Moody's Talks - Inside Economics - Pinto, Prices and Policy

Episode Date: April 28, 2023

Falling house prices and recent housing policy actions taken by the FHA and FHFA to address housing affordability are top of mind this week. Edward Pinto, Senior Fellow and the Director of the AEI Housing Center at the American Enterprise Institute joins to discuss. The team also provides their thoughts on weaker-than-expected GDP data. Is the weak GDP # good or bad for the economy? Marisa dominates the statistics game. For more on Edward Pinto, click hereFor the full transcript, click hereFollow 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 Mark Zandi, the chief economist of Moody's Analytics, and I am joined by my two co-hosts, Chris D. Reedy's and Merceda Dina Talley. Hi, guys. How's it going? Good to see you. You always say that, Chris. It's always good to see you. Oh, no, I meant it's always going well. And he's always doing well. Oh, he's always doing well. Yeah. That's a good state of affairs, though. Yes. Yeah. Yeah, but you wouldn't tell me otherwise. I think so.

Yeah. I'd laid out on the line, right? Actually, he would. He would do, he would tell me. Yeah. You're talking about me personally, not the economy, right? So it's an opinion may differ. Indeed, I was talking about the, but we could talk about the economy.

We probably should talk about the economy. Yeah. Mersen, you're doing okay? I'm good. You're back up and running. Yeah? Okay. Yeah.

Fit as a fiddle. Okay, good. I'm great. Okay. Okay. 100%. Good, good. And we have a guest, Mr. Pinto.

Ed Pinto, good to see you, Ed. Likewise, Mark, Marissa, Chris. And you're hailing from Bethesda, you say. I am paling from Bethesda today, yes. Yeah, and I know, because you have a home in, don't you have a home in Tampa, I believe. Sarasota. Oh, Sarasota.

Okay. All right. Got the right coast. Right coast. Right coast, right coast, yeah. Are you getting hit by that seaweed problem? Is that an issue there? I've been reading about it.

No, we haven't been hit. by that yet i i i don't know yeah hopefully not so c weed pile uh yes i've been reading about that yeah i'm more your way my mom lives in naples and i keep asking for the sea weed update yeah okay yeah well we're what a hundred miles north of there we'll see is she getting it mercia no not yet not yet okay but virile beach i have the storm right yeah well i i have a home in virro ed And that's on the other coast. Directly across from Sarasota, I think. You can't drive across directly, but easily.

Yeah. Right, right. And they are, there is some seaweed issues there. Yeah, yeah, some seaweed. It's not, it's not, you know, if you can't walk on the beach kind of problem, but, you know, it's becoming more of an issue. Anyway, it's great to have you, Ed. We go back, I think, certainly back to the financial crisis. Yes, probably 2008 would be my guess, somewhere around there.

Right. When you were doing all that work on Fannie and Freddie. Absolutely, yeah. Yeah. And I can remember, I think the first time I met you was in New York City, and my assistant set up a meeting in some dive somewhere in the middle of Midtown. Do you remember this? I also met your brother.

Oh, is that right? Yeah. And then I was down into your office outside of Philly. I remember that. Oh, that's right. Yeah, yeah. Well, he, I remember this. we go to, we're a meeting added in this hole in the wall, the middle of the middle, like very close

to Penn Station, you know, in New York. And I'm going, I'm thinking to myself, why did he pick this spot, you know, why, why this spot? And it turns out my assistant picked it because she didn't know where, oh, Sarah, Sarah's on the line. My assistant's still, she's still, this, this is no criticism. But she picked this spot because she thought it was. easy to go to and she didn't know, you know, where to go. And so. Good job, Sarah. Good job, Sarah.

Not that, not that Mark remembered it. That's right. Not that it didn't make an impression. Yeah. It was 15 years ago, but that's right. That's right. That is kind of bad, isn't it? Yeah.

Well, we got off to a good start and that was good. That's what counts Sarah. It was. That's right. Good coffee. I recall. Good coffee. Good coffee. They're keeping expenses down, right? He's the expenses down. Oh, yeah, we didn't blow the budget. That's for sure.

That's good. Yeah. Ed, you are now at the American Enterprise Institute. And you've been there for quite some time now. Yes, since about 2008 also, yes. Oh, okay, great. And you run, is it called the housing center? What is it called the Housing Center? The AI Housing Center, yes. Housing Center. You've got some really good folks there. I know. Thank you. Steve Oliner and Steve. Steve just retired.

Oh, did he? Last month. Oh, okay. After helping, you know, co-found the Housing Center back in 2013. And he was with a, since 2011. Before that, he was at the Fed. But Steve's shoes are being filled quite ably. They're hard to fill by Joe Tracy.

Oh, Joe. Joe's there. Okay, cool. Yeah, he's really good. as senior advisor and I forget non-resident senior fellow at AEI. And so Joe started literally the weekend, the first workday after Steve's retirement. So we, and that's been great. We really like Joe.

He's got also experience in the Fed. And then we have the rest of our staff to buy us and CC and Arthur and all the others. Yeah, it's a great group. And you do really good work and want to get get into that and some detail. And just to round out, you know, because you're, you're deep housing, mortgage finance. And before I, you were, I know with Sandy for a while. Yeah. So I started out, you know, in law school, and I've been in housing finance my entire career.

Right. So I started out as an attorney at the Michigan State Housing. I'm an authority, became general counsel after a couple years, spent eight years there, spent a couple of years at mortgage guarantee insurance corporation and mortgage insurer. Oh, I forgot that. You know, I'm on the board. Yes, yes. This came back from a board meeting from MJ.

Well, and I'll get to my son in a minute. Okay. And then I went to Fannie Mae for five years. I was a senior vice president there for marketing and product management. And then I was their first chief credit officer and executive vice president for credit. And then I went into consulting from 1989 to 2008 and doing lots of different things, mostly on the single family housing finance side, but a little bit of multifamily. And then started up with AEI in the housing policy.

