Moody's Talks - Inside Economics - Housing: Locked In, Locked Out, Locked Up

Episode Date: November 13, 2024

Chris Avallone, Head of Merchant Banking at Amherst, joins the Inside Economics crew to discuss the housing market.  The group examines the "lock-in" effect keeping existing homeowners in their homes and the "lock-out" effect preventing aspiring homebuyers from realizing their dreams.  Chris describes a playbook that local governments could use to address zoning and free up the "locked up" housing market.  After a quick stats game, Mark polls the group for their forecasts for when and how the housing market will normalize. The recording of this podcast took place before the results of the 2024 election.For Cris's paper on the Housing Deficit and Housing Affordability click hereGuest: Chris Avallone, Head of Merchant Banking at The Amherst GroupHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn 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 Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Chris DeReedies and Marissa Dina Talley. Hi, guys. Hi, Mark. Hi, Mark. Welcome back, Marissa. Yeah, welcome back. Thank you. You look rested. You're lucky I came back. I didn't want to. Really? It was that nice of time? It was really great. Yeah. You were in Costa Rica. I was, yeah. It was my first time there, and it was wonderful. Highly recommend it. Did you go to the jungle?

or the beach or do you go to both? Jungle. Just jungle? Mostly jungle. Volcano? I don't know. Volcano, jungle, yeah. Saw all kinds of creatures,

sloths, monkeys. Whoa. It was amazing. Yeah. That sounds like fun. Yeah. When I was there,

there was a volcano that was erupting. Was still erupting? No, it's not anymore. We hiked around it. Yeah, it's not erupting. Right. Yeah. Beautiful country.

I have. And that volcano was erupting when I was there. Wow. That was that right. Yeah. I don't know. Yeah. Or no. Yeah. Well, did you get a chance to visit Moody's office in Costa Rica? I did not. No. We've been expanding in Costa Rica. It's a great place to... That's right. There's one in San Jose. Yeah, I wasn't really in San Jose other than to fly in and out, right? So, and then I was hours away. But next time. Next time. Okay. Very good. For sure. And we have a guest. We have a guest. We have a guest. Chris Avalon. Hey, Chris, how are you? I'm doing great. Thank you for having me. How are you guys? It's Avalone. What did I just say?

Avalon. We answered either one. After the whole conversation. Oh, no. Really? Did I really? No way. That's so embarrassing because we just had this conversation. Right. We practiced. We practiced. And I said, I go to Avalon in the summertime. And he goes, well, it's Avalon.

Although you have a grandmother, an heir to grandmother who says Avalon. I have a grandmother who she married in, but she's stuck with Avalon. So it's, that means it's acceptable. If grandma says it. I'm with her. Then you're allowed. Okay. That's so bad.

I can't believe I did that. So bad. Anyway, it's wonderful to have you. You're the head of merchant banking at Amher's securities, right? Did I get that right? That's right. I'm the head of merchant banking. we're the Amherst group now.

We were in our securities for a number of years back in our time pre-crisis in the mortgage space. I'm getting this all wrong. Everything I'm saying is wrong. That's all right. I remember Lori Goodman. Lori is at Urban and she for many years was Amherst and it was Amherst and it was Amherst securities when she was there.

Absolutely. Absolutely. A lot of people in the market know us from our Amherst securities days. but today we're a vertically integrated U.S. housing platform. So we're an investment manager and operator that provides solutions for both investors and residents in accessing housing across the country. So while we were in the mortgage space pre-crisis, post-crisis, we've kind of delved into different equity investment strategies in both for sale and for rent housing.

And you can think of us as vertically integrated to an extreme, right? So we have economists, research, and a full investment management infrastructure. But then we also have a real estate brokerage, a construction unit, a property management business that are actually in the field engaging with our residents and our homes on our platform every day. So I'm excited for the conversation today because I think we can offer a unique blend of both perspectives on the data, but also give real examples of how this data is impacting people and kind of translating into neighborhoods that we operate in across the country.

Yeah, very cool. I mean, when you say vertically integrated to the extreme, that's a catchy way of framing it. Yeah. Yeah. Well, look, I think one thing we learned as we pivoted from being in the securities market to the actual housing market is that we needed to have all of the. the capabilities to control the experience for our residents from start to finish. So it wasn't good enough to outsource brokerage or outsource renovations, right?

Because we just couldn't have the right quality control. And without that, we couldn't make scalable institutional investment products without durable underwriting. And so gradually, we added capability after capability. And today we have over 1,200 people across the country dedicated to our housing strategies. Well, very cool. Well, you should know, because we are going to play the stats game, and we're very competitive. You've got Chris DeRis here, who's like a, yeah, he's a mortgage finance maven formerly a Fannie Mae, formerly a Fannie Mae, formerly a Fannie Mae. Good Bachi player. He's done

very well on Bacchie ball. He's a, he likes wine, especially in the cellar here in his villa in Italy in the summertime. And he's made a lot of money in the crypto market. So that's Chris. So you've got to be careful about Chris. I got to spend more time at Moody's. Marissa was in Costa Rica. Chris is in Tuscany.

I'm just down here in Austin, Texas. Yeah. Right, right. And of course, I'm on the board of directors of MGIC. So I keep a close view on the mortgage finance world as well. And I've always appreciated the deep research that comes out of Amherst. You guys do fantastic. work.

You know, I think it's among the best I've seen on the housing finance and the housing market. So thank you for coming on. So there's a lot. We're obviously going to talk housing, housing finance. A lot of topics to kind of tackle. First up, top of mind, this mortgage rate, the 30-year fixed, Chris was just saying today hit 7%.

And that's up from, it felt like just a few weeks ago, maybe three, four, five, six weeks ago, we were flirting with six percent. And it felt like we might go into the fives, which I think folks in the housing industry would really have appreciated. But now here we're back up at six, you know, back up in yields of the rate, not quite a percentage point, but, you know, within spitting distance for a percentage point. Chris, what's going on? How do you diagnose that increase in rates? Well, look, I think we've seen a really resilient economy, seen a really resilient consumer. We've seen really resilient, I think, employment data over the past few weeks.

