Plain English with Derek Thompson - "The Weirdest Housing Market in Recent History"

Episode Date: July 12, 2024

Skyrocketing rates, shrinking affordability: The U.S. housing market is a mess. It's also a bit of a mystery. Why are prices still sky-high, even though many measures of demand are weak? If the supply of new homes is nearing a historic high, how come the inventory for existing homes is close to a historic low? Today's guests agree that this is one of the weirdest housing markets in recent history. Mike Simonsen, president founder of Altos Research, and Lance Lambert, cofounder and editor-in-chief of Residential Club, join to talk about the state of the U.S. housing market—what makes it ugly, what makes it weird, and what would have to happen to make it better. If you have questions, observations, or ideas for future episodes, email us at [e-mail]. Host: Derek Thompson Guests: Mike Simonsen & Lance Lambert Producer: Devon Baroldi Learn more about your ad choices. Visit podcastchoices.com/adchoices

Greetings, it's Mal. Call your banners because it's time to head back to Westrose for House of the Dragon, season two. The ringers Dragon riders will soar alongside you each week with a heron-hall-sized slate of conversations. The dragon has three heads, and on Sunday nights immediately after Hot D concludes, Chris Ryan, Joanna Robinson and I will be with you for Talk the Thrones. Then on Mondays, two more shows away. Dan Lath and Charles Holmes, Steve Allman, and Jomea Denneron, aka the Midnight Boys, Pugh!

Pugh! We'll head to the tourney grounds to share their reactions. And of course, Chris Ryan and Andy Greenwald will sip the Arbor's finest vintage on the watch. Then on Tuesdays, Joanna and I will head to the bowels of a pleasure den for our House of our deep dyes. Then on Thursdays, Joe, Neil Miller, and Dave Gonzalez will gather the Ravens for trial by content. In this season, full episodes of Talk to Thrones, House of Ar, and the Midnight Boys will also be available on video on Spotify and the new Ringervverse YouTube channel. Podcast episodes available on Spotify or wherever you get your podcast. Today's episode is about the U.S. housing market, which one of today's guests calls the strangest in recent history.

To understand what makes today's housing situation such a violation of several econ 101 assumptions, we should think back a few years to 2022 when the Federal Reserve first started raising interest rates to fight inflation, to reduce prices. There are many ways that economists assume that higher rates, impact the economy. And one of them is this idea that higher rates reduce prices and activity in so-called rate-sensitive industries. So high rates on credit card debt means less credit card spending. High rates on auto debt means weaker demand for new cars. And higher mortgage rates should mean all things equal that, let's say you look at a $500,000 house in the market in 2020, and then you put it back on the market today when interest rates have skyrocketed. And a lot of

prospective buyers are going to say, well, look, mortgage rates are a lot higher today, which means my monthly payments on interest will be a lot higher today, so I can't afford as much house as I once could. Rather than offer 500,000, as I might have in the previous interest rate regime, I'll offer you, you know, $450K. And you multiply this phenomenon across the market, and that's what you should see. Weaker demand should mean falling prices. But today's housing market is uglier and weirder than most people predicted. Uglier because even with rates rising faster than any period in modern history, home prices have not declined. According to the S&P CoreLogic Case Schiller price index, housing prices as of the spring are higher than ever. In fact,

for the first 52 months of this decade, U.S. housing prices were up 51%. That means this decade has already seen more home price appreciation than all of the 1990s, all of the 2000s, and all of the 2010s. This has been a uniquely horrendous period to be on the outside of homeownership and looking in. But here's where things start to get a little bit weird. Typically, when home prices are setting records, it's because you have white, hot demand for housing. But today, several measures of demand, like mortgage purchase applications, that's the number of people who are looking to take out a mortgage to buy a house is at multi-decade lows. At a high level, this sounds like a completely broken market. Price is so high that a lot of

potential buyers have simply given up on trying to even pay. As one of today's guests, Lance Lambert explains, the decline in mortgage applications isn't just due to priced out buyers. It's due to another incredibly important statistic that we have to understand to see what's really going on here. It comes from decreased turnover from existing homeowners, right? So some would-be sellers feel like they can't afford to sell their current house, which they bought with low interest rates, and buy a new house with higher interest rates. As a result, rather than switch from a low-to-high interest rate,

they simply say, look, I'm not selling. I'm staying in this house. I'm enjoying the low interest rate that I got on it. That means fewer sales of existing homes. That means lower inventory, and lower inventory means higher prices. Today's guests are Mike Simonson, president and founder of Alto's research, and Lance Lambert, co-founder and editor-in-chief of Residential Club, a newsletter on the U.S. housing market.