And I had kind of migrated away from the legal work towards policy early on. but now in as happens this I was talking to Lori Goodman the other day about the same her daughter who now works at I think Freddie Mac but my son now works for arch mortgage insurance oh okay and so another mortgage insurance yeah great in my company yeah yeah fabulous in my company started there about six months ago so I never imagined that he'd get into the mortgage business he just ended up stumbling on this great job and and got it six months ago. So as Tobias said, who is the assistant director at the housing center, my wife and I've been married. It'll be 50 years this year.

Congratulations. Thank you. And I've been in housing for the entire time. And so Tobias said, oh, great. Now Joan will get housing in stereo. Yeah. Yeah. That's all you're going to be talking about. Just which is. Yeah. But Lori said that her daughter never paid much. attention to what Lori did, and then goes to Freddie Mac and then says, mom, they know you there. Oh, she's a legend. Yeah, I had no idea. That's hilarious.

Yeah, of course, Lori runs the housing finance center at the Urban Institute. So you guys are great. And they do fabulous work as well. I do a lot of work with them also. Well, it's great to have you. And we're going to go deep into your work and housing, house prices, and politics, and policy and all of the above. But before we do that, we had a chock full, a week of chock, a week that was chock full of economic data. And the data point at the top of the list was

GDP for the first quarter. And I thought maybe Mercy can give us a rundown and what that GDP number had to tell us about the economy. Yeah, it was weaker than we were expecting. So GDP grew at 1.1% quarter over quarter on an annualized basis, we were expecting it to be about a percentage point higher. And that was roughly what consensus was expecting also. So that's weak compared to the last couple of quarters. You know, we got 2.6% growth in the fourth quarter and 3.2% growth in the third quarter of last year. So significantly weaker. Within the details, consumption was quite strong. So personal consumption expenditures added almost two percentage points to GDP growth.

Other, or I'm sorry, they added, I was looking at the wrong quarter. Yeah, they added two and a half percentage points to GDP growth. Residential fixed investment, which I know we're going to talk about in the podcast. So this is investment in housing that subtracted a bit from GDP growth. And if you look at the prior quarters, residential fixed investment has now declined for eight consecutive quarters, as, you know, interest rates have risen quite fast over the past year. The other big component that moved the needle was the change in private sector inventories. That took away about 2.3 percentage points off of GDP growth. So it nearly offset the increase in GDP from consumption.

Net exports added a little bit, but much weaker than we'd seen in the past couple quarters. And government spending was a bit of a support adding nearly 10th of a percentage point of growth to overall GDP. What else? the non-res fixed investment sector added to growth. So, you know, within fixed investment, certainly housing is the weakness, but outside of housing, things look pretty good still. So it was a pretty weak reading, you know, weaker than we were expecting for sure and maybe some indication of what's to come over the next couple of quarters. Yeah, a week. So 1%-ish. That's about half the economy's potential rate of growth.

which is the rate of growth necessary to generate enough jobs to maintain stable unemployment. So if you stay here for very long, unemployment is going to start to notch higher. Is that a good thing or a bad thing in the context of the current environment? Well, I mean, it's kind of in line with our slow session story, right? It's sort of what we've been talking about with. We have still positive growth, but it's slow. It's below potential. We're starting to see slowing kind of across the board and everything.

We got a lot of releases this week. We got a lot of economic data. You know, the housing market is a little shaky. Okay, okay. It's like it had been stable. Answer the question. Answer the question. You're, you're vacillating.

You're vacillating. Is it good or bad? I mean, in the context of we need to get inflation down, the fed's on the war path, raising interest rates, what do you think? I mean, Chris, what do you think? Yeah, it's in that direct. It's supportive of getting inflation down. We do need the economy to slow.

But calling it good is never easy in this environment, right? You want growth, right? I'm a little bit concerned with the mix, right? Consumption growing quickly, but investment pulling back, I don't see that as a positive, right? Consumption can be fickle and you want the investment to continue for our future here. So, I mean, I get maybe it's my rose color glasses. I'm just saying that that number was, let's say. Don't say in the strike zone.

Okay, let's say on script, you know, I mean, if the Fed were going to pick a number that it wanted, it'd say, I want 1%. Yeah, but I also think the Fed would want slower wage growth, which it didn't get. Okay, okay, yeah, we'll get to that. But in terms of the GDP, in terms of the growth rate of the economy, they got to, you know, pretty what they want. Because consumers are hanging tough. You know, they're doing their thing. I mean, year over your real consumer spending growth is 2%. That's like, you know, exactly what you want. Some of the fair amount of the weakness was just inventories, just draw, you said, less, I think you actually saw a decline in inventories. Yeah. Yeah. Which is pretty good, right? Because

that lays the foundation for better kind of conditions going forward, particularly in the manufacturing base where, you know, the inventories were becoming more of an issue. I, I, I, agree with you, Chris, the one thing that makes me a little nervous is the investment spending on the equipment side, but it was fine in terms of intellectual property. It was fine in terms of structures, you know, that felt fine. So, and then government spending feels like it's starting to kick in a little bit. I don't know if that's the infrastructure spending kicking in yet. I might be a little early for that, but that's going to happen here going forward. So, I mean, And, you know, if you were going to pick a number, doesn't, no, it doesn't come close.

I agree. I agree in isolation, but I'm just worried about some of the other indicators that show that maybe. Okay. Yeah, we can worry. Inflation isn't coming down as quickly. Yeah, one's the trade-offs. Very well made. Yeah, we may get into a situation where we fall into a recession or we see negative GDP growth and

and core inflation is still, you know, up around three and a half percent. All right. Let me ask you this. Let me ask it this way. What number would you have wanted to see? I mean, precisely, what number would you have wanted to see? I would have liked our four pass to be correct at 2.1%. No, that was just a tracking estimate.