And so it feels like some of the themes that the Fed was pointing to when they, when they adjusted rates in September, may have been overstated, right? And I think the capital markets are still. trying to skate to where the puck is going a little bit. Rates going higher does increase barriers to home ownership, right? It also shines a light again for us on the difference between the cost to own a home versus a cost to rent a home. And we think it steers a lot of consumers into the rental market because between low inventories available for sale and very high mortgage rates, it's a really difficult environment to be a home buyer.

Yeah, when I think about the mortgage rate, the 30-year fixed-rate mortgage, the first thing I do is I kind of decompose it into the 10-year treasury yield, which is the risk-free rate, kind of the benchmark long-term interest rate, and then add a so-called spread to get to the fixed rate, the fixed mortgage rate. So the 10-year yield is now sitting at, last I looked, four and a quarter, that's up about half a percentage points, maybe even a little bit more. And that goes to what you were just saying about the Fed, in expectations for monetary easing because of the resilience of the labor market investors have kind of become less aggressive in their thinking about the rate hikes, and therefore long rates have pushed up a little bit. Also, I'll throw in one other thing. I'm just going to lay this out and want to get your reaction.

I think markets are anticipating increasingly a Trump win. And if President Trump wins the re-election, it wins re-election, they're thinking as his policies, trade war, you know, deportation, deficit finance tax cuts in the full employment economy, is inflationary. And that's pushing up, you know, long-term rates also. And then there's the spread. And the spread is a malage of stuff, you know, everything from, you know, mortgage originators have to get paid, you know, compensation for originating a mortgage, the servicers need something. there's the prepayment risk that's involved in investing in the security. And that also feels like that's widened out here too. So the run up in the 30-year fixed mortgage rate is a function of both higher 10-year

treasury yield and also a widening in the spread. Is that kind of sort of fit with your – did I put too much – I put a lot of words in your mouth. Did I put too many words in your mouth or does that chew pretty well? I think that – I think that's right. As we look out at the 30-year mortgage, I think we believe it likely normalizes somewhere in the mid-5%, right? Kind of thinking about those building blocks of a 10-year treasury, maybe high threes to four and a spread of 150 to 175 basis points. So kind of using those components, mark, that you laid out.

I think the spread to the 10-year, if you look back in recent history, may have been a little bit tight, just given how big of a bid that the Fed had. So it's somewhat difficult to forecast specifically where that spread might shake out. But I think that's where our eye is trained, kind of mid-fives for the 30-year fixed-rate mortgage. But I think what the market's selling us right now is it might not necessarily be a straight line, right, between here and there. Yeah, so what you're referring to is the Fed is it bought a lot of treasuries and mortgage securities when it was quantitative easing, and now it's quantitative tightening and allowing the securities to run off the balance sheet.

They're not selling anything, but they're allowing to mature and prepay, and that's putting upward pressure on the spread because they're not, they're exiting out. They're no longer the buyer and that and they were a buyer at any price i mean they were priced insensitive and so the buyers that are coming in now are much more price sensitive and much more attuned to the risks of investing in a in a mortgage security sounds right yep absolutely absolutely i mean they were they were a pretty meaningful bid for for a number of years that that tightened up that spread and and and to your point while they're not actively selling just the the lack of is likely to widen that spread out a little bit, we think.

Hey, Chris, Christoridis, is that characterization consistent with the way you're thinking about things? And what would you add to explain what's going on here with the mortgage rate? No, I think that's right. I suspect the spread is going to, I think it'll tighten, but I don't expect it's going to go all the way back to even 175 necessarily in shorter for the reasons that you mentioned. So my expectation is that, you know, we dip understead. six, but but not much more below that. So I'm not expecting five and a half anytime soon.

So what you're saying is the, so there's their 10 year yield, that's up 50 basis, 50, 60 basis points. The spread is widened. The difference between the 10, 30 year and the 10 year mortgage that that spread is widened a bit too. And you're saying that, you know, that typically, historically, in recent history, that difference is about 175 basis points, 1.75 percentage points. Right now, it feels like it's around 200 and, if I do my arithmetic real fast, 250 basis points, something like that? Yeah. So that's a pretty widespread.

But you're saying that will, that 250 will go to 175, but over a long period of time, not any time this year, next year. It could take a while for that to happen. Yeah, it wouldn't surprise me if it hangs out at 200 or a while. while, right? Why? Why? Because the Fed is one factor there, right, having to replace pretty significant buyer. Where are the other investors going to come from? And then there is competition with other debt out there if we're issuing it a lot more. So that might push up the spread as well. So and the volatility, I'm not, I'm not sure. Everyone talks about the volatility coming down.

I don't know if the volatility actually comes down as far as anticipated. So that spread might actually maintain a higher level than what we've seen historically. Yeah, just to explain that, you're saying, because the spread is a function of the fees paid to originators and servicers. If it's a Fannie Freddie loan, they get a fee for the credit risk that they are facing. But the biggest part of that spread is the compensation that investors in those securities require for the risk that they're going to get prepaid. they're going to get the mortgage.

The mortgage is going to, they're going to get bought out of that mortgage at a lower rate at an inopportune time for them, and they want to get compensated for that risk. And that value of that prepayment option, it's an option, is a function of the volatility of interest rates. So if you have a more volatile, a lot of movements in interest rates, that spread is wider. And rates have been very volatile. And you're saying, that remained the case. And I will expect it to reduce, but I don't know that it goes all the way back necessarily.

