Moody's Talks - Inside Economics - The One About Housing

Episode Date: January 19, 2024

Robert Dietz, Chief Economist of the National Association of Home Builders, joins Mark Zandi, Marisa DiNatale, and Cristian deRitis to discuss the outlook for mortgage rates, home sales, and construction activity.  The team delves into the immigration and demographic trends affecting housing demand along with the 5 L's (Laws, Labor, Land, Lending, and Lumber) limiting homebuilding today.  Rob's quoting of Tolstoy catches everyone off guard while the wide-ranging discussion made it difficult for the team to come up with a clever podcast title so we took a cue from Friends. Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two friends and co-host, Chris DeRides and Marissa Dina Talley. Hi, guys. Hi, Mark. Good morning, Mark. Getting snow up there in the Northeast? Oh, Marissa, you're not.

I know. I'm not getting snow in Southern California. No, not yet. Yeah. The climate is changing, but not that rapidly. Right. Nice in Southern California, I assume. It is.

It's nice. It's about 60 degrees, maybe, 55, 60. 60? Yeah. Then sunshine. No sunshine, actually. No, it's pretty happy. Chris, that isn't so nice to me.

Oh, I'm so sorry. We are supposed to get rain for the weekend. Well, that's a good thing, right? It is, yeah, as we say here. And Chris, I'm down in Florida, but you're up in Philly. Getting long of snow, I understand. We are. second snow day this week. So if there's some chaos in the background, that's, that's why. Yeah,

we were just talking about this. I thought school days were a thing of the past with virtual learning. I guess not, huh? Snow days? Yeah, snow days. Right. I mean, you could, they don't just immediately get on the PC and do the virtual thing. That's not just automatic, I guess. No, no. They're not corporations there. Okay. Okay. They got bus schedules. Everything is planned, right? So can't just, uh, It just change over so quickly. Yeah. But I know there's some relief in Philadelphia to get snow because I think there was like two years of no snow. That's right.

Some outrageous. Yeah. So anyway, okay. Well, we got an action pack podcast. This is going to be all about housing. And we've got a great guest to help kind of figure out what's going on. And that's Robert or Rob Deetz from the National Association of Home Builders, Chief Economist. Hey, Rob, how are you?

Doing well. Good morning. So when I was emailing you last night, you were getting on a plane coming back to D.C. Where were you? I was in Kansas City this week. As part of my duties for NHB, we try to get out in front of our local chapters. So I travel once or twice a week. I think next week I'm going to New Orleans and St. Louis.

So you travel a lot then. Yeah, a lot. Yeah. Yeah. And Kansas City had thawed out. I watched a little bit of that Dolphins Kansas City game. That was pretty brutal. Actually, yeah, my wife and one of my twin boys actually attended that game in person.

She's from the Kansas City area. So they flew back to D.C. I flew out there. It was a little bit warmer from what they experienced, but it's still been pretty cold. Pretty cold. Well, I'm glad you're safe and sounding on the podcast. And maybe you can just tell us a little bit about yourself. How did you become chief economist?

And I've known many NHB chief economists. going all the way back, I don't know if you remember Dave Siders. You remember Dave? Dave was my first boss. We've been lucky. We had a series of Dave's. We had Dave Siders, who multiple decades and a mark, you work with him a lot. Then we had Dave Crow when I basically applied for this position.

They said, well, your name's not Dave. I said, well, my middle name is Dave. So I kind of got me in the door a little bit there. But now I've been at NHB now for 80s. 18 years. I joined in November 2005, as housing data people will remember, November 2005 was the peak for single phoenix starts. So maybe I've been the bad luck element for the industry there. But yeah, for the last eight years, I've been the chief economist. And my wife and I are both economists. We both got our PhDs at the Ohio State University in the early 2000s. And I've been lucky.

I had a lot of good housing economist mentors. I literally got into housing economics when I was 19 years old. And my principal of economics professor at George Washington University, Professor Anthony Yaser was the housing economist. Oh, is that right? Wow. I thought I was going to do macro and maybe law school or something like that. And he kind of said, no, you're interested in maps. You want to do housing economics. So I've been really, really lucky in terms of being men toward by a lot of really good housing people. Well, I remember the NHB used to have this annual conference. I don't know if you still do at your headquarters at HQ in D.C., which is a really nice

HQ. Are you still there at the same HQ? No, we're still there at 15th and M. Yeah, 15th and M. Yeah. Cattacorder neighbors with Fannie Mae when they moved from Northwest D.C., although I guess in news this week, they may be giving up the lease of that new building, which opened in late 2019.

So kind of a signal on the office market, less of the housing market. But yeah, we used to have an annual forecast conference. That was kind of a casualty of the Great Discussion and the Housing Crunch. Now we do a variety of virtual events. And, you know, really our focus is trying to get in front of builders on the road. So my biggest trip this year, last week was in U.S. Utah, got stuck up highway for three hours when they closed it in front of me. So there's a firm amount of travel on this job.

But it's nice. You really do get to learn that kind of the local commentary from the builders, the remodels, bankers, realtors, to match the data that we all stare at every day. I got a great story about one of those conferences. It was right before the whole world changed for the housing industry. It was like Circa. It might have been 2005. Dave Siders would have been the chief economist then.

Yeah. So, and I had been doing these conferences for a number, not a lot of years, a number of years. And, but this one I was very lugubrious about the housing market. I mean, I was, this, we got a big problem dead ahead. And Dave got so annoyed at me. I mean, really annoyed. Because, you know, to some degree, you know, he was a bit, in particular, it was a bit of a cheerleader. Sure.

And he got really mad at me in a nice kind of way. But, you know, I was walking out of the conference feeling, you know, a little uneasy. You know, because he was definitely mad. And he was a force, you know, he was well known in the industry. And I just felt a little queasy about it. And so there's a hotel right across the street. I can't remember. It's a nice hotel.

The Madison, yes. The Madison, right. So I walk into the. Madison, you know, thinking, I'll just get a cup of coffee. And I'm not making this up. All right. I turn the corner in the hallway and I'm face to face. You'll never guess who.

The Dali Lama. I'm not kidding. The Dali Lama. The oddest story. All right. Absolutely. I'm not making this up. I'm not.

I'm looking at this guy. He's looking at me. And like, of course, his bodyguards were like, what the hell just happened? You know? And I'm going, I know this guy. Who is this guy? And before I could figure it out, the bodyguards ushered him away, you know, assured him away.

And I go, okay, I must be okay. If I just ran into the Dalai Lama. Yeah, I got some karma there. Yeah, did you take that as some sort of karmic sign? The world's on my side. Well, your forecast call proved correct. Yeah, absolutely. That is so bizarre.

It's so bizarre. I think maybe I'm making that up. How could that possibly happen? It's really weird. Anyway, let's talk about housing. And this is a great day to talk about housing. This is Friday, January, the 19th, and we just got the report from the National Association of Realtors on home sales, existing home sales for the month of December. And boy, were they bad.

I mean, I think they fell again in the month from a very low November. I think, correct me if I'm wrong, guys. but I think for the year, if you look at all home sales, it's like maybe just over three million. And that's about as low as it's been in, I don't know, 25, 30 years. Four million, right? Lowest since 1980. Was it four million?

Just over four million. Oh, just over four million. For the full year. Yeah, for the full year. And for December was that just above, what was that number? Was that? That was three. 378.

