Odd Lots - This Is What 5% Mortgage Rates Mean Now For The Housing Market

Episode Date: April 11, 2022

For much of the last two decades, housing has been the consummate macro asset. It was at the heart of a huge boom. Then there was the crash and the Great Financial Crisis. Then there was slow comeback and return to normal. And then amidst the pandemic, housing became insanely hot for a variety of reasons. But now housing is also a micro story, as the housing supply chain -- not a topic many people have put much thought into previously -- is a key reason why home construction is slow. So where does this all stand, now that mortgage just broke 5%? Do understand the state of the market, we speak with Conor Sen, a Bloomberg Opinion contributor and the founder of Peachtree Creek Investments as well as Dustin Jalbert a senior economist at Fastmarkets, with a specialty on the lumber market. We examine housing from both the macro perspective as well as the supply chain. See omnystudio.com/listener for privacy information.

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vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Oh, and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Al-Away. So Tracy, you bought a house recently. That's kind of like winning the lottery in this economy. I know. Well, okay. So first of all, we put in three offers for different houses and we got gazumped on all of them. We got outbid. And then finally we found a house that we really liked and it happened to be a probate sale. So the owner had actually died and it was going through, you know, probate process. So no one else wanted it because no one else wanted to deal with that. So we actually got that house and it's been really amazing. It's kind of like an odd lots of housing, right? I mean,

like a literal, like here's like this like asset that didn't go through. It's not the normal thing and you have to like put it a little extra work to move it and it took advantage of that. That's right. We did our due diligence and we were very patient at a time when a lot of people kind of are worried about missing out. No, it really has been an extra. I mean, the last two years have been extraordinary for all kinds of reasons, particularly with housing. We've done a handful of housing episodes before, but it feels like maybe we're at some sort of turning point because rates have just seen one of the biggest upward move. Mortgage rates just hit 5%. Like maybe something's changing here. Is this the peak housing market episode that we're doing right after I bought a house?

Yeah. And now, right, so we've jinxed your home purchase. Now you're going to be underwater for 10 years. But it does feel like something's changing here. Right. So we saw the 30-year mortgage rate hit almost 5% quite recently, which is, you know, a very big increase from what it has been over the past couple of years. And there's this wider macro discussion going on right now about financial conditions as interest rates rise. How much of an effect is that going to have on financial conditions and the overall health of the U.S. economy? Are homeowners going to start feeling the pinch of these higher rates or have most people, at this point actually refinance their mortgage at very, very little rates. Yeah. You know, I was thinking about this. You know, the other interesting thing about housing is it's such an important part of the economy.

Obviously, it's a huge source of wealth, housing assets. It's a huge source of consumption. People need to pay rent or have a place to live. And as we've sort of being reminded in the last six months or a year, it's a manufactured asset. It has a supply chain like everything else. and we don't, I think for like 20 years or for a long time, we did not think much about that aspect of housing. You just take it for granted. You get the wood. You get the workers. And so forth, the labor part had been stressed for a little while pre-COVID.

But I think that, like, we're all sort of being reminded that homes have like tons of parts. Like a car has tons of parts. And if you're missing one thing or of a part of wood, for example, gets really expensive, then that makes building the new house difficult. Right. So it feels like we have all these different push-pull factors. So on the one hand, housing finance, the cost of a house is very, very expensive at the moment. And with rates going up, you would expect it to get even costlier. But on the other hand, you're not necessarily seeing the supply response because of all these supply chain and logistics issues that we've been talking about. Right. Well, I'm very excited. We're going to have a big housing conversation because as you mentioned, mortgage rates nearing 5%, macro things, what's going on there, micro things, supply chain, commodity,

all kinds of questions. We had to bring on two guests this time to help us bring it down. We're going to be speaking with Dustin Gelbert. He is the senior economist at fast markets in the wood products area. Great on the sort of supply chain costs, lumber, all those things. What's going on there? And we're also going to be speaking with Connorsen, columnist for Bloomberg Opinion, founder of Peach Creek Investments, longtime friend of the podcast. But amazingly, I think this is his first time. actually coming on. Amazing. So I'm really excited about this conversation. Dustin and Connor, thank you so much for coming on Nodlots. Thanks, Joe. Thanks, Tracy. It's a real pleasure to be here. Yeah, likewise, I'm excited to be having this conversation. So, Connor, actually, let's start with you

and, you know, let's just start really big picture. Like, okay, we've seen this huge rate shock. Rates nominally are not that high, but the size of the move is absolutely historic over the last few months. What are the sort of immediate sort of first order implications for the housing market from this big move to basically 5% 30-year mortgage rates? The most obvious one is that affordability has certainly taken a huge hit. I've seen things like the average mortgage cost for a first if you were buying a house now versus a year ago is up around 30%. That's certainly going to impact demand to some extent, although at the same point, rents are up 17% year every year. So it's not like this is happening in a vacuum. But I think just that affordability shock is the first thing we're trying

to figure out. Yeah, this is something that came up recently, this idea of homeowners actually purchasing houses as basically inflation insurance, right, as a way to get away from increasing rents. Right. So in 2006, when everyone's worried about, is this another housing bubble, housing crash thing going on, that was really more about home price appreciation speculation, people putting down very little, hoping that homes would go up a lot over the next two to three years, whereas now arguably it's more of like my rent is going up a ton and I'm worried about inflation. Maybe it's more of rent inflation speculation than home price appreciation speculation. My impression is that overall in the economy right now, there may be some softening. I don't know.