I think there's still a lot of uncertainty out there. Yeah. Chris, going back to you, Avalone, so, you know, my kind of, and I, just the level set, you know, somewhere in the five and a half to six percent range. That's kind of sort of where we think things are going to settle in the long run. We're just, we're debating what's, when do we get to the long run? Yeah. And this is really important because we're going to go on to talk about interest rate lock in a second. and, you know, getting rates down are critical to easing the rate lock and getting transactions

back up. But my sort of kind of thinking, you know, simplistic thinking is that that spread is a function, really a monetary policy, a Fed policy. So as the Fed cuts short-term interest rates and hopefully the yield curve becomes more positively sloped and the volatility in the market comes out because we're normalizing rates, rates, that that should be enough to reduce the prepayment risk to investors, and that will allow that spread to come back to something more typical. Then we get rates back down.

And, you know, I was thinking that was good. I didn't think it was going to happen next quarter, maybe not even next year, but over the next couple of years that that normalization of monetary, of what the Fed, of monetary policy of interest rates, that that would allow for this normalization of that spread. and we get mortgage rates back into the fives. Does that sound reasonable? Or am I, is that, it's much more complicated than that. No, I don't, I don't think it's, it's a lot more complicated than that.

Okay. I think that we're, I think that we're seeing that, you know, this, this economy is not that easy for, for the Fed and others to get their arms around. Yeah. And we're seeing the capital markets going to kind of that volatility point and those, that, what are the value of those embedded options in mortgages? they're a really tricky thing to value right now, particularly in the environment where we've kind of sailed off the map in terms of available liquidity in the housing market, the cost differential between how consumers can access housing and having such a vast amount of mortgages that are in the money. It's just a it's a challenging market to invest in and to trade right now.

I think that that goes to maybe the point that Chris was pointing to earlier, which is that it's going to be challenging. to squeeze that volatility out of the mortgage marketplace. Okay, so let's, to end this part of the conversation, let's each put forward when we think the more 30-year fix is going to be back to its, let's call it equilibrium rate. Chris, Evolone, you said five and a half. Chris Rees, you said five and three-quarters. I say five-and-three-quarters.

Mercer, do you have a view on this? No view. Five and a half, somewhere in the mid-to-high-five. seems correct. So Chris Duretis, when do we get back to five and three quarters? In a consistent way. In a consistent way? I'm thinking at the end of 25, early part of 26. Oh, okay. Okay. That seems reasonable to me. What about you, Chris? I was 18 months from now. Okay, fine. Okay. Okay. So, okay. Marissa, are you going to be an outlier? No. I mean, I think you're looking at like six more Fed rate cuts between now and then, roughly?

Yeah, that sounds right. Right. Yep, according to our forecast. Yep, yep, yep. Okay, okay, very good. Let's hopefully catch the case, because that's really key to getting the housing market, at least in terms of transactions, existing home sales, you know, moving in the right direction. I mean, at least moving up, right? I mean, what was it? We got 3.8 million existing

home sales in the month of September annualized. Is that right, Chris? Yeah. And you have to go back in the teeth of the pandemic or the height of the financial crisis to see that kind of level of activity. Yeah, so it's very, very low. And this goes to the interest rate lock effect that, you know, you had so many homeowners when rates were low back before the Fed started tightened, locked in, got mortgages. They refinanced and got mortgages at very low coupons, very low rates in the twos and the threes. And when actual market rates are at six or seven, it just doesn't make any economic sense for them to, you know, sell their existing home, extinguish that mortgage at a low rate, go buy another home, get another mortgage at a higher rate, the monthly

payment, the increase in the monthly payment's just, you know, out of bounds. is Chris, Avalon, excuse me, Avalon, I'm going to have a problem with this the whole time. Actually, you know, Chris Dorees and Marissa know this. I'm named dyslexic, aren't I? I've got a problem. I've got a dyslexic, I'm kind of a dyslexia problem with names. You didn't notice it? Well, at least my first name is the same.

Yeah, right. So the last name wasn't confusing enough. The first name is another true. Like I get so confused with Chris. Craig and Greg, it's like, you know, it's very, very problematic. What do you think is going to take, you know, what are the conditions that are necessary to ease up on the interest rate lock to get home sales starting to move north here? What do you think needs to happen for that to occur?

Obviously, mortgage rates, but, you know, what will it take? Yeah. So it's interesting. You reference the payment differential. which I think is where everyone's focused. One of the things that we look at is also the payment differential relative to household income.

And what I mean by that is if you look at recent mortgage origination, the average household earned about $110,000 a year. And with mortgage rates at seven compared to kind of where the existing installed base of mortgages is, that's about a $1,000 a month payment difference or $12,000 a year. Just think about that. If you're a household with $110,000 of income, you have a $12,000 incentive to stay in your home.

That's more than 10% of your annual income. So the barrier is really high. And if we look at the distribution of existing mortgages, there's really not going to be very many, in our opinion, that come off the sideline between a 30-year rate. rate like seven and a 30 year rate like five and a half. Maybe it's it's three million marginal mortgages that that come back into the money at that level. And of course, like there'll be people who as the 30 year rate moves down, it gets close enough and they lean in and and maybe they've had a life change or maybe they want to move in their neighborhood. So there'll be there'll be more liquidity that

comes into the market. But one of the things that we're really focused on right now is that we're not even really close to that tipping point where the amount of incremental liquidity caused by the burn off of the lock-in effect will actually move the needle in the for sale housing market. What do you think, Chris, Doreides? I think it takes time. I think I certainly agree that the lock-in effect is going to remain strong. But you do have more people who are seeing life go by and they are listing. their homes. So you do see inventories coming up. They're up 25%, 30% year over year, obviously

over off of a low base, but they're moving in that direction. And that's not interest rate related. That's people deciding that, you know, the current house they have doesn't really fit their needs. So they either have to trade up, trade down, move, right? So I think he'll continue to see that, but that's a long, slow trend, right, that takes time to to unwind here. So I don't see this being resolved anytime soon. It's kind of, you're saying the pent-up life that's occurring because people, children, divorce, death, job change. Retirement, yeah.