Yeah. Oh, 3.8. Okay. Okay. Yeah. I mean, that's just amazing, right? I mean, it's lower than in the teeth of the pandemic shutdowns are pretty close. You have to go back to the kind of the height of the financial crisis to see those kinds of numbers.

I mean, the market is really, at least in terms of home sales, taking it on the chin. Yeah. From the demand side and on the supply side, right? But the last year and a half have been pricing out on demand. And, of course, then supply is constrained by the mortgage rate lock-in effect. Oh, yeah. Yeah, right. Exactly. And is that to what you describe what's going on here? It's the lock-in effect. Is that primarily what's going on?

Maybe you can just explain that, you know, in terms of what's going on. Yeah, undoubtedly the market is supply constraint because at the same time, while the volume levels are down, the pricing is up. I think it was up 4% year over year on the data they released this morning. So I tend to think of it as a short-term effect and a long-term effect. The short-run effect is undoubtedly. the mortgage rate lock in effect. So if you're a, you're a homeowner and you've got a two and a half or a three percent 30-year fixed rate mortgage, you're going to be a little less likely to put your home on the market and go out and get a 6.6 percent 30-year fixed-rate mortgage. As rates settle in lower, and that is our forecast, that gap will close and some of that inventory will unlock. So 2024 should see rising inventory levels. But I think in a lot of the business press

commentary, we also miss the long run factor, which is that that housing stock is too small relative to the population and the characteristics of households. And that really is due to what we've indicated is basically almost a decade-long period of underbuilding. So high home prices, despite high interest rates, that seems to be pretty consistent with the story of an insufficient housing stock. Yeah. And I think just to put a finer point on it, I think the average coupon or the average interest rate on an mortgage that are outstanding, I think there's like 50 million or so mortgages out there, is 3.5%. I think you said, did you say that 3.5%? Yeah, I just use that as an example. Yeah. I think that's the number. Yeah. 90% of existing mortgages have a rate less than 6%. So,

well below current market rates. Yeah. Hey, Chris, I mean, that seems that's a very compelling reason for why we're not seeing home transact. The home sales are on the floor. Any other reason that you can think of? Why, I mean, is there anything else going on? Is it simply that that's driving these very weak sales? Yeah, I would think so. It's the supply, right?

It's unusually low level of supply. And that's really the barrier, right? That's what's driving the market and keeping the house prices up, right? That's the telltale sign that it is supply, not the demand. But can I give you a kind of an interesting divergence for this year? So we were talking about existing home volume down at multi-decade lows. New home sales post an increase. Now, why is that?

despite all the kind of the headwinds, and we can talk about all the supply side factors. But it's because new construction is trying to fill the gap. So if you look at total inventory levels, I don't have the data from this morning, but in recent months, new home inventory has been about a third of total inventory in the market. Typically, it's about 12%. So it's not an automatic process. The development process for land can take two to three years. Home building can be a six to eight-month process.

But because of that restricted supply on the resale side, new construction is attempting to fill part of that gap. Yeah. In my kind of simplistic way of looking at the data, say we're at 4 million existing sales, typically it's kind of closer to 6. So there's a shortfall of about 2 million relative to kind of typical home sales level. It goes up and down and all around, obviously, based on conditions, but based on the mobility of the population cutting through the kind of business cycle. that's kind of the number you get. And with new home sales, we're at 600K, roughly speaking, and kind of typical would be 750K.

So it's down, but it's not down nearly as much as the existing market. And my thought or my explanation for what's going on in the new home market was also that builders have effectively cut price. In the existing market, as you pointed out, no one's cutting price. Prices are still rising in most of the country. but for the builders, they are effectively cutting price in lots of different ways. The so-called interest rate buy down, 3-2-1 buy-down seems to be the most popular way of doing it. But if you talk to a builder, and I know you do all the time, but when I talk to them, they say,

if you kind of translate these incentives, it's about 10% of the price of a home, and that's helped them support the market. Is that consistent with your view? Roughly. I think that may be a fairly good representation of particularly larger builders that have larger builders. Right. And that market share, if you're talking like the, say, the top 100 builders. And there are 50,000 home building companies in the country. Really? The top. Yeah, it used to be 90,000 back before the Great Recession. So, but yeah, yeah, you're talking about 40% of the market. And mortgage rate buy down seem to be the most effective and the most utilized. I think if we look at the census data

on new home prices, it's down about 6% year over year. I think the last thing builders want to do in the steps of incentives is an outright price cut, particularly in an environment where building material costs continue to edge higher, although that has slowed as well, which is probably a good sign for inflation moving forward. I think that the, The trick actually, the challenge for builders moving forward over the next year, year and a half is as interest rates settle in a little bit lower, how they begin to deal with buyers who expect price cuts or mortgage rate buy downs and begin to say, you know what, that was really compressing some margins. Now we're moving to a more normalized market. We're not there yet, but I think that's likely to happen. Excuse me.

Now to get home sales back up, we need an improvement in affordability. And that can happen in three possible ways. One is lower rates. Two is higher incomes. Three is lower house prices. Prices don't seem to be coming in. Incomes are rising, fortunately. It looks like we've avoided a recession.

but the key here, I think, is mortgage rates. And you mentioned in your forecast that you have mortgage rates coming in. They peaked at, the 30-year fix picked it around 8% back a couple three months ago. We're now down, as you said, 6-6. Where do you think rates are headed here? Yeah, we've gone back and forth on this every month when we update our forecast. Right now, I think we'll likely see maybe at the average for the fourth quarter, 6.3, 6.2%.

We're more conservative than some other forecasts. And from the 10-year treasury rate and sort of say, okay, here's where we think the 10-year treasury rate's going, given expectations of monetary policy and economic growth. But something that has changed in the last two or three years is that the spread between the 30-year fixed-rate mortgage and the 10-year treasury has really expanded. So like you were saying back in the fall, when we were touching 8% rates on the Freddie Macs survey, the spread was about 300 basis points. The average for the decade following the financial crisis was about 160 to 180 basis points. So you kind of have to make an assumption of what's going to happen to that excess spread.

If you're looking at a forecaster who's saying, you know, we're going to see sub 6% rates by the end of the year, which I think is, too optimistic, they're probably making an indication. I think that spread is going to come down pretty quickly. And there's a lot of guesses on, you know, why that spread is expanded. I think a lot of it likely has to do with quantitative tightening and the Federal Reserve's allowing the mortgage-backed securities, the $2.7 trillion of MBS that they built up in their balance sheet, letting that roll off, and then some uncertainty with the housing market itself. So you froze just for right when you got to the kind of the bottom line, where you thought mortgage rates were going to go. So we're at 6-6.

So let me ask it this way. A year from now, and obviously forecasting, anything is hard, forecasting interest rates is very intrepid. So, you know, with that as a stipulation, in your base case, most likely scenario, where do you think mortgage rates are going to be by this time next year? Oh, so this time next year, we're looking at close to 6%. Close to 6. Yeah. What we've been discussing is the fourth quarter of this year, 6.3, 6.2, and then move closer to 6 by the time we start 25.

And let me ask you this. In the long run, abstracting from the vagaries of everything, you know, what should the 30-year fixed-rate mortgage be? You know, if you're kind of a prudent planner in the housing ecosystem or your potential buyer down the road, what kind of is a normalized mortgage rate in your mind? Talking about normalized variables in the post-financial crisis housing market is always dangerous. But I think we're probably headed down to about five and a half, maybe a little bit lower than five and a half on the 30-year fixed-rate mortgage. that's important because if builders or buyers are thinking that we're going to see three and a half percent again, they're kidding themselves.