Logistics may be goods, maybe. What are you seeing on your side? Because a huge question that we're, you know, this issue is like, yeah, there's tons of demand for housing. We just can't get them built. you have all these permits, but it takes forever. Is there any easing going on in any aspect of the construction of new homes yet? Yeah, I mean, you know, right now, it doesn't seem like there's a lot of good news, right? I think, you know, if there are some kind of silver linings here, certainly in the wood product space that I cover, you know, specifically, you know, with fast markets, we're seeing lumber prices come off. Yeah.

Kind of the peak levels that we saw sort of about a month ago, you know, the cash market that we report based on our, you know, our random lengths editorial team, what they report on the markets down, probably almost $300 per thousand. You know, a lot of people follow the futures market and it's fallen a lot more. So, you know, there has been some loosening on the framing side, but everything we hear on the ground, trucking, you know, especially flat beds are still incredibly tight. I know there's been some talk recently on the van side of the trucking market, things loosening substantially. But flatbeds, you know, it's a different animal. That's really how a lot of building materials go to market. And that is still incredibly tight. Part of it is seasonally, you know, demand is strong right now.

We're entering the prime building season. And so that is, you know, still a challenge in the marketplace. Another maybe kind of green, you know, kind of green shoot here, some positive. The rail side is starting to loosen a little bit. there's a lot of framing lumber, as you've talked about with, you know, previous guests, you know, Stinson Dean on this. A lot of framing lumber comes from Canada, and a lot of that is delivered via rail. We've had huge rail challenges for several months now. We're starting to see some improvement there, and that's helping deliver some of that framing material to market.

But it's still, you know, it's still very, very tight even as prices come off, these really hot levels. So can you just remind me, what is the relationship between lumber prices and new housing inventory. So when lumber prices are going down, is that bullish on new houses? Because everyone's like, oh, it's cheaper to build them. Let's get started. Or does it suggest that construction is already coming down? And so, you know, there's less demand and more supply. Well, so I mean, and this is probably something that somewhat debate here. I would argue that, you know, the situation with lumber right now is, is more a function of what we're seeing in the transportation markets, this sort of loosening, right? And what you're seeing on the housing side,

sort of the inventory effect, you know, there's still a lot of construction, actual physical construction going out in the marketplace. So you think about the actual wood put in place or other building materials put in place, right? There's still a, you know, a borderline historic amount of homes currently under construction, right? There's this sort of huge sort of unfinished inventory that's in progress, right? So there's still good demand, especially on the new instruction side and some parts of the remodeling space. So at least in the short term, you know, the demand picture for us the next three to six months looks, you know, hasn't really changed all that much. So again, a lot of what we see on the pricing side right now is more

logistics and transportation issue as opposed to the building cycle, you know, the sort of actual starts slowing down or something like that, right? Is that kind of makes sense? Yeah. No, and, you know, it's something that I've been thinking about a lot. Obviously, we've done quite a number of logistics episodes, something more broader that I've been thinking about a lot, which is that, you know, in a downturn or in a crash, like we saw in March, April 2020, you can sort of like build up these big stockpiles of goods, right? Lumber sits there, other goods sit there. But you can't really build up an inventory of logistics capacity. Like, that's just gone forever and then when the economy picks back up again and starts growing really hot, it's not like there's a bunch you can

draw it down. It just immediately gets a, see how it immediately gets squeezed. Yeah, for sure. And actually, you know, it's a good point, Joe, because one thing we see right now, it's kind of skewing more to what I see on a daily basis, this being lumber and wood products. But what's interesting right now is when you look back, say, 12 to 18 months ago, you know, we had this big sort of positive demand shock of home construction and this renovation boom. So positive demand shock, some of it was sort of underlying demographics and demand, but certainly COVID has contributed to that. and the supply side was constrained for a lot of reasons.

Some of it was actual plant capacity issues, but a lot of it too was workers were furloughed, you know, sort of sent home. And it's taken a lot of time for sawmills, wood products mills and other sort of building material producers to get those workers back and be able to sort of add shifts, add overtime, things like that. Now that's head counts have more or less normalized at a lot,

in a lot of parts of the supply chain. What we're seeing now is, yeah, it's that throughput. via trucking, via rail that are causing bottlenecks. And one thing we've seen in lumber specifically, mills are actually having to curtail production right now, not because they're not profitable. You know, prices are still close to record levels and their margins are swelling. But the issue is they're overproducing what they can actually ship, you know, specifically in British Columbia. You know, there's, again, there's a lot of sort of sawmill output and a lot of lumber that comes to

the domestic market here in the U.S. Some of that is sort of captive because of these, rail bottleneck issues, which, again, from a builder perspective, for your wholesaler, it's just incredibly frustrating, you know, that the hits just keep on coming, even as we're seeing at least at the plant level, some improvements in the supply chain. Connor, could you come in on that demographics point that Dustin just mentioned? And, you know, we hear a lot about this idea that millennials are finally getting into the housing market. People wanted to buy houses and move away from cities during the pandemic. What exactly is going on here. And are there any historical analogies that we can look at for this particular era?