That was just a tracking estimate, right? That was, that's what the, actually, that fell, interestingly enough, when you got the durable goods numbers the day before that showed investment was going to be weak and that pushed the tracking estimate down to I think one and a half. So I think the actual consensus on the day, and the Atlanta Fed wage GDP tracker was 1.1 on the nose. So the consensus had come in, you know, because of those in trade data that we've gotten the day before. But okay, all right, fair enough. Did you want to bring up any, Mercer, you mentioned the ECI. Maybe you should talk about that for the employment cost index because that that was more disappointing in the context of

the current environment. Yeah, a lot of data came out. So we got the employment cost index for the first quarter. And this is the Fed's preferred measure of wages because it controls for the mix of jobs created. And that actually accelerated compared to the fourth quarter. So it was up 1.2% from the fourth quarter, it was 1.1% in the fourth quarter. That's for total compensation. Wage growth overall was stable. It was 1.2%, which is exactly what it was in the fourth quarter as well. So that uptick was mainly a reflection of an increase in benefit costs rather than compensation. So year over year now, we're looking at wage growth of 5%, which is about what it's been. for the past six months, it was 5.1% in Q4 and 5.1% in Q3. So that was a little disappointing to not

see more of a slowdown in wages, especially that's the one the Fed is keyed in on, right? When they're looking at pressures coming from service sector industries and employers keeping wages high in those industries where the main input cost is labor. Yeah, of course, is that consistent with your take on it, too? Yes, I'd say much more focused on the ECI than the GDP number to your previous question, right? GDP, yeah, it's got to keep an eye on it, but it's probably not going to sway the Fed's decision. This ECI certainly much more important and the PCE, which I think we'll get to next. Well, much more important in what sense?

In terms of setting monetary policy? Yeah, if that's the objective. We're focusing on what, trying to understand what the Fed is going to do next and what implications that could have for the economy longer term. Yeah. I think those are the numbers to watch. Yeah, I don't know. It feels like the job market's weakening to me.

So, you know, it feels like it's just a matter of time before that wage growth comes into more, in a more fulsome way. But yeah, that 5% is too high. We need 3.5% I think to be more consistent with the first target. So it's got to come in more. The PCE, that felt like that was okay. No, the core, that's the consumer experience. expenditure deflator, the measure.

Yeah, that actually decelerated in March. It was 0.1% March, February to March, and that's... Core, I think, was 0.3, excluding food in energy. Corps was 0.3, right? And that was unchanged from the previous months. So that didn't really budge. It was the headline that budged, yeah. Right.

Of course, anything on that? No, Bernard Yaros wrote up the summary. for this one for us on our website. And he indeed said that it stuck to script in. Oh, did he? He's using my language, is he? Yeah, okay. I think that is, and I think that's the case,

but yeah, obviously still concerning in terms of the level. Yeah, okay. Okay, I think it's a good time to turn to housing because in the GDP number and growth broadly, certainly housing is a drag on growth. It is in recession, home sales, construction, and house prices. Ed, how would you just broadly characterize housing market conditions at this point? I mean, there's some optimism out there that it might be bottoming out. I mean, are you of that view?

So you've got two different pieces of it. One is home sales, which is existing and new. And then you have home prices. Home prices have been much more resilient than I was, expecting given interest rates at six and a half percent, give or take, mortgage rates up from two and three quarters, three percent, not too long ago. And that's largely due to continued supply constraints, which are severe in most of the country, particularly at the lower end of the market, and we'll be talking a lot about that or the course of this podcast. And but the

The inventory, months remaining inventory, are all very low at historic, near historic lows. The historic lows are set during the pandemic, but if you go back 40 years, we're lower than, you know, 38 of those 40 years. And so that is keeping house price appreciation stronger than otherwise would be. It is definitely slowed down. On the home sales side, particularly existing sales, that's way down 30, 40 percent, on the measure we use and I think the home sales numbers are somewhat similar. And that's just due in large measure to a lack of supply. You can't sell what you don't have. There has been a bigger slowdown at the higher end of the market. That was really the run-up in the high end of the market was unprecedented

during the pandemic. And so that has definitely slowed down the activity. But again, it has has had much less effect on home prices. Yeah, you at the housing center at AEI, produced your own house price index. And very timely, because you're out with March data, March 2020. Yeah, so you might say, well, why does the industry, you know, why do you need another house price index? There's already lots of them.

And the answer was three or fourfold. One is we didn't like the latency of the other indices. Kay Schiller has got a tremendous amount of latency, because while they will come out in April, they have come out in April, and they'll call it February. It's actually an average of December, January, and February, meaning it's actually February.

And so it has quite a bit of lag to it. It's actually January. So it has quite a bit of lag to it. We come out with our March numbers. We came out with them, I think, Monday or Tuesday of this week. And so that was one reason. Another reason is that we wanted an index that just didn't break the market up into one-third, one-third, one-third, one-quarter, one-quarter. We wanted to define price bins by the amount of leverage that was present, market-to-market-to-market driving house prices.

because what we knew from the run-up to the financial crisis, the low end of the market went up quite a bit faster and came down quite a bit more during the correction than the high end of the market. And the way we describe it is the high end of the market is left to their own devices more or less. If they want more leverage, they have to self-create it, take higher debt-income ratios,

put less money down to leave them, to buy a more expensive house potentially. And people that are not getting government assistance tend not to do that. They tend to be more circumspect when it comes to leverage. On the other hand, if you're at the bottom end of the market, the low end of the market, which is largely defined by FHA, they basically, those buyers tend to use most of the leverage,

much of the leverage that's made available to them by the federal government, these agencies. And so we consistently see low prices going up faster in general than high prices. That was turned upside down during the pandemic. I'll get back to that. And so we wanted an index that actually would track that. So we created one with four price bins, low, low, medium, medium high, and high. And we actually define low as metro by metro, quarter by quarter, what is the 40th percentile of an FHA home,

a transaction that was insured by FHA, and that sets a dollar point, and then we take all of the sales below that dollar point and call that low. We take the 40th to 80th percentile and call that low medium. We know that basically largely represents first-time buyers entry level, because we also look at what percentage of that low and low medium are first-time buyers and entry level, as we call them, and it's about 75, 80%. On the other hand, the medium high, and the high is everything, the medium high is everything above 80%, so it includes a little bit of FHA, but it's mostly Fannie and Freddie, and the top of the medium high is the Fannie Freddie loan limit divided by 1.25 to account for a 20% down, which is about the average down payment at the high end of the Fannie Freddie loan

limit. Again, that's done at a metro level, but there it's adjusted every year as those limits adjust. And then the high is everything above that. And so the high ends up being largely private portfolio lending with a smattering of Fannie and Freddie because that 20% calculation for down payment is imprecise. Can I just to summarize because many of the listeners are not as deep into the weeds as obviously you are, we are. So what you've done is you've taken to construct your house price indices by price tier. You've broken the market into where the mortgage financing is coming from.

