always say this every time I see Dennis,

but it's true. Look at him. I'd like to think I can still act like I'm in my 20s too sometimes, but that's good. That's great. Yeah. I was going to say I would take the over on the 25-year comment that you guys

know each other because I've known Ivy for 22 or something like that. And I know your stuff was already in existence then. It's probably true. And it was economy.com. So I'm not sure what I don't remember when that change happened, but. Yeah. That's when we sold the company. You know, we had our, we had a company at economy.com.

My brother and I, a fellow. We started it back, you know, 1990. We sold to Moody's, I don't know, 16 years ago now. So, but, but that, so, so, Dennis, you're ahead of re-partn me. So I have the domain. That must have been. I still, yes, indeed. Oh, no, wait.

Hold it. Hold it. I don't have the economy.com domain. No, I don't. It's the Moody's owns the economy. com domain. And we still use it, actually. If you go www.com, you'll come to one of our websites.

So, yeah. I held on to a few other. We bought a whole bunch of them, you know, like every state code plus economy. like, you know, PAeconomy.com. I've got a few of those. Are you interested in buying those, Dennis, by any chance? I mean, everything's got a price, Mark. I know.

That's worth about five cents on eBay, probably. Yeah, anyway. So you're a director of research, and you've been with, you were a founding member of Zellman associates, correct? Yeah. Yeah, it was our small team from Credit Twist. Yeah. Great.

How big your research team now? How many folks do you have working now at... Including Ivy and myself, we're at 12. 12, fantastic. And where were you prior to credits? You guys met each other at Credit Suisse. Did you come right out of school? Were you doing something else?

So the internship that Ivy referenced, I was actually, I had already graduated from college, but was going back for a master's in accounting. So I knew that summer period was really an internship type period. And the reason I was going back for the last year of accounting was somewhat to build a knowledge, but also because I was totally unprepared to come into and get a good quality job. So it worked out well to be the naive graduate going to this hybrid internship between New York and Cleveland, which is where Ivy was working from somehow still with a 2-1-2 phone

number to kind of mask that transition. But that was where we had met. And then fortunate enough to get offered a job back at Credit Suisse. And then I remember Ivy calling me. and letting me know that that would be also on her team as well. Well, fantastic. It's good to have you both. And, you know, let's go back to the mortgage rate question. I'm really, you know, obviously housing finance, very sensitive to rates. So I assume you guys have a view on where mortgage rates are headed.

And so let me ask, do you have a view on where mortgage rates are headed and how does what the Fed did this past week affect you're thinking about where mortgage rates are headed? if you have an explicit forecast. Well, we don't have an explicit forecast, but I think that with Chris's comments about the Fed planning on selling MBS, really it's a function of the pressure on, or I should say, the lack of demand that that would imply, would you'd assume rates would move higher. And yet also we're seeing pressure on originations, you know, significant pressure on refis. So it's kind of like they'll be originating less, so there's less supply while there is less demand. But directionally, we're obviously seeing rates not only increase, but spreads are widening with pressure on the mortgage originators that are trying to deal with competitive pressures, but offsetting the fact that the primary secondary spreads continue to be challenged.

So we're seeing year over year for primary buyers, the monthly payment for an entry level buyer is up about probably 30% year over year. So certainly that is directionally not favorable for the consumer, for the primary buyer. Despite that, though, there's been really surprising resiliency to that. And we think that has a lot to do with the non-primary buyer in the market that people don't really worry about. but we're paid warriors, Mark. That's what we do for a living.

We're not, we don't have any skin in the game. We don't have a book of business that, you know, we're tied to any view. And we just try to be insightful. But we are concerned about, you know, rising rates, but we don't forecast them. Okay, so let me unpack that for a second because I have been a little confused about this. So the mortgage rate that people pay, you know, right now is a little over 4% last I looked. That's up about a percentage point. from where we were really not too long ago, I think, you know, kind of towards the end of last

year early this, right, Chris? Yep. Some of that is, obviously, all interest rates have risen, the so-called risk-free rate, the 10-year treasury yield rate, which the mortgage rate is often, is based off of that has moved up. But the, as you said, the spread, the difference from the mortgage rate and the 10-year treasury yield has also increased over this period. And so if you go back beginning of this year, the difference between the primary mortgage rate

and the 10 year yield was about 150 basis points, one and a half percentage points. Now it feels like it's more like two percentage points. So it's increased by a half a point. So what's going on there? Why is that spread gaped out like that over the past couple of months, a couple three months? Do you have a sense of that? You know, Dennis can weigh in, but we used to use the 10-year versus the 30-year spread as a proxy to understand, you know, what mortgage.

rates, you know, directionally would look like in competitive pressures, but it's really kind of broken down that typical benchmark. And that has a lot to do with the pressure that we're seeing on NBS prices and originators that have to sell those mortgages into the secondary market. So that they're requiring a higher return. So that's why the spreads are widening. And I think that, you know, with the Fed, you know, obviously saying they're going to start not only, not buying as Chris pointed out, but they're going to be selling. We're seeing that pressure result in that widening spread. And I think it was over 200.

It's like a 206 basis points the last I looked. Oh, is that right. Yeah. I know Dennis, if you want to say it gets a little outside of our our sort of sweet spot mark, but I think it has a lot to do with the Fed policy around. They were the the incremental buyer for quite a long period of time. Right. And just not even being a buyer anymore sort of the market was trying to get ahead

of that as well in anticipation. of knowing that they would be exiting the market, demanding that price premium earlier, and then now to the degree they become a seller, I think that's got people expecting that spreads are going to at least stay elevated at these levels, if not potentially pressure it further. Good point. One offset, if I may just add it one offset that may help a bit to the consumer is that, you know, during the post-shutdown pandemic period, really the best credits were being underwritten and purchasing homes or refying.

And it wasn't because they weren't willing to lend to less credit-worthy borrowers. But today they are seeing more easing or willing to do a little bit more to bring in those lower-credit borrowers today. And not, you know, a subprime type borrowers, but just on the margin. And you're seeing in our mortgage proprietary survey that we do monthly, we're seeing slight easing non-QM as well as Jumbo. and lower FICO scores on conventional FHA, VA, VA. So that's starting to happen as the market's more competitive. Got it.