So sure, this is the main difference between the current cycle and the mid-2000s, because the average age of the first-time homebuyer tends to be in the early 30s. And so what was strange about the housing bubble is that the people born in the early 1970s, that was actually like the smallest generation of people in the long time in U.S. history. Only about 3.1 million Americans are born every year during that time. And so as they were, in their early 30s, that was the sort of peak of the housing bubble. So the demand that we had at that point was really unnatural driven by speculation rather than demographics, whereas now it's the opposite. There were 4 million people born per year around 1990. They're the ones who were in the early 30s now.

And so that's why the demand picture is so much different now than it was then. That's really fascinating. I don't think I'd ever realize that aspect. I mean, I knew that in the mid-2000s, there was a lot of unhealthy speculative activity. But I had never thought previously about how how just there wasn't really a very large base of, I guess you'd say natural buyers during that period. But I guess that's really interesting. But I guess what about the bigger question? So like for people who aren't in the housing market or for people who didn't win the lottery like Tracy did and actually get a house, the other question besides mortgages is like, well, will housing ever go down?

Will it ever get cheaper? Or will it at least slow down in prices such that it's not a big risk to wait a couple of years? is that a possibility? Like, could we see the nominal price of a house come down? And what are the factors that are sort of drive this? Maybe both of you can sort of come in on this question. Yeah, my view on this is there's sort of two ways in which that could happen over the next five to 10 years.

One is that you have millions and millions of people losing their jobs because ultimately if you don't have a job, you can't pay a mortgage. Right. Maybe you're a forced seller. And then the other is that we do know at some point baby boomers will transition out of their current homes, whether it's voluntarily or involuntarily. that's probably more of a later part of the decade story. But once that happens, particularly in places that don't have great demographics,

maybe rural parts of the Northeast and Midwest, places like that, then you just don't have people to step into buy those homes and they go down in price. Yeah, I mean, I generally agree with Connor. I mean, I think, you know, when you look at the dynamics in terms of demographics over the next five to 10 years, you know, it's a very positive story. And again, barring some sort of unexpected recession where, yes, sort of employment goes down and, you know, some aggregate demand of the economy goes down, you know, for kind of having a steady sort of business cycle expansion, it seems hard to imagine a situation where you're going to have broad base sort of downward moves in home prices. And, you know, another, you know, and again, we look at this from the building side of the equation here, you know, one thing that we think is going to be really challenging is just for construction activity to be able to ramp up sufficiently to build the number of homes that we need to meet, not only, again,

existing demand, year-to-year demand in the marketplace. If you're a believer in this idea of pent-up demand, sort of suppressed headship rates where people are not forming households and some of the key demographics we've talked about here at more kind of traditional rates we've seen over, you know, over history, it's going to be really problematic for the industry to ramp up. Labor is going to continue to be an issue. You know, we've heard a lot about the zoning and, you know, issues, particularly on the multifamily side. Think about that in a hot, tight labor market. How are we going to ramp up, say, half a million residential construction workers if we want to ramp up to, say, you know, 1.8 million starts or completions consistently. And we're seeing that right now, too,

you know, completion rates, you know, we're starting homes at a 1.6, 1.7 million, you know, pace. But completions are, you know, pretty flat around 1.3 million, you know, completions. And that is, Some of that is supply chain oriented in terms of actual building materials, but some of that is also labor. Some of that is land availability. All those factors are going to also on the supply side make construction constraint and kind of underpin home price appreciation. This is really striking. And I'm just looking at this chart on my terminal right now because I just want to drive home for listeners what you said, which is that we have had housing start pick up. You know, a home builder is going to like get a plot of land and start putting down a friend.

and all that. But completions, like actually turning the housing start into a home that someone can then move into has clearly not kept up. So currently, like just look at the February numbers, the official, it's like close to 1.8, 1.8 million homes and the actual completions 1.3. And so, yeah, I mean, there's this huge gap that's emerged between, okay, you want to start a house, but actually get a house completed. Yeah, something that Dustin and I have talked about over the past few weeks in response to this rate shock is that home builders have had this, you know, to the point of that data, they've been starting a lot more homes than they've been completing. And so their inventories of homes under construction, that backlog has been growing. And we wonder if that's

going to be something that management teams think about over the next couple months, where they say, we have a lot of homes under construction that are at risk if, you know, maybe we're supposed to be delivered in the first half of next year. And if market conditions really change, that could be the kind of thing where they might have to take losses or write downs. And I believe, I mean, homebuilding stocks are down 30 to 35 percent year to date. So I think, investors are worried about that as well. And that would just be really bad news if they start to your homes and just focused on finishing their backlog, then you create more supply issues next year. I was about to ask about the home builder stock. So if you look at something like KBH, I think it's

trading below its book value at the moment. What is that telling us about the future direction of housing construction and profitability, I guess? Right. So the book value for a lot of these home building stocks is really based on inventories, which is homes under construction and land, that they own. And so to me, if homebuilding stocks are trading below book value, that's saying not only are investors thinking they're going to miss earnings over the next few quarters, they're saying they're going to take actual write downs on the land and the homes under construction that they have, which is to me a pretty severe forecast. But if that were to happen, that just shows that the economy, I think, is much, much worse than appreciated, or it could just be an overreaction.