Those are things that in the past people will just move and get a home that fit their demographic, their need, but not going to do it with this interest rate environment. That's right, that's right. And they're recognizing there's a cost, right? Chris is right. They're going to do the math and say, oh, yeah, there is a cost here. But maybe their other factor, if they're downsizing, right, then clearly they may make it up elsewhere or they're moving to a lower cost area when it comes to insurance or property

taxes, right? So that might start moving. The other thing that could happen is these households that are pent up get to a point where they need to move and they just cut price, right? I mean, when we know, or it seems, I think we know, that the market, home sales are sensitive to price because if you look at new home sales, this is the $738,000 we were talking about earlier, new home sales were back to pre-pandemic levels, right? They're not inordinately depressed. And that goes to the fact that builders have, I think I have this right, builders have

effectively cut price through interest rate buy downs. They're saying, okay, you know, you don't need to pay seven, you can pay six, you can pay five, and I'll do this for you for a year or two or three. In some cases, for the life of the mortgage, and that's an effective price cut. And once as they do that, we are seeing buyers come in and buy. So one other way that the interest rate lot could abate is if sellers decide to, you know, they cut the price 10% on the home. Because these interest rate buy downs in the new home market is they're effectively at 10% a price cut, I believe, if you do the arithmetic. Chris, Avalon, does that sound right to you? It does sound right in theory, but in practice, what we're actually seeing right now is that

sellers are listing their homes at a premium to where we see intrinsic value, right, with our ABM models of every home across the country. And they're listing at about a five-point premium to that intrinsic value, which is as great of a premium as we've ever seen. So it almost feels like the sell side of the market is getting more opportunistic and less serious about finding that clearing price and potentially cutting price to find a buyer. And that's materializing on our numbers in one in 10 listings, actually just being pulled without ever finding a clearing price.

So while we see the same 25, 30% increase in in available inventory that Chris was referencing earlier, the pricing expectations of sellers and buyers are diverging in this market based on what we're seeing in our data. Oh, that's interesting. So despite the pent-up life, it's not pent up enough for them to start becoming more aggressive on pricing. And just the opposite, they feel like they've got the upper hand here and are willing to charge a premium.

Yeah, well, I mean, one of the things that we say here, so it's a little catchy, but we say the housing market today is locked in, locked out, and locked up. Yeah. Locked in, we talked about, right? That's the mortgage lock and effect. Locked out, I also mentioned earlier, it's a really difficult market to be an aspiring home buyer. Right.

And then locked up, what we mean by that is that buyers want, lower prices because of higher costs of ownership. And sellers want higher prices because of higher replacement costs, right? So there's a widening bid ask in the U.S. housing market that's impairing liquidity, right? I like that. That's catchy. Locked in, locked out, locked up. There you go.

You got it. That sounds like a lot of locks. A lot of locks. Yeah, it's going to be hard to unlock all of that. Yeah. Well, what, let's turn to another kind of related issue, and that is the affordable housing shortage. And so, you know, we've got this in the existing market, we've got this interest rate lock, which is resulting in a very depressed level of home sales, existing home sales. On top of that, we have this extraordinary.

shortage of homes available for sale and rent, particularly when I say affordable, particularly in parts of the market that are at the lower end of the market or in the middle part of the market. High end of the market, I think less so. There seems to be more supply, particularly in the rental side. And that doesn't feel like there's a severe shortage. There maybe even be a bit of a surfeit in housing at the higher end of the market. But in the middle parts of the market, the bottom parts of the market, you know, you look at vacancy rates, it's pretty clear there's a very severe shortage. Did I characterize, do you agree with that characterization?

Does that sound right to you, Chris? It does. And we think that that shortage is caused by, I think, two important factors. One is, it's very difficult to build at affordable price points. frictions, the cost of capital, et cetera, just make it very challenging. And the second thing is there's a pretty significant problem with obsolescence of our existing housing stock, where in a lot of instances, the right thing to do is to rehabilitate an existing home and reintroduce that to a new family at an affordable price point.

And obsolescence kind of continues to nibble away at the market, particularly at those affordable price points in established communities. So we see that every day, particularly with our rentership cohort. And one of the things that we're trying to do is combat both of those headwinds, both new homes and combating obsolescence to try to redeliver to the market affordable housing solutions. But it seems, I think you make a great point that the fundamental problem is the cost of building because of all the zoning,

permitting, labor costs, building materials, appliances, pretty much everything that goes into a new home, both for rent and for home ownership, is up a lot. So therefore, if you're a builder, and you need your own return on top of the cost, when you actually build a home,

the price point that makes all the arithmetic work, cover all your costs, and then return is just too high. just to pricing. Yeah, that's absolutely right. And one of the biggest variables, going back to some of your points on zoning and other things from a builder's perspective is time, right? Time extends capital costs, extends risk.

And particularly in the capital markets we've been in, it's been very difficult for builders to go far enough out the risk spectrum. to deliver scalable solutions, particularly out of affordable price points. I can give you an example of something that I think worked well for everyone, which is that we were developing a parcel in North Carolina with the intent of delivering rental homes. And we did all the permitting, we did all the horizontal development. So all the roads and family, Chris?

Single family. Yeah. All the roads and sewers and utilities and things were in. And before going vertical, we went out and kind of took a poll of builders in the area if they would be interested in taking on the vertical development. And because we already had the permits done and we already had the utilities and the roads and the sewers, we had multiple bidders from some large national home building platforms because they knew that they could get in there and they can limit their time, limit their capital markets risk, and deliver more affordable housing, right?

And so that was to us a really powerful case study that if you can take down some of these risk factors that all participants in the housing market are facing, that you can, in fact, unlock supply at affordable price points. But if you can't take down those barriers, then it's going to be very challenging. You know, Vice President Harris has put forward a housing plan. It has a lot of moving parts, but the one significant part that goes to supply is to just provide tax breaks, tax subsidies to lower the cost for building to put up more home. So in the case of rental, just expand the low-income housing tax credit program. There's a lot of problems with that program, but it's tried and true.