We talk about the state of U.S. housing, what makes it ugly, what makes it weird, and what would have to happen to make it better. I'm Derek Thompson. This is plain English. Lance Lambert, welcome with the show. Thank you for having me. Mike Simonson, welcome with the show. Great to be here, Derek.

I think what I want to do is to frame our conversation about today's housing market by first reviewing what's happened with housing since the pandemic, because a lot has happened to housing in America since the pandemic started. Lance, I want to start with you. There is a widespread sense that housing affordability has gotten worse, faster than any time in modern memory in this country. And sometimes economic sentiment is vibes, but sometimes it's real. And you have written that this is very real.

You've written that in the last few years, we have seen the fastest ever deterioration in housing affordability. I want to get started with just a big open question. What happened? What in your mind were the most important drivers of what you have called the fastest ever deterioration of housing affordability? Yeah. And so if you go rewind all the way back to March 2020, there was a few week period where

people were a little scared, right? and a little more than scared. And even builders and, you know, some of the people that I know in that space, they were worried, right, for their own business with the lockdowns and everything. And a lot of real, some states actually stopped real estate showings. But very quickly, housing started to take all. And so what occurred there is that you had a period of an increase in housing demand from work from home. But it wasn't just, you know, the work from home going to the Boise's in Austin's. It was also an increase in demand for space. So even in markets like San Francisco and New York that lost residents during the pandemic, those places actually saw a decoupling of roommates. And so there was a net

increase in demand for housing and for space. You had the ultra low rates. And for the investor side, that was huge because it meant far more properties were cash flowing, right? And then you also had the stimulus money and all of that, of course, but there was also a liquidity bubble, essentially, that poured over from the institutional capital markets into housing as well. And so it was just a bull rush. And so 2020, 2021 into 2022, you had an overheating in prices where the demand on top of the supply, it just overpowered the market. The Fed estimates that new home construction would have needed to increase 300% to match the increase in housing demand during the pandemic. That's just not possible. It just, it doesn't work like that.

Supply cannot respond quickly to demand. And let alone, there's all the supply constraints and all of that as well in the market. And so you had an overheating in prices. That was very quickly followed by the Fed going from quantitative easing mode into quantitative of tightening mode. And so the interest rates, the average 30 or fixed mortgage rate went from 3% to 4% to 5% to 6% to 7%, and still even some borrowers who don't have great credit now, it could be still closer to 8%. So that overheating in prices, followed by a rate shock, is the fastest ever deterioration in housing affordability because incomes just couldn't keep up with

it. Now, if you zoom out, and those are the three core metrics for housing affordability, it actually gets even worse if you start to add in things like home insurance. So between 2018 and 2021, there was only one time that a state saw more than a 10% increase in home insurance, and that was Florida. Last year it was 25 states. So home insurance is now a wildcard that's helping to deteriorate housing affordability further. And it's not necessarily the worst housing affordability ever. It depends how you measure it. You could argue that 1981 is worse when mortgage rates were 18%. But at the same time, if you're a cash buyer in 1981 and you have two X your income, you could go buy the house outright in cash, right? Whereas today, when prices are

5x, 6x incomes, it's a very different story for the all cash buyers. So it kind of depends on the lens that you look through. So bottom line, it's not just vibes. The housing market really has experienced a kind of perfect storm. It's not just the decades of underbuilding, which is constrained supply. The work from home revolution, I'm so glad that you mentioned that clearly was a contributor here. You had this growth in household formation as the people were coming together and roommates were splitting apart. I think there was pandemic cabin fever too. People just wanting to leave whatever house they were locked in looking on Zillow for some place to move into. I was very much in that bucket as well. My wife and I,

we had lived in Manhattan four or five years before the pandemic hit. I was at Fortune Magazine then. And that first week that the lockdown said, I was like, we're probably going to move home and buy a house is what my wife and I were talking about because we had a three-year-old in the city, didn't have a lot of space, very expensive, of course. And so it was just a good opportunity. Now, were we already going to do that? Yeah. Maybe it would have been 2022. Maybe it had been in 2023, but it definitely sped up our decision. I want to go deeper into the supply and demand factors here. Mike, let's go deeper on the supply side story first.

It is an article of faith for me that America doesn't build enough houses. And depending on where you look, the housing deficit is somewhere between 1 million and 5 million homes. Clearly, it's worse in some of the richer coastal cities and metros. But the truth is, and I'm not sure that everyone recognizes it, we had an apartment construction boomlet. In the second half of 2022, housing starts for buildings with five units or more, so larger apartment buildings, reached their highest levels since the 1980s or 1970s, and now they've crashed. So there's two things to explain here. Why did we get this apartment boomlet, and why is it now suddenly

crashed? Yeah, and so we've really got two, almost two separate markets. You've got like single-family homes or homes that were underbuilt since the great financial crisis. So if you think that the multi-decade average might have been a million and a half homes per year, that that fell to like half a million. And we are just in the last few years back to building those, to start building on our long-term average of how many homes we have to build. And, you know, we've got replacement homes. So these are not just population growth.

