The Compound and Friends - The Fastest Drop in Home Prices Since 2009

Episode Date: October 3, 2022

On this special episode of Live from The Compound Zillow's chief economist, Skylar Olsen, joins Josh Brown and Michael Batnick! Dr. Skylar Olsen is the Chief Economist at Zillow. Previous to her current position, Skylar founded a consultancy supporting public-facing economic data programs, was head of economics at a digital mortgage start-up, and spent 8 years supporting the Zillow economic research department. Listen to The Compound's podcasts: The Compound and Friends: https://podcasts.apple.com/us/podcast/the-compound-and-friends/id1456467014 Animal Spirits: https://podcasts.apple.com/us/podcast/animal-spirits-podcast/id1310192007 Portfolio Rescue: https://link.chtbl.com/totherescue Talk with us about your portfolio or financial plan here: http://ritholtzwealth.com Check out our automated investing platform, Liftoff: http://liftoffinvest.com The Compound Newsletter: https://email.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews Facebook: https://www.facebook.com/ritholtzwealth Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

We are live. What? Josh, you already cutting me off? What? No. You look like you're going to say something. I feel like John didn't fade the music as delicately as Duncan sometimes does. All right.

He's a villain. He's a villain. Take it easy. No. He's going to kill it tonight. I'm not worried. All right. He's a villain. He's a villain. Take it easy. No, he's going to kill it tonight. I'm not worried. All right. We are so excited. What perfect timing.

We have Skylar Olson on. Skylar is the chief economist from Zillow. I asked her to raise my Zestimate before we went live. She declined. She doesn't have that sort of power. But we are really, truly excited to have you here. Thank you, Skylar. Yeah, no, thank you so much for having me. You know, one of our senior leaders,

Christina is a big fan of yours. So this hopefully will be even a good surprise for her. You know, I don't even know she's expecting this. Very cool. Very cool. Welcome to the show. So all right, this has been quite a housing market from 2020 to 21 to we're on the other side of all of that and rates are shooting up. So how do you describe the state of the US housing market today on October 3rd, 2022? Oh, dude, this though today. Oh, you can start, you can rewind. Yeah. I mean, I guess the way that I've described this whole experience, you know, it used to be like, oh man, this is my moment. I've been studying housing for 10 years.

It's like the Economist Super Bowl, you know, this is primetime. To go on for, you know, over two and a half years is definitely a thing. This moment is so different from the beginning. We're at a major transition point, I guess, high level. How would I characterize this day to day? major transition point, I guess, high level, how would I characterize this day to day? You know, we are going through, you know, pretty significant rebalancing, you know, back to what normal might mean. And that's going to be a rocky path to get to that new kind of stable, steady state. You know, higher mortgage rates are absolutely putting the squeeze on new

buyers and even sellers, you know sellers are pulling back their new listings. So it's a changing market. Do you have any pity for the sellers who basically could have just made up a price, threw it out there into the universe, and had a bidding war an hour later and closed that night? If you really were serious about selling your home, basically you sold it. Are we on the same page there? about selling your home, basically you sold it. Are we on the same page there? Yeah, I mean, you know, when interest rates were down at, yeah, 3%, yeah, when we had the leverage of a lifetime, you know, it was truly a seller's market

because it was a no-brainer to be a buyer. You know, if it's a no-brainer to be a buyer, then, you know, you've got buyers rushing in and trying to, you know, almost at any price because low rates and a 30-year fixed rate rate mortgage that insulates you from those higher prices. So you're willing to do it as long as rates, you know, stay low. So as soon as rates came back up, yeah, things are slowing down really quickly. I guess from a seller perspective, it's, it's kind of hard because it's a little bit like, well, I mean, yes, prices are, you know, slowing down and in some places they're falling. But as a seller, you know, you're likely still sitting on two years worth of record home price appreciation.

So I don't feel, you know, I still feel like they've got the home equity. They've got the wiggle room, you know, to still sell if they wanted. I guess as soon as you're a seller and a buyer at the same time, yeah, I have a little bit more sympathy. And I think that's the challenge is that a lot of sellers are buyers. And if they don't, if they can't, you know, access that lower interest rate or access that affordability for their next home, they're not going to be able to sell this one. And then that's the reinforcing problem we're in right now. It's incredible how quickly we went from 2021, the latter half,

an environment where people couldn't afford the down payment, but they could afford the mortgage. If you could get the down payment. And now, both