Moody's Talks - Inside Economics - Housing 360

Episode Date: February 23, 2024

Mark, Marisa, and Cris take a deep dive into current housing market trends.  They consider the demand and supply drivers that are depressing existing home sales and pushing homebuyers towards new construction.  Along the way, the team deconstructs mortgage rates and provides its best estimate of the nation's housing deficit.  Mark challenges Marisa and Cris to come up with solutions to the housing crisis and wonders if we'll ever experience another sharp increase in foreclosures. Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale 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 Marks Andy, the chief economist of Moody's Analytics, and I'm joined by my two co-host, Chris DeRees and Marissa Dein-Natally. Hi, guys. Hey, Mark. Good morning. Well, this is a companion podcast. We've got two podcasts this week. We had a nice conversation with Mark Collabria, former director of the FHFA, the regulator of Fannie Freddie, talked about housing, mortgage finance, housing policy. And let's consider that a bonus episode. And we're going to have a bit of a

conversation here, not quite as long as a typical podcast. And I think we're going to focus mostly on the housing market in this conversation to kind of dovetail with what we talked about with Mark. Sound like a good game plan, guys? I didn't give you much warning on this. Sounds great. But you guys could talk about anything, couldn't you? I could bring up any topic and we'd be off and running. No? Almost. Almost.

Yeah, I can make things up. Yeah, right, right. Is there any topic that, oh, well, I was going to ask you, there are any topic that's off limits? There's no topic off limits inside economics, right? I don't think so. No, no, yeah. Just some topics are more informed than others, I guess.

Yeah, there you go. There you go. There you go. Okay, well, let's dive right in. And one of the reasons why we picked housing was because we were talking with Mark. The other is we got some data. I saw existing home sales came out for the month of January. And what I thought we do here is just to provide a little bit of a frame is talk about housing demand.

That's home sales, new and existing. Housing supply, that's housing starts and could be manufactured housing, whatever we want to talk about. and then house prices. And now let's talk about demand and home sales. And we got existing home sales for the month of January, four million homes were transacted in the month of January, seasonally adjusted, obviously, annualized. That's pretty low, isn't it, Chris?

By historical standards, it is low. It's lower than last year, last year ago. It was like 1.7% below that level. A little bit of a bump from December, though. So it's maybe, hopefully, moving in the right direction. I don't think so. I was looking at the time series. It's like right around four, it's been around $4 million for like over a year now.

Yeah. I'm just one data point, right? Looking at December and it bumped up to $4 million. Recovery has to start somewhere. Exactly. Exactly. So hope springs eternal. I guess part of that hope is that inventory is also rose.

Not a lot, but again, you do see some additional inventory and all those sales are our demand. There are also the combination of demand and supply. So you need to have more homes available to buy in order to see sales rising here. So it's a little bit of a creep up in a positive direction, but still very low by historical standards. Yeah, my sense is if you kind of just put up a picture of existing home sales, you know, the whole historical time series, and you take a look at, you know, it goes up and it goes down, it goes all around. It feels like cutting through the volatility, the underlying

sales level is about five million units per annum. If you got five million, it's not a great year, but it's kind of a okay typical year. So I think a good kind of rule of thumb is there are about a million units, home sales short of what would be typical. Does that sound about right? Yeah, it might actually be a little bit north of that, right? Historically. But yeah, I think if we were at five, everyone would be happy.

Happy, yeah. So what's going on? Why, you know, no recession, you know, there's no unemployment is below 4%. people are making money, what's going on? Why, why four million? Why are we so low? Yeah, so I attributed to both the lock in and the lockout effect, right? So the lock in effect is due to the rates, right?

We've talked about this in the past, just given that homeowners with a mortgage have locked in a super low rate by historical standards, much lower than today's 7% mortgage rate. just no incentive, very costly decision if you're going to sell your house, move into another one, and take out another mortgage, right? So that's really a deterrent to selling homes, to moving. So that's certainly keeping a lot of inventory off the market. And then at the same time, there's that lockout effect. If you're an aspiring home buyer, you're facing a significant mortgage payment here with a 7% rate. still high house prices. So that's certainly curbing some of the demand out there as well.

Yeah. Hey, Morrison, do you have a mortgage? I know that might be a personal question. I don't know. Yeah, I do. What's your mortgage rate? 2.8? 30 year fixed? Yeah. 8. Oh, wow. That's pretty good. Wow. Yeah, it is. So the current mortgage rate is 7%. I assume, you have some interest rate lock, right? You wouldn't move. No. You would not move because 2.8 to 7 is way too much.