It's been around for a few decades. People know how to scale it. And then on the single family side for home ownership, straight up tax breaks for home builders that build homes below a certain price point. The idea, again, it goes back to it's about getting the cost down sufficiently and builders getting a return that they need and getting to a price point that's. more affordable. What do you think about that approach? Does that make sense to you? Well, the first thing I can say is we're fans of anyone that wants to bring productive solutions to the table. Right. So we need

more housing, both for sale and for rent. And we think that we can be a partner with either side of the aisle by delivering some of the capabilities that we have. What I want to highlight is we, we have a term that we call the missing middle, right? So if you work and you have savings, you can buy a home. And things like down payment assistance programs can increase access for those households because they already meet the credit box to get a mortgage. And maybe they need to get over the hump on a down payment, right? if you work and do not have savings, you're in this missing middle, right, where you don't have

government subsidized rental support, but you don't qualify for a mortgage and probably also don't have a down payment, right? And so when we think about a number of these initiatives that are that are being floated, we think that they're all productive for different segments of the market. but we continue to see an underserved segment that has outgrown multifamily, that's out-earned housing choice vouchers and other government subsidized rental programs, but is not going to be able to access a mortgage or achieve the savings required to be a homeowner. And that's a really challenging demographic for the government to reach directly. And we're seeing that come through in some of the proposals.

So I think the proposals can all be complementary, and we welcome all of them, but there's a neglected demographic cohort in the middle where we think we can support them from the private sector. Interesting. Chris, do you want anything on this part of the conversation on the affordable housing shortage? Yeah, well, I guess I can second the fact that certainly exists and everyone has an interest in resolving it. we also have a lot of special interests that are going to prevent it, right? The nimbism is strong everywhere you go. So, you know, we could say every little bit helps, but I'm not so confident. I think it's more a question of time and demographics that ultimately will resolve this.

Yeah. Well, I don't think I've ever asked you about VP Harris's supply side proposals. Just, you know, it's pretty straightforward. Just cut taxes for builders, both on the rental side and on the, ownership side to just address this the cost to bring down the cost and allow them to get the return they need at a lower price point that's more affordable for for buyers. It kind of, it's because as you point, as you, as you, as you, as you're pointing out, addressing each of the individual costs that go into building a home like the zoning or

the permitting or the labor, you know, addressing that's incredibly hard and difficult. And in many cases that you can't, federal government can't really have much say into what zoning and permitting is going to be at the local level. So it's almost like they don't have the tools to do it. So given that, this approach, at least my thinking, my thought process around it is that it overwhelms those other costs. You know, it's just straightforward. You don't have to pay taxes. You pay a lower tax rate. It's right to the bottom line.

So it just makes it, you know, much more. it makes it easier to do the arithmetic for things to pencil out and for you to build a home that as a price that is, you know, more competitive. Does that resonate? No. You still need the local government to play ball in terms of the zone, right? If you just, there physically is not the location to build the property, even if the cost is zero, right? Right.

So that's the, that's the hard part. And you're right. The national government, the federal government doesn't have the tool to. force, right, that building. They can put out some carrots, perhaps, some incentives, but I think very difficult to unseat the incumbents here because you have, if you're a homeowner, you have the incentive, right? You want less supply, right?

Yep. Yeah. Hey, Chris Avalon, you see, see why I'm dealing with this guy? He's very, very pessimistic. I mean, I can't. Very skeptical. Very skeptical. Are you skeptical?

I think where Chris is right, though, is that. local governments, they need a playbook for public-private partnership. One of the things we run into a lot when we're dealing with local municipalities is really good intentions to deliver housing solutions, but they don't know where to start. An example of this, we were working with a city kind of in the southern United States. they just got a huge manufacturing multinational corporation to build a manufacturing plant in and around their city. They know they're getting tens of thousands of new jobs. They know they have a housing shortage.

And we can tell them based on the profile of those jobs, what type of housing they're likely to need. So we can tell them what solution they need. But bridging from everyone knowing what they need to actually know, knowing how to catalyze the reaction that they want and have that housing delivered is really, really difficult. And so one of the things, I don't know if it's the federal government that can do it, I think we can probably help in the private sector, but giving local municipalities a playbook on how to how to develop public-private partnerships to deliver housing solutions could

be a really powerful and scalable thing across the country. And you haven't seen anything like that? There's nothing like that. No. We haven't seen it. We haven't seen it, and it's a big challenge for local officials, right? Many of them don't come from the housing sector. Many of them aren't familiar with the capital markets.

It's a challenging thing for them to ultimately drive progress on. So I'm very sympathetic to where their starting point is. I think that's where the resources are needed. Okay. I want to come back and talk about homeownership and the context of the work you're doing on, on buy to rent and buy to build and that kind of work, because I know you've done a lot of work there. But before you do that, let's play the stats game. The game, we each put forward to stat, the rest of the group tries to figure that out.

Best stats, one that's not so easy we get it right away, one that's not so hard, we never get it. And if it's apropos of the topic at hand, housing, housing finance, all the better. It doesn't have to be, but that would be better. And we always begin with Marissa. Marissa, are you ready to go here on the stats game? Yes, I am. Okay, excellent. Great, great.

You're up. 8.4%. 8.4%. Is that a growth rate? No, it's not. Is it an interest rate? No. It's a share.

It's a share. 8.4% of something. No? Marissa? Is it a share? It is a, um, oh,

oh boy. Wow. It's a, it's a ratio of something to something. Something to something. Is it related to affordability? Yes.

Yes. Okay. 8.4% of existing homeowners could afford their own home. No. That would be a share. I mean, you're going down. That would be bad.

8.4% of the population. Oh, is it, no, I was going to say 8.4% of the population of households devote more than 50% of their income to housing. No. Okay. Can you give us another clue? It is something that we, it is a racial. that we calculate using our house price index. Overvaluation.

Yes. All right. 8.4% of homes are overvalued. Is that it? That's it? That single family homes are overvalued by 8.4% as of September. And that's the lowest that it's been since the end of 2021. And that goes to two things.