So just to summarize for the listener, so what you're saying is, and it makes sense to me, is that, okay, the Fed was buying all these mortgage securities back in the pandemic, trying to get mortgage rates down. Now the economy's strong. They're going to start tightening policy, which means they're not only not buying mortgage securities or allowing them to prepay, they may even start to sell at some point. They don't think they've gone that far yet, but they may do that.

That's one of the factors causing this difference between mortgage rates and treasury yields to kind of widen out. But, I mean, what you're pointing out is, hey, look, because interest rates are up, and we're going to come back to demand for housing in a bit, because demand is now suffering primarily by first-time buyers and primary buyers, given the competition in the origination market, that might cause the, at least at limit the increase in the spread or might even bring it in at some point. That's kind of sort of what you're arguing. Or the other way of thinking about that, too, and the last point is, remember, the rate

is more of the price dynamic. But I think what Ivy was getting to and what will become incrementally more important is what are the terms? What are the other metrics that are going into that to where you could go to the consumer and A, you'll probably see a lot of buy downs more so going forward, whether that's a bill or buy down

or even a homeowner could potentially be doing it. But you could also see a different mix of product. Rate might be higher, but down payment flexibility, credit score flexibility, those types of things you're starting to see more of as the industry like any other industry doesn't want to shrink volume. So they're going to do what they can to try to drive volume in as controlled way as possible, I guess.

Oh, okay. So, Ivy, you weren't really talking about the interest rate. And also underwriting, the underwriting standard. Yeah, I was. Yeah, I was talking about the underwriting stringency, which is what we measure. But I think, as Chris would know, Fannie and Freddie actually went on the, call it, jumbo, second home buyers, actually tightened and increased the cost. for those loans. So you know, you've got that dynamic

that it's moderately starting to impact second home demand that we're seeing showing up, but still elevated. Got it, got it. Okay, let's, before we move in deep, deeper into the housing mortgage markets, let's play our statistics game. And just to remind everybody out there, the game is each of us,

and you guys can play or not play, it's up to you. You know, love to have you, but you don't need to. You just want us to sit here, Mark? We can't play the game. I don't know. I would much prefer if you played, but, you know, it's okay. I'm giving you a way out if you want to get out of this.

Because you should know I always win. I always win. No, no, only kidding. Ryan's actually the big winner here. So maybe I will win today. You got a chance. You got a chance. So the game is we each announce a statistic.

The rest of us try to figure out what that is. The best statistic is one that is not, you know, too easy so that we all know it right away. One that it's not so hard that it's like, you know, forget it. We're never going to get it. And it would be bonus is if it's somewhat related to what we're talking about, you know, housing, housing finance, or the recent, recently what's going on in the world. You know, we could talk about the, you know, it could be a statistic related to the Fed or to, you know, anything in the economic statistics over the last week, something like that. So with that as a description, I'm going to turn to, just because Chris knows this game well, I'm going to go to Chris first. Chris, what's your statistic of the week?

All right, nice round number, 70. 70. Okay. I'll guess on that one. Okay, go ahead. 70% of homeowners are locked in below four. Oh, that might be right. That might be right. That's not the number I'm thinking of.

Is that right, though? 70% of people with mortgages have, a coupon rate that's below 4%. Right. All right. Whoa. Well, before we- I thought, I thought I had it.

That's a really good one. Before we go play, though, that's a really good, interesting statistics. So Ivy, why is that, what was the import of that number? What's the significance of that? You know, I think that the Fed policy of, you know, pumping liquidity in the market and buying MBS, the backlash of a refi boom is going to be an impediment to mobility. consumers will, you know, be disincentivized to move unless they have the arbitrage, which is what most people are focused on, is those that are leaving high-cost states to

moving to low-cost states, whether you're leaving the state of California and you go in Arizona, mountain states, Texas. But we're watching that very closely. And just to give you some perspective, that number at the end of 18 was 39%. Oh, my goodness. And so now with mortgage rates above four and 70% of mortgages have rates below for, you're saying it's going to really interest rate lock. It's going to make it difficult or make it less likely people are going to move because they'll get a mortgage. Right, because mortgage rate.

Mortgages aren't transferable with the exception of FHA, VA, which we don't really see a lot of that. But that's at least on the conventional jumbo side. They're not transferable. And I guess that's also why refi activity is completely dead now, right? Because. Well, we see cash out refi out. There's that, you know, there's so much equity. But I don't know, Dennis, any guess on the 70 or Mark? Okay, yeah, yeah. Is it related to housing, Chris? We can ask questions, guys.

We can ask questions. It is. It is related to housing, so it's consistent with your rules. Well, why are you saying it that way? You're just kind of being a little sly when you answer that question. Is it related to housing or not? It is related to housing, yes. Okay, okay.

Your projection for home ownership, right? Oh, geez, that would be pretty aggressive. No. That'd be often. That was the number that came out this week. What's that? NHB survey. NHB survey, which one?

The builder sentiment survey, the buyer sentiment survey. That one? Expected sales. Expected sales. That's it. You got it. You got it. Yeah.

Okay. That was pretty good. Tell us about that. Tell us about that survey because I don't think we've ever talked about it. And what's it saying? So it's a survey conducted by the National Association. of home builders and Wells Fargo jointly. They sent out a survey to home builders and asked them various questions about the state of the housing market, but how builders feel about the market.

One of the questions is around expected sales activity. How are sales going to be within the next six months? 70 was the number for March. That's down 10 points from February, which was at 80. and it's now at 70, it's the lowest since June of 2020. And it's below what we had prior to the pandemic as well. So that's consistent with higher rates, you know, people being more cautious here. So it does suggest that sales are going to be slowing going forward. So that sounds pretty ominous then, down 10 points? Is that, you know, that's future sales, right?

They're saying future sales are going to be. Well, you know, the interesting part about that. that for me, Chris, is a lot of times the builder survey when it comes out, there'll be some attached commentary. And I think there's only three general questions that could ask. How do you about current sales, future sales and traffic? And it's a literally a good, fair, poor, multiple choice answer. And then they create the diffusion index out of that. You'll see a lot of times when that goes down, sales activity goes down. They'll say, well, why and say, well, we're worried about supply chain. We're worried about lumber costs. We're about these other things.