And that can play an important role in terms of those buyers that were priced out of the market and are sitting on the sidelines. And if they're waiting to get their neighbors, you know, 3% rate, they're going to be waiting a really long time. Hey, Chris, I think we have rates coming in. if you told me we're closer to 6% on the 30 or fix a year from now, that sounds about right. And I think we have rates in the long run normalized settling in between five and a half and six. Is that right?

Five and three quarters? Okay. Do you want to just decompose that and describe why we think that spread that Rob talked about is going to compress? I sure. I think you already alluded to some of the reasons, right? You have the Fed, which was a big buyer of mortgage-backed securities during the pandemic, no longer purchasing. So that's a fairly substantial investor, you know, no longer in the market and who's going to replace them. You also have a number of foreign central banks that also were big buyers also retreating, right?

They've got their own issues, right? So they're not necessarily participating. So, you know, that alone, at least in the short term, that would see spreads widening out in order to clear the market, right? We have to attract investors back in. I think over time, we will see more investors coming in. We also see that the mortgage-backed security market will be a bit smaller, right? We're not originating as much, so things will normalize along that dimension. There's that uncertainty in the future, I think interest rate uncertainty.

Certainly is playing a role in widening the spread. as Rob mentioned. Then I think there's a lot of investors, MBS, mortgage-back security investors also trying to understand what the prepayment risk is going forward, right? You're originating these loans today, somewhat even close to 8%, not too long ago. Well, if rates really do come down as we expect them to, you're going to start to see refinancing pickup of that paper. And so there too, the life of those loans is going to be relatively short.

and the investors have to charge up for that as well. So we're in this odd position here, but over time, I would expect to see that spread narrow. I'm not convinced it goes all the way back to the historical level because I don't know that that demand is that lack of demand out there. It's a pretty big shoe to fill when it comes to the Fed. But I think we will see the spread narrowing as things, as we get the all clear signal. in the economy overall. So do you think it would be reasonable to see the spread go down to 200 basis points rather than like 180 or 170?

Yeah, that's been my 200 certainly, but it could be a little bit less than that, maybe 180, 190, somewhere in there. But who knows, right? There's lots of, a lot of factors here, as you mentioned. I think all those factors make sense, but kind of the simplistic way I think about it is that the key here is the yield curve. the shape of the yield curve, right? Because right now, the curve is inverted. Short rates are higher than long rates. So that's an expectation that in the future rates are going to go lower. No one really

knows where. And that's the prepayment risk that you talk about, that investors are nervous about how low rates will go and will they get bought out of these mortgages at these higher rates? But once the yield curve becomes more positively sloped, and it feels like we're heading that direction, the Fed's going to start cutting interest rates, the short rates are starting to start to come down. and it becomes more normally shaped, then I think investors kind of feel a little bit more comfortable. The concerns around prepayment risk start to abate a little bit, and that's when that spread starts to come in in a more meaningful way. Does that, does that resonate, Rob? Does that make sense? Yeah, and then it sort of asks the question about where is the anchor rate or the equilibrium rate

for the 10-year treasury, and that should look like the nominal GDP growth rate, I think. You're speaking my language. That's exactly the way I think about it. Okay. Yeah, exactly. Right. I get asked that. That's, that actually other than who's going to win the presidential election.

Yeah. Yeah. Yes, exactly. Yeah. Where does the, where does the 10-year treasury rate level off? And so I've just been saying, okay, well, you're asking what's the nominal growth rate for the U.S. economy? And that's, you know, pick your favorite forecast or whatever they think the equilibrium nominal growth rate is.

I'm your favorite forecaster, right? Okay. Okay. Okay. Four percent. 4%. Yeah, we've been saying 4%. 4%. Okay.

Very good. Good. So, but here's the thing. Okay, if mortgage rates go from 6.6, let's say optimistically to 5.6, let's just say. It's down on a hundred basis points. And we avoid a recession. And house prices keep rising. The numbers don't square.

I mean, affordability isn't restored with those kinds of. a number. So what does that mean? What does that imply? Does that mean we're in a world of very low home sales, mortgage originations for a long time to come? Well, so you listed four ways that we can sort of address the affordability crunch. Can I give you a fifth one? And I'm not going to shock anyone here listening. I gave you three. I was the what's the what's the four and five? I thought you listed four off. Incomes, prices, rates. Oh, okay. So I was going to give you four. Okay. All right. Here's the fourth one. I'm not going to shock you as the chief economist of the National Association of Home Builders.

We need to build more. We need to increase the supply. But that's through price. That works through price, though, does it? That's right. Price is the outcome variable for all of this. But I think what it suggests is that 24, 2025 and 2026, we will see an increase in supply. Some of this is kind of building in the system.

There's certainly some challenges. Do we have enough workers? Do we have enough watts? What's the lumber market going to do? We've already seen lumber futures pricing begin to increase. But, yeah, I think the economics here is such that we don't have sufficient supply. And inventory is limited. And we're likely to continue to see some nominal price growth.

Yeah. Okay. So that makes perfect sense to me. we need more physical supply. We need more units ultimately. I mean, that's the only fundamental solution to the kind of box we're in here. And,

you know, at these prices, you would think that, you know, you get pretty good returns if you're a builder, right? I mean, your return on equity, your return on capital should be pretty good.

So there's a lot of incentive to build at the end of the day, you would think, right? So there is, but yeah, it's important to keep in mind the question is whether you can build, and that's often related to is the zoning sufficient. Can, you know, for the private builders, and here we're talking about 60% of single-family construction,

can they get access to financing? You know, I think we typically think of the market in terms of the big publicly traded national builders, but for that 60% of the market, they've got to go get what we call AD and C loans, acquisition, development, and construction loans. The interest rates on those loans is set effectively by the prime rate, so short-term rates. The average annualized effective interest rate on a development or construction loan in the United States right now is 13%. So that is going to cause a constriction in the land and the lot. Where do you get that data? That's from our, yeah.

Your survey? Quarterly survey. Early survey. Okay. developers, yeah. So, you know, it's availability of financing, cost of financing, and then policy around land and lot development. And so that right now we've seen a little bit of an increase in lot supplies. I think that will reverse itself, and lot supply availability will decline by the end of 24 as single family home building picks up.

The result is that we've got, I think, a fairly moderate increase for next year for single family home building, about a 5% gain. And then the ability to build in 25 is really going to be dependent on how many lots that we can bring into the system. Yeah, let me take a step back. So we're saying we've got this affordability issue. We're going to get a little bit of relief from lower rates. We'll get a little bit of relief from higher incomes, presumably, continued non-recessionary

economy, more jobs, continued wage growth. but we still need to see, you know, relief on the price side. And the way that's going to happen is, in part, we're going to see more new building. And that goes to another issue. And that's this so-called affordable housing shortage that we've had this kind of shortfall in home building, really going all the way back to the financial crisis. And there's a lot of estimates as to the size of the shortfall. I mean, how many homes are we down?

And, you know, we've got an estimate. I won't tell you what it is because I'm curious what your estimate is and how you get to it. Yeah. Just to give folks some context with regard to how big a deal this is. I mean, how short are we? So we adopt, I think, a fairly conservative methodology. There's a lot of numbers out there, some as high as $8 million. We estimate the housing shortage at about $1.5 million.

And you're speaking, you're speaking, you're like this, we're through a mind meld. Oh, that's really funny. Okay. That's good. Because usually when I give that estimate, people go, that's way too small. Yeah. And the numbers that we've seen out here. So let me give you our methodology.