Right. And I couldn't. I really couldn't, even if I wanted to, because house prices where I live are so high now, coupled with the mortgage rate. I would never be able to afford the house that I live in today if I were, you know, looking now. I bought this house in 20, well, I'm not.

in this house right now. But in 2017, right? So the house, the house value has almost doubled since I bought it. Oh, wow. And yeah. So right. So it's almost like staying put for the foreseeable future. There's no mortgage rate that it gets you to start thinking, oh, maybe I could move if I wanted to. I know you've recently renovated your home. So you're kind of making it your own. That's right. That's what I did instead. Yeah, it did instead, right. Yeah. But if I said mortgage rates were 6%, that's not going to move the dial here for you. No, because that's still way more, right? That's still basically double my current mortgage rate. So, and at a higher house price. Right. What about you, Chris? Do you have a more? You can tell me, Mark, that's a personal question. I'm not going to

answer that question. I'll answer any question. I do not have a mortgage. I paid it off. Oh. Oh, okay. Congratulations. Congratulations. Yeah. Yeah. I mean, in a townhouse, it's not a very large house. I was going to ask the same questions, but I guess I can't do that. Well, I think you could. I mean, would you move right now? Right now. So I'll tell you my story briefly. I had been looking for another place, a larger place for a while.

And right, this is even kind of maybe a, a year before the pandemic. Very limited inventory. And I just kind of gave up now because of the inventory. So yeah, the interest rate is certainly a deterrent, but it's more about the inventory. There's nothing being available. And so I did the same thing. I renovated.

So now I've really, I've stopped looking. You're comfortable. You're comfortable. So at least for now, I have no real incentive to move. Yeah. Interesting. Well, in our four. forecast, we have mortgage rates continuing to come in. They peaked at 8% back. I don't know when

that was, maybe six, nine months ago. We were as high as eight. And now we're down to seven last I looked, maybe a little higher, given what's going on in the bond market. And we have, in the long run, meaning abstracting from the vagaries of the business cycle and everything else, we have mortgage rates settling in somewhere between five and a half and six percent, which is, that's going to take some time to get there in part because of, well, maybe I should ask, Chris, you know, that spread between mortgage rates and 10-year treasury yields remains pretty wide. If we're at 7 percent on a fixed mortgage rate and the 10-year yield is at 4 and a quarter, that's an unusually widespread.

but we have that spread, that difference narrowing over time and the mortgage rate is coming into about 5.5% and 6%. You know, it would be, I think, instructive. Maybe you could explain, you know, what's our thinking, why is the spread so wide? Why are mortgage rates so high relative to 10-year treasury yields? And why do we think that spread's going to come in and we're going to sell in around 5.5 and 6? And since I'm asking you so many questions, one more, why do we think five and a half to six percent is given what Marissa just said, you know, why is that going to be sufficient to get, you know, to unlock housing and get more, more housing transactions?

That's a lot. I know. I asked a boatload of questions there, but. All great questions. So I'll start with the spread itself. You're right. The spread is unusually wide. It's a bit less than the P.

I think that we peaked out around over 300 basis points. And I think we're coming in a bit. But still, the historical spread has been closer to, say, 175 basis point somewhere around that range. So still, that's a percentage point higher than what we would expect given that spread. So why is that? Why do we have that higher spread? I think of three main reasons. One is just there's ongoing volatility in the interest rates themselves, right?

So rates keep moving around. And if you're buying a mortgage-backed security or if you're a lender of mortgages, then you have to take that into account in your pricing. That volatility, that uncertainty certainly induces a premium here. Second key factor is just the outlook, the expectations. If you believe our forecast or you have a forecast where rates are falling, even if it's gradual, you would expect that there would be a lot of refinancing activity in the future for a mortgage that you issue today at 7%.

Clearly, a lot of borrowers are banking on that, the ones where still in the market. They're buying, they're willing to accept this higher rate, but many of them are really counting out in the fact that they'll be able to refinance in the future. So that too has to affect the pricing of the mortgage. The origination that you make today may not last that long. It's not going to go out for the 10 or even 30 years. So you have to account for the fact that this might be a relatively short duration mortgage. Then the third factor, I would say, is the demand for mortgage lending that is out there in terms of the Federal Reserve, having been a large buyer of mortgage-backed securities during the pandemic.

in their effort to keep rates low. Now, they're no longer doing that. They're actually allowing their holdings to run off. They're running off at a slow rate because mortgage borrowers like Marissa have such low interest rates. They're not, they have no interest to, who certainly sell, and also to even accelerate payments at this point. So it's not a very quick process, But the point is that the Fed is no longer that key buyer in the market. And given that hole that exists, you have to compensate or raise rates in order to attract other investors into those mortgage-backed securities. So I think those are kind of the main reasons I would cite for that increased spread.

Over time, I would expect that to normalize, right? If we're right about our economic forecast, things get a little clearer going forward, especially as the Fed does start to cut interest rates, bond traders should have a little bit more certainty in terms of the future. We should get maybe some other investors into the market to bid down that spread as well. So I do expect to see that spread come in and that we will land at that, what do we say, five and three quarter, six percent long-term interest rate. Is that sufficient to really attract a lot of buyers?