Usually the reason is it doesn't have anything to do with sales, which is kind of the comical part. And with this decline, what a lot of builders are doing today is holding product off market because they don't know what their future costs are going to be. They're worried about the supply chain. And they're still starting the homes. They're accumulating more spec. And under the premise that eventually the supply chain will open up as we get closer to those homes being completed, we'll know better how to price them.

And then we'll release them to the consumer. And a lot of the industry is doing this. The majority of the industry is doing this. So in some respects, if you asked any builder about, well, what's your outlook for future sales? You sure as hell would hope that it's really good because there's a lot of spec homes coming. But yet the answer is to head at the other direction, which is a bit ironic based on their activity around specs. You know, Chris, I think he knows a lot about these statistics. We've got to be careful.

Yeah. It feels like he knows a lot more than we do, which is, I guess, a good thing, a good thing. So, Dennis, so what's your sense of that? I mean, is, and I know this is what makes looking at the housing market now feel like Allison Wonderland, is it demand or supply, you know, or is it both that's really now starting to weigh on sales? We saw existing home sales today. I hope that was nobody's statistic, but that was kind of on the soft side, at least relatively

expectations. I think we all thought they were going to be lower, but it fell a little lower than I thought. So it feels like demand, well, in a traditional time, you say that's demand. Demand is weak. Mortgage rates are up. Demand is weakening. But it kind of feels like you're saying, well, yeah, that may be the true, but there's also the supply side issues as well. Is that kind of what you're saying? And there's no doubt that the supply side issue is real. The conversion rate out of backlog, how quickly builders are completing homes. We're seeing that under a lot of pressure and probably starting to maybe stabilize a little bit, not getting incrementally worse,

but it's at an extended cycle time. But what you're seeing is it complicates the read on the market because if you're a builder that's holding product off market, what you're doing to essentially accomplish that is raise price. And there are enough buyers, whether they be primary or investors, to accept that price. And one of the dynamics you saw last cycle,

which you worry a little bit about right now, is if you're signing a contract for X price on that new home and they're telling you it's not going to get billed for eight, nine, 10 months and your deposits only 2%, 3%, whatever it might be, and it's refundable in some states. It's not a lot of risk at the signing period. It's almost an option contract that's pretty attractively priced. So no one's going to back away from these contracts. Now they'll just sit and wait because there's been so much appreciation.

It's not until you get to some type of inflection point that that could create some risk. But I think it challenges the notion that anyone really knows how deep the demand is right now because it's not being tested in many ways. And the hope and the premise that most of the industry is operating under is that it'll be there when we're ready for it. End of this year, next year, when these homes come to market, the demand is so deep. And as you mentioned, we'll get into some of these bigger picture themes. But the idea is we're so underbuilt, the demand is so deep. When we release it, the buyer will be there. Oh, this is interesting.

Yeah, the cycle time, just to put in perspective, or about two months longer than historically. And we had Lenar report earnings, and sequentially, they did see an uptick in that cycle time, but running year over year about two months longer. So it takes them 100 days, 120 days, it sits at another 60 days. And the cap, so what we do, a proprietary home building survey that equates to about 15 plus percent of new home sales. and the publics represent 45% of the new home market. And combined, you know, they're probably limiting sales in more than half of their communities. And in some builders cases, they're not even selling right now.

So there's really, we'll call it a supply chain not only on the materials and getting the labor, but it's also getting the land developed. And it's at the municipality level. And it's a lack of staffing. It's problematic across the board. So it's resulting in as a lack of growth. So on the insatiable demand, it's great, but it's not great if you can't deliver people of their homes and can't open new communities.

So the industry is very, very challenged right now. Well, it sounds also like you're saying that if you look down the road here, six, 12 months, and let's just say mortgage rates do push up to say four and a half percent closer to five. Affordability becomes a really much bigger deal for the primary. buyer, the first-time buyer. You're saying there is a, it felt like what you were saying is that you've got all these properties that are essentially contingent sales that could fall off pretty quickly here. And so you could be left six, 12 months from now with kind of a hole in the market, which might mean lower house prices, for example. Is that, am I reading too

much into what you said? Or is that? No, I think that is a concern. I think that at the same time, I hosted a roundtable in Phoenix week and a half ago and probably 30 executives. And the mortgage commentary was like, we have to underwrite people, re-underwrite them every day that are in backlog. And we're in this frenzy of concern that will they be able to, you know, continue to qualify. So as you think about that backlog and assuming their primary buyers, they're not that worried right now, to Dennis's point, because there's been so much home price appreciation, so they're kind of in the money. The question is, will they be able to meet the terms of the loan on the new basis? And so there may be some fall out there, but the builders are somewhat complacent about it.

And we were talking about interest rate locks about can you lock in? And one lender is offering a 360-day lock, which is sort of an innovative product. Typically, you can lock in 45, 60 days prior to close. And there's a product now 180-day lock. And that costs about a point and a half. And so when you think up front, what the consumer is willing to do with a lock that could mitigate the risk that if rates were to your point, go to four and a half, they could right now lock if they want to, but it's out of price.

Got it. I think, Mark, for a lot of when we started talking about, we started talking about it. about mortgage rates and how we look at. We certainly, we don't forecast, we think more about the spread dynamic and how does that compound, what the forward yield curve is implying and so forth. But we always come back to the idea that the relative move in mortgage rates is a massive factor for the market. And whether you talk about it as a spread for what people have to what's outstanding, and when that's in their favor, it triggers refi activity and movement activity, or you think about it from an affordability standpoint, you get 100-based point drop in

rates. That's like getting a 12% cut in price on the house. So the idea that that was hugely beneficial over the last couple of years to argue otherwise would be a little insane. And to think then it reverses and won't have some negative consequences is a bit comical. And you can look at it many different ways, but the correlations are very, very strong when you look at it versus sales base, whether it's existing homes or new homes. What's bridged that gap in some periods in an unhealthy way is well, you have to start stepping in with other things, different mortgage products, which is what we saw last time as people chase the market, or you have the investor buyer steps in because they're not as price sensitive as the