The leverage associated with that mortgage financing. The low end is FHA, FHA, Fannie Freddie. And then the middle is kind of Fannie Freddie. And the top is more banks, other so-called portfolio lenders that don't sell. the loans to Fannie, Freddie, or the FHA, hold them on their balance sheet. And there tend to be jumbo loans, big loans to higher income households. That's kind of how have you done it? That's it. And we actually can measure the mortgage risk. We have a mortgage risk index that measures the mortgage risk versus the 2006, 2007 stress event

that comes from layering, risk layering. And so we then can look at what the loan mortgage default risk built in from just the risk characteristics into each. price spin and it orders itself as you'd expect. The low price spin has the highest risk, the high price bin has the least. So the third reason we do it is the methodology we use. I won't get into exactly how we do. It's not that it's a secret, but it gets really into the weeds. But we have a methodology that allows us to do it more quickly and do it across a much

larger count of transactions. This is repeat sales, right? Your index is repeat sales? Well, it is repeat sales, but we call it a quasi. I repeat sale. Okay. We're using an AVM for one sale to create one sale point. And we're using the actual sale to create the other.

AVM being the automated valuation model. So there's a model determined house price, not a transaction, actual transaction. And so normally when you do a repeat sales, you have to throw out most of the sales because you can't connect the two. Interesting. And so we're able to connect a very high percentage each month. And so whereas K Schiller publishes, I think, 18 or 20 metros, again, with a lag, we publish 60. And we can publish on an annual basis.

We can do it down to the census track level. So it just gives us a lot more data to slice and dice. And so we like that. That's cool. That's cool. We actually construct a repeat sales index as well. And we have March data. Chris, do you want to describe the March?

I want to have Chris describe the results of our March house price and I'm curious how it lines up with yours. Do you recall Yeah. Have you looked at it carefully Chris? Yeah. Yep. So we showed a half a percentage point a decline in March

so that's that is quite substantial. Your over year, constant quality? Year over year we're at 1.4 personally see if I can. That's month to month down to half a point. March was down half a point. Yeah, that's right. And year over year, 1.3% growth still.

But certainly decelerating from the double digit pace. Piquita trough, our index suggests prices nationally are down 2.2%. So what was your number a year over year, Chris? 1.3? Yeah, we're at 2.3 for March, year over year. And month to month, we're at, hold on a second, month over month. we're at 1.4%. Is that up?

Positive. And that was up. Well, it was about flat with February, which was month over month, 1.5%. Oh, okay.

So these are month over month numbers. And what we do, one other thing that we do that is pretty unique is we utilize the optimal blue rate lock data to track in real time is that we get the data daily.

but we aggregate it up weekly. And so on Monday, we have last week's rate lock. And so a rate lock is somebody buys a house, and then they're getting a purchase loan, and they do a rate lock. A few days later, they apply, do a rate lock. And we get that information, which includes a lot of information about the transaction at an anonymized level. And so we're able to do two things with those data.

One is we can track volume and slice and dice that quite a bit. And so we publish rate lock volume data for cash out, rate and term, by agency, purchase, and all of that. And I've been doing that for, I think we go back about four years because that's how far the data go back. But secondly, we're able to take the individual transactions, aggregate them up to a national level, And then we create a proxy. It's not a proxy for what turns out to be our constant quality year over year, month over month, HPA that we use from the public records data. We're actually able to create a proxy of that. So last, this past Monday, for example, here we are in April.

We have an April number. We have a May number and we have an early June number. because loans that rate locks last week, most many of them will be closing in early June. And what's it saying? Do you know? I think for early June, we're down to about zero year. Okay, year over year. So still weakness. Yeah. And so we actually think that we've already passed the worst in terms of the correction. We had about a 5% correction. that happened pretty quickly in the latter part of last year.

Piqued it nationally, I think it peaked in July. Some regions of the country particularly out west, it peaked in May and June. But we now see on a month-over-month basis, that is reversed. So that 5% decline that we sort of built up over July, August, September, October, November, and probably December, we've now had some month-over-month positive numbers. Well, starting in July, we're going to be, we think we're going to start seeing some modestly positive numbers in terms of HPA month over month. But they're going to be offsetting last July, which are negative numbers.

So that's going to start bringing. Okay. So you're saying that you're sensing some stabilization of pricing. And you actually think the price declines, do you think they're over? Do you think? I think there's been, unless something happens where interest rates break out of this. six and a half range or there's something else that happens with the economy. We also think that unemployment will have minimal impact on increasing the supply of homes, which comes when people

either pull out of the market or go into distress. We think it would take unemployment of five and a half percent for that to have an impact. So we're still two points away from that. We're a long, seem to be a long way from having unemployment impacted. So we're back to this supply issue. There's nothing on the horizon, immediate horizon, it says there's going to be more supply. Yeah, okay. So I want to come back to that. I do want to say one thing about our house price data that I observed, just pointing this out. There's 400 plus metropolitan areas in the country, so we create HPI house price indices for all of them. Four-fifths of them, 80% have experienced declines. 20% of the markets have not. Philly, house price.

prices have not declined, just pointing that out. And Vero Beach, Florida, no price declines in Vero Beach, Florida. Who lives in Vero Beach as a place in Vero Beach? Guilty. Guilty. Yeah. That's because the seaweed hasn't affected the price yet. Yeah, exactly. Yeah. So I was very, very happy to see that. Of course, there's a lot of volatility in the data month to month because a trend and vero doesn't have as many transactions as some of these other bigger florida markets does so that may be but may be part of it just just this point to that chris you heard uh you heard ed he doesn't think that there's going to be any more price declines or any significant more

price declines so what what do you and it obviously on a national basis on a national basis yeah we track the top 60 we look at more but we track the top 60 month by month and um we've seen a pretty on a month over month basis. We've seen a pretty consistent shift to increases. Yeah, what do you think, you want to describe our forecast to Ed? And how do you feel about it, the forecast, in the context of what's Ed saying and everything else you're observing? Yeah. Yeah. So our forecast is a bit more negative, right? We have a five to 10 percent peak to trough decline baked in the forecast, five to 10, because it does depend on which specific house price index we're looking at, but across the majors, the FHFA, R MHPI, and the K Schiller, that's about the range.