Like, that's why we've been behind in that. The multifamily apartment side is like that is, that boom was really a function of the cheapest money ever. And the crash is a big difference between big apartment buildings and like your mortgage is your mortgage is locked in for 30 years at 2.8%. You know, or Lance got his at 3.5% in 2020 when he moved. But it's locked in for 30 years. But if you're financing a big apartment building, you don't get a 30-year fixed mortgage. And so you are much more impacted by the rate changes than the existing homeowners in the country. So you get people who financed and whose cash flow models on a big apartment pay out when your financing costs are low.

And suddenly they're higher than anybody predicted, higher faster than anybody predicted. So that puts a ton of strain on those types of projects. Therefore, therefore, there are, you know, like fire sales. There are also big shifts. Those big, you know, those big apartment projects that have been planned for years have assumptions about where people live. And a lot of those assumptions changed. So if you put a big apartment building in downtown Seattle, like that work done,

changed in that period. And so a lot of those, those aren't penciling out the way they expected to. You said there are really two separate markets and housing to follow, single-family houses and multifamily housing. I think there's another way to usefully split the housing market into two parts. And that's on the inventory side. So I want to do this carefully because I think it's, it's very important, but it's also a little nuanced. In the past, whenever I've covered housing, I've always said that the most important statistic in housing is inventory. When inventory, that is the amount of houses that are available to be sold, when inventory is low, there are a few houses available, which means that buyers will pay through the nose to get

one of those scarce homes, and that means prices are going to rise. And I've always said that when inventory rises, you can expect that price growth will moderate. But right now, we seem to be in this very strange, very historically exceptional period where inventory is rising a bit, but prices are still high. And Mike, as I understand it, a big part of this inventory mystery is that there are, to use your language, two different markets to look at. If you look at new homes, that is homes just completed where the paint is fresh and nobody's ever lived there, that inventory is going up and up and up. But if you look at existing homes, resales, where people have been living for the last few years, that inventory is still.

stuck at a 30-year low. So, Mike, why don't you give us the 30,000-foot view here on inventory? And then, Lance, I'm going to go to you for a breakdown. If you think of year-over-year inventory increase, we have now 39% more homes on the market now than we did 1st July last year. So 39% more homes. It's a significant number more homes. And so a couple of the dynamics are happening here. One is when inventory rose in 22, that actually led to year over year

home price decreases in the first quarter of 23. So inventory rose dramatically, prices came down. In 23, after that initial bit, inventory actually dropped

most of the year. We had demand greater than supply, so inventory actually dropped for most of 23. We ended 23 with fewer homes on the market than we ended 22. So right now, inventory is up. It's been climbing all year. It's been climbing actually for 33 months in a row or something like that.

Inventory has been expanding versus previous year. And so that implies future price moderation that you'll see end of this year into early next year. So, Lance, inventory is rising, but it's still severely constrained by the fact that resale listings are pathetically low. How do you evaluate this dynamic? The way that I like to think of inventory, it's almost like a car dealer ship lot, right? So it's the supply demand equilibrium. And as that lot gets more packed, it's more likely that maybe you'll get some deals, right? And if that lot starts to dry up very quickly, you can start to, you know,

it gets more competitive, right? The dealer's not going to make. the discounts. And that lot can also, how packed it gets or how, you know, few cars are on it, doesn't necessarily get driven by the deliveries to the law. So the demand side of it can have a huge impact. If buyers pull back or they rush in. And so what you're seeing in this market right now is a market where there's not a lot of resale listings coming into the market. It's not quite as low as it was in 2023, but you're not getting a lot of listings come in. But what you have had is affordability is so strained and that some of these markets that also have the competition from the new construction where they're doing the buy downs, they have some of the discounts. It's leading fewer buyers into the resale market.