affordable as the entry level primary buyer is. But how can we sit here and say that home price, the cost of a monthly payment, right? That's the cost almost every entry level homeowner is going to be thinking about their purchase in. If that's up 30% has risk of going up more, we know incomes aren't up that much. We know people weren't sitting on a huge war chest. of savings prior to the pandemic. So how does it not worry people? I'm with you. I mean, I totally, I'm totally with you. I mean, my sense is that rates have come down. They came down during the

pandemic. You had the supply constraints. So the increase in demand from the lower rates bumped up against no supply and you get prices going north skyward. In a sense, the lower rates got capitalized in the higher house price. Now, if demand goes away, because more, rates are up, and they're up, they could be up a lot, then that's got to come out of house price, right? You know, that's kind of what you're arguing. Yes. Yeah. Right. So, so, I mean, let me ask you this, though, Ivy, why, okay, so our forecast, and I think your forecast, because I'm a careful consumer of what you guys say is not too dissimilar. You're saying, you know, house price growth has been sizzling, you know, right now I think it's 20%, 15, 20% year

every year, depending on which house price you measure you use. But we're all saying, like, a year from now, you know, two years from now, it slows kind of gracefully. Maybe we get no house price growth for a while, but we don't, nobody is saying house price decline. Did I mischaracterize your expectation? Is that roughly your forecast that house prices are going to be, they're going to go flattish maybe, but they're not going to decline, at least not nationwide. Is that roughly right? Well, right now we're in the middle of updating our forecast. Okay. We've got a lot of moving parts, but we had been,

our last quarterly update was for 2022 to be up 4% for existing home prices. 2022. 2020 and 23 is kind of flat. Okay. But I think what, you know, countering, I was just with a lot of institutional investors, meeting with industry executives. And I think that what we hear from them and that complacency slash maybe more optimistic view that you can sort of counter the rising rates as a risk is the

biggest one, which I'll let my in-house demographer speak to Mr. McGill, who has an incredible brainiac genius work that he did in a piece he published. We, it's element published. Fantastic piece, by the way. Cradle to grave on the demographics, which are quite sobering. But a lot of what I hear to counter the concern is the fact that we have so much wealth creation by senior boomer Xers that are really supporting and supplementing their adult children's down payment, you know, the amount of gains from the stock market, cryptocurrency gains. Redfin came out and said 25% of buyers in 2021 used their stimulus checks for downpayment.

I call that. You know, and obviously those that, that goes, that's going away, but there was also cryptocurrency gains. And so that's one counter argument that there's wealth, transfer of wealth. And then you have the migration. So in Scottsdale, when we had this roundtable, you know, builders that are move up, high end said, you know, 40 to 50% of our buyers are from out of state. And given it was Arizona, they were saying from California, Washington predominantly,

whether you're in Texas and A, the Texas MSA is they're coming from, you know, California, they're coming from Washington as well. But that number had been prior to COVID, they estimate 20%. And there's so much of the market dynamic that incrementally that you see from non-primary, where you're seeing cash buyers accelerating while those getting a mortgage are declining. So I think that the market, and I go and I look at markets like in Toronto, or where markets where there has been investors have been really the predominant incremental growth that's supporting robust pricing.

This could go on longer. The one thing different in the U.S., and Dennis can speak to this more, is that we are adding supply. You know, the amount of supply that we have is just not there yet. It's kind of feels like the way who cried wolf. You know, we keep saying we've got record multifamily backlog. We've got single family backlog at the highest level. since 06. And, well, you know, the guys around the builders around the room and Scottsil were like, well, we can't get any homes completed. So I don't know how that's going to change because we don't

have plumbers. We don't have roofers. We don't have HVAC. They're all aging out. And we don't, you know, we're so constrained. So I think the dynamics of the market are really giving people a false sense of security that this is going to be sustainable. And in the near term, you know, there may be continued price appreciation for longer, even with rates rising. You know, if you you could sell a home in, let's say, Pasadena for $1,000 a square foot, and then you move to, you know, let's say Phoenix, and it's 600 a square foot. Do you really care if mortgage rates are up, you know, 100, 150 basis points? And by the way, don't worry about gas prices, because, you know, if you're moving to the

desert or Inland Empire, Palm Springs, you're working remote, so you don't have to worry about gas prices because people drive to qualify. hear every counter to my headwind of concern that people are just shrugging off as an issue. And I said, yeah, but they still have to buy groceries and they still have to pay for higher shelter. We have double-digit rent inflation on new leases and high-renual, high single-digit renewal. So it's coming at every aspect from inflation. And so I think it's really difficult to just assume it's going to continue to rage. but institutional investors, they are looking to add more capital and looking for opportunities

because the Fed has pumped so much liquidity into the market that residential real estate is the darling. And we could talk about that for hours, about the amount of capital coming into the market. So I just wanted, so there's a lot of cross currents. We're talking about house prices and growth and where they're headed. And there's negatives and positives, obviously. Very complex. Again, it feels like Alice in Wonderland to me. But before we go on to the investor part of the equation, because I'm a little confused by that as well, what's going on there, what is your view then? I mean, you know, will house prices grow, do you still think it's 4% per annum, you know,

over the next couple, three years, which, by the way, would be kind of the average house price growth since the beginning of time. So that's not really consistent with the idea that the market's going to run into some trouble. That seems like kind of, you know, down the middle of the fairway. Is that your view or is it price growth goes flat or, you know, what is your thinking here? Well, let me, I was going to say, let me, I'm going to make this an easy one for you. I'll introduce my stat, my number for you because it feeds into this.

Okay, go ahead. Yeah, we were going to go back to the game, yeah. Okay. So it's 294,000. 294,000 sounds like a price of a home, but that is that is not, the median price is 350, I think. No. Is it a price of a home? I don't think I should guess because I feel like I have a little. It's a number, not a price. I'll give you that.

Say that again? The unit number, not a price. 294,000. Is that units authorized but not started? No, but you're on the right track, Chris. Okay. Units that were authorized but not. Well, I know there's 1.6 million homes under construction,

half of which are single, roughly half are multi, so that's not it. Yeah, but you're on the right track too, Mark. You guys are getting there. I don't know. What is the 294?