I think it'll be helpful, but it's not going to, I wouldn't expect that to create any type of boom. I think what it will do is just get more and more supply into the market. Given other life events, you'll see maybe homeowners rationalizing a bit that, okay, I'll have to give up maybe a 4%, 5% mortgage. I have to pay a little bit more, but I only live once. I'm willing to stomach that higher interest rate. And perhaps I've made some great capital gains on my existing property so that can offset it. So I think it helps to loosen the wheels, if you will, of the market. But again, I don't expect that that would cause a reduction in that rate to 6% is going to cause a real boom in the market.

Yeah, I guess the other thing would be it's really kind of people's expectations. expectations around rates. I mean, you know, the longer rates stay up where they are. I think people start adjusting upward where they think the, you know, kind of the rate is going to settle in long run. They're not going to sit around waiting for 2.8 percent for that's not going to happen. I mean, some people might think that is going to happen because that was only two, three years ago. But another year two of seven, six, seven percent mortgage rate, people say, oh, maybe we're not going back to 2.8. And then at that point with life events, as you, as you said,

they begin to think, okay, maybe I just, this isn't great. This is going to be costly, but I'm going to do it. I'm going to go at five and a half or six percent. Yeah. Yeah. The other factors, what happened? Oh, go ahead. I was just going to say that was the mortgage rate I had when I bought my first home in Philadelphia at the peak. Yeah. Before the housing bust. I really timed that great. It was like November, 2005, I think. When you bought it in Philadelphia? Yeah.

But when did you, oh, I guess you sold like five years ago. I sold 10 years later for less than I bought it for. Oh, is that right? Yeah. Okay. But I'm not saying. But that was a good mortgage rate back there then, right? Like 5.5% was pretty good.

So it is all what you're used to. What you're used to. Yeah. I just think there's another portion to the affordation. portability piece. So I think it depends where in the country you are, right? So where I live in Southern California, it's extremely expensive. So the mortgage is not helpful when it's 7%. But even if we got back to 2 and a half percent, three percent mortgage rates, like I said, house price appreciation was just so bonkers during the pandemic that the house I live in now,

which is small, is worth double what I bought it for. So I think it really depends. And I think it really It depends on the market that you're in. Right. Yeah, very true. One of the interesting things, there's a lot of interesting things about the housing market, but one of the things I find fascinating is while existing home sales are very depressed, 4 million units annualized, new home sales, not so much. I mean, they're not booming, but, you know, abstracting from the monthly vagaries of the data

It feels like around 750,000 new home sales annualized, which again, if I put a graph up of all the history and I take a step back and I look at it, 750K feels kind of sort of where it should be in the long run. And, you know, what's going on there? Why are new home sales holding up better than existing home sales? Mercer, do you have any sense of that or Chris is the housing maven? Should I throw it back to him? Do you have any sense of that? Marissa? Why is that holding up?

I don't know. I don't know. I don't see. I haven't seen a new home go up around me in years. All right. Well, Chris, do you have a perspective on that? I mean, I've got a perspective, but what's your perspective? Why are new home sales?

First of all, I characterize the data correctly. And second of all, if I did, what's going on? Yeah. I think the simple answer is just the lack of supply in the existing home side pushes anybody who is an active buyer to consider new housing. The other factor I'll throw in there is that because of that lack of supply in existing homes, the price differential has been bid away. So the new homes actually are coming in or being sold at prices that are very competitive

to the existing market. which is extremely unusual. And so if you're a buyer, you're facing this higher mortgage rate anyway, right? Do you want to buy a used or existing versus a new home? That new home may be quite compelling. So I think that's fueling some of that underlying demand for new homes as well. Yeah, I guess the other way to say what you just said is builders are much more aggressive on pricing, right?

they've been effectively cutting their price. They've been doing these interest rate buy, so-called interest rate buy downs, essentially paying, allowing, they're getting around, helping with the interest rate lock effects. They're saying, okay, to a buyer, you don't need to pay seven, you pay, you pay four for the first year, and then you pay five for the second year, then you get market rate for the third year, that kind of thing.

So you're effectively buying down the interest rate, which is effectively cutting price. And in fact, if you talk to a builder, and I've talked to a few publicly CEOs of publicly traded builders, they'll tell you that they feel like they've effectively cut prices by about 10%. That's the effective price cut that they. And that goes to your point, Chris, that if you look at the median price or the average price on a new home, now very similar to an existing home. And that is very unusual.