And so you're starting to see more, you know, in this hypothetical, more cars, but it's really homes, kind of build up. And I think, though, if you cut it deeper, you will see that there's a huge amount of regional variation across the country. where a lot of the markets in the Sunbelt that have more of this new construction saw more the affordability deterioration or overheated price growth during the pandemic housing boom, which has since strained fundamentals. And those markets, you've seen active inventory rise more. And then there's still this pretty big swath of the Midwest and Northeast. Yeah, inventory is starting to tick up, but it's still ultra low, like historically low. And the technicals of the market there are in a place where if you roll through the seasonally strong

window because resale is so tight, you're going to see upward price growth. And so those markets plus parts of Southern California have kind of helped to keep price growth on a national basis up a bit more is kind of how I view the data. How much of the issue right now is homeowners don't want to resell their homes because they're paying a mortgage that they got in 2019 at 2.9, 3.2 percent, and they don't want to buy a new house, the mortgage is going to start with a seven, versus how much of this is a phenomenon where the pool of buyers is such that there aren't a lot of buyers who can afford current mortgages, and so they aren't meeting homeowners at the prices that they're listing their homes. So I guess how much of this is,

This is the homeowners are like locked by the rates that they got versus there's a demand side problem. People literally cannot afford to buy homes whose values are predicated on interest rates that no longer exist, Mike. Yeah, so we call that the lock-in effect. So how are homeowners locked into their existing rates? And so it's pretty obvious that if I have a 2.8% mortgage and, It's really expensive. Even by the same house again, I couldn't afford it for a lot of people. So that means that there is a certain amount of lock-in happening.

I'm not moving because I got a great deal. One of the, I think, important misconceptions about the lock-in effect is that the lock-in effect is actually not a function of high rates now. It's a function of a decade of ultra-low rates. So the lock-in is that I've got the best deal ever. And so even when rates come back down again, I'm still not selling my home because I have the best the 11th. I might buy a second home when rates are at 3%.

It's very easy to pay two mortgages at 3%. And so what we see is that we've had declining inventory for 14 years in a row, with the exception of 2018 to 2019, because that year mortgage rates rose. about 100 basis points in the year and inventory rose in that time. So rising interest rates leads to rising inventory, falling interest rates lead to falling inventory. And so, you know, a decade ago, in July, we might have 1.2 or 1.5 million single-family homes unsold on the market sitting there.

You could walk in and have that to choose from. And right now there's 646,000 this week. So it is still half of what it used to be a while ago. And that's because we have given so many Americans the best deal ever on their financing. And so you have a situation where that lock-in started a decade ago. And as a result, we've done things like we've taken 8 million homes out of resale and kept them in investment. or second homeownership in that decade. I want to talk about mortgage rates themselves

because the typical spread between treasuries and the 30-year mortgage interest rate, Lance, you've written about this a lot. The typical spread is about, what, 1.7 percentage points. Today it's closer to 2.8, 270- 280 basis points. Why is the spread, the difference between the Federal Reserve's interest rate

and the interest rate that people are paying on mortgages relatively historically high right now. Yeah, so normally there's about that 1.75 is like the 40 or 50 year average for it. And let me just start by saying that I don't work in the mortgage industry, so I'm not super close to the space. But the general narrative there is that once we went in from quantitative easing mode, where the Fed was buying up a tremendous amount of mortgage-backed securities to quantitative

of tightening mode where the Fed wasn't selling them off, but they stopped buying. And so some of them were rolling off the books. As that happened, no natural buyer moved into the market to replace the Fed. And so there was less demand for the mortgage-backed securities. So that part, also the part of the fact that there's a general belief in the mortgage industry, in the bond industry, that over time, the people who are taking out mortgages in the vintages of 2002, 2022, 2023, and maybe even 2025, at some point, there's a high probability that they'll be able to refinance. And so that prepayment risk also factors into it. And so they want more of a premium.

So the volatility, the fact that a buyer didn't naturally come in and replace the Fed, and the prepayment risk, that's the general industry narrative of why the spread is so high. Now, the spread has eased a bit. The spread last year when Silicon Valley Bank failed, and so there was a tremendous amount of uncertainty out there, and people thought, hey, maybe this could be a little bit of a financial crisis. And then right after that, we saw a huge fight over the debt ceiling, right? And so during that period, last Memorial Day, it was like a 3.3 percentage point spread.

And so if we still had that spread today and set a mortgage rates around 7.10%, we would be at like 7.6% average 30-year fixed mortgage rate. So the spreads have eased a bit. But yeah, it's definitely something that irritates the industry because if the spreads were normalized today, we'd have an average 30-year fixed mortgage rate of like 6.10 or 6.20. So it's definitely something that the industry has been frustrated about since 2022. So I'm trying to take the side of somebody

who is currently outside the homeownership market trying to break in, trying to buy their first home, their second home. And what you two are describing is this kind of hydra monster that they have to take on. It's not just one head, which is the years of underbuilding, which is exacerbated inventory. It's not just the years of cheap money, which to Mike's point is so critical to understand why you have this lock in effect. All these people who own homes aren't reselling their homes at anything near the rate we might historically expect them to. It's not just what most people, I think, outside the market are looking at, which is, holy crap, mortgage rates are so high compared to what I'm used to, and that's making me concerned about buying a home relative

to renting. Another thing that people mention sometimes, and I would love you to help me evaluate the degree to which this is a real hydra monster is institutional buyers, right? There is this narrative that the reason that there aren't enough homes available for people to buy is that these folks, the private equity folks, the big banks have come in, and they've bought up all these homes around Phoenix, and they've bought up all these homes in Florida, and now they own the homes, and they are renting them out to families,

rather than allowing families, giving them the opportunity to buy that house for themselves. Mike, starting with you, how seriously do you take the argument that the reason that houses are unaffordable in America has a lot to do with the fact that these institutional buyers are gutting inventory for potential.