Is that spec building? The number of kind of... It's the increase in what's under construction over the last year. Oh. Oh, okay. Okay, now that borders on a little too hard.

I'm just saying, Dennis. Well, I realized after the 70 that the number was a little hard, but the reason I brought it up and why I'm focused on it is because that's how much was added to backlog in the last year. That's equivalent to what was added to backlog of what's under construction, the last five years combined.

And mind you, the last five years were not bad housing years, right? So what I was kind of speaking to and I think what it's one of those data points that almost feels like in three years, four years time, people look back and say, yeah, it was obvious. I mean, look at how many homes people started. And it's a number and it's not even just last five years. That's like the second highest number. You got to go back to the early 80s to find anything close.

So you have all this. You mentioned earlier, the demand response is immediate, right? The pandemic brought about an immediate demand response alongside mortgage rates. The supply response hasn't happened yet. It takes too much time, especially when the builders literally stopped starting homes in March and April of 2020. And it took some time to get back to any type of inventory. You could argue they still haven't gotten back there. So and that's not the peak of it because the capital flowing in from every angle, multifamily

developers, builder land investments, single family for rent, that number is only going to go higher. And I think when we when we're when we're sort of triangulating that with demand and thinking about price, we know that that's the cyclical component of the market, right? You guys know as well as we do that the demographics don't move that fast. You want to be on top of them. You want to understand the story of it. But year to year, the growth of the.

the population even in a good year, right, is 1%. The number of bodies in our country that's not swinging around all that much and how people behave doesn't swing around as dramatically as people want to imply. So this is all about supply. And if the supply mountain that's coming over the next 18 months is more than we can demographically support, then what do you think own builders are going to do to clear that inventory? Okay.

Dennis, I'm going to pin you down, baby. You got to everything you're saying to me says price declines is what you're saying to me. But are you saying price declines? I think you see price declines. I think it's going to take some time because of right now, builders are pushing price to cost. They're not pushing price to affordability. They're not matching it up with incomes.

They're looking at it and saying, my demand is infinite. So I'll raise price to cover my costs, even though they've always told us that that's not how you price a home. But that's what's happening. So I think in the near term, you see prices go up. But I think you've got this compounding effect where you're going to have to see prices go negative. And again, in hindsight, in a couple of years, we'll sit there and say home prices went up 30% in two-year period of mortgage rates were higher

and you had a bunch of supply coming. Why is it a surprise? I am totally with you. I am totally with you. I'm totally with you. And our forecast has it coming right down to zero but not actually going negative because I'll give you this is the reason why. Because the minute you say negative, Mark, that's the headline.

Marks, Andy says that home prices are going negative. Well, yeah, then I'll get vilified. But you guys, what you need to remember is that the supply is highly concentrated. And therefore, we could have corrections that are more pronounced where the supply is the greatest. And I think that's what we need to focus on because nationally, it may not go negative because in Ohio and your state of great state of Pennsylvania, we don't have the same magnitude of supply. When we look at the one thing we haven't talked about yet, at least within the inflationary

component, is land prices. So we do a quarterly land development survey. And land prices at the end of the fourth quarter, finish lot prices, we're up, you know, 35% year over year. And that's national. And that looks like a hockey stick from where it had been over the prior period five plus years. So when we look at lot prices and the land grab, it's it's very disconcerting to assume that the builder is going to be able to sustain profitability unless they can just continue to pass it on to the consumer. And they have been. And that's one of Dennis's point. They're not writing, they're not pricing to affordability.

They're pricing to cover those costs. land being the biggest. And so recognizing a finished lot as a percent of the cost of goods sold is half of the cost. So you can spend a lot even on lumber, which is the thing you hear mostly from builders whining and complaining. But if you buy the land wrong, that's going to be what ultimately determines what they do on pricing and then they have to blow out these homes that they're speccing. And I don't think that's going to happen in Ohio. I was speaking at the University of Wisconsin this past summer. talk to some private builders there, and land prices are up maybe 10, 15%.

So, and there's no real public builders there. I think Lenar was just entering the market at that time. So I think we have to think about the concentration and no surprise, smile states, sand states. I heard a new term banana states from a building product distributor. So however we want to formulate our thoughts, is it a surprise that Austin's strong? That's where all the builders are going. Or is it a surprise that Boise now is a new hot market and the builders, are entering those markets, why the private builders that have been there for, you know, decades are saying, I would never pay for that land. Or is it surprising that the, you know,

built for rent capital is going to Arizona and to Texas or Florida and following where they believe the growth is the strongest. So I think it's not national numbers I think about. I think it's about understanding where the supply is going not only to be significantly higher, but also aware within the market because they have to go further out to the tertiary markets in order to even come close to penciling a return that they're promising they're not their own capital, they're investors that they've raised money with. And you hear from the land developers that it's a lot of dumb money. And there's new new people in for the market, new, new players on the chess board that are driving a lot of the growth. Let me, let me, and I am going to come back

to house price. And I'm just two things. We're going to come back to the game. And I mean, you're going to go. I'm going to give you a chance to play the game. And then at the end, I'm going to ask for an explicit house price forecast for the next couple, three years. And I'm curious. We have to do it after our macro forecast. Because we're in the, no, no, no. This is a preview of that, a preview of that. So, and I'm going to tell you what our forecast is and what I, and you can say this is our forecast, but, you know, I think it's going to, you know, it's going to be less than that or more than that, where the risks are. But let's go back to investors for a second. This is confusing to me because if you, so we have all these

institutional, well, we got all kinds of investors coming in. The latest data, we get transaction level data. We calculate the number of investors based on, you know, on the deed, who's, you know, who has a corporate kind of a name. In, you know, roughly a quarter of the sales now are to investors, and that's up a lot, you know, maybe 10 percentage points over the past year. Some of that is, the increase in flipping hasn't really, is, not flipping per se, that remains about, you know, five, 10 percent of the market nationwide. It's up in some markets like the Boise and the Phoenix, but not many markets. Most of it's institutional.