We take the American community survey. So the kind of the deep geographic survey, the Census Bureau runs. We look at vacancy rates at the metro level. We try to age them up to what we think they look like because there's a bit of a data a leg. And then we basically perform a magical calculation and say if overnight you could add a certain amount of housing stock to return the vacancy rates to their long-term averages, how much is that that housing stock addition? It works out to about a million and a half. Now, we're sort of, it's a mix of single family and multifamily. And what it represents is

about one year's worth of home production. So that's what we think the shortage is. And And we do believe that between 2025 and 2030, we will reduce that housing deficit, maybe by about 100,000 homes a year. Now, an important footnote to this, which is, I think some of the larger estimates, three to four million, I think part of the difference in those calculations is what we're counting as housing supply. And I give you the big one, I think, results in the difference, which is that over the last five to seven years, particularly over the last few years, we've seen an increase.

in the supply of ADUs, accessory dwelling units. Freddie Mac estimates that are about a million and a half of them. Now, they're not a perfect substitute for an apartment or certainly an entry level single family home, but they are holding a household. If you build the attic or the shed outback that's acting as an apartment, you're turning an owner-occupied home effectively into a duplex with a rental unit. Well, if we've added about a million and a half of those, you're that you take that right out of the housing shortfall. And so there's some other elements like that. But I think we're looking at a shortfall about a million and a half units. And it's a, it's a multi-year process once we get the industry really kind of operating to reduce that number.

First, we're at one seven, aren't we last day looked? That's right. So I think we use a very similar methodology that Rob described. We do. We use the vacancy rates as well. We get pretty close. But then we do add in, so we make an estimate of suppressed household formations. So folks who didn't, you know, they're living at home, they're living with roommates. They're just no option for them to rent or buy. So if we look at household formations over the last few years and we try to calculate how many of those kind of inherent or latent household formations there are, and that works out to about an extra, what, three, 400,000 or so.

Yeah. Yeah, that's funny because what we do. on that is we assume that those households are basically locked in for social reasons. So it's a more conservative approach because we have to advise people who have to go borrow money to buy land. Fair enough. Yeah, it's an estimate, right? I'm not sure what will happen to those folks.

To your point, they very well could just get locked into that arrangement, especially as they continue to age. But some of them we assume will be coming back. It sounds like, Rob, that you're saying that the underlying rate of supply that would equal demand, underlying demand for new housing, is about 1.5, 1.6 million units per in. Right. Okay. We're very similar.

But did you happen to catch the Congressional Budget Office released a report yesterday on the nation's demographic outlook? Did you see that? No, not yet. Oh, gosh, you need to go long. Okay. You need to go low. They are now estimating that we're getting much more foreign immigration into the country, which is intuitive, given what's going on, than originally estimated. It's not a million immigrants every year.

Last year in 2023, I think they're estimating two and a half to three million immigrants. Oh, wow. Yeah. I'm not kidding. And then they have a forecast, and the forecast has immigration kind of over the next couple of couple three years normalizing back to a million. But I'm not so sure about that. You know, I mean, maybe, but you know, maybe not. That's a lot of people and that they got to live somewhere, right? So 1.5, 1.6 may not be the number. But you're exactly right. And in fact, that actually reminds me

when we were looking at our demographic profile of the U.S. I mean, typically in front of audiences talk about how the millennials were so much larger than Gen Z. And what I've seen at the age ranges in the early 20s, so kind of members of Gen Z, there's more of them in our current updates of that demographic table. I wonder if some of that is immigration. Yeah, right. Here's the other thing I wanted to point out. That 1.5, 1.7 million, it's probably even more than that in the affordable part of the market because the high end of the rental market is oversupplied. I mean, we've got all these big towers, apartment towers going up, luxury towers going up in bigger, like in D.C. and Philly, Chicago, I don't know if in San Francisco, but Nashville.

Nashville, yeah. And that's oversupply. That's where we're seeing a lot of a higher vacancy and decline rent. The affordable part of the rental market, the shortfall will be even more serious than that. Yeah, I think the problem is definitely concentrated in that lower. end of the market as one builder who builds in the affordable arena as well as in market rate said is that the challenge for builders is that we're being asked to build 20-year-old properties and new construction by definition is new construction. So the filtering process has been broken by insufficient supply. From a policy perspective, it's why the low-income housing tax credit and the tax-exempt bond programs are so important because that really is the only way that we

that new supply that's income targeted to, you know, the people who need it the most. And then on the for sale side, it's kind of the same challenge, the kind of housing that we need the most, entry level, small lot, small square footage, it's the most difficult to build because of zoning reasons, per unit costs, things that make the market shift to that higher end. So, yeah, definitely there's the challenges in that entry level. space, both for rent and for sale. Yeah, I'm going to come back to, I want to play the stats game, and then I want to come back to why this shortfall has occurred.

You know, you've already alluded to many of the reasons, but go through them in a more systematic way, and then talk about the policy response. You know, what could policymakers do to help, you said 100K,000, you know, we're going to whittle down this showfall 100k, you know, per annum. That means I'm going to be retired, long retired. You know, I may be in the grave by that time, you know, we get enough housing unit. So that doesn't feel unless we, and I'm assuming that, assume, that's assuming no policy response, you know, that kind of. Right. No big dramatic policy focus. It's going to take some time. Yeah. It, you know, it took us 10, 15 years to get into this box. I guess it's, you know,

logic would dictate, you know, with a little bit of luck, would still be 10, 15 years to get out. But anyway, I just, before we go to the stats game, hey, Marissa, I've locked you out of the conversation only because I've got all these houses over here. I understand. They're like deep into stuff. This is their thing.

This is their thing. I get it. Yeah, but any comment on the conversation, you know, up to this point in time that you want to make? Yeah, I had some running commentary as you guys were talking. I mean, one, back to the beginning of the conversation. about home sales reaching a 20, 30-year low. I don't know if you saw the mortgage apps data for the past few weeks.

It's really, really popped up in response to lower interest rates. It's up down all around, right? It's a weekly survey, and it's very sensitive to interest rates. But it seems to suggest some demand, at least coming in to 2024 on the home sales side. So and Rob knows, I'm sure the NAHB builder's sentiment survey looks looked a bit better too for the year. So perhaps we get, you know, some more supply this year. Right. Can I just one quick comment on that?

Yeah. I think it's an important point. I'm curious what the other guys say. And we'll come back, Marissa, sorry. Yeah, that's okay. On the mortgage rate, it feels like buyers are becoming increasingly conditioned to think that it is. It isn't going back to three and a half on a fixed mortgage rate. It's five and a half to six.

And so once mortgage rates start getting closer to six, it feels like life comes back into the market. So you agree with that, Rob. I see you shaking your head. I hear that on the road all the time. People sort of say, is there a magic number? Well, there's no magic number. But if we could see market rates get to about 5.9 percent, the feeling is there's a lot of demand that will be priced back in. You mean if it has a five handle as opposed to a six handle?

That's exactly right. Yeah. I think that's right. Sorry, Marissa, go ahead. No, that's okay. And then just question for Rob, you know, I think when I go out and I talk to clients and we talk about the housing market, probably the most common question I get is this question of why don't builders just build more?