Slower house price appreciation in the single family market. because there's not a lot of activity, buying activity, right? And rising incomes that are making things a bit more affordable than they've been in the past three years. So this is using our Moody's Analytics House Price Index. Right, right. Boy, that sounds low to me, doesn't it? It does sound low. We've become accustomed to the high.

Yeah, right. Chris Avalon, you point out another something you calculate where he shows, valuations are significantly higher. Well, the one that I was pointing out, it was the homes that are being listed for sale relative to our AVM model of those homes. And so these listings are coming out 5% above what we think would be a fair price for the home. And that's creating a wider bid ask in the market.

But we also direction, I'm not sure if it's 8.4%, but agree with what Marissa was pointing out which is that single family homes in general are screening as overvalued, but wages are catching up and HPA is slowing down. And so that gap is shrinking a little bit. Well, does that remind me the way we calculate that, is that based on looking at prices relative to rents or relative to incomes or both? Do you know? Is it both, Chris?

It's relative to what we think the fundamental value is, and I thought it was both. Am I right about that? Yeah, so it's the current price relative to our estimate of fundamental value. That estimate of fundamental value is driven off of income as well as construction costs, right? Oh, this is through the, this is the model or model. This is a model based. Model based. Yeah.

I was going to say it's unlikely that it could be compared to the cost of renting a comparable home because on our numbers, that delta between the cost of ownership and the cost of rentership of a comparable home is about 40%. Wow. Yeah, I think the way I kind of think about this is when you are thinking about buying a home,

becoming a homeowner, you've got two kind of decisions to make. The first decision is can I afford to buy a home? So I look at my income and I look at the interest rate. I look at the monthly payment. I compare that to my, do I have the down payment, that kind of thing.

But it's really the first decision is relative to income. And then once I determined that I can buy a home, then the question is, should I buy a home? You know, what is it, what is the home relative to renting? So it's the first, it's a two-step decision process. And the first step is house price to income. The next step is house price to rent, right? So this is saying, you know, it's still, we know that it's very difficult to afford

to buy a home, and even if you overcome that hurdle, we're still, it's still not, it's questionable whether you should because house prices are high relative to underlying rents and construction, relative to rents. Is that, yeah. I think there's a, there's another, dimension. It's, you're getting to it a little bit with the cost to own versus cost to rent, but it's also, can I buy the home I want? Yeah. Because with home prices that have great, grown at a rate much faster than incomes. And with higher interest rates, if you were in the market for a home three years ago, and now you need to get back into the market for a home today, in many instances, you're going to be looking at a much smaller or older home in a very

different neighborhood, possibly a different school district. Right. So there's a big product component to it too, outside of just the affordability metrics. It's can I get the home that I want? Yeah, good point. Good point. Well, Chris, do you want to go next? Chris Avalon? Do you want to go next?

Okay. Here it goes. Oh, boy. All right. My stat is 24%. Okay. And it's obviously housing related. Housing related.

Yep. It's a share of something. that's right it's a share or something uh it's the share of home buyers that are first time home buyers no that's what's that i was going to guess that yeah i mean typically the share of home sales that are first time buyers are i think 35 but it's got to be a lot lower than that right now So it's not that. Is it the share of homes purchased by for cash? It's a share of the home market.

It's a share of housing stock. It's a stat about housing stock. The housing stock. New home share of listings is that? It's around there. No, 24% of the housing stock is. Oh, housing stock. The housing stock.

It's not It's not obsolescence, is it? Oh, it's an age more than You guys are on the right track now More than 50 years old or something It's got to be a big number It's a shocking number, isn't it? So can I tell you?

Yeah, far away, go ahead. It's the other way around. So 24% of the percent of homes that were built this century. So more U.S. single-family homes were built in the 1950s than in the 2010s. Yeah, true. Makes sense.

Yeah. 21 million homes were built before 1979. So when I go back to kind of talking about the need to combat obsolescence, the good news is these homes are well located. Yeah. Four bedroom. They have backyards. They're in good school.

The bad news is, you know, they're 30, 40, 50, 60 years old. Yeah. Okay. You make a great point. So you're saying this is a big problem. There's no one answer to the problem. But one of the biggest, most obvious ways of address is just go look at the existing stock. It picks it up and it's in the right place already or close to and more affordable.

And that may help significantly address the affordable housing shortage. That's the point, the broader point. Chris Dorees, you've made this point. You wrote, didn't you write a whole paper? I did. Nobody read it. Yeah. Nobody read it.

Maybe I did. I read it. I thought it was great. That was great. Yeah, I've been making this point for a long time. We've got, now the number escapes me how many millions of homes that are vacant, unoccupied, not seasonal, right? They're just sitting there.

Many of them probably do need to be fixed up. That's why they're not occupied. Others may be tangled up in some legal or family, you know, nobody knows what to do with grandma's house, right? Type of situation. Right. So, yeah, that there's, is the answer lie in plain sight, right? I think that was the title of the paper even.

Hey, Chris Avalon, you see that he's pretty catchy too, you know, locked in, locked out, locked up. Right. Is the answer in plain sight? I like that. We're going to use that. We think it is. I'd love to read the paper. I'll be your second reader, Chris.

All right. No, no, wait. Hold it. Hold it. I read it. I read it. You were number one. That's what I was the second.

It will be the second one to read it. Okay, got it. So when you say they need to be fixed up, I mean, what are you like when you, when you were citing these vacant unoccupied homes, who owns them? Sometimes they're just, they're abandoned. You know, like if you go to parts of Philly, if you just drive in Philly, go from, it feels like miles that, you know, the homes are, they're completely vacant. They may be owned, but it's not clear who has title. That's part of the problem, by the way. part of the problem. As part of the problem, if you go to Philly, they can't, they can't figure out

who owns the damn thing. Like some of those family issues, right? Who actually inherit, right, might be tied up for years. Yeah. Right. There's a lot of legal issues. Yeah. I don't think it's investors. I don't think they're hanging on to kind of big enough to a large degree. I think it's more of these, maybe mom and smaller investor. I don't think it's going to be those corporate investors. They're too savvy for that, right? They're going to dispose of those properties. So then when you're, and this is for you, Chris A, as well. I mean, so when you're saying they need to be fixed up, so what do you propose? Investors come in and buy homes and fix them up and sell them at a lower price point? Or are you talking about more like public policy, cities, that sort of thing? It could be either, but to give you a sense, when we rehabilitate a home on our platform, we're investing. 30 to $40,000 in that home at our cost, right, with economies of scale and national supply chain.