I mean, that may have happened once or twice in history other than the, the current point in time. So we're getting a lot more new home sales as a result. Okay, that's demand. Anything else on demand that you want to bring up? Can I ask a question about the new homes? Yeah. Predominantly what kind of homes are being built? I mean, is it skewing more toward condo or single family and what's the price point? Because I know, you know, when we would talk about this years ago, we were talking about a lot of high-end homes being not starter homes, right? More sort of

move up McMansion type homes. So are we still seeing that kind of building or is it more entry level? Chris, you want to take it? Yeah, it's so single family is still the dominant property type. That's

still what people want. Single family detached is the gold standard, if you will. So that's still an area, but you do see builders being very creative and responding to the market by reducing a floor plan size. So you're seeing that the average or median square footage of homes is getting a bit smaller. So they're responding to some of these constraints on affordability, not only by cutting the rates, offering these buy downs, but also adjusting the floor plans to build, put up more as many homes as they can to satisfy the demand that that's out.

there. So I think that that's certainly a positive sign. It does vary across the country, so I don't want to generalize too much. But yeah, I think it's a real testament to the flexibility that the builders have in trying to resolve this housing deficit problem. I think if you go back, you know, in the wake of the financial crisis and the years after, most of the years, you know, through the, let's say through 2018-19, that kind of, before the pandemic, builders were focused mostly on high-end housing. I mean, there was a lot of demand. That's where the margins are wider.

Their actually fixed costs of construction had risen during the pandemic and the wake of the pandemic, all the permitting costs and zoning issues and that kind of thing. but in more recent years they've begun to move because there's been more supply at the high end and the margins aren't quite as good. They've been moving down into the kind of more entry level. So some of the bigger, like a D.H.I. It's the stock ticker for, what is it, D.H. Horton? I can't remember. Yeah, D.H. Horton.

Yeah, they're the biggest. I think they're the biggest builder in the country. They now have, you know, very extensive operations building kind of more, as I call it, entry level or new homes or kind of lower price point homes. So it's changed, but it's only been recently. And this now goes into supply, the supply issues. And here, we've got a, you know, despite the ramp up in construction since the financial crisis, we've got a very severe shortage of homes, right, Chris? And there's a lot of debate about this.

In fact, you can talk to the realtors, you can talk to the builders, you can talk to the Mortgage Bankers Association. Everyone's got their own estimate of the shortfall. What's the right estimate of the shortfall, which means what is our estimate of the shortfall? Our estimate is around $1.7 million. That's based on the vacancy rates. So looking at today's vacancy rate, which is very low in calculating what we would need to add in order to get the vacancy rate up to a historical average. And also accounting for what we call a pent-up household, household formations that didn't occur over the last few years because lack of affordable housing. So put those two together.

And yeah, 1.7 million is the number. Which is a big number, right? I mean, the huge number. Yeah. I mean, current single family, multifamily last I look is, that's housing starts is I think 1.4 million maybe, 1.3. Yeah, 1.3, 1.4. And then throw in another 100,000 per annum manufactured homes.

That's another source of supply. Let's just say we're at 1-4-15 and under, and then shortfall is 1-7. That gives you a sense of magnitude, right? I mean, of the shortfall. It's more than a year's worth of, you know, if the shortfall didn't increase at all, if there was no demand, it would take over a year of supply to catch up, you know, given, you know, where we are with regard to the supply shortfall and the vacancy rate. And what is the underlying level of demand for new homes, Chris? For new homes? Yeah.

Or are saying total. For new construction, let's say. I'm sorry, new construction. So we have three components, right? We have the household formation, demand from household formations, demand from second homes and the demand from loss or obsolescence of homes and replacements, right? Home gets lost in a natural disaster. We have to rebuild it.

I think there's some debate around this at the moment, given our latest population statistics, but I think we had been running at something closer to 1.3, 1.4, a million. So a million from household formations and then three, four hundred thousand from the combination of second homes and obsolescence. So the amount of supply we need every year just to meet underlying demand for new homes is? Yeah. It's like one five one six, isn't it? Something like, yeah, in that range. Yeah, right, one five, one six.

And that's probably underestimating things in the context of the demographics, right, given the immigration that's coming into the country. Which we're not really, I don't think we're really, because we're just still getting our minds around the magnitude of the immigration flows into the country. Our estimates of, say, 1-5-16 underlying demand is probably significantly underestimating underlying demand. That'd be my sense of it. Yeah, I think that between immigration and also there's debate about that some of that pent-up demand with younger adults still living at home and how many. of those would actually move out if they could. So there might be even more demand than what we're saying. Those penthousehold formations maybe even higher.

Yeah. We're actually working on trying to revive. This is a process, but we're trying to think about how we should revise our estimates of population growth, household formations, all the demographic variables, given what appears to be a surge in immigration into the country. I mean, the, and this is, this is, this is not, not, not, this is not been embedded in the census data, you know, census is kind of the keeper of the, of the data and they're not, they haven't adjusted to this yet because they, you know, slow moving in terms of, you know, adopting, uh, uh, the data as it comes in. But if you look at

study, uh, study, recent studies done by the congressional budget office, CBO, the non-partisan group that does the budgeting, they have to forecast the economy and therefore have to have some sense of the underlying demographics. They're estimating that foreign immigration into the country in, in 2022, was 3.3 million people on top of 2.6 million people in 2022. And this is just for context. And it's kind of a typical year before this surge in immigration. It's about a million per am.