Because it seems like there's a financial incentive there, given lack of demand. And you mentioned the, the, the, you mentioned. expensive cost of financing or the lack of financing for a lot of builders, especially smaller builders. I think number two, you would say zoning laws in certain parts of the country just make it more difficult to build. I'm wondering what you're seeing on the cost side of building, just in terms of labor and materials. Can I stop, though? I want to come back to that. I want to play the stats game. And then I want to come back to why the shortfall. And that's where you're going. It seems to be going. Yeah, it's a really good question.

pause, but that's a really good, yeah. But let's do the stats game first before we do that. And just to remind the listener, the stat game is we each put forward a statistic. The rest of the group tries to determine what that is through questions, deductive reasoning, clues. The best stat is one that's not so easy. We get it immediately. One that's not so hard that we never get it. And when it's apropos to the topic at hand, all the better.

And we always begin with Marissa. That's tradition. Sorry, Rob. You'll see how this is done. She's way too good at this game. Awesome. Go ahead, Mercy. You're up first.

Okay. My statistic is 8%. It's not what the 30-year fixed rate mortgage was two months ago. That's exactly what I was going to say. That's what I was thinking. 8% was worrying me there. It's housing related? Mercer?

It is housing related, yes. Is it come from the real the home sales report that just came out this morning? No. Construction permits and starts something. Yes, it comes from that report. Oh, 8%. Was that the gain in single family starts? Close, but no.

Completions, increasing completions. It might be the actually, I think it is the increase in completions too, or it's close to it, but that's not what I'm thinking of. This is a percentage of the partial. This is something. What is that? This is a percent change. Yes.

Some statistic in that that that's right. That's right. Okay. Yes. Um, and Rob, you said overall starts. I was thinking the monthly change and single family starts. Single family starts.

Uh, because multifamily was down a little bit, I think. And permits? Permits. Yeah. No. No. Marissa.

Not. permits? It's the, it's the change in multifamily starts over the month. So, oh, it didn't prove. Back a course. Yeah. Single family starts were down almost 9% over the month. Multi-family starts were up 8% over the month. And multifamily starts have been, sorry, Rob. I was just going to say that the strength in multifamily has been a real surprise. You talk to apartment builders and they keep saying, where is the financing coming so much so, that some people actually question the data. I think the data are right.

I think we've seen a shift in where apartments are being built and who's building them, different financing models. But that 8% number is really kind of a striking one. We're at 400K, is that what it was? Annualized starts in multifamily? Yeah, 433,000. Yeah. Yeah.

So multifamily starts, they're down about 8% if you look, year over year, but they've been basically rising since the middle of 2020. 23, they had fallen quite low. So they're on the upswing, well, single family starts are still kind of depressed, right? So if you look at, if you look at where they are relative to history, I mean, they're down to like late 2020 levels. So they've really been going nowhere since the end of the pandemic in 2020. You know, Rob, my explanation for why multifamily starts have held up is just a lag. You know, it just takes, you know, these. financing deals take a long time to kind of come to fruition, to get going to come to fruition.

And these numbers are still reflective of credit conditions before the banking crisis. And as we move into this year, at some point it's going to feel things are going to come off really pretty quickly because of the tightening and underwriting that occurred after the March banking crisis last year. Does that, does that resonate with you at all? Yeah, our forecast for 24 is a pretty notable. drop in multifamily starts. And when we've looked at the geography of where multifamily permits were pulled over the last year, there was a decline in the central business districts and a rise in ex-urban, small cities, and even rural areas. The market share just shifted out. And so the builder who's building in those markets is less likely to participate in maybe some of the big private

data surveyors, but is being picked up by census. So we think there's been a shift of who's building multifamily as well. And by the way, that that shift means more two and three story wood frame multifamily and a little smaller set of the steel and concrete. Yeah, that makes sense. And the other thing to note is completions still remain very elevated because that's a reflection of the starts that have been happening for the last year or so. And a lot of those got bottled up in the pipeline because of the pandemic and the impact on supply, you know, building materials. appliances and labor and that kind of thing. So we should get up for completion.

Yeah, I was just the incredible number of multifamily is one million apartments under construction. Yeah, yeah, right. Barely near the total we last saw in 173. Right, right, okay. Okay, good. So, Rob, you want to go next? Yeah, I'll give you one.

I'm new to this game, but it is something we talked about earlier in the call. So 19%. Oh, a percent of. of cash only buyers? Not a sales transaction. Is it related to construction? It's related to the demand for construction. Is it 19% of some demographic?

Yes. Okay. Or purchase homes. Is it? Oh, first-time buyers. Close to that. Let's think potential buyers who aren't potential first-time home buyers. Potential buyers.

Is it some age group? Yes. Okay. 25 to 34 year olds who could be potential home buyers, but who are not. Okay. 19% of you did talk about it earlier. Living in the differences in the housing deficit. Oh.

So, okay. So of 25 to 34 year olds, 19% of those folks have the finish. financial wherewithal to be. Chris got it. Oh, what was it? Live with parents. Yeah. 25 to 34 year olds.

That number peaked a few years ago at about 22%. It did move down during COVID, so we did get some unlocking as household formation stepped up. But it is roughly twice the rate that we had two decades ago. So 19% of 25 to 34 year olds live with their parents. Right. Wow. That's high.

Yeah. It was one out of 10. back, you know, closer to the year 2000. So if we think about the long-run demographic effect of underbuilding both in the for rent and the for-sale market, it's this increase in failure to launch or the tenant who lives on the parent's couch that's really seen the impact there. And then, of course, that has big impacts on everything else that we track from a macro perspective in terms of declining marriage rates, the declining fertility rates. impact that's going to have on Social Security and Medicare revenue sources. So I think it's a,

you know, if you kind of connect the circle on this in terms of housing and then impact on demographics, that number really is the key one. You have any data on the kind of the income level of the families that these folks, these kids are living with? No. In fact, that's something that we've talked about doing a colleague on my team, Natalia Savinsky, who I went to graduate school, with and known for 20 plus a year. She looks at this data once a year, and that's something we should check out. Just say, yeah, just anecdotally, because I have a large family, so I see everything. Some of these kids may be there because it's by choice, and they're not leaving.

They're just going to inherit that home, right? That's not, no one said that, but that's exactly what's going to happen, you know? They're just, it's a waiting game. Yeah, it's just, I like where I live. I'm very comfortable. And these are nice homes. These are pretty affluent, you know, folks. And no reason to launch, it's not a failure to launch.

It's just no interest in launching. Fair enough. Yeah. And that gets back to what we were talking earlier, the housing deficit. Are those young people? Can that be unlocked? And in some cases, because of social changes, maybe the waiting game. But in other cases, I do think it is people who are looking to make sure they can pay down student loans or looking for that right entry level apartment.

Right. I think child care and entry and child care and elder care also play a role here, right? Absolutely. That multi-generational household is just more economical. That's a great point. That's part of it too, right? It's definitely part of it. Yeah, definitely part of it.

We have a lot of builders that talk about building for multi-generational families, particularly in certain immigrant communities as well. Okay, Chris, you're up. What's your stat? 3.3 million. Housing related? It impacts housing. I would say it's the most important.

That sounds like the immigration number. It is. Very good. Ah, ding, ding, ding, ding. Wow, in one. 3.3 million. That's the CBO's estimate of immigration last year in 2023, and their estimate for immigration, net immigration.

this year in 2024. Then they have going down to 2.6 and eventually coming into... Do you believe that forecast, 2.6 back to a million? I don't know what else they're assuming. They're the wall. Maybe, right? You have to be assuming something about policy. Yeah, right.