So at a consumer's cost, that would be 20, 30 percent higher. And that's a really significant investment for a consumer to make in a home that by and large is going to be around a $300,000 home, right, at that affordable price point. If you're a consumer and you have that type of capital to invest in a home, you're more likely to use that as a down payment on a home most likely at a different price point. So there does need to be some incentive for either the private sector or the public sector to invest those dollars in affordable homes that need rehabilitation, right? because it's unlikely that owner occupants or consumers will choose to do that or will have the financial means to do that directly. There is a piece of legislation out there that also is part of the Harris housing plan,

the neighborhood home tax credit, which is designed for this purpose, right, to provide a tax subsidy for renovation to make it, you know, work out because the economics don't quite work in some of these older urban areas where you have a lot of stock. You just can't make it, just the arithmetic doesn't work, but you need some form of tax subsidy. But that, that's never become law. That's been kind of kicking around for a while and hasn't become law. I don't know if that's going to work or not. Maybe we should just move on at this point, because I do want to talk a little bit about the investing you guys are doing in terms of buying property and then renting the property. And it sounds like you're also building to rent as well. You've mentioned that earlier.

There's a lot of controversy around that in the context of homeownership. You know, home ownership's under a lot of pressure for obvious reasons. It's been declining. And the concern that's been expressed is that, you know, if investors, like you come into a market, buy homes from a homeowner and then rent that home out, it becomes more difficult to increase home ownership. And obviously, home ownership has been a goal. policy goal for, you know, many decades across many administrations, thinking being that homeownership is the best path forward for creating generational wealth, particularly for minority

groups where they don't have a lot of wealth. How do you, what do you think about that? How do you respond to that? Look, I think the first thing that we focus on is our residents and who's living in the homes that we're delivering to the market as rentals. And I'll give you a couple of stats on that, right? So in the United States, home owners earn well above $100,000 a year. They have a credit score in the mid-700s.

They're more likely to be married and they're less diverse than home renters. Home renters earn half as much as the first group. their credit scores in the mid-600s, they're more diverse, less likely to be married, and equally likely to have kids. So if we just zoom out and we think collectively,

private sector, public sector, where should we commit our resources, which cohort is in more need of support? I think we'd all likely agree. It's that second cohort of renters, right? And so once we can kind of find common ground in supporting that group, then the question becomes, what is the best way for them to access safe, secure, and affordable housing? And we talked a little bit about the

rehabilitation and the investment that we're making in these communities. We can talk about the level of service that institutions can provide, very similar to multifamily, right, like 24-7 service, amenities, so on and so forth. And so I think it's easy to understand why for the single family renter cohort, the resident experience and the opportunity and the access that rehabilitating an existing home and welcoming that family into that community is a really attractive option for them. I know that there's a lot of focus on institutions buying homes. I can tell you that we and our peers own less than 2% of homes being operated as rentals today. And when we go out and bid on homes, we actually acquire way less than 5% of the homes that we bid on,

that we think we can deliver in an affordable way to renter. So we're not setting the price. We're not dominating the market. but in instances where there's homes that need a little bit more investment and should be delivered to that rental cohort, we provide, I think, a really attractive way to deliver that solution. And that should be attractive to consumers. And I think we think it should be attractive to the government and regulators as well, because

we can reach that cohort that I think we would all say is underserved. Of course, the 2% is nationwide. I think the other concern is that, you know, there are certain parts of the country, largely in the southeast, maybe into Texas, over into parts of the mountain west, where this is a much more significant part of the housing stock. You know, like if you go into places like a Tampa, we're talking, I don't know what the numbers are, but they're meaningfully higher than that. I think that is that a reasonable concern?

I think it's a reasonable concern. It's a fair question to ask. But from our perspective, that's also where this demographic of single family renters lives. In the United States, you had to have a 720 credit score to get a mortgage. You have to have tens of thousands of dollars of savings to put down a down payment. There's a lot of really important jobs and really important industries that that, don't deliver that financial profile to families in these communities. And so I think our market footprint and that of our peers is really a demand-driven

solutions-oriented footprint. And that's, I think, what it's important for people to keep in mind. You're also in the build-a-rent market, too. You mentioned a case in point earlier in the conversation. Is that a growing part of your business as well? Is that even more broadly, is that becoming more of a place for institutional money to go to build homes? Because there, I think, much less concern and resistance, right? Because you're adding to the housing stock and easing the affordable housing shortage.

And, you know, I think everybody's on board with that. Is that something that's becoming more commonplace, more prevalent? Absolutely. It is. Absolutely. Now, look, we and our peers, I think, struggle from some of the same challenges in going out the risk spectrum in volatile capital markets that the traditional builders would face. But introducing new housing stock, we absolutely believe that's a key part of the housing solutions that our communities need. I would say that we've observed a lot of new build homes are in the second and

third ring around employment centers just because that's where you can source large tracts of land. That's where there's the space to do that. So it's very logical. One of the challenges we see with that is that it doesn't afford renters the same type of access to establish communities with established school districts that owners might have. And we think that it would be fair for renters to have access to those communities as well. So it's a balance, right?

It's a balance. But we absolutely believe that that building new homes is critical to meeting the needs of consumers today. Chris, do you want to weigh in here? Anything you want to add or put forward? Yeah, I'd concur that we need more housing. Right? That's the bottom line. You get more supply. I think the concerns about certain communities certainly bear taking a closer look at. I often wonder though about the proposals that are put forward to try to ameliorate the situation. If you just, let's say you restrict corporate investors,

well, if that just shifts over to mom and pop investors, right, have you really solved the problem that you're after? And I think it's very difficult to, design a legislation that can actually, you know, solely cater to first-time home buyers, for example, or, you know, it's, it becomes very squishy in terms of how you actually design this. And I just think that there are other priorities that we should be focusing. And this seems a bit of a bit of a red herring in terms of, you've got this huge supply issue. Let's go focus on that. Let's focus on those vacant homes. Now, I think this is a secondary third order type of effect of anything.