potential homebuyers. So the Wall Street landlord is like the most ready-made villain you could possibly imagine. And so you can understand why that narrative holds. However, it's really fascinating. The big money, big institutions, people, companies that own more than a thousand homes is a tiny fraction of homeownership in this country. And it's like, you know, 4% of the homes that were bought, it's like less, it's like one person, less than one percent of the homes that exist. The fact is that most investors in this country in real estate, in residential real estate, are individuals with one, two, three homes. And so 95 percent or something, 94 percent of investors are people, individuals with one,

two, three percent, you know, one, two, three homes. And what's interesting is that in the last year, the last decade, there's been a lot more of those. So we are investing, we are taking, as money was cheap, we as a country took homes out of resale and have them in the rental space instead. And that is one of the factors that means we have less inventory. but it's generally not true to the data to blame it on the big funds. In some local markets, like some zip codes in Tampa, you know, there is a pretty dominant, like that's where those guys want to buy. And so you can see that more pronounced in some local markets, but in general across the

country, the big Wall Street folks are a tiny fraction of the market. Lance, do you agree? Should we blame Wall Street? Or is that a ready-made villain that shouldn't necessarily be as villainized in this particular category as it is in mainstream media? So like what Mike said, there around 1% of the total housing stock for single family that they own, the operators, over 1,000 homes. Now, zoomed out, if you look at investors at large, back in the early 2000s, they made up around 13% of home purchases. and that slowly, like Mike was pointing out, has slowly ticked up to 25%. Now, I think where things were more problematic is not just necessarily the institutions, but really that period during the pandemic housing boom where the Federal Reserve and really central banks across the world, Australia, Europe, they misunderstood the strength

and the speed of the recovery of the economy. And so demand got overpowered at the same time there was a supply shock. And so how that played out in the housing market is that there was a bull rush from investors and institutions were a part of that. I talked to the CEO of Roofstock last week, and they buy up homes for institutions. And he told me in the first month of 2021, they did $10 million in home purchases for institutions. By June, 2021, that was $250 million. So there was a huge ramp up, but institutions were a part of it, but really it was a much bigger pool of investors. And it's really the mom and pops, the people who own 50 homes. And it made

sense for them because the fact that home prices were ripping, rents were ripping, and rates were super low. So almost everything on the market cash flowed that investors wanted. So there was a tremendous amount of housing demand out there. And although investors made up 25% of purchases, they were competing for a lot more of the homes that they didn't win. And so I think the overall investor impact during the pandemic housing boom and during the overheating is very much true. But it's also created from something else. It's kind of my view on it. And also like Mike said, is if you live in some pockets of like Dallas and Atlanta and parts of Tampa and Charlotte and Houston and Phoenix, those six markets are where 36% of institutional and homes are,

just those six. So for some of those people, that's probably why there's more, you know, political pressure and outcry in some markets. But where I live, I'm in the Midwest here in Cincinnati. If you look at our data, it's not that huge of a number. But we saw the same amount of house price growth is a lot of those markets that did have the institutions. So the overall pandemic housing boom and this overall overheating in prices is much, much bigger than just investors and also bigger than much bigger than the institutional side as well. What you said is a good reminder that there really is no such thing as a national housing market. There are thousands of housing markets and they can do very different things at once. Then we aggregate all of the numbers and

say this is what's happening in America, but the stories can be very different if you look at, you know, Hartford, Connecticut versus Phoenix or Austin. So speaking of Hartford and Phoenix and Austin, Lance, I would love you to give me a sense of, and Mike, you can add your two cents here as well, a sense of where home prices are rising the fastest right now and where they are cooling right now, right? Is it the same sunbelt suburbs that were out of control a few years ago, Austin, Phoenix, or has that story shifted in meaningful ways? The truth is that work from home are the fact that a lot of people could buy in a market that is cheaper or in a place that's cheaper than they normally could have and then still make the same amount of money. That impact during the