So that's a pretty big delta that's not in our data. It's not in that 1.5, 6, 7 million per annum underlying demand. And that's, we're working to try to figure out how to incorporate that. Sounds like that's easy to do, but that's actually pretty hard to do. There's just so many different dimensions to that data and to figure out how immigration fits into that is difficult. So we're kind of working through that. Okay.

So we've got this really severe shortage of single family housing. And clearly this has become top of mind. This feeds into the affordability crisis, right? Because there's no supply. And if there's no supply, that means higher house prices and you mix in the higher mortgage rates and people can't afford to buy a single family home. So this has now become a, you know, a very significant top of mind issue for people starting to play into the presidential election. It's an election issue. Should policymakers do anything about this?

So, you know, what or what and or what should they do? You know, how should they respond? Got any views on that, Marissa? I think you see it, an attempt to address this in a lot of places all over the country. I mean, I know here in California, just the plight of homelessness has been top of mind to every policy discussion, every election all over the state. And this goes, this goes in part, a big part to housing affordability, right? So you see it being addressed in Los Angeles, trying to build housing,

trying to repurpose office buildings, hotels to house people. There is a big proposition on the ballot here in California that we will vote on next month that will provide a lot of money to trying to, to address homelessness and a big part of that is affordable housing. So I think, and, you know, we will talk to Mark Calabria about housing policy. We've had other guests on here talking about housing policy. The kind of cool thing about this problem is that it's local. I think you can, you can do things at the federal level to try to address it, but really when it comes down to it, It really is oftentimes has to be tackled at the local level.

So we can have all these many experiments going on all over the country and try to see what works and what doesn't work in terms of addressing this, either usually from the supply side, right? That's how they're going to try to address it either by incenting builders and investors to get into the market to build more affordable housing or by taking existing housing and trying to incent builders to do something with things that already exist. So I think there's a lot of experimentation underway. I'm not sure, you know, maybe you guys know if there's something out there that, at least at the local level,

that looks to be successful so far. I think a lot of this is yet to be seen. Well, that's a hopeful perspective on it. The other is, because it's so local, it's very hard to address, right? I mean, what do you do at the federal level? That's right. That's right. Yeah. Right.

I think it's very hard to address it at the federal level. I think most of it has to be done at the local level. You have zoning laws that differ widely, wildly across the country. Just the availability of land and space to build is hugely different. Like I said, I haven't seen a new house go up in my neighborhood. And I don't think I ever have, right? There's just no room for it. So you either have to tear something down and rebuild it or it has to be an existing home sale.

But then you have other parts of the country where there's much more room to build and less restrictions on building. Well, in our conversation with Mark Collaboration, again, pointing to the podcast, that's the companion to this one, that we talk about the low income housing tax credit, the LITECH, which is a tax subsidy to builders to get them to produce more. affordable rental housing. Chris, you're not a fan of that, and I don't know that we need to go into that because we did to that to some degree in the other podcast. But, you know, if not that, then what? What should policymakers do? Should they just throw up their hands?

I mean, what should they do? What do you think? The simple answer to this complicated issue is zoning, right? We need to change zoning laws, right? That's the regulation. But good luck with that. I mean, come on. It has to be done at the local level, right?

It does have to be. Yeah. Well, local level, there are some states where, you know, at the state level, they have some control. I think what Oregon and some other states have instituted things at a higher level. But yeah, you're right. For the most part, they are very much localized decisions. It's not easy.

But I think it, I think at the federal level, there are some carrots that can be dangled out in terms of funding of particular areas, making funding conditional on changing zoning. They would call that a stick. They wouldn't call that a carrot. You're not going to get transportation funding unless you change your zoning laws is what you're saying. Well, you will get transportation funding. Okay.

All right. If you get if you change your zoning laws. Right. Okay. Some carrots and sticks. But you're right. It's not easy. The Litech, I'm not.

I'm not against it. I just don't know that it really helps to move the needle all that much. I think builders, if you gave builders the opportunity to bill, you change the zoning so they're not restricted to build single family detached homes with large lots as they are in many parts of the country, they will be very creative and come up with that idea. They will fill in townholes. They can adjust their construction to achieve their margins and maximize. the opportunity that is made available to them, but there are many cases restricted by these regulations, right? And that forces them, that causes them to adopt incentives that lead to misuse of some of the land, I would argue. So I think until we get some of those attitudinal

changes, it's going to be more piecemeal type of incremental adjustment here versus some large sweeping federal law that suddenly leads to a lot more housing. Yeah, it feels like this is going to be a problem for a long time to come. And it's getting, given the numbers we just described, it's not getting better. It's getting worse, right? I mean, we've got a $1.7 million shortfall where we need, you know, even not incorporating a new demographic data on immigration. We need $1.5, $1.6 million every year.