Something about policy. Going forward here. Average over the last decade was 900,000 per year. Right. Just to give it the context. So, yeah. I think we're completely missing the number. number of homes. We're, you know, increasingly, we're going to need a lot more homes, a lot more homes.

Yeah. If this, yeah, it's sustained, yeah. The work, based on the work you did, that you got to point out to people, assuming immigration does at some point normalize, and it will, you know, it will normalize. And you look at 10, 15 years from now, what then is the demand for new housing based on, you know, a new household formation? Let's see you, Chris. Oh, it's negative, right? we start to or just it's just keeping up with replacement right you do have natural disasters you have loss of housing stock but yeah if you look out now maybe this is more 30 40 years in 30 40 years yeah right but that if you assume that immigration does normalize actually comes in a bit at that point and you have the fertility rates no coming down you can say what you want about mortality rates

I guess. Yeah, the long, long term outlook is certainly that we're not going to need a million-plus homes built per year. It's going to be far less. We might be moving more to more. By that point, maybe there's more restoration, more renovation that goes on. But yeah, these greenfield lots, it's going to be a different building environment, at least in my view.

I don't know, Rob, if you have a different. Yeah, no, we think that begins to affect the multifamily market. the next 10 to 15 years. If you just look at the demographic tables, I do think we're going to see a big shift in what home construction is because of those factors that begin to take hold in the 2030s. And one sort of leading element of that right now is the share of single-family homes that are built as tear downs. So you know, see in any big northeast city, the suburbs, those inner suburbs, great lots, great commuting locations, but older housing stock. Teardown construction right now, by our surveys is about 10% of single family home building.

I think over the next five to seven years, that chair goes up to about 15%. So 500 basis point gain. And that's a shift in who builds too, because that kind of construction is more likely to be undertaken by smaller private builders. Are you seeing an increase in tear downs to put up more units?

Tear down a single family and make a do. Yeah, not enough, but yes. So in some communities, you do have subdivision of a lot by right. So you can create two units or you can build a duplex. A good example of that, like in Nashville in certain neighborhoods, they're building two quasi townhouses. They're not single family attached, but they might as well be on a prior lot that contained one home. So it actually is increasing the stock.

But in a lot of areas, the zoning just doesn't permit that. And so what you're seeing is a larger, more energy efficient, more resilient home, replacing an older home. I'm seeing even with the areas that are adopting, you know, looser zoning or reform their zoning, it's not an instant solution, right? You're not going to see people really jump on that opportunity until the economics really work for them. That's right. Okay, I'm going to give you my statistic. I'm mixing it up a little bit. This is just a big clue, not housing related.

Yeah. Yeah, just to mix it up. Because it's another really interesting stat that came out this week. $371. Retail sales related? Nope. That came out this week. That did come out this week.

Great number, by the way. Christmas sales were strong. Pretty darn good. Shipping cost or commodity related? No, no. No. Inflation related. No.

No. I mean, indirectly. Think the American consumer. Think what drives the American consumer. Oh, income? Yeah. Oh, is it the median weekly earnings? Median weekly earnings.

That is, that $371 is the real median weekly earnings of wage and salary workers. It's deflated by the CPI, so it's an $80-284. So, you know, kind of misstate the level isn't so important. I just use that as a way to play the game. But what's important is that is now firmly rising. So this is after inflation, median in the middle of the distribution of workers, their wages, their earnings on a weekly basis are now rising strongly. I mean, over the past year, 2.2 percent, that's strong. and it's now above what it was pre-pandemic.

And my sense is that given the data we're seeing coming into this year, by the second or third quarter, real median weekly hearings are going to be back on trend. Meaning if I go back prior to the pandemic, look at the growth rate in that data, extrapolate that out until now, to the early part of 2024, we're going to be back on trend here in the not too distant future. So, you know, despite everything,

despite the pandemic, despite the Russian war, despite all the inflation, everything else that's going on, here we are, you know, back on track, you know, compared to, you know, now you could say, well, why do we think the pre-pandemic trend was a good thing? But it wasn't bad. It was, you know, it was okay in the grand historical scheme of things. It was pretty good because we had been through a number of decades of basically flat real incomes, median incomes, because of the skewing of the income distribution. But we are, that's my loom cube. I just ran out of juice. So that, world's not getting any darker. It's just my room, we just got darker. But I take a lot of encouragement in that. You know, I do think the economy is performing well. It's starting to show up

in, you know, people's real incomes. And I think people will recognize it here going forward. What do you think? Good statistic? Yeah. Marissa? Okay. Good. Yeah. Yeah. What? You're smiling. Because I was considering that as my statistic. Oh, is that where are you? Okay. Okay. Okay. Very good. Do you, Mark, do you see a big pickup in productivity growth? Do you think productivity growth is going to be fairly constant as we move forward over the next five years? I mean, a lot of talk about AI and other elements.

I mean, that seems like the driver for wage growth in equilibrium. I, my, you know, Rob, I'm, I'm optimistic. Maybe I'm, I'm reading too much into the data, but it feels like, you know, productivity growth has picked up. Now, productivity growth will have and it will flow, you know, so this could be just a head fake, you know, this recent acceleration. But it feels like it might be resting on more fundamental factors. I mean, I don't think it's AI. That's definitely not playing a role yet. I think it will probably second half of the decade, but not now. Yeah. Remote work, the evidence there suggests that probably not, you know, helping. I think it will ultimately, but that's a reasonable debate, but I don't think that's playing a big role at this point. I think the thing that's driving it, and I say this more without, you know, deep research, just my intuition and looking at some of the data is all the quits that occurred back a year two, three ago. There was, you know, remember the, the mass exodus from jobs. And people move to jobs at the, that, they're better suited to in terms of their education and skill. They're much happier. If you look at the surveys, the conference board runs this cool survey about, you know, how do you feel about your job? And people feel really good about their job because they quit and got a better one, higher paying one. And I think there was a bit of a learning curve. You know, once you quit one job, go to another, it takes a little bit of time to figure out your new job. But I think that people are

figuring that out. And that's, you know, that should result in some productivity goal. By the way, I think this brings up a good question about the construction industry. Maybe you can show it some light on. If you look at productivity growth in the construction trades, it's been pretty abysmal. In fact, there was a recent paper of Austin Goolsby, who's now the president of the Chicago Fed, he was a professor of University of Chicago, had a paper out about a year ago, too, talking about the shortfall in productivity growth in the construction trades, which is, you know, gets back to we need more homes.

And if we, it would be really nice if we had a construction industry that was much more productive and productivity was improving. So what's going on there? I mean, is that, is that, is that productivity shortfall real? And what's driving that? It really is. I mean, sort of kind of a rough measure that we do since 1993. So over the last 30 years, productivity growth and residential construction.

instructions up like 13% compared to almost 50% for the U.S. economy, total workers. So the Austin's paper, Raven Malloy at the Fed, I know Ed Glazer and some of his students are looking at this. It's real. The question is why has productivity growth lagged in the sector? There's a lot of different explanations. I think some we can probably discount. I've seen some academics suggest maybe it's monopoly power that seems implausible in an industry that's got 50,000 firms. You know, just the nuts and bolts, literally how we build homes really haven't changed a lot. There's a lot of off or sorry, on-site construction. 97% of homes are built on-site. Three percent are built modular and manufactured, but that share was 8% 20 years ago. So that share

has actually gone down a lot, even though people are certainly talking. talking about it a lot more. I think, and I'll throw this out there, I know people may disagree with me on this, but I think if you look at the growth in regulatory burdens and barriers, things like zoning, just the general incremental elements that we add to what takes to build a home compared to 30 years ago. And that does yield a higher functioning home at the end of the process, but it's more expensive. It's just more expensive to build today, both land development and construction, and that has likely restrained home building as well. So it is one of those important factors along with zoning and financing issues that I think has gotten us into this housing

deficit. Interesting. So that doesn't augur well going forward, though, because regulation is not going away. No. And moreover, you know, the industry is putting a lot of time and effort. I mean everyone, suppliers, industry associations, builders into recruit, train and retain and retain. workers, bringing workers into the sector, you know, reaching out to trade schools and community colleges. We estimate that we probably need to be adding about 700,000 workers on a gross basis just to kind of tread water with the industry's workforce. And from the productivity perspective, productivity is likely to go down before it goes up.