I mentioned we're down about 2% so far based on the MHPI, so still more to go. I agree that the supply is limited, but the affordability remains a real issue. And our model is a fundamentals-based approach, and it's looking at that price-to-income ratio, looking at other factors, the interest rates, in making this determination. So by our measures, the market is substantially overvalued still because of the 40% run-up in prices over the last couple of years. So it would take time for those prices to re-equilibrate with incomes, especially with incomes projected to slow in terms of their growth.

So, yeah, we're expecting prices to remain negative for a better part of this. A lot of assumptions, obviously, two key ones. One, that fixed mortgage rates stay around 6.5% 30 are fixed. Through the end of the year, they start to come back down next year to 5.5. 5 by the end of the 2024. And the other is no recession. A weak economy, virtually no growth and jobs. Unemployment starts a notch higher.

But no recession. And with that, we get peak to drop declines in the entire market, you know, from A to Z of almost 10. In the Fannie, in the Fannie Freddie part of the market, probably, what, 6, 7, 8, something like that. Less. Definitely, we do do price tiers that are equal segments, so one-third, one-third, one-third, and clearly the price declines are really consecrated in the higher end of the market. We see virtually no price decline in the bottom end of the segment. Because my view is that that's really driven by that affordability. Right. You have people who may be trading down.

the higher priced home. I still won a home. So I'll compete for that lower end of the market. So that's holding very strong and the supply is very limited at that end. So I do agree. I mean, we see for the peak to trough, I said 5%, which is at the lower end of year to 10, we see zero year over year for December, 2023. And we see, I think it's 3% positive for 2024 year-over-year-over-year. But on the supply or on the low, using our price bins, the high-end, this is year-over-year for March. The high was minus 0.4%.

So call it 0 year-over-year. Medium high was 0.6. Low medium was 3.1, and low was 6.1. And again, our low, and all of these are based market by market by market based on the leverage component that we described earlier. And so that 6% on the low end, back in 2019, that would have been viewed, forget inflation, which is, these are nominal prices. But back in 2019, 6% would have been considered a very healthy increase in house prices, even at the low end. And so we're just not, we saw it slow down and now it's starting to speed up. We think what you said, Chris, is right.

You know, you have people can move down market. They can't move up market. And so that's a factor there. You have the work from home. We think of the tailwinds where we view work from home as a huge tailwind, which allows people that normally would not have driven, you know, the drive to you qualify mantra. Well, now they're driving because.

They don't need to be in the office as much. And now they're competing with people who would have been driving to qualify. And so you have a lot of pressures on the lower end of the market. And maybe we'll have some time to talk about this. But we've done a tremendous amount of work to connect the displacement pressure that comes from house prices being out of sync with incomes at a metro level. and the displacement rate in terms of homelessness as measured by the point in time homelessness rate

across 360 categories, geographic categories that HUD tracks. And we have found in looking at 30 plus different metrics, this single most important predictive metric to predict the rate of homelessness by these 360 areas, is the median house price to median income in that area. And it swamps all the others.

That's interesting. R squared to 78%. And so we've built that into what we call our good neighbor index, but maybe we can get into that a little bit later. But that's a very important point. And one of the questions is whether the price pressures in the lower end of the market are related more to demand or to support. apply. So my sort of narrative or thinking has been that since the financial crisis, home building

has been relatively constrained, except up until right recently in the pandemic, before the run-up in mortgage rates. But for most of the period after the financial crisis, home building has been relatively muted, constrained for lots of different reasons, particularly at the low end of the market. We, you know, the builders, particularly publicly traded builders, focus on the high end because that's where they could make the most money return on equity is a lot higher. The low end, very difficult. Also, during the financial crisis, because of the hit that local state government took, they raised their fees on permitting and the fixed costs of actually putting up a hummer rose quite significantly. So it made it much more difficult for builders to build those homes at the lower end of the market. So my kind of thought process has been we really need to focus on the supply side of this market,

try to figure out how to create more supply, particularly at the lower end of the market. Does that resonate with you, Ed, or do you have a different take on that? Yes, exactly. And we've been, most of our work now is on the supply side of the market. And I'll talk about that a minute. But I would push back on two things. Okay. One is back in 1970, California was normal in house prices to income.

San Francisco was just about normal. And the problems that have emanated largely from the West Coast, also up in New York and some of the Northeast, have really been took hold there and then started spreading other parts of the country. And when you're at a median home price to median income at a metro level of about three or less, you have virtually no homelessness. But once you get, you start moving up from that, we can actually track how that works. California has been above that level for a very long time. They started getting above that level in the 70s and then the 80s and the 90s. And now they're in San Francisco 10 times area meeting.

and their area medium is the highest in the country, you know, San Jose, San Francisco. So that's number one. This has been building for a long time. We have a lot of information of why it's been building, but it has been building. The second thing is you talked about the builders. There was a perception that the builders rape and pillage,

which is how I describe a little bit of what you just said. They're going to go. I didn't say that. I didn't say that. I don't even mean to apply that. It's paraphrasing. Basic economics. You know, you build where you're going to make the money.

Yeah. Well, but again, let's push back against that. So we took 540 counties around the country in 200 metros, and we mapped out in a scatter plot what the gross living area was of single-family attached. We also did it for single-family attached, but detached. What the gross living area was of the unit was the Y-axis, and the X-axis was the as-built development.

Based on the square foot lot, how many lots do you get per acre? that became the Asbilt development. And we found uniformly, it was an 85, 88% correlation that there was a gradient that was very strong as the gross living area declined, the gross living area declined as the as built density increased. And so what's really driving this is zoning if you don't allow higher density, which is a controlled thing by the government entities, not generally the. the builder, it's the government entity. If you allow higher density, even in single family

detached, we call that greenfield development. We looked at 20 years worth of development, brought everything current to the present value with the automated valuation, and did that. We also then said, okay, now we're going to have the Y axis be the value of the house today, and the X axis is going to be the same as built density. We got the same gradient. And so we can see one of the things that we say as we talk to local and state governments around the country is if you allow higher density, even for single family detached, if you go from four to six units, if you go from five to seven units an acre, six to eight, whatever, you get a massive increase in the number of units, you get a reduction in the size, but still being very ample given the household sizes today, and you get a

reduction in price. And it's all driven by you, the local official. It's not driven by the builder. Yeah, and you're absolutely right. I should have said also, obviously, permitting is a big factor here in what's going on. And that also changed. It's been building over a long period of time. I think it got much more serious, significant, you know, around the financial crisis. But I totally agree with you.