But, like, this is pretty wild. Like, we're in a market in which demand for housing even seems to still be red-hot, right? Five percent mortgage rates. Despite that, I mean, it still sounds like there's huge lines and bidding wars. Like, it doesn't seem like that's gone away yet. And yet you have these home builders, which are well off their recent highs. And investors saying, like, some of these plots, like, they might take a loss. They might just completely write them down. Like, it does, it feels like a pretty extraordinary disconnect. There's, I think the sort of sell side view of what what's going on with home building stocks is that the valuations are cheap, but when mortgage rates are rising, you don't own them. And it's sort of, you just kind of wait until rates turn and see where things are and then reassess.

It also just emphasizes too, you know, it's interesting that I think the home builders have had a lot of confidence that demand was going to be there, right? Even as cycle times for, particularly on the single family side of the market, cycle times have gone from, say, you know, six to seven months on average. pre-pandemic and now we're somewhere probably around eight, nine, maybe even approaching 10 months in some cases. You know, I think while you saw this growing delta between completions and starts go up, I think the home builders had some confidence that demand was going to be there months out, particularly given how low rates have been. But now as this affordability question has come into play, I think there's just generally

less confidence what the home buying market will look like in 2023, even though. though we have all these underlying sort of demographic tailwinds, right? But one thing that we often remind clients is that just because there's pent up demand out there, it doesn't necessarily dictate that it has to be realized in the marketplace. And affordability does still matter. So I think, you know, you're seeing it in some of the home builder sentiment data recently that, you know, maybe they're getting a little bit skittish. And, you know, I think completions are going to continue to move higher here. those start numbers could start to kind of flatline a little bit as they try to sort of focus on those backponder. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute.

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But what's your expectation for exactly what happens here and how much of it depends on how high the Fed actually raises rates? Something that interests me is that Redfin, they do housing analytics and help home buyers and home sellers, put out a piece last week, I believe, talking about softening that they see or signs the potential softening. And it was really focused on high-cost markets like San Francisco. Los Angeles, New York, just because that affordability is really, really challenged. It was challenged to begin with, and it's even more so now. And they hadn't seen that to the same extent in the destination markets that people have been moving to during COVID with remote work and migration. And so something I wonder is that arguably the Austin, Texas housing market has been driven

more by the buyer profile of people moving there than local market conditions. And so could we start to see something where the high-cost markets start to stagnate a little bit, But as long as people are still moving to those destination markets and bringing their bigger budgets with them, that doesn't impact their affordability issues. Well, so this raises another question. And of course, when COVID initially hit and suddenly everyone wanted to move or it seemed to catalyze some big shifts. And we saw, okay, a bunch of people said, you know, left the Bay Area. We're going to move to Austin or somewhere else in Texas. And or maybe they went down to Florida or something like that. Or some sort of maybe people just want, you know what, I can't. live in a city, I want to live in a suburb. But it doesn't feel like the other places cool down. Like, are we seeing other areas where prices are falling because everyone is moving out of them?

It seems like some places got really hot, obviously places in Texas, et cetera. But it doesn't seem like the other places like actually cooled or really got that cheap, or at least in New York here. You know, nothing seems to be particularly cheap. I think that gets to Dustin's point about the headship rate going up where, and this could be a strong economy, strong job market thing as well, that in the 2010s we spent all this time talking about people still living in their parents' basements when the job market and wage growth was weak. And now that those things are strong, you have that pent up demand for new household formation and things like that. Yeah. And I was just going to say to, I think that last point, Connor, on household formations.

So when you look at the official census data, you know, 2020, and you have to take it with a grant of salt to some degree because the data can be quite choppy. But, you know, at least looking at 2020 data, you know, when you look at sort of the number of households, it was sort of flat year over year. But again, to Conner's point, you have to think that there's a lot of people returning to the shelter market, both on the ownership side, but also the rental side of the market too, right? And so, you know, they kind of move hand in hand. You know, you're not seeing any relief on the ownership side of the market, but it's the same story, in some cases, if not worse, on the rental side of the market. So, you know, kind of the real estate market across the board

is having this massive adjustment as, you know, a lot of, especially young people who maybe lived with parents during the pandemic are stepping back into the rental market. You know, job growth and income growth is driving people to separate away from roommates, right? So, you know, now you don't need to share an apartment. Maybe you're going out and getting your own place. I mean, all this is impacting the shelter market across the board here. So everything is really tight. And even in, even in the high-cost cities where people are migrating out of. So that actually is a good sort of step back. And I want to go back to this question of pent-up demand.