pandemic was felt most acutely on the markets like Boise, like the markets like Phoenix, like the markets like Austin. But that effect has not fully gone away. And so what you are still seeing in some of these parts of the country, there's still this extra demand in the excerpts. Or for are places that are maybe, maybe it's not somewhere you could reasonably commute five days a week or four, but maybe if you had to come in one day of the week from office, you come from Connecticut, you come from further out in New Jersey. And some of those places that also don't have the new construction stock, they're not building a lot and fermenting a lot in New Jersey and Connecticut. And so some of those like donut areas of the country that are outside of metros that also don't

have the new construction, they've stayed fairly warm in terms of pricing appreciation, and the resale stock there is very tight. So for Hartford, Connecticut, they're still down 79% for active inventory. So that means for every five homes that were for sale in 2019, there's just one now. So still very tight. And then you go to a place like Austin, where not only did they, within a three or four month period in 2022, shoot back to pre-pandemic levels, they're actually like 30 or 40 percent, depending on where you look in the metro, above pre-pandemic inventory levels. And prices there have softened.

They're down in the city around 10. And as you get further into the excerpts, there's parts down over 20 percent in the Austin MSA. So things vary right now significantly across the country. Mike, I want to continue. with you on the mystery of Austin because I consider this such an interesting story of housing, demand, supply, and pricing. So a quick summary of a report that I did from several months ago, in the 2010s, Austin was growing faster than basically every other U.S. metro by population. It was pulling in movers from around the country. And initially, these downtown and suburban

areas were really struggling to build enough single-family homes and enough apartments to meet that influx of demand. And famously, it was causing Austin housing prices to go absolutely berserk. In 2021, Austin reported that it saw rents rise at the fastest rate in city history. The next year, according to Austin data in 2022, rent growth doubled, median rent doubled in Austin, which is just insane to think about. So Austin, in response to this incredible and obvious demand starts adding more and more homes. At one point, it's adding homes more than twice as fast as the national average, nine times faster than San Francisco or Los Angeles or San Diego, nine times faster. It's incredible. And now in the last few quarters, we've seen that Austin

rents have actually declined by 7% year over year. What's going on in Austin? I mean, rent declines, or at least printed rent declines in a city like Austin, which was booming more than any other city in the 2010s, it's just crazy for someone like me to see. How would you describe the phenomenon of Austin the last few years? So there's a couple of dynamics going on here. One is that, as Lance pointed out, there is more inventory now in Austin.

As of this week, there's just over 10,000 single-family homes on sold on the market. That's higher than it has been, a decade since we're coming out to actually more than a decade because since 2011 when we're coming still coming out of the financial crisis so and there is indeed more um active inventory unsold now there's a lot more people and a lot more homes than there were 15 years ago too so so per capita it's a little it's a little bit muted so it but that's very notable and it's and it climbs very quickly climbed very quickly in 22 and is climbing again this year has not

peaked for this year. Typically, Austin inventory peaks in August. And so we've got another probably six, eight weeks of inventory growth there. With what's one of the fascinating things about when we look at home prices and rents is that people often assume that those two would move opposite. If I'm not buying, I'm going to rent. So if I don't buy, that'll drive up rents. It turns out, though, that they actually move in tandem. And they're both driven by household formation. Household formation. And so that's people moving out of the mom's house.

It's immigration coming in. And during the pandemic, there is a, there was a, you know, a very obviously well-documented, like California migration to Austin. I live in San Francisco. I know a bunch of people who moved to Austin. And there were a few things that made that make sense at that time. One of the things is when, you know, mortgage rates are 3%. it's very easy for me to overbid by a hundred thousand bucks on a house because my payment doesn't

actually move. It moves a tiny little bit. Now with rates at 7%, 100 grand makes a big difference in my payment. Right. And so there is very quick adjustment in pullback in demand and pullback in prices that happened because, you know, if you're leaving San Francisco and you sell a million and a half dollar house and you buy in Austin and you're paying mostly cash and you can pay, you know, like it's very easy to overbid in that scenario. And now it's much more difficult to overbid. And so that drove a lot of that demand shift. I want to talk a little bit about the near future, not like the distant future, which is impossible to predict, but like the next few months, the next few quarters, that edge of the present. We've seen a enormous number of housing starts

in multifamily. There are a ton of apartment buildings that it seems like are about to come online. That should significantly increase inventory. Lance, I'm interested in whether office to apartment conversions might also make a dent here, especially in places like D.C., New York, Chicago, Los Angeles, where working from home is such a large share of the labor force that there are a ton of empty offices that can be converted. What are you looking forward to the next few quarters in terms of the growth of apartment units? Yeah, so offices to Resi, it's something that's picking up. It's something on a percentage basis that's rising fairly quickly. But in terms of the total number of units, it's still fairly small. It's very expensive to do it, but it's something to watch. And it's

something to watch not for the next year, but really for the next decade. But the biggest story right now in terms of apartments is this multifamily supply that was financed during the period of ultra low rates, 2021 into early 2022. And it's finally making its way into the market. And so in In 2023, we saw the highest number of apartment completions for over five units since 1987. Well, this year, 2024, according to Real Page, is projected to be the biggest year for multifamily completions since 1974. But we're also at an interesting moment where a lot of this multifamily supply is coming in. But if you look at the leading indicators of what's next, multifamily start.