We went back 20 years with this. We went back 20 years so that all the houses that we were looking at had no depreciation issue because they were all 20 years or less. So what our answer is, is light touch density, which is a small lot development. We call that small lot greenfield development under 5,000 square foot lots, more than eight per acre, preferably 10 or 12 on single family, 30 units an acre on townhouse, preferably. We also include two unit, three unit, four unit, up to eight units. It's basically up to about 22 units an acre, if you do it in density. It includes accessory dwelling units and everything in between, cottage housing, you name it.

And so we've done a tremendous amount of research on that. We have quantified how many more housing units. We know what the conversion rate is. We know what the economics are. We've calculated the economics area by block, property by property. So we've got a model that tells us, is this economically feasible to convert as an infill to higher density if it were legal? And then what the optimum number of units would be. And so how many units you get?

Why is this important? Well, California is doing a lot here. They have a lot more to do that they need to do. Washington State just passed a law that just a week ago, it's on the governor's desk, that would allow light-touch density. in virtually throughout Washington State and residential areas. There are some exceptions, but there's a few and far between. And significantly, Charlotte, North Carolina, passed an ordinance late last year, takes effect June 1st that would legalize by right two and three units throughout the city

in all residential areas. And they already have a history of doing some higher dancing in about three or four percent of the residential areas. And we just finished a project that we can actually visualize where those units have been built in the last 20, 30, 40 years under this zoning. Because we think once this zoning ordinance takes effect, the real driver is making it legal. The financing isn't the issue. The labor isn't the issue.

The lumber isn't the issue. It's making it legal to build higher density. Once you do that, the private market, if allowed to do it right, we'll figure out a way to do it. Let me ask you a question around that. I mean, you've got some good examples of communities moving in that direction. But pretty universally, it's very difficult to get local governments to do the kinds of things that you're describing. What can be done here to help facilitate this effort, this transition? I mean, if it left to its own devices, it doesn't feel like that's going to go anywhere, at least not very quickly.

Well, something that can be done? Maybe hinting at what can the federal government do? Is that? Yeah. I mean, what can we do it? Because the short answer on the federal government in my book is nothing. Nothing. Okay.

Because the federal government was the cause of this problem. The federal government created the current zoning system that is called exclusionary zoning. They created it in 1922. It was created for nefarious purposes to keep blacks and other, quote, undesirables out of neighborhoods that were being built in the 20s. And we were living with that decision from 100 years ago by the federal government, the Department of Commerce. So I think it's an education process. It's a grassroots effort. We work with groups all over, Yembe groups, other think tanks.

and, you know, different organizations, the home builders, the realtors, the change of commerce, et cetera. There are lots of groups interested in this. It is trench warfare, but the way I describe it, Mark, is we have the winded or back. We know we're getting, having victories. Arlington, Virginia just passed an ordinance. It is trench warfare, but this is the United States of America, and we have a republic, and it's the laboratory of the states, and then under the states. That's the way we operate. It may not operate as fast,

but when the federal government does something, you get these results that you live to regret. And I could list 20 others other than the zoning, but I regret them all. Okay, got it. I hear you loud and clear. It feels unsatisfying somehow, but I hear you. We're making progress.

So you have to look as the glass is half full, not half empty. Got it, got it. Let's do this. Let's play the game, the statistics game, and we'll come back to how. But in the game, obviously, I think we're all going to pick statistics that hopefully are related to housing mortgage finance. Not necessarily, but I'm just saying. And the game, of course, is we each put out a statistic.

The rest of us try to figure out what that is through clues, deductive reasoning. And the best statistic is one that's not so easy that we all get it quickly, not so hard that we never get it. and if it's apropos to housing, mortgage finance, all the better. Okay, with that as introduction, I think we always begin with Marissa. Marissa, you want to go first? Sure. Go ahead, fire away. Okay, minus 0.4% in March.

Okay. Is it one of the economic releases that came out? It is. This week? Okay. Today? No. Okay.

Is it housing related? No, it's not. Oh, okay. Throw us off. All right. Yeah, they come from the GDP report. But we did dance around it at the beginning of the discussion. So we did refer to this.

It's not GDP in the GDP numbers. It's not, no. Okay. And we didn't, hmm, okay. And it's a government statistic that came out this week. Is it from the PC? No. No.

No. E.C.I. Can you give us a hint that doesn't give it away? Well, we were talking about it in the context of GDP. We mentioned it. You mentioned it when we were talking about the GDP numbers. Wage-related? No.

No. What? Geez, Louise. What were we talking about, Chris? you recall talking about the components the investment consumption no but she's saying it's not GDP it's not in the GP release uh but we were talking related no it's not it's not in the GDP inventories related inventories no no um goodness gracious sakes live that this is a tough like you're you're eCI it has uh no she said no wages it's not wages it's not wages it's not

I wanted to be waiting. Can you give us like what what's part of the economy we should be thinking about? So we were discussing it when we talked about marking down our estimate of Q1 GDP. Oh, investment. Durable goods. There you go. Okay. Durable goods. Okay. It's in the durable goods numbers. It is. Yeah. Okay. Okay. Fair enough. So minus point four. Was that the core, you know, ex-defense ex-transportation? Yeah.