And this was obviously something that we talked about a lot even prior to COVID, which is just like, okay, there's this huge wave of potential millennial home buyers. Post-great financial crisis, we know that housing starts were very slow. So there's like this story of like the underhoused economy was a thing that we were talking about. prior to COVID hitting and then it really seemed to accelerate. But what are the numbers? Like, what are we actually talking about in terms of how much pent up, how big that pent up demand is and what we need to see on a sustained basis to do something about getting back in equilibrium? Like, okay, is 1.8 million annualized housing starts enough? Does it need to go to two? Like, what is,

what seems like a reasonable, like, numbers here to bring into balance? What's the shortfall? So I think there are two ways of looking at this. First is looking at, the vacancy rate of homes that are like sort of owned homes and rental homes and looking at what a normalized level was over time. And that maybe tells you something about what the current shortfall is. And that number is around two million housing units. And then sort of for pent-up demand, that gets a little tougher because again, you're making assumptions about what homeownership rates might be in an ideal environment. Should they, should the homeownership rate in 2025 look like it did in 1995? But you're seeing that both say millennial households,

but also households in their 40s and 50s, that home ownership rate is much lower than it was pre-2008. And so if that were to normalize, that's several million more. And to Dustin's point, it's unclear whether we can meet that demand on the construction side over the next several years. Yeah. And just to extend on Conner's point, it's something that we at fast markets, when we do our kind of long-term housing forecast, it's really a demographic story, right? And this is always a big point of debate is what is this pent-up demand idea, right? And, you know, when you look at other people who forecast the market, you know, the range is anywhere from there's zero pent up demand. We're already overbuilding to we're six million units short, right? So, I mean, there's a massive range out there. You know, just kind of attach some more numbers to it. Sure.

First of all, you need to think about what existing demand is for shelter, right? Right. And that number is when you think about what household formations could be trending at to just meet. you know, again, existing demand, you're probably talking about anywhere between 1.1 and 1.2 million units. Then you tack on every year there's shelter loss that is either destroyed because of natural disasters, wildfires, infills. So, you know, homes that are torn down and then built on, you know, a new home built on that lot. You know, that averages, you know, 200 to 300,000 units a year. And then you tack on second and third home ownership. You know, that that puts us, between somewhere around 1.4 and 1.5 million units of demand annually, just existing demand. So, and then you have to build on top of that, right, to deal with the pent-up demand that

Connor talked about. Let's say you think there's 3 million units of pent-up demand because of the vacancy rate issues plus these foregone households. So if you build at a one, if you complete at a 1.8 million unit rate, that's going to take you 10 years, you know, that extra 300,000 units you're getting a year, that's going to take you 10 years to fill that pent-up demand gap. So that's just, that's a huge number that you're dealing with there, right? Dustin, you mentioned this very wide range of expectations. Is that historically, is that unusual? Have we been in a situation like this before where people can't really agree on that number?

Or is this the result of just being in a very, very weird post-COVID time where there are a lot of different things going on and we're just not sure of how they're all going to play out. You know, I think it goes back to Conner's point is that this idea of pent up demand is, it's a little bit nebulous and some of it is a function of what you think, quote unquote, normal headship and household formation rates should be, you know, looking at the key demographics as they kind of come of age in home buying years. And that is a difficult thing because it's somewhat arbitrary in terms of what that should be, right? determining that. And to some extent, it's also a function of where you start calculating,

like what year you start calculating pent up demand, right? So if you start in 2000 versus 1990, that starting point matters in terms of what that cumulative buildup of pent up demand is. So you can arrive to very different answers there. That's kind of where we see it when we kind of do this type of analysis internally ourselves. So we keep kind of a range. I don't think anybody knows what that exact number is. So I've got a theory related to this pent-up demand thing, that's sort of in defensive baby boomers in the housing market. And I think when people our age think about baby boomers, the sort of stereotype is they all got to buy a house in Los Angeles in 1984 and made a gazillion dollars over the next 30 years. But it's sort of like, when did the baby boomer

pent-up demand in the housing market get met? And we know that mortgage rates in the 1980s were still in the double digits. And you can imagine how we would feel today if mortgage rates were 10%, how many people would be locked out of home ownership. And as rates kept declining, that allowed more and more people to get into homes. And I would argue in a sense that some of the early, least mid-2000s housing construction boom was lagged pent up demand from 30 years of people who finally could buy a home based on four to five percent mortgage rates. So this could go on for quite a long time. Yeah, that's interesting. Yeah. And this also, of course, gets to the challenge of like what is cheap house, right? And when is housing affordable? Because, okay, we could look back at the early 80s

houses were so cheap, but mortgages were, of course, much higher. Or we can look back at 2010 out of the great financial crisis when houses were cheap and mortgages were cheap, and yet unemployment was close to 10%. So there were not a lot of people at the time who could have the income or there, there was a significant curtailment of people at the time who even had the income to get a mortgage. It kind of feels like there are very rarely sweet spots, maybe, you know, 20, 21 with rapidly improving job growth. And yet mortgage rates really low was like that sort of like brief, like extreme sweet spot. But then again, I guess that was like a year of huge housing bidding war. So it doesn't feel like there's ever like the perfect time. Yeah. I mean, I've been out of

college for 20 years now, and I've never once heard people say housing's so cheap, it's time to buy. And so maybe the late 1990s were okay because the job market was strong. The real home price boom hadn't happened yet. Mortgage rates were coming down. But if it's only a few years out of a multi-decade period, then maybe housing just never gets cheap. Is there any prospect for something meaningfully different on the supply side? And like, is it a different kind of construction? Is it something regulatory that could open up a lot of space?