And the reason why is we've got a big wave of retirements coming. that means older human, you know, high-skilled workers leaving, younger workers is going to take some time for them to get up to speed. And so productivity is likely not to show a big gain in these data, at least in the short run. Okay. So this is a nice segue into back to where we were prior to the stats game. And that is what is driving, what has driven this shortfall in housing and particularly affordable housing? What are the factors? And you mentioned a few, but maybe you could just going to go through that a little bit and give us a sense of that. Yeah, this gets to Marissa's a big question here, which is we've been saying since 2014,

2015, and it was more of a warning back then. But we identify a set of factors that we think are responsible. I've sort of called them. I hope it's not too cute, but called them the five Ls that we lack labor. We lack lots to build on, lending. We talked about financing to builders and develop. We've had issues with the lumber and building material availability. That was particularly a COVID era.

And then the last one is that kind of broad category of laws and regulatory issues, things like zoning rules, incremental gains and building code requirements. I've seen some pretty insidious forms of exclusionary zoning pickup around the country. It was in one market recently to remodel the exterior of a home. you had to repaint the home in a certain kind of expensive paint. When I asked a community official why that rule was in place, he said, well, to maintain community character. And my reply to him was, are we talking to the homes or people?

He didn't that response. But you add all those things together, labor lots, the financing. It's just been a supply-constrained environment for home building. I mean, since we worked off the glut of inventory that came out from the great financial crisis. And as you said earlier, it took years to get us into the situation. It's likely to take years to get us out because there's no single, simple, scalable solution. If any analyst is saying, if we fix X, we're going to get a big supply response, they're kidding themselves. It's going to take efforts on all those different factors to build up the supply channel to get more for rent and for sale.

housing on the market. The five L, kind of at the number one L, would you put that at zoning, exclusionary zoning, or would you put it financing? What would be the top L? Yeah, if you ask builders, it depends on the market. So if you're in a high growth market like Texas, they're going to tell you it's labor, undoubtedly. They're going to say the availability of skilled labor is the top challenge. That prevents us from scaling up the amount of home building we do. In more medium-regulated and highly regulated markets, they're going to say it's laws and regulatory requirements, particularly zoning in terms of getting land into the system, but also just the general growth in regulatory costs. We do a survey once every five years of land developers and builders and try to

estimate what's the share of the final home sale price of a newly built single family home that's made up in these regulatory costs, and we estimate it's about 24 percent. And that's consistent with some academic research that's come out over the last few decades as well. So it's an important part of the construction process. But labor and these legal and regulatory burdens that affect law development, I think I've put at the top. The one thing I don't understand about that, the laws, the regulation, particularly exclusionary zoning, has that really changed since before the financial crisis? I mean, it's always been that way. I mean, it's always been in our service. Is it gotten worse in any? Yeah, the, the, the

cost of the actual home cost has been rising faster than inflation. Now, it's a survey we only do once every five years and it is a survey of builders. So they're always going to complain, obviously, about how difficult it is to building. But in my, Chris, he's always complaining, you know. Yeah, right. The supply side is always a tough one. But just the, the ticky tech growth of costs. And it's a challenging environment where, you know, if you'll be talking about a policy issue and they'll say, well, this is only a thousand or it's only three thousand. thousand dollars. This is a great example of a death by a thousand cuts. It is the full set of all these things as they build up over time. Again, exterior requirements, green space requirements.

That's one that's definitely gotten worse over time. How much of the land that you go out and purchase can you actually build on? Well, as green space requirements have expanded, that that restricts the amount of housing supply. There's certainly markets that are moving in the right direction. You know, the reason that Dallas and Houston last year built 40% more single-family housing than the entire state of California is you can build with more density in California. The impact and permit fees in California can be $100,000 or $200,000 before you even put a shovel in the ground. So you see clear geographic effects as well. But yeah, over time, it has gotten worse. You know, my goal is to have one zinger for Chris every podcast.

And I just sneak it in it. It's like, you know, Alfred Hitchcock getting into his movie. You know, I just have to have one zinger, you know, I think you're exceeding expectations there. I don't know.

You're up to like three great. No, no, I had one zinger. There was only one zinger today. There was only one zinger. So, Chris,

you feel free to fire back. I might get mad at you, but go ahead. You know, give it a shot. I'm only kidding. I'm only kidding. Okay.

So let's, it's, we're coming closer to the end of the podcast. And I do want to end, with, well, okay, what do we do? You know, what should be done here? And I hear you on the exclusionary zoning regulation, but let's just put that to the side. I mean, that's, that's a really tough one because that's determined at a local levels. And, you know, it's very difficult for federal policymakers to have any influence. They can do some things. They could

like, say, I'm not going to give you transportation dollars unless you change your, you know, your exclusionary zoning, but that's a, that kind of a stick is politically very difficult to execute on. So let's, let's put that to aside. You mentioned LI-Tech. Maybe we should go there first, but you tell me, what should we be doing here on the policy side, on the federal policy side? Continue to protect, even expand, I think in the budget proposal that's pending right now, there's an expansion for LI-TEC housing. That's really important on the for rent side. workforce development. There was some political debate about zeroing out job core funding, which is part of getting those kinds of skilled, trained worker training programs in place.

We need to step up our funding in those kinds of efforts to make sure that the jobs that are in demand right now, the jobs that have large number of job openings can be filled. I would say that the federal government can play a role in terms of the zoning issue, maybe carrots and sticks in terms of trying to incentivize state and local governments to do the economically right thing in terms of trying to get more land in the system. I think you're right. There is some reason to be conservative, at least pessimistic about this. Nimbism is always going to be an issue, although we are seeing the rise of Gimby, yes, in my backyard movements. And unfortunately, though, we've also got the rise in what we call the bananas, which are the build absolutely nothing anywhere near anything.

Oh, I didn't hear that. Pose any kind of do it. Yeah. We view the nimbious as maybe getable. The bananas are a lost cost. They don't want change, period. So that's out there. But yeah, workforce development, we've talked about, and this is easier said and done,

but I think it would be interesting to think about. We have a secondary market backed by Fannie and Freddie to support mortgages. What would a secondary market for builder and developer loans look like? I mentioned that 13 to 14%? and effective interest rates. If we pooled and created a standard box of builder and developer loans, could we push that interest rate lower? That's something Mark Calabria had talked about when he was the head of the federal housing finance agency. It's something NHB has been talking about for quite some time.