And I think it's, and you correct me if I'm wrong, but it's mostly, you know, I'm going to buy to rent. But the question is at these prices, you know, I've done some pro formas too because I'm kind of a mom and pop investor. So I go into, you know, into Philadelphia. And my son does this. He goes into Philadelphia, buys old housing stock, rehabs and renovates, and then rent. rents, and he's been doing this for a number of years. So I look at a lot of the, you know,

the spreadsheets, and I can see what the return, the cash returns on based on expected rents, and they're, you know, pretty good. It's hard to pencil it out. At least on a cash, on cash basis, you can't pencil it out. So then you're thinking, they've got to be relying on capital gain, but does that make any sense at these kind of high prices in what we were just saying about it? So my question to you is, what are they doing? Is it, I mean, just because they have the cash or deploying it? So it really is, dumb money? I mean, what's going on? I can't figure that out. Or is my arithmetic wrong? Well, in the markets where, you know, they're building as opposed to renovating, you know,

I think that you can make assumptions about future values that can, you know, be arguably wrong. And therefore, you can make the numbers work. You also can assume you're going to get, you know, a strong leasing once you're you know the level of lease rates that you're underwriting with the hpa you'll you'll benefit from but i don't necessarily think it's all done money i think there's you know been probably some pretty significant returns already realized oh yeah guys have been doing it for a number of years and i don't believe that the institutional investors are really the lion share of the at least on the existing stock i think it's much more still individual investors and short-term rentals.

I was out to dinner last night with an industry executive and him and his wife own several homes in inland desert area, California, Palm Springs. They have a condo in Mammoth. You think about co-primary, second home, few investment properties, using short-term rental to catch, supplement your income. There's such a significant amount of private investors.

I was at dinner with a builder in D.C. in December. And he said, yeah, we'd probably sell about 20% of our homes to private investors. And these private investors are not flippers, so he's not worried. Yeah. They're just buying to run out. And what we always come back to is that, you know, at some point, you know, do we have a people problem? But Dennis can weigh in more as our, you know, thoughts are aligned.

You know, we are always challenging ourselves because this can last, a lot longer when you think about, you know, what, tell me where rates, you know, Chris will be two years from now, you know, and are we going to go into recession because the Fed's been so behind the curve and they're going to tighten as a result of their tightening, we roll over into recession and rates actually go back down and that the only place that people can hide is in real estate, you know, there's so many variables that we can't tell you what it's going to be like in three years. But the dynamics of supply and demand intersecting to denizens. point, if supply does come to fruition and, you know, these builders in Scottsdale is just an

example of the rest of the country where supply is so constrained, they just don't see any way it's going to change. They're not going to all of a sudden miraculously have more trades, more bodies at these various trades, and they don't understand how the municipalities are going to hire, you know, a staff that's normally two, or sorry, six, and now is only two. You know, kids straight out of college that have worked there for one day are working at these municipalities and, you know, there just feels like there's impediments. And that's their pushback. So. And the view is not so much even that it's supply. It depends how you wanted to find supply. Ivy's talking about the ability to get homes completed and on the ground. But the underlying premise

that's supporting the thesis for anyone who, you know, on the institutional level, and I think this is the narrative in the media supporting the individual investor is that you have a housing shortage across the country. That supply is, forget what's in backlog, that there's three, four, five, six. I've seen eight million type shortages of number of houses that the country needs that it doesn't have. So the perception is that you've got this big tailwind from the millennials, which is misfounded, and you've got a shortage of housing. So why not be the best place to invest? And the way you get there on higher prices is to model more aggressive of rent growth, Mark.

You've got to change your Excel model and model a little bit more rank growth from these historic peaks. That's what it is. I mean, it's got to be because, you know, if I put in strong rank growth in the Excel sheet, I mean, I'm talking the strongest rent growth that ever seen. I'm still not getting, I'm getting kind of maybe 5% cash on cash returns, which it's okay, but, you know, for the risk you're taking, I mean, it just feels like this is, and we're, you know, obviously supply is picking up.

And then I would argue, if you like a total new supply now, we're at 1.8 million, 1.9 million, including manufactured housing. That is no less than, maybe now more than underlying demand for new housing. So vacancy rates are about ready to turn. They're going to bottom out here, and they're going to start to turn and move in the other direction. So you look at all that and you go, this doesn't make sense what's happening now in terms of, at least increasingly makes less sense from an investor perspective. That's right. It sounds like what you're saying, too. Yeah, absolutely.

And I think what you're really talking about, and I think we're talking about in aggregate with a lot of these things is just where are we on the risk tolerance spectrum right now? And I think there is a lot of investors, private individuals and institutions that believe that the risk is low for those reasons we mentioned. I think what we're looking at from more of an unbiased perspective, it sounds like you share that view is the implied risk seems quite high. Yeah. And it might very well be right. We might very well be wrong. But I think there's a lot of underlying data and a lot of yellow flags that we've been talking about that leave us much more cautious. And as I be said, we're skeptics at heart. I think we'd be bad analysts if we weren't. But we tend to lean pretty heavily on what the data is saying. And I think the data is leading us to a lot of these conclusions. And some of the things that were very evident with hindsight last cycle, I think people are looking for that same mortgage driven excess. It's not going to be.

there. It's something else. And those something else's are starting to add up quite a bit. And Tydy's point can last longer than it should. But it feels like you're at the point in the cycle where every step higher that it's going just kind of means the other side's going to fall a little harder. I like that metaphor. So Ivy, Ivy, we're going to play the game. You got to play the game. Are you ready? You ready with your statistic? I was going to provide you a statistic. I was just going to also say, you know, to Dennis's point, just talking to a, C-suite executive that runs about 10,000 unit portfolio of multifamily assets. He said, I used to do cartwheels if we were getting 4 to 5% rent growth.

So now I'm doing backflip and triple cartwheels because I'm getting 16% on new leases and 12% on renewals. And if you're underwriting a new development for multifamily, and that's the input that you're utilizing, That return is going to look a lot better than if you go back in pre-COVID, the cartwheel, two to four was a good annualized rate for rent growth. And by the way, the Fed doesn't incorporate what current, you know, in their PCE and thinking about shelter. That's not showing up today in CPI. And Dennis can speak more to that. So, you know, I think that there's a lot of assumptions that rent rolls are going to be sustainable

because Dennis's earlier point, we have a shortage. There's no shelter and there's a huge deficit. All right. So my number for you, it's an easy one, I think. We'll see. Five trillion. Five trillion. Well, that's the amount of fiscal stimulus provided to the economy during the pandemic.