It's like, people always, you know, it's like, everyone on Twitter all the time is like, build, build, build. And it doesn't feel like that's a very controversial stance. Everyone likes the idea of more housing stock in general, but there are all kinds of constraints. There's the physical ones, just the sort of labor and lumber. And then there's regulatory ones, whether that means to make cities where it's difficult to build, et cetera. Is there anything that could happen that would actually meaningfully just change the supply side of the supply demand equation? Yeah, you know, Joe, it's interesting. because I think, you know, the last decade, we've been so worried about affordability on the demand side, right?

It seems like we haven't really prepared ourselves for what we're going to do when we get there. And now the supply side is constrained, right? You know, and I'll kind of break it down between single family and multifamily because I think, you know, there are definitely crossover issues. But, you know, to me, when I look at this, you know, on the multifamily side, certainly the permitting and zoning issues seem, you know, like major challenges. right that are kind of stalling the ability to ramp up apartment construction and smaller more affordable sort of units out in the marketplace and so that is going to continue to be a challenge right

for political reasons i think you know maybe connor you could probably talk about better than i but i think that's that's going to remain challenging i think the advantage with multifamily right when you look at history in terms of productivity of construction multifamily actually has a lot better sort of track record of of increasing productivity growth. So I think even in a labor-constrained environment, you know, we are seeing, you know, sort of technology like wall panelization, off-site construction that are being implemented, component manufacturing, you know, more quickly adopted in the multifamily space. So I think even if we're in a labor-constrained environment, we probably have the ability to ramp up multifamily given those factors. Single-family is very labor-intensive. You know, you're building on-site,

your stick framing in a lot of cases. Most of our homes are built with wood. Historically, it's been a cheap way to build, but it's kind of been contingent on a well-supply labor market. In that context, you know, on the single-family side, I mean, certainly zoning and things like that can help. But again, I come back to really issues on the labor side. Can we pull in more sort of migrant workers in key building markets like in Texas and California? you're talking about the residential construction employment is dependent on, you know, anywhere 30 to 40% of the labor market there in residential construction is our foreign-born workers. So in an immigration constrained environment, you know, it's going to be tough to ramp up. If that loosens up, maybe we get some, some, a quick burst of production. But beyond, you know, kind of really pivoting to

off-site construction, manufactured home construction, it looks like a challenging road ahead for single-family in particular. So I look at it sort of in two ways. I follow what the home builders do and stay really closely. And they've really, in my opinion, kind of optimize their businesses where they're really trying to be cautious about how many homes they build. They don't want to get caught with too much inventory. They're really focused on high profit margins, returning cash to investors. And that to me isn't going to be enough to meet the housing demand we have. I have this line that I like to use that the future is a policy choice. And I think ultimately that really is what it comes down to. And you can sort of look at in response to the return of soldiers from World War II. And there was this sort of,

we're all in this together. We have to build enough homes to meet the demand for GIs and people like that. And we met the challenge with zoning changes and giveaways to home builders and things like that. And I don't see that same political will right now. And, you know, ultimately that's what we need. Otherwise, I think this is just going to be the reality for at least this decade. Can I just ask, going back to the baby boomer point and your well-intentioned, fence of baby boomers, Connor. But one of the things we hear, one of the things we hear a lot is this idea of either large financial institutions like private equity coming in and buying up a bunch of single family homes or sometimes multifamily. And this idea that you have a lot of baby boomers

who have built up wealth over the years and there are very low mortgage rates. And so what they do is they go out and buy second homes and then rent those out for additional income. How much does that constrained supply and how much would you expect or how much additional inventory would you expect to come on stream when baby boomers, how do I put this? I guess when they die. So even though the numbers from institutional investors buying homes are large, like tens of billions of dollars sounds like a lot, when you're talking about tens of trillions of dollars of real estate value in the United States, that's not a very large percentage. And so it gets a lot of headlines, to your point, that's not really where the sort of soaking up the inventory is coming from.

And an earlier guest, Mike Simonson spoke to that. When baby boomers die, I think the question is, I mean, maybe they just give their homes and their real estate to their kids. And it stays in the family and it doesn't get released onto the market. So I think that will help to some extent, but sort of magnitude wise, I don't know. Yeah. I saw there's a new startup that Andreessen Horowitz is funding that allows people to basically do what commercial real estate investors do, which is not, they don't want to be a landlord and they don't want to sell their home so they can like swap it in for this portfolio of like sort of like a quasi reet. And so they retain ownership, retain housing equity. And so, you know, I feel like they're going to find a way