Easier said and done, but I think it should be seriously looked at it. We're serious about supply side items. And then lumber and building materials, look, we still have a tariff on Canadian lumber. That's about a third of our lumber consumed comes from Canada. It's not a tariff that's governed by USMCA or the NAFTA regime. It surprised a lot of people, but the Canadian lumber trade is completely outside of those rules. It's set by the Commerce Department, so it's not really kind of a political toggle. But we need the U.S. government and the Canadian government to achieve a new softwood lumber

agreement and get some stability in that market. And then also facilitate additional production of lumber. here in the United States, particularly as single-family home building increases in 24 and 25. Yeah, so I think it feels like the most straightforward thing to do most quickly would be to increase LI-Tech, low-income housing tax credits. It's a very tried and true program, been around since the six tax reform law. There's a whole infrastructure for implementing it pretty clear what levers you need to pull to juice it up, and builders can get going right away. And it's for, you know, the affordable part of the rental market, right?

So that, and as you said, that that is in the tax legislation, that to juice up LI-TEC is part of the provisions in this current tax legislation. So we got a fighting chance, right, I think, to get. Bipartisan support, so Republicans and Democrats. It's a program that's been in the code since 1986. And it works for that, that affordable rental market because it's supply-side focused. It provides equity to allow building. that kind of property. It doesn't address the for sale entry level market. We're going to need

different tools for those. I got two other ideas I want to pass by you. Before I do that, let me turn to Chris. Chris, is there anything that other ideas that you might want to bounce off a rob that might be helpful in addressing this affordable housing shortage? I guess I completely agree with what he's saying in terms of the priorities here. You mentioned the modular housing that kind of picked my interest there. Do you think? I think that's something that certainly could be used to reduce the costs here. The history with modular and panelized, and this is different than manufactured housing, right? Manufactured housing is about 100,000 units a year.

That's what we used to call mobile homes. They're higher quality today, more resilient. But modular and panelized is more factory built, off-site construction. As I said earlier, the share, according to the Census Bureau, is about 3%. We've got some industry stats that says it may. be as high as six or seven. The challenge there is that often it comes in higher than than forecast in terms of the cost. It can take longer. To quote Tolstoy, I think it's Anna Kerenina, that every happy family is the same, but every unhappy family is different in its own way. The same is true

with construction projects. And so adopting modular construction. You see that an economist that's quoting Tolstoy. That's pretty impressive. That was a pretty bad quote. No, no, no. I thought that was beautifully done. That's the first time this has been done on the podcast. Yes. My three years of taking Russian. Yeah, but with construction projects, they're all unique, right? The lot, the building code requirements, the local code requirements. And so the idea of modular is that you can capture economies of scale. Well, that may be true in Ireland or Sweden, where the modular shares can be more than 50% of homes built. It's a lot more difficult in the United States where you have 4,000 different building codes.

So capturing the economies of scales difficult. Now, it makes it sound like I'm discounting its ability. I think we're going to see the share of that. I think it's going to help, but we shouldn't bet all the chips on it. You know, the shares should go back up to about 10%. But it's not going to be 20 or 30%. It's not the end-all be-all. This is my big theme, which is we need to move the ball on all.

these fronts simultaneously. There's just simply no single solution here. Two other quick ideas, just the lightning round. One, you mentioned a secondary market for ADNC loans. Why not a secondary market for chattel loans, you know, the loans that back purchases of manufactured housing? I think that's a good idea as well. You know, anything that we can do to build out that that entry-level space, I think, is important. Okay, so that's going to be on the list of things you, next time we have it on the podcast, that'll be, oh, okay, great. And here's a real push, and I was emailing you about this a month or so ago.

What about LI-Tech for single-family for home ownership? You know, Li-Tech can be used for single-family rental, but nobody does because there's a lot of complexity to that. But LI-Tech for single-family home ownership, what do you think of that? idea. Yeah, this was an idea that actually there was some legislation proposed back in the early 2000s. I worked at the Congressional Joint Committee on Taxation on the Hill before coming to NHB, and I've ever seen these proposals around. It probably would have been a better way than some of the down payment assistance programs. The challenge is that the program, LITAC, is complex. It is

probably better situated for the multifamily universe where there's more scale. Single family, it's a lot of smaller builders and there's kind of an open question of whether the logistics of it would work. But I think it's an interesting idea because it would provide equity to builders to build that home. And then it could be out on the market for purchase. And then you could target it for certain geographic areas or income categories. So if we're thinking about fiscal policy playing a role, I think that's got to be part of the discussion. Just need to figure out how to make it accessible for that smaller builder that's building about 60% of the new homes. But the publicly traded guys, they do 40% of the building? Top 100. Yeah, it typically is going to be

about 40 to 50%. But that, I mean, I hear you. And it would be nice to tailor it to the smaller guy. But even if you got something that these big, you know, top 100, that they should be able to have the expertise to be able to do it. No? That's part of the solution. But I really do think we got to make sure that it's available to all builders, because then we can have important industry shifts that we can talk about separately. I guess politically that would else will help out too. Absolutely. Yeah.

Because big holders are not in every single market. They're obviously markets, but then you've got a program that's not going to serve those secondary, tertiary, rural markets. I think then you've got a political problem. You know, that brings up a point. I thought that was my idea, my tech for single family home ownership. There's no new ideas. There's definitely no new ideas. Anyway.

Okay. Well, very good. anything else guys we want to ask Rob Marissa anything else you want to ask Rob or any other points you want to make before we call it a podcast and more question back to demographics and supply of housing sure and this is for Robin and Chris too when we're talking about housing potentially being over supplied when you look several years down the road is that does that have to do with this shift of the houses that baby boomers are in

transferring to their children? I mean, how big is that effect going to be that we're going to have this potentially massive inheritance shift of single family homes to a younger generation? Where does that factor into these calculations? Yeah, this is sometimes referred to as the silver tsunami. I think it's somewhat overstated. I mean, it's funny, I think back to the late 90s, some of the first academic papers as a graduate student that I I remember analyzing, we're predicting this was going to happen with the boomers. I think this plays out, but it plays out in a much slower, more orderly process than the idea of all these homes hitting the market at the same time. But I think the big thing is what I think Chris was indicating earlier, which is the fall off in household formations, which is going to occur just means that over time, the demand for new construction is going to evolve.

It's going to reduce its level of output, and it's going to shift more to that kind of terror. down rehab type component. Just to add, just to add, I think one important consideration is the, this is the distribution of housing and where it's located, right? So to your point, Marissa, yeah, there will be some of this wealth transfer that goes on. There'll be some inherent of properties. They may be in places that people don't want to live or can't live in the future. So that's kind of an offsetting effect.

We might actually see more building and going on in the 2030s, 40s, 50s because certain parts of Florida or other parts of the country may not be inhabitable or people just prefer not to live there. So you could see some construction going on because the amount of property that is deemed, you know, lost in some way from hurricanes or other events could cause some of those shifts to occur. And also the preferences, right? You could have folks preferring to move to other areas as well. And there's a generational element here, which is if you look at the homeownership rates, they've been going up for those older Americans. So the idea of downsizing or moving into long-term care facilities or things like that, that has declined.

I think we're going to see a lot more aging in place take place, which is a boon for the remodeling market because it means reshaping the existing stock for essentially a new set of demands for housing. And it's good investment, right? I mean, absolutely. People are getting a pretty good return on those homes. So, okay, well, very good.

Rob, this was great. Very informative and thoughtful and covered a lot of ground and really appreciate it. And hopefully we'll get you back here. That'd be great. Yeah, that would be really nice to have you back. Yeah, well, thank you so much. Okay. All right.

Dear listener, I hope you enjoyed the podcast, and we'll talk to you next week. Take care now.