and we're producing 1.4, 1.5 million. So, you know, vacancy rates are going to remain very low. Rents and prices are going to remain very high, right? I mean, it's going to be very, very difficult. The homelessness problem is going to be very pernicious. Getting new households into homeownership is going to be very difficult. The home ownership rate is going to be under a lot of pressure. It feels like this is we're in store.

for a pretty tough decade or two here in terms of the housing issues. Would you just agree with that? If you look ahead, if you look ahead 15, 20 years, things will change, right? The demographics are going to be very different. That's a great point. That's a great point. Which also, you know, adds to some complication as well, right? Because if you're a builder with that longer vision, are you going to really ramp up all your activity today?

if you know that the demographics are, you know, going to adjust in the long run? I think that's still far enough away in the future. Probably. Yeah, that you would. Probably, but nonetheless, I think it's something. Kind of like you're in the fossil fuel industry you're saying, you know, you know demand is going to ultimately weaken. Do I really want to make that as big investment state? In the fossil fuel industry, though, those investments, they're 30-year, 50-year investments, right? Yeah.

But you make an interesting point. And the point, just to make it clear to the listener, is that, demographic shift here, the population, unless immigration really changes to a significant degree, unless this surge we're seeing now is sustained for an extended period. Yeah. Barring that, you're saying a population growth, household formation growth, this source of demand for new housing is going to weaken, meaningfully weakened, meaning we're going to need several hundred thousand homes new homes a year, not 1.5 million new homes a year.

And that's a very different kind of environment. And this housing shortage will go away at that point. But that's a generation from now. That's right. That's literally a generation from now. Yeah. Tough to tell that to a young adult looking for it. Yeah.

Right. Right. Right. Yeah. I guess one other thing that could be done at the federal level is we are lacking construction labor, which has been a hindrance to home building as well. So immigration reform would potentially go a long way. toward increasing the labor supply in that industry, which has been hampered ever since,

really since the financial crisis, right, where a lot of labor left the country and never came back. So that's one thing that could be done at the federal level. It might be marginal, you know, in terms of the cost of building, but it is a factor that we keep hearing about. It keeps coming up when we ask home builders what's preventing them from meeting this demand that's out there. And that's one of the factors that always gets mentioned. Yeah. And I guess tariffs, right, on Canadian lumber, right? That the builders always bitterly complain about that.

And of course, in this presidential election, former President Trump's talking about additional tariffs. You know, so anyway, okay, let's turn to, so we talked about demand. We talked about supply. Let's talk about house prices and timely. We just, I think, released yesterday the Moody's Analytics, repeat sales, house price index. Is that right?

And the reason I know this is because Chris was sending me an email telling me my home and Vero is falling in value. Oh, no. I could feel the glee in his somehow the shot and frowd in his email to me. Not at all. Not at all. I know you just want to keep track. He just pointing it out.

He takes no pleasure in that. No pleasure in it. Not at all. Particularly because the prices have risen so much. Exactly. Yeah, right. Yeah. Anyway, so what did the MAHPI say?

So it was positive over the month and certainly over the year. So from December to January, you're up 0.3%. Right? So a little bit of an acceleration was 0.2% the month before. And then year over year, it's 5.8% growth, which is, you know. It's still outstripping income, right? Yeah. Yeah. So it still remains very, very robust. The growth is stronger at the lower end of the market, kind of consistent with everything we've said, a bit weaker at the higher end, but still positive and strong. What does that look like regionally?

Regionally, well, Veroes down. Veroes down. We know that. Yeah. Yeah. Some of the areas that were that experienced. some of the greatest appreciation, parts of the south, parts of the west are are weaker in terms of their growth rate. I think there was only one, one state where it was actually it did turn negative. I think maybe Wyoming, but you have to be a little careful with some of the data, a number of transactions given the low volume. But, but yeah, west and the south sees some of the some weakness. There's some growth still in the Midwest and the northeast, right, where you do have.

have metros that might be still providing more value on an absolute dollar basis. They're attractive, more attractive, I guess, to aspiring home buyers. But yeah, for the most part, it's an adjustment. You produce that nice map of all the metropolitan areas in the country, 400 plus, and you show them if they're on a year-over-year basis, or prices declining, are they up, you know, zero to five, five to 10 and 10 plus. And I did notice the, and of course, the red is a decline. I noticed Texas has a fair amount of metropolitan areas with declines.

Anything going on there? Or is that just the fact that they rose so much in value since the pandemic and this is just a bit of a correction? Anything going on? I think that that's certainly part of it, just normalization, if you will. But also the supply, right? So Texas is some of those areas are areas where you can build where the regulations aren't as strong. So you've actually seen, I think Austin has had a bit of a building boom and you've seen rents coming in, prices coming in as part of that.

Yeah. This goes to the magic of supply. We just need supply and we'll get some affordability. Yeah. Interesting. Back to zoning. Yeah. Okay.