I think, I think, though, in the case of the legislation, and you're right, there might be a big gap between theory and, you know, what actually works. But I think the one thought, one thought behind the legislation to try to address this issue, if it, you know, if it needs addressing, is a tax, the kind of the tax advantage that large investors have over individuals. And I think the legislation is trying to level the playing field. Again, in theory, level the playing field in terms of the kind of the tax consequences of owning a home versus investing in a home. Does that resonate at all? Chris Avalon? It does. It does.

We're in favor of a level playing field. Okay. And meaning that there's solutions that we can, we can deliver under all, all the proposals that you're, that you're putting forth. I think we would prefer, right, to have fewer frictions than more. We think that those benefits generally flow through to the resident, right? It allows us to invest more in the home. It allows us to avoid deferred maintenance.

It allows us to keep an incredibly high standard of service. It allows us to take more risk in longer term. development projects and introducing new housing stock. So I think all of those, all those things that are perhaps perceived as advantages to the institution, whether in the capital markets or tax code or what have you, we're endeavoring to pass those through to the consumer to provide them a safe, secure, and affordable home. And to the extent that frictions get introduced, we may not be able to do that as frequently for as many consumers. Well, let's end the conversation this way.

It feels like to me the housing market is just out of whack. It's just, I don't know how I'll describe it. It's just like, you know, interest rate law. I like you're locked in, locked out, locked up. It's like really a mess. And it took us a while to get into this mess. It feels like it all started to develop back. a generation ago before the financial crisis and here we are. When does this market ever get back

to something, let's call it normal, you know, something that we feel where prices and rents, you know, are affordable for the typical American. Is that a fair question? I'm going to go to Chris to Reedies first because it may be unfair. How would you answer that question, Chris? Is there ever getting back to normal? Is this like, you know, we're going to be living with this? No, it's a fair question. Okay.

You know, if you look at the long run, I mentioned this earlier, a long run demographic trends. True. Point in that direction, right? So if you take this out 15, 20 years, right? Right. current birth rates and whatnot, you get a market that is back to that type of. You're just saying there's no going to be no demand because the household formations are going to be so low.

Well, not that there's no demand. The demand comes in and the supply keeps, I'm assuming the supply keeps chugging along. I don't see that supply. I don't see that supply miracle coming up. Unless we rehabilitate the vacant homes. Yeah. But I don't see the home builders, right? Even if you remove some of these obstacles that they really, you know, accelerate or double their production.

I think they're kind of doing what they can do and they can do maybe a little bit more, 10% more. But I don't see a real ability to suddenly ramp up supply. So I think it just takes time. So what you're saying is we could be the case that we're, you know, if you look at completions of homes, we're probably 1-6, 1.7 million. if you throw in manufactured housing, something like that. Yeah. To get that up is hard and may never happen. But the way for the market to come back to something normal

with vacancy rates that are more typical where rents and prices are more affordable, you look at a decade from now, 15 years from now, assuming no meaningful change in immigration policy, just given the aging of the population, domestic population, that means that slowly but surely the market will right itself. And 15 years from now, a generation from now, we'll be back.

It won't be locked in, locked up, locked in, locked out, locked up. It'll be, or whacked out. It'll be something more normal. That's what you're saying. That's what I'm saying. Okay. Chris, Avalon, what do you think of that? Yeah, I was just going to say years.

Years. I wish that we had a crystal ball that would tell us how this. all ends up scrolling out. But look, I think the good news is there's there's a lot of focus around it. There's a lot of, there's a lot of ideas being generated. And so, you know, hopefully we can all kind of come together and start shipping away. But even if we are able to, you know, stop digging a deeper supply deficit and, and write the ship, it's going to take a number of years to kind of get back to an equilibrium.

Well, I feel like I actually feel better about things. with this conversation because, you know, we highlighted Chris DeReedy's and your perspective on renovation and repair and it feels like a way to go. And then this, I like this kind of give me a roadmap or guidebook, I think you called it, for municipalities to address some of these frictions that exist that I can get more supply. That seems like a reasonable thing to go to do as well. So I feel better about it. Marissa, what do you think? Are you on board with the generation, a generation from now, things normalized? Or are you more?

Yeah, I mean, I think the way I think about it is the youngest, the youngest baby boomers are 60 this year, right? And I think there is going to be this transfer of housing from the baby boomers, either dying and leaving it to their children or downsizing, right? Getting out of the big homes they're in, moving to something smaller. So I think you're naturally just through that alone going to have a big, big amount of supply coming on the market over the next 10 to 20 years. I mean, it's happening now. It's been happening.

But as you move 10, 20 years out, it's going to be, I think it's going to be massive. I know much of the baby boom is on that younger end of the spectrum. Yeah. Okay. All right. Any parting words from the group? Anything else? Any other topics we want to tackle?

I know it's getting late in the game, and we ask Chris to hang on for a while here. So I appreciate that. Anything else? Mr. Dr. DeRides? I think we're good. We're good. Okay. Chris Avalon, I want to thank you for, you know, coming on.

And a very difficult topic. Housing is a really complicated issue. And obviously a very important one because it is the cost of housing. is a single most important item in most, I think in everybody's budget, right? Is there anybody who's budget where housing isn't the most important thing? I think it's the most important thing. So very critical. So thank you for coming on. Really appreciate that. Yeah. And thank you guys. It was it was awesome to join big fan of the podcast. And we appreciate you inviting us. So thank you. Thanks. I appreciate you. We'll take it. We'll think. We'll take it. And with that,

dear listener, we are going to call this a podcast. Take care now.