Okay. It's durable goods. It's core durable goods orders for the month of March. So this is stripping out, you know, non-defense capital goods, stripping out aircraft orders, civilian and government. So it was down 0.4%. This was the second consecutive month of decline, but it's, this is,

This is actually declined four out of the five last months. So that suggests going back to this weakness in investment spending, right, in private investment spending outside of, even outside of housing. Not a good sign. And year over year, core durable goods orders are down 2%. Or I'm sorry, they're up 2%, but that's the weakest positive reading that we've had since. like the worst of the pandemic since like March or April of

2020 and if you strip out the pandemic you have to go back to about 2011 to get a weaker year on year reading in core goods. So you're, this is making you nervous

that the businesses are starting to pull back on a quay. Yeah. Yeah. Okay. And this is forward looking, right? Because these are orders. So, could also look at shipments, which were also down for two consecutive months. And this is, this is kind of current receivables, right? But the orders can go out six, nine, 12 months.

So this suggests, you know, potential weakness coming in the quarters ahead as well. Yeah. And I guess also in the context of the banking crisis and the fallout, that's going to have on credit. And particularly your small business, I guess this would be the place to really, You know, let me quickly, one thought was, you know, his generally recessions, I think I'm getting this right. Recessions are led by the consumer. The consumer packs it in, stops it in, stop spending, and we go into recession. Could it be the case that, and there's certainly, that doesn't feel like that's what's happening now. I mean, consumers are cautious, but they're, you know, they're spending like they typically do for the most part.

could it be that, you know, this recession is different like everything else about this current environment and it's the businesses that kind of lead us into recession? Is that kind of, is that a possibility? Is that what you're thinking? No. I mean, I think, is it a possibility? Sure. But I still think that there's, you're right. I mean, we got data on consumer spending and income this week too. I won't go into it in case that's somebody's statistic. But, you know, that shows resilience among consumers, but we've also gotten data on credit markets and consumer borrowing, and that is turned for sure. So balances are now falling compared to where they were a year ago when you look at a variety of lending products. So to the extent that consumers may be

drawn down any savings they have, it also looks like they're pulling back on debt, that's could also, that could be supply and demand, right? It could also be banks making it more difficult for consumers to take on more debt. Interest rates are higher. Lending standards appear to be tightening across a variety of products. So, I mean, I think eventually this is going to come down to the consumer. We noted the labor market seems to be weakening too. I would just add, Marissa, lending standards in one area are weakening reasonably fair amount, and that's mortgages, government mortgages,

Fannie Freddie FHA. FHA lowered their premium. That's going to be increased demand against tight supply. Fannie Freddie just changed their LLPAs or loan level pricing adjusters, tilting more towards high-risk borrowers. That's going to increase demand there.

All of this is going to feed into that low end of the market where there's no supply and house prices are already going up, 6% your year. It's an interesting point. So, Ed, did you want to take a crack at this game? Sure. I'm going to throw out.

Let me get the number in front of me here. It's obviously something we publish because I don't follow the other. Fair enough. Oh, no, this is a problem. So we're not going to get it, Ed. We talked about it quite a bit. So we'll see. But the number is, hold on a second.

I just picked up the wrong thing. Okay. The number is 2.1. And it has somebody to do with housing, obviously. Uh-huh. Is it related to your house price estimates? It is not related to house price estimate. Is it the risk index he referred to?

No. No. Is it like months supply on the market? Ah. Which month's supply? Oh, geez. Well, wait. it's 2.1 months. Think about it. Right. Existing. Well, no, it's all, yes, existing, but what

portion of the market? Oh, is it the low end of the market? Yeah, it's the low-ending market. So, again, by the way, Marisa, that, that was pretty good. That was impressive. That's a pretty impressive. I don't know that. Yeah. We did poorly, but yeah. You have buyers market, sellers market, you have equilibrium point. The equilibrium point at the low end, we estimate to be around five months, give or take. So two, two point one months is a riproaring sellers market for the low end. And again, that is not as low as it got down to 1.1 month, believe it or not, during the pandemic in 2021, maybe early 22. But 2.1 months is probably the lowest that it had ever been, we started tracking 2012 through sometime in 2020. It is a riproaring

low end of the market seller's market. And again, you add more leverage or demand through the government loosening up credit, reducing the cost of credit, as FHA did, and you will end up adding fuel to the fire. And I'm just curious, when you say the low end of the market on a national average basis, what cutoff are we talking about in terms of like the... Well, again, we don't have a national cut up because it's... It's Metro by Metro by Metro at 4. 40th percentile of FHA, seller, buyers, spread across the entire market,

all homes below that point. But it's probably, you know, 300,000, probably less than that, 250, something like that. Again, we don't have a national number per se. It's market by market. Hey, Ed, just to push back a little bit on your point, about the FHA premium cut.

And this is a, you know, stating what the argument here is for cutting the premium. It was 30 basis points, 0.3 percentage points. One argument was, look, the FHA had built up a significant reserve based on the premiums that they were charging. Typically, the rule of thumb is you want at least 2% of reserve. Minimum, but they were at 11%. They were at 11%.

Yeah, what's the right number is a good question, but 2% was the statutory minimum. Yeah, but 11% is extraordinary by any measure. That's the reserves that they have built up. So they're saying, hey, look, at the premiums I'm charging, I'm building up this massive reserve, and that doesn't feel appropriate to me. And I'm just going to cut it 30 base points. And the second thing to demand, demand's gotten crushed because the 30-year fixed for the typical bar, not the FHA bar, the typical bar or six and a half,

that's just completely knocked everyone on the market. So lowering the mortgage right by 30 basis points, 0.3 percentage points, I mean, I'm not, I'm not juice in demand. I'm just trying to cushion the blow from the surge in interest rates that have occurred. Well, you are juicing demand. And we did a very in-depth paper, published paper on this back when FHA lowered their premium 50 basis points back in 2013, I think it was, 13 or 14. and we had a strong, not as strong as today by any stretch, but a strong seller's market back then.

FHA announced that it was going to bring in all these buyers. It was going to, excuse me, new buyers, FHA, yada, yada, it was going to be so affordable. And we said, no, no, that's not going to happen. It's going to drive house prices up and they're going to poach customers from the other agencies. And so we did an in-depth study and we found two things. One is, I think 70% of the 50 basis points was translated within months, months into higher prices. And we could demonstrate that empirically around the country. And secondly, I believe something like 80% of the increase in borrowers that FHA experienced came from Fannie, Freddie, rural housing and VA, to less extent VA.