to prevent these houses. Capitalism will find a way to prevent these houses from coming out to the market. Capitalism finds a way. Yeah. You know, the other thing, going back to Connors point to, you know, one question about, you know, even if this sort of, baby boomer supply is released into the market. It's a question of also the geography, right? Where are these homes located? So, you know, if you have lots of migration to the sunbelt, you know, if these are sort of whatever vacation homes or second homes in, I don't know, Midwest or northeastern United States, you know, sort of Cape Cod, like are those places that we really need the housing supply to be released from, right? So I think that's what also makes it quite

uncertain, even if that supply side release occurs, is it geographically going to be in the place, you know, the locations that you need. Housing the original non-fungible token, right? Like a house in like southern Illinois is not a house in central Texas between Austin and San Antonio. And so just because it exists doesn't mean it's going to solve an acute housing shortage that people immediately need. I think something we haven't talked about yet, too, is that if hybrid remote work becomes a thing, tens of millions of workers now need an extra bedroom as a home office.

That's sort of tens of millions of bedrooms from the national housing stock that aren't going to be there because maybe now instead of needing a three or four bedroom home, you need four or five bedrooms or what have you. And so I do think that's sort of a subtle factor that hasn't been discussed enough in terms of why the shortage is existing. Yeah, you think about the amount of floor space that's pivoted from the commercial space. space and the office space to the home, right, for that exact reason. Yeah. People needing an extra, you know, people need an extra, extra space for a home, office, maybe two. That's a lot of demand in terms of floor space going to the residential side all of a sudden.

And I know that the numbers are kind of squishy on the percentage of the population that's, that was pre-COVID remote work and now where we are now. But if that number doubles, let's say, just for just a thought exercise, that's incredibly bullish for real estate demand in general, not only new construction, but also renovation demand, where we're seeing, you know, particularly for lumber and structural panels, that's a huge category, a channel of demand that we're seeing being driven by this work from home movement. And oh, by the way, you have soaring home equity that's helping fund that. That's really interesting. How much are you seeing on that? So like we've been talking about

all the housing starts, et cetera. But how important? important for lumber wood products is the either renovation or someone wanting to add a deck to their home. Like how big of the, how big of a contributor is that to overall demand? I'll speak to lumber mainly. And it's probably different by building, you know, the type of building material. But certainly for for softwood lumber demand, what we call repair and remodeling is actually the largest single end use market in terms of volume. It's larger than new residential construction. Yes.

And that always surprises people. I would not have guessed it. Yeah, and it's, it's, it's, lumber's a little bit different than say even plywood or OSB, you know, OSB tends to skew a little bit more towards the new construction space. But, you know, you mentioned it, Joe, you think about all the renovation that happens, you know, new decks putting in fences, people putting in, you know, those, you know, flower beds, things like that. There's a lot of sort of home improvement that happens on the renovation side.

That is substantial. And probably the best number to kind of size up the market is from the Harvard Joint Center and housing studies. And that market, based on their estimates, including both improvements, so home renovation and maintenance, is around a $430 billion market. So that's substantial, and to put some context to it, total construction spending is probably about over $800, $800 billion in total. That excludes sort of the maintenance portion. So if you've tacked on maintenance, it's probably more like a trillion dollar market. So that's a pretty big chunk of, total residential construction that it goes into that renovation space. It's incredibly important,

and I think it's going to remain outsized because of how, you know, we have such a shortage of both new and existing home inventory. People are sort of pivoting to renovations to enhance their shelter space. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, clean up, and half your Sunday gone. Factor solves all that. These are fresh, ready-to-eat meals designed by dieticians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste

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What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, The Killing of Bob Lee, beginning April 16. Can I just ask, in terms of supply shortages, I mean, we've had lumber, truss plates, kitchen sinks, garage doors. Garage doors. What's the sort of next thing? on your radar or what is your pricing data telling you will be a future crunch point? Boy, it feels like we've covered everything, right? It feels like every component of a house.

I'm not sure what the next thing is, Tracy, because I mean, I think when you think about it, right, the way that the shortages have progressed, it's almost been in tandem with what the building cycle looks like, right? First, it started with lumber and structural panels and engineered wood products. And now it seems like more of the shortages are stemming from how you finish a home. Again, you mentioned the windows, the HVAC systems. You know, I was kind of joking at the beginning of the question, but it does feel like we've really touched a lot, you know, all points of the building cycle. So, you know, it seems like, again, those parts to finish a home are really going to be, continue to be the critical determinant of us being able to complete homes, especially considering a lot of that material, either the components or the actual building materials themselves are sourced from offshore.

I think while you're seeing maybe a little bit of relief on sort of the framing materials, a lot of it is sourced domestically, you know, the vast majority of it. And so it's a lot more function of the domestic transportation constraints, which are still tight, but probably improving a bit on the margin. while, you know, container ships and port throughput, you know, it continues to be a constant challenge with complex items like that. So, you know, I don't know what's the next thing, but it seems like that area is still going to be problematic. What's the next thing you're thinking about right now? Like, what should people be watching? And it can be anything, but it's sort of like, what's the next thing on your mind? I think for me, since, again, we talked about how home building stocks are down so much this year.