are down 52% year over year. So we have a lot of multifamily supply hitting the market. We're seeing a lot of discounts in terms of deals that people can get, especially in the Sun Belt markets where a lot of the supply is hitting. And in some of these markets like Phoenix and Austin, you're seeing outright declines for apartment rents. But that's the moment we're in now. The interesting thing will be to see where we are in 2020, 2006, 2007, as we start to get into a period where right now the starts are down 52% year every year. And so what is, you know, what do completions look like two years out? Right. And just for people who aren't housing nerds, start essentially just means that the housing construction project has started, the ground has been

broken, that they're starting to lay sticks. And then completion essentially means we're ready to cut the tape and start walking real estate people through that home in order to rent out or or sell these places. Do you have a sense of where these units are? I mean, you're talking about a historic number of apartment units coming online. But there's also all of these headlines out of California or New York

that are like, oh, my God, no matter how much red tape we pull away, we still can't add enough housing. So some people might get a little bit of whiplash. How, on the one hand, are we not building enough homes or we need homes? But also the number of homes coming online is the highest in 50, 60 years.

Is there a geographical story to overlay here about where these apartments are going? And Lance, Mike, either of you can take this if you have the data. It's the boom towns. It's these boom towns in the Sunbelt, Nashville, Austin, Atlanta, Tampa, Jacksonville, you name it through a lot of the Sunbelt parts of like Los Angeles where they're not building quite as much. But it's actually through one lens, yeah, maybe if you're one of the operators there, maybe this is a tricky time. But through another lens, it's like, this is good for those markets,

because one of the things that those markets have enticed people with is affordability, right, is the fact that, you know, you can go there and still get probably a good job and have a lower rent than you would in New York, Boston, Washington, D.C., Seattle, San Francisco, L.A. So the fact this multifamily supply is coming into the market and will decelerate rents for a period, I think that's good news, probably, for those markets. Yeah, and I think it's coupled, I think it's coupled with the same demand as home purchase weakness. So, like, we can track in our rental data.

We have are showing year-over-year, nationally year-over-year, asking rents down, both in single-family homes and in apartment buildings. So, like, it is, we could see a drop of the last two and a half years very clearly on the yearly appreciation. And right now it's flat to down across the country. And so, you know, it is, when we talk about affordability, whether it's in rental or in home prices, it's very often assumed that, you know, we had, you look at the chart and the chart goes up and to the right, very steeply. And it's very easy to look at that chart and assume there has to be a regression to mean. That means there's going to be a big price correction.

Like that means there's a crash that must happen. What we can, the other way you can get to affordability, though, is stability in prices over time and incomes climbing over time. And so, you know, for example, we can see that, that like, if, if, if, if, if, if, rents are flat year over year and incomes climb a little bit, that's a, that is a, like an improvement. On the, on the purchase side, you can see if prices are flat and or if, you know, mortgage rates stay higher for longer, that means inventory builds over time. Let's say they've been, rates have been up for two years. Let's say, well, let's say rates stay up for two full more years. and then inventory builds now back to a million single-family homes on the market like it used to be.

Now prices where they don't necessarily crash, they moderate, they've been flat for four years in a row. Now, and incomes have been climbing, and then rates drop, then you have a dramatic affordability shift that is in the pricing change of affordability, and the payments change in affordability. So I think there's a lot to be seen there where very often people are assuming prices went up really fast. That means they must fall really fast. I talked to Conner-Send, Mike,

our mutual friend who's been on this show several times, what he wanted me to ask you because he unfortunately couldn't be here. He wanted me to ask a question I think you probably just touched on, which is that inventory is up a lot, but transactions haven't followed. And he wanted to know what you think breaks this impasse.

And at a certain extent, I think you already outlined what might be your answer, which is that, you know, we have a situation right now. We're given high interest rates and given lock-in, we don't have consumers who feel like they can afford prices at this level. We might need to just wait a few years for real wages to grow to the level that given what we expect 30-year mortgages to be, they feel like they can afford home prices at these average levels. Is that basically a part of your answer?