And rural housing lost 40% market share in three months. So what is the purpose of one government agency cutting prices in order to basically pick up share from another government agency? And the result in a seller's market like we have is going to be to drive prices up not 6% but maybe 7.5% all things equal. What we suggested at FHA and they ignored it was rather than keeping with the very high risk lending, which FHA does day in and day out, it's extraordinarily high risk. They are the subprime lender for the country, the federal government is guarantor. Rather than doing that, you could have created a premium structure that had 30-year rates over here that either stayed the same and you use the excess that you thought you had on 20-year term loans that would have built wealth for these hapless borrowers that get FHA loans and have a very hard time over time building wealth because of the high-definery. and everything else. And you would have lowered the risk profile at the same time. And you wouldn't have created the upward price pressure because you would have been soaking up that benefit

with the cost of doing the 20-year loan, the added monthly payment. And so we suggested that and it was ignored. We suggested the exact same thing to Sandra Thompson at FHFA before they did the LLPAs and it was also ignored. The problem is the government's go-to policy is how do we do something that leads to more risky loans. And so if you look at what Fannie and Freddie did with FHFA, it will increase the number of risky loans and decrease the number of lower risk loans. FHA will do the same thing. They will be increasing in the marketplace because they will absorb customers from the other agencies. They will be, and we found. also that as they absorb them, those borrowers take out riskier loans because they're available.

And so we don't think that's a sound policy. Okay. So a lot to unpack there. We need like re-podcast for that. So we're definitely going to have you back. But we're running out of time because I know you have to catch a plane. But I do want to go to Chris and do one more stat because I only because I've performed very poorly so far and I've got to redeem myself.

Okay. Okay. I'll give you the, go ahead. We call it the overhanded softball here, the minus 5.2%. To me, to me, to be, yeah, go ahead. What is it? Minus 5.2%. Pending home sales.

Pending home. You got it. Marissa's on fire. You're on a roll, Marissa. You get the balance. Wait a second. Wait a second. Next week.

You're not using chat GPT or are you over there? Thanks. Maybe she is chat to GPT. Could be chat GPT. We're in the matrix. Man, she's like raising the bar here. I'm going to get on. Yeah, I didn't even have a chance to digest the minus 5.2.

You didn't hear the question and she was giving the answer. Yeah, she was giving the answer. What the hell? Boy, you definitely deserves a cowbell. Yeah. Yeah, get the cowbell out. That's so funny. Okay.

I guess we have time for one. Should I do mine? Go ahead. Well, you're not going to be able to answer it. So you're, you can't. I know. Why do it? Yeah.

I do it. It's a little hard, but I'll just throw it out there. And then we are running out of time. But here there's two numbers, 5.9 and 4.9. And it is related to a statistic that came out today. Are these percent changes? Oh, yeah. 5.9.

I'm sorry. 5.9% and 4.9%. Oh, is it the ECI? Is it in the ECI? It's in the ECI. Is it wages and benefits? Is total compensation? Or total compensation and wages year over year?

For a certain sector. Apropos. Low end? No, no. Civilian private workers. Oh, construction. It's construction. Yeah, so it's the employment cost index, total compensation,

so wages, salaries, and benefits for the construction sector. Year over year, it's up 4.9%. And in the quarter, Q1, 2023, it's up 5.9% annualized. Accelerating. Yeah, I looked across most sectors, certainly the large sectors. None of them are accelerating. You know, either they're kind of the growth rates are stable or they're coming in. The one exception that I found was construction.

Construction. So that goes to, you know, still very tight labor market. there. Only last month did we see any job loss in construction. Perhaps goes to, you know, single family is down, but multifamily is booming. And also we've got a lot of public infrastructure that is now kicking into gear because of the infrastructure plan. So, and we still have labor market issues related to the pandemic, you know, going back to the difficulty of getting immigrants, you know, here into the construction trade. So a lot going on there. And it also just, highlights another broader point is that construction, the industry has shown very poor

productivity growth over the years, very difficult, at least as measured, to increase productivity. And so that makes it, you know, very difficult to keep labor costs down. So I thought that was a... Mark, you said we have a moment to talk about maybe the supply issue. Yeah, sure, fire away. Again, we've come up with what we call Light Touch Sensity. And what we have found is that as you move from McMansion, so the exclusionary zoning that we have basically promotes McMansions

because that's the highest and best use. And by definite, they have to, and it's based on if you tear down a house, you have to have a lot that's worth a lot to justify tearing down the lower price value that's on it. And you have to replace it with an expensive house. And that's why you get McMansions. Builders don't pick McMansions. put on those lots. The economics drive it based on the zoning. And if you allow two units, you would get a duplex instead. If you allow three, four, five, you'd get whatever. In general,

it marches up. And what we found looking at Seattle is as it marches up, the total amount built increases, the total value built increases, but the per unit value declines. And eventually, once you get above three or four units on a parcel, it actually gets less expensive. than a unit that you're replacing, which means you're getting rid of one unit and replacing with three or four, you know, three additional or maybe four additional at lower price points. And that's what you need in order to get this market healthy and have an abundant supply of housing. You need to be building in that middle point and below. And that then gets the filtering going and that then reduces the displacement pressure that leads to homelessness. Yeah, I'm with you. I'm

I guess the only place where I might diverge a bit is, you know, in terms of policy, maybe there's a way to facilitate more of that more quickly because that is definitely a big, big problem, big problem. Hey, Ed, I want to, I want to, because I know you, I want to be respectful. I know you have to catch a plane. I do want to say the one thing that I find so endearing about you is how so excited and interested you are in what you do. It's infectious.

I mean, I mean, how can you not like housing after listening to you? Because you love it so much. The, if you have it for 50 years, then it becomes a little different. Oh, okay. The reason is literally every day I'm getting stuff out of what I call our laboratory. And this morning, I got these maps that Arthur put together. And every day, we call it, we start with data. we turn data into information, but the key is to turn information into knowledge.

And so every day I'm getting knowledge coming up from the laboratory, and then you turn that knowledge into policy and action. And that's what I find exciting. Well, you certainly are exciting and you make everyone around you more excited, which is, you know, that's a rare quality. So thank you. And with that, dear listener, we're going to call this a a podcast, talk to you next week. Take care now.