No, okay. That is $5 trillion, though. No, I know. That's the $5 trillion. This is the increase in housing wealth. Increase in housing wealth? Correct. Over the past year?

Over the pandemic. Two years, two years with inclusive of those that don't have a mortgage, which is about 35% of homeowners. Oh, that's a good statistic. I think it's $3.2 trillion without for those that just have a mortgage. Right, right. Someone was telling me, and I haven't been able to confirm this, and we mentioned it in a different context earlier, that people are cashing out now to finance future additional purchases, that a lot of the investors, are now using the built-up equity in their previous purchases to buy new homes, additional homes.

Have you run across that? Have you seen anything? That feels sort of untoward to me, like a sign of froth, you know, when people started doing that kind of thing. Does that run across your radar screen at all? I haven't heard that specifically, but I wouldn't surprise by it at all. That feels like 2006. That doesn't feel a little weird.

Well, I think people have more than doubled their, The couple I had dinner last night with, they basically bought two years ago in Palm Springs, and they've more than doubled their investment. And, you know, today it feels pretty good owning it. So unless you have challenges on the carry costs, and you start to say, you know, my overall expenses are rising and it takes a lot more cash flow to pay the property taxes that are rising, and just the overall utilities and every aspect of carrying more than one home. And it's not your day job like your son is doing fix and flip or renting rentals.

I think people might start to say, I should take some chips off the table, but we haven't really seen or heard of that much. Although inventories did sequentially in the NAR report today, we did see inventories tick modestly higher. But inventories are at least as a percent of households are at, you know, predominantly all-time record lows. And I just revert back to what, what did it look like before the pandemic? And it was also at all-time record lows. And people would say to me, why is housing still lackluster? Why are home prices not rising more, even though inventories are so

tight? And we can get through all the reasons. But at that point, you know, that that was more me providing people who are aging in place. You know, people are locked in at a low rate. Landlords like their cash on cash return. So try to explain why housing wasn't stronger, but now it's all about, well, inventories are so tight. There's no housing. So that's why home prices are up massively, but home prices are up massively because the velocity, historically, velocity defined as those homes available for sale at the end of a month and then sold in the subsequent 30 days. Historically, call it roughly 20% of the 30 days. Those homes would sell. The last data point, I'm not sure with the NAR today, but it was approaching 60%.

And so they're turning so much faster and how much of that is, to your point, investors that are, you know, selling and taking profits. But we're, you know, watching that velocity very closely. But I think if we want to nail down our home price forecast, you know, I would say that it's so contingent on when the supply comes to market and what the economic backdrop would be. But I would guess that right now this is going to go longer and there'll be an upward bias in the near term to our pricing forecast just because the momentum is so strong.

And I think it's like an ocean freight. You can't turn the tide that quickly. I think the consumer is sort of brushing off the war. And the tightening isn't just beginning. So Main Street versus Wall Street, you know, Wall Street investors, the capital, they're not even taking a breath. There's no stopping them. And they want to give more capital and they want to buy more and there's land banking

going on and there's just a tremendous amount of optimism that's not deterred at all by what's happening from Fed policy or from the war, at least my little anecdotes in being out in Southern California marketing and visiting with investors that are very large investors and very active, not only with institutional capital but also on the land banking side. So I think it probably goes longer, but Dennis, you might want to weigh in. It's just, it's fascinating right now to be where we are in the analysis part of the game. Let's do this. Two things.

One, Chris and I have a bet. I want to get your take on the bet. And then second, maybe just to make it concrete for 2020 is hard to talk about house price, Chris, because you're right. I mean, you're coming into the year at 20% your rear. So no matter how you do the calculation, based on the arithmetic, it's going to be a strong year. I mean, even if it slows dramatically by year's end, you're still going to get a potentially a double-digit game for 2022. So let's look into 2023.

And I'm going to go to Chris first. Chris, what do you think 2023 HPI growth, house price growth, is going to be? And let's say the core logic HPI series, the controls for mix, and it's the entire market, not just, you know, the conforming market or non-conforming, it's the entire market. What do you think house price growth will be? And you can give a range, too. You know, how do you want to characterize it? Can I also add on to that is, are you, do you, when you ask the question,

are you thinking what the average through the year or point to point, like end of, end of that. I was going to say that then I thought it was too, too much, but because precision is good. I was going to say Q4 to Q4, Q4-2020 to Q4, Q4-2020, not calendar year. you know, because you can have that, you know, that effect that Ivy's talking about. I'm trying to, you see what I'm trying to do? I'm trying to get to your underlying sense of where house price growth is headed. So, Chris, what is your, what is Q4-2020-to-Q-4-2020-to-three house-price growth?

And again, characterize it any way you like, you know, range, upside, downside. I'm just, you know, I want to get a sense of what you really think is going to, the world's going to look like in 20203. Yeah, so I think two to four percent. We might guess for this year where I think we have to update our forecast, make it a little bit stronger. I think there's going to be a last gasp as people see the higher rates. But then I do expect to see the rates where you're biting towards the end of this year and it's at 23. Two to four percent. Okay.

Downsides or upside risk? Downside. Downside risk. Okay. Ivy, Dennis, who wants to go next? And you don't have to go if you don't want to. I'm just... No, I'll frame it in a way that obviously we are in the middle of ours as well.

so we can't frontrun it. But where we were before was modestly negative for existing in 23. And that's point to point. And we were a couple points negative for new, where the builders would, they're more likely to incentivize clear price. And that's inclusive of incentives and so forth. I think to Ivy's point,

the momentum in the near term is stronger than where we were before. Yeah. And I'm not sure that that necessarily means that we would look at 23 with more optimism. I think we're also going to introduce 24. So there's kind of that element to it. But I would say I'd be more likely to see it minus two than a plus two. Got it. Got it.