So in our forecast where, you know, I'll have to say. I feel very proud of our forecasting prowess over the last year or two because, you know, we never called for recession. We kind of avoided that pessimism, at least most of us did, avoided that pessimism. But nonetheless, we have said some forecast errors in the one error is around house prices. We expected house prices to weaken meaningfully in the wake of the face. rate hikes back in 2022. And actually initially they did. I mean, back in 2020, prices declined as the Fed jacked up interest rates. But in 23 last year, prices stabilized and by years in were

rising again and now coming into 2024, as you say, they're rising up 5.8%. I think this is a new record high in terms of existing prices. We're at a new record high. So where do we go from here? You know, what's our outlook for house prices going forward? And in the preface it by, you know, this is, this is, we haven't gotten this right so far, you know, particularly difficult. But what do we think is going to play out here in terms of prices going forward? And why did you get it wrong? And why, yeah, why did we get it wrong?

I'll let Chris answer that question. All right. Thanks, Merritt. Chris, why did you get it wrong? Yeah, thanks, thanks. I'll answer that question for the extent of the lock and effect. It's a lot stronger than any. initially and I expected.

That plus the willingness of the affordability, even though it's record low, you know, the surely is keeping a lot of buyers out, but home sale, 32% of home sales now are all cash, right? So they're still. Is that right? I didn't know that. Wow. I was in yesterday's report.

That would have been good. We're not playing a stats game, obviously, but that would have been a pretty good stat. Yeah. Yeah. So you still have, you know, buyers out there that have other means that are not dependent on the on the mortgage rate. So it's that combination of the lack of supply, but still strong demand that, you know, led to the house price gross.

And what, what I got wrong, I guess, in terms of the extent of that. I was really right with, I was, you know, I was there right with you. I got it dead wrong. But, okay, so going forward. Yeah, what's going on? Short term expect still fairly. solid growth here because of the supply demand imbalance, but I do expect that we will get some basically my forecast is fairly flat that, you know, we're just those forces of some increasing

supply coming online, life events, some additional building, right? He's going to continue to put some downward pressure on price. And the affordability continues to be a factor, right? And the longer that mortgage rates do remain at an elevated level, that's going to continue to make it difficult for some buyers. So for those reasons, I do expect that will see that push pull in pricing over the next year or so. But again, short term, I don't see a dramatic decline anytime soon because of the imbalance. So prices are high, affordability is low. I mean, you look at price, the house prices relative to people's income, so household income,

kind of a tried and true measure of valuation, you would argue the market's overvalued. Prices are really high relative to income compared to what's happened historically. And, you know, obviously that goes to the affordability crisis. People then naturally ask the question, are we in a bubble? because, you know, we have these valuation measures, house prices to income, house prices to rent. And if you look at them relative to long run trend, they would say the market is more overvalued today than it was prior to the financial crisis. And that we consider to be a bubble.

Would you consider what we're going, given that, what I just said, would you consider what's going on now a bubble? Well, I guess I would define a bubble. Only by the fact that it pops. If it defliferation that deflates gradually over time, which is kind of the forecast we have here, I don't consider that a bubble given the, I guess a bubble is violent, in my opinion, that you'd have some event that really causes prices to decline. Instead, I expect that we're going to normalize into or come back to more of an equilibrium price to income ratio. with flattening house prices, some growth in income, mortgage rates coming down, right? So you kind of can adjust back into this level of pricing.

Basically, pricing got ahead of itself. It's going to take a little bit of time here for incomes to catch up as prices go flat. Marcy, you have a different answer? I think you need other characteristics. Like, you need a lot of speculation over leverage. You don't see that now, right? I mean, this affordability, things are extremely unaffordable. But that is, as we discussed, an issue with, it's a supply issue.

It's just lack of inventory in the market that are keeping a floor under prices in a lot of these places. I don't see a lot of speculative buying and building going on. Yeah, in my view, a bubble is speculation, meaning you've got investors in the market that are buying with the sole intent of flipping that property quickly to make a buck. And to make it even more serious is if they're doing that with debt, with leverage. I mean, that's what was happening back in the bubble before the finance. That was a bubble because there was just a lot more investors that were. flipping. You know, they were quickly buying certain, they lied in many cases about the fact that they needed a mortgage and they said they were a homeowner, they were buying it as homeowner,

but they were actually an investor and then taking that and then moving on selling and getting that profit. That kind of speculation, you know, greater fools theory. I'm going to be able to find a greater fool than me to buy this property out before everything falls apart. You know, it was the crypto market, for example, or the equity market back, circa, you know, Y2K, that's a bubble. You don't see any of that now. I mean, the investors you see now, they're buying their hold, right? They're buying and renting the property out because rents are so high. They're not buying with the intent of selling quickly or flipping.