And feel free to expand. Yeah, that is exactly part of the answer. So we wait a few years. So higher rates means more inventory. So a few more years at higher rates allows that inventory to build substantially. That means there's less price pressure. That means when you're buying, there's less competition per house. So those are all parts of all the factors in there.

One of the things is interesting is we were talking about the local areas earlier. that the areas right now that have strength in purchasing and low inventory tend to be cash-heavy markets. So that's why, you know, Boston and the Northeast and then down in Southern California have had tighter inventory and better home price growth, where the South tends to have higher mortgages and worse FICO scores. So it's actually more expensive to buy a home relatively in those markets than if you're cash heavy. And so you can see that impact in the markets right now.

So one of the things that then gets the inventory has risen, but transaction volume hasn't really risen yet, is that we're still in a. essentially rising interest rate environment, rates are higher than they were six months ago. They're hired and they were a year ago. Rates are still rising. And so if you're shopping for a home to 7% and suddenly it's 7.2% you don't make an offer

and therefore the transaction doesn't happen. But once we, and who knows when it comes, but once we shift that broader trend where if rates ease back into the sixes, you'll see an acceleration of demand faster than supply, so you'll see the transaction volume pick up, you'll see inventory fall, and if rates fall fast enough,

that dynamic will shrink inventory a lot and actually push prices higher. Lance, last question to you. The picture that Mike is painting is not at all a happy picture for this group of people that I mentioned earlier who are sitting outside of the home, ownership market trying to break in, but feel like prices are just too high, especially when you

factor in the cost of 30-year mortgages. What he's saying essentially is that, you know, if you're someone who's looking forward to the Fed cutting interest rates, maybe this happens in September, maybe it happens again in December, maybe we get lucky and we get a few interest rate cuts in the next few quarters. What Mike is saying is, well, you might mechanically think that lower mortgages means more affordable homes. But if you multiply that out over hundreds of millions of households, if everyone thinks that lower mortgages

means, oh, now I should buy a home, well, that's just another word for demand rising to meet the level of homes that exist, and rising demand given a certain level of supply means that home prices are going to go up. Do you agree with this idea that if you're a wannabe home buyer who's sitting outside the market, right?

And we can talk about, you know, regional, city specific, but right now I really am talking with the aggregate sort of average home buyer. That it is just a tough position to be in because home prices are really high and there's not an easy path to see how home prices can fall mechanically just by the Federal Reserve lowering interest rates. Do you agree with that somewhat pessimistic portrait? I agree that it's very challenging to kind of figure out one, like what is our path to restored affordability, right? So there's three different, let me give three examples of how we,

of times that we were here before. So if you go back to the early 80s, we were in a situation where housing affordability had deteriorated in a similar way. It took a little longer to play it out, but it happened in a similar way. Prices continued to rise through most of the country on a nominal basis that were at any given time about 20% in markets falling, but most of the markets were still going up. It really wasn't until, you know, about the early 90s that it was just a long period of incomes outpacing prices that housing affordability nationally was restored. Then you have an example in the mid-2000s where the U.S. we deteriorated again, right? That time, though, we got out of it through prices coming down very quickly, but also a lot of people had to lose their jobs, too.

It wasn't a easy path to restored affordability. And then the third place is Canada at the same time. They saw a deterioration in affordability, just like the U.S. The only thing is they never worked back to restored affordability. Actually, this cycle went up to a worse place. And so I think there's no guarantees in terms of like when you go through an affordability deterioration in terms of like how you get back, when you get back, you know. But I think if you and now that put that over to the side, then there's looking at home ownership, which is if you look through history, most people who buy and hold for several years, usually it pans out over time for them, especially with these fixed rates.

You know, you can get in, you can lock what your payment's going to be. If rates do come down, you could refinance. And you know what? Even if prices come down in some of these markets, if you have a long enough outlook and you're planning to live in that market for long enough, you can kind of weather those storms. And the times where markets have fallen 20% or 25 or 30 or 40, or 40, 40% those have pretty much been outliers through history. And yeah, every once in a while, you will have it like in the mid to late 80s in Texas where Austin, Dallas, and Houston went

through the oil bust and savings and loan crisis. But those have kind of been unique chapters in history. So I don't know how everything is going to play out this cycle. I would be lying if I said that I know for sure. But what I do believe is that there is a value to home ownership and if you look at your personal life and you assess your relationship, how long you're going to live in a region, your income outlook, those things probably matter a lot more than trying to predict what's going to happen to home prices, what's going to happen to mortgage rates. Lance Lambert, Mike Simonson. Thank you guys so much. Thanks, Derek. A lot of fun.

Thank you for listening. Today's episode was produced by Devin Boraldi. Our summer schedule for plain English for the next few weeks will be one episode a week on Fridays. We'll see you next week.