Ivy, what would you say? Yeah, I was going to say with it accelerating more than we modeled for 22, you know, the stronger the climb up, the more likely the decline down. So, you know, the more we keep pushing on the gas. So, you know, I'd probably be in the low single digits from that 2% that done is pointed to. It seems reasonable. I think that the risk would be that, you know, it's not as quickly materializing for various reasons. But I do think that there's going to be more like even a midsingle, you know, three to four plus and at least maybe more in areas where the supply is just massive. So I think nationally 2% down sounds pretty reasonable.

The funny part to me, Mark, is when you have this conversation with clients or people in general, they're like, you actually think house price could go down? Yeah. You know, almost like a negative number. Like it never happened. A tail risk, a tail risk event. And you kind of look at it and you say, let's go back to our fourth quarter 19 outlook, look at where the trend line is. Yeah. Where is it now? And we're kind of haircutting here, 2%, 3%, you'd still be up, what, 25, 30%, 30% from where you were, you know, pretty sizable gains to begin with. So I think everyone's

always a little cautious to throw that negative number out there. But where you're left is not that bearish of a scenario from where you would have thought 23 would be in 19. I'm with you guys. I think it's going to be negative. No doubt about it. In fact, the only reason why it might not be is because no one's going to sell their home. They all think, everyone's going to think, oh, my home is worth 1.3 million because that's what Zillow says it is today. And I'm not selling for less than 1.3 million. So the actual price, you know, the shadow price, if you had to transact, as an economist would say, it would be firmly negative, but the actual measured price may not because you'll get 4.5 million existing home sales because no one's going to transact. That may be what happens.

Well, you also have people that are actually going to get foreclosed, and we see delinquencies rising and subprime mortgage. So you start to... Well, that's a different scenario, though. That would be real big time price declines, right? Well, the amount today is fairly negligible. I mean, the people that in forbearance have been steadily declining as the mortgage services are working hard to keep them in their homes. There's so much startup capital that VC back that have been in the market sort of facilitating

a lot of the purchases for SFR, like the eye buyers. you know, they don't want to say how much they're selling even in escrow to SFR. But, you know, when you think about the magnitude of the co-primary, you mentioned like people aren't going to want to sell their home because they've made so much money and they'll just think it's going to go up because Zillow says it's X value. But if you're carrying multiple homes or you're assuming your short-term rentals are going to keep generating incremental income for you and all of a sudden they don't, I think that we're going to see that this non-primary piece of the market.

it might even be bigger than your 25% of what transactions. And it's just, it feels like, you know, I asked an audience, you raise your hand in Southern California. I presented to a group, probably about 100 people. Raise your hand if you have another home besides the one you live in. And very few raise their hand. I was surprised because I think that, you know, cocktail chatter, it feels like everybody that I talk to.

Maybe it's just the, you know, Wall Street crowd. But there's a lot of people that have more than one unit and do they start to get you know nervous because the ocean freight changes direction on the on the you know ocean you start to get some waves and they said oh you know what i better lock in those gains and that that tide can change very quickly and you know certainly our job is to provide you insights but the nice part about what we do that's so differentiated is that we're able to get real-time perspective from people that are in the field operating daily. And I sent around to our team, one of our industry executives that's in Austin and pretty much the Southwest, but he's based in

Austin. And he was showing us that a builder was offering incentives in San Antonio to close homes. And we didn't understand it, the mortgage rate buy downs. And wait a minute, I thought the market it was off the charts, robust. Why would a builder have to give you buy downs or pay closing costs, I think it was actually? So we're just not sure how much of that non-primary starts to diminish, resulting in inventories lifting and everybody, why are inventory is rising?

What's going on? Yeah, yeah, I hear you. Hey, I know we're running out of time. And I know Ivy, you have another appointment to go to. but and there's like a gazillion things I wanted to ask you. Maybe we can have you back if you're, if you're game for it. But I do have a question.

Your background, it's, that's the Empire State Building. Is that the sun's setting or the sun rising? It feels like this should be the suns setting given this conversation. But I think it's the sun rising, isn't it? If I'm looking, I'm looking east, aren't I? Or have you guys even thought about this with the back?

Definitely not. thought about that. Somebody, I'm sure, I'm sure. Somebody in marketing. Are we sure the sun even comes for that direction? It might just make it look nice. Yeah. Well, anyway, I think it's sunrise.

The sunrising. That would be apropos, I think. Certainly on you guys. You guys are fantastic. I really want to thank you for taking this time with us. And Chris is going to be wrong, guys. I can feel it, you know? The house price forecast of his.

I'm going to have to work on him. Yeah. So anyway. You're coming around, Mark. Better to be an optimist. That is true. You have more fans. You know, I think that I've been called Permabair, Jihad, number of names, Poison Ivy.

Oh, that's a good one. Sorry, I shouldn't laugh at that. No, it's okay. I've got thick skin, but, you know, fortunately, we have a very good team that we collaborate, and we're always questioning ourselves. And, you know, I recognize that, you know, we, just are, you know, providing people a perspective that's admittedly contrarian, sobering, and they really don't want to hear it. I always go back to the days of 2005 and think about,

you know, so many people that would say, you know, thank you for making for us stop and think about, you know, some of the things that were concerning back then. Had you not, I wouldn't be here today. And that's the most rewarding thing that we can really ever look back on and that we were able to help others. And so I think that we just want to continue to provide those insights and always being thoughtful and challenging ourselves. Every day we challenge ourselves. And we talk amongst ourselves and we have a very strong team. And so we'd be honored to come back and share with you, you know, what the latest and greatest is. But the paid warriors either do us well or we'll be wrong, but, you know, certainly, you know, the information we're providing,

it does, does make people stop and think. I always get questions after I present, can I see your slides? Can I, can I dig in deeper? So people do, you know, those that are thinking about putting capital work, they want to know, but they don't want to know. Yeah, yeah, yeah, I hear you. Yeah, but you guys, you know, you do it in such a nice way, you know, it's easily digestible, very readable. fun to listen to, and I'll have to say often right. And I'm on board with you guys. I'm with you. I think there's a day of reckoning coming.

Probably not this year. That freight train as you talk about or that freighter's got a moot turn. But 2023, 24, it feels like, I don't know. It feels like we're setting us up for a correction. But anyway, with that, we're going to call it a podcast. And thanks everyone for listening in. Talk to you next week.