There's some of that in some markets. We actually track that. You know, we look at extra transactions. and there were some of that creeping into places like Phoenix, you know, the really high-flying markets, you know, back in the teeth of the pandemic. But you're not saying that now. So this is, in my view, the market is overvalued relative to incomes and rents, but we can explain it by what you just said. There's just no supply, you know, physical supply or because of the lock-in effects, it's not because of speculation. This is not a bubble.

This is not a bubble that is going to burst. Okay, so I don't think Chris, I don't, I mean, of course I've been wrong about house prices. I could be wrong again, but it'd be shocking to me if we saw some kind of violent, you know, move down in price. It's just, if there's going to be weakness in price is going to be kind of a grinding down in price, you know, over time. As people, life happens, people have put homes up on the, for sale on the market and you start to see more inventory and, you know, you see some price. To actually transact the price, sellers have to bring down their price a little bit. You see some grinding down our price. But I'd be shocked if we saw some big move.

Unless we had a recession, that might be different. Well, I was going to go there, a provocative question, even if we have a recession. Yeah, exactly. Would you expect to see prices fall dramatically? Because in that case, then mortgage rates are coming in. Right. And the people who have jobs saying, oh, my gosh. Here's my window.

I'm going to walk through it. So I'm not even sure. You're right. I'm not even sure that would happen. I guess it depends on severe the recession is, but you're right. It does, but I think a key differentiator this time is the leverage piece that you mentioned. There's a lot less leverage today. So even if we have a recession, it's not going to be as damaging for a lot of borrowers.

They could hang on, especially with a lower interest rate. So, yeah. And that's maybe where we end the conversation in terms of, we've been talking about housing. Let's talk about quickly mortgages and mortgage credit quality. I mean, delinquency default rates on mortgages have been very, very low. And in part goes to the low unemployment, but also goes to the fact that this run up in house prices. I mean, I think, correct me if I'm wrong, Chris, but in our house price index, it's up almost 50% since the start of the pandemic.

So if you go back, this pandemic was four years ago on the nose. You go back four years ago, look at house prices in that four-year period, up 50%, 5-0. That is a lot of equity that's been built up in people's homes. And people are not going to default on their home if they've got equity in it, right? Because they can just turn around and they sell it. So it feels like, correct me if I'm wrong, it feels like mortgage credit quality under almost any scenario here is going to remain very good. Anybody disagree with that? Overall?

Overall. You can find some pockets, but yeah. Yeah. And also, I guess you can see the home equity lending has picked up for obvious reasons, the equity and high cost of credit card debt and people need to cash. So maybe we see some weakening in credit quality for home equity lending, second mortgages, but I'd be surprised on first. I interrupted you.

I was just going to say, unless you bought a house in the last two years, right, where we have seen a deterioration in credit quality for very recently originated loans, both personal loans, credit cards, even mortgages, there's some evidence of that. But the vast majority of people, if you bought a house before the pandemic or even in 2020, mortgage credit quality is good. And they have so much equity that even if house prices, even if house prices fell 20%, most people would still be sitting pretty. So you're right. Like, in context, In contrast to 2007, 2008, where equity was just being wiped out so people were walking away, this is a very different situation. You would have to have some catastrophic decline in home values for another foreclosure crisis to happen.

Yeah, you even about two years. Oh, sorry, go ahead, Chris. I was going to say, and then on top of that, you mentioned foreclosure, are we ever going to have another foreclosure crisis? It seems like they just call out the moratorium. in playbook. That's a good point. Yeah. Right.

Is that. Right. Are you saying that the GSEs FHF, Fannie Freddie FHA, they're never going to allow, if people start getting in trouble, they're going to come up with mitigation and different methods to try to keep people out of the foreclosure. It's just not going to happen again. Of course, the underlying mortgages are a lot better too than, you know, you've got 30-year fixed rate.

it's not two-year subprime arm. So like before the financial crisis. But you're saying even if we, people started getting into trouble, they may not ever get to an actual foreclosure sale, at least not to the degree that has been historically because policymakers just want to allow that to happen. Yeah. Yeah. I think in the other podcasts with our collaboration, you can explain some of the details there.

Well, that's a good way to end this podcast. So you can listen to this one and then go off and listen to the one we did with with Mark, which I think was very informative, both historical recounting but also looking forward. And anything else on housing we want to bring out? I thought that was pretty comprehensive. Anything else you want to bring up before we go? Other than my home in Vero, I'm quite confident.

I forecast many things. Some I'm confident in, some not so much. I'm pretty confident this home's going to be, well, maybe not as confidence. Now that I think about it, I was going to say I'm confident It's going to be worth more 10 years from it. Climate is changing fast, Mark. I know. That's why that entered into my mind. Oh, no. You got rid of the seaweed problem, though, right?

Yeah, no seaweed. That's good. That's good. Yeah. Okay. All right. Well, thanks for the conversation. And we're going to call this a podcast.

Dear listener, we'll talk to you next week. Take care now.