And builders have been still, Trish saying they're trying to meet construction backlogs and growing community counts by 10% this year is that when they report earnings over the next couple months, what will they be pivoting at all in their business models in response to changing market conditions? Because as an investor, I'm looking at them trading in some cases three to four times estimated this year's earnings saying, okay, what's going on? Like the market's trade, valuing you like you're going to go out of business. Prove to me that you're going to not have an issue a year from now. Yeah. And I mean, I think on our side of fast markets, we're obviously thinking a lot about what, you know, the picture, the building picture looks like in

2023, right? It feels like 2022. The market is kind of set here in terms of the construction activity we're going to see, except with maybe the exception, sort of the DIY side of the renovation market. We're seeing some softening there. But I think when you think about new construction and pro-driven renovation, you know, a lot of that activity is already booked out for much of the year. we're wondering now, okay, what does 2023 look like with rates going up close to 5% now, maybe going higher, building material costs, continuing to remain elevated. You know, is that going to cool housing starts to some degree? Is that going to cool the renovation market between, you know, a combination of demand destruction

and also thinking about this pivot back to the service side of the economy, right? If people are less inclined to renovate their homes because they're going on vacation again and on top of that, you know, just demand destruction from elevated price levels, you know, will we see some cooling in 2023, both on the new construction and maybe on that R&R piece too? All right. Well, guys, Dustin and Conner, that was fantastic. We covered a lot of ground. I learned a ton and great having you both on outlaws for the first time.

Thanks for having me. Yeah, it's been a pleasure. Thanks, Tracy. Yeah, that was great. Thanks, guys. It's almost like you don't even know where to begin to think about it. I had not thought previously about just like how much adding decks and fences and flower beds added to the lumber market. I guess that's true.

I mean, I thought the point about how the supply shortages are sort of following the trajectory of actually building a home was very interesting. I do feel a little bit better about buying over the past few months right before interest rates go up. I'm sure. You were really worried that, like, Like, what everyone does, I think that's like a thing. People buy a house like, oh, I definitely bought the top. Yeah. I mean, I think everyone inevitably feels like that.

And I suspect, you know, maybe that will turn out to be true. But I feel a little bit better, I have to say. You're feeling better as someone else is feeling worse. Like, so it's like you bought a, but no, like, it does not feel like from this conversation. And I guess this is probably one of my big takeaway is that even with 5% mortgage rates that there's going to be like, major softening. Like there's too much structural demand. There's too much pent up demand. The demographics are too good. The supply is too constrained for there to be like some sort of shift. Quality, we didn't really get into it, but like I know like loan quality, I believe, is very high these

days. It's like nothing like it was in the mid-2000. So it does not feel like there's going to be like some like wave of relief or a bunch of new homes that get really cheap all of a sudden. Well, you mentioned loan quality, and this is the other big thing that is emerging, and we just discussed it, but this idea that people who are buying houses now are not necessarily buying them as speculative assets and thinking that that price is just going to keep going up and up and up. Rather, a lot of people seem to be buying these as logical investments or a logical choice and inflation protection. So rents are going up enormously. I might as well own my own house in the current situation. Yeah, we had the CEO, I forget which homeowner. It might have been KB Holmes, maybe 12 brothers.

Yeah, I knew you wrote about this, right? And he said, he said, housing is shelter, and it's also shelter from rising rent. And I thought that was just like really fascinating. Like, people want a predictable monthly check and to not have to, that they pay out and to not have to worry that their cost of rent is going to jump 20% next year when the landlord ups it. And so in an environment in which there's a high degree of anxiety about rents going up every year, you could pay extra and buy a house, but then you could theoretically lock in a monthly cost that's stable for 30 years out. Right. And so even if mortgage rates are going up, at least they're relatively predictable.

And Connor made that point. Like, yes, the all in affordability for homes is like up 30 percent, but rents are up 17 percent. And you have to have shelter that makes it such. that the price of, you know, it has gone up to cost of buying, but not, it makes it in, sort of relativistically, not as much. Anyway, so many, so many different angles. Yeah, but you're, you're entirely right. There, there is just so much to digest in the housing market at the moment. It does kind of feel like, overwhelming. We'll, uh, we'll come back in six months. We'll see how far under water you are, or whether you're, uh, you're already ready to cash. Another, another episode based on my, uh, personal misfortunes. Excellent. Yeah. All right. Uh, shall we

leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allo. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Both of our guests are on Twitter and their great follows Dustin Gelbert.

He's at Two By Forecaster and Connorsen. He's at Connorsen. Follow our producer, Carmen Rodriguez, at Carmen Armin. Follow the Bloomberg head of podcast, Francesca Levy at Francesca today. And check out all of our podcasts on Twitter at Bloomberg. under the handle and podcasts. Thanks for listening. Hey there, Oddlots listeners, we are very excited to let you know that Oddlots is nominated for a Webby Award. You know, Tracy, I'm not normally like a big awards person or get excited about that, but now that I saw that we were nominated

for the Webby for Best Business podcast, suddenly I'm feeling very competitive and I want to win. You really want it. Yeah. Okay. Well, on that note, listeners, if you enjoy Oddlots, if you like what we do, we would really appreciate it if you take two minutes of your time and head over to vote.webbyawards.com. You can find oddlots in the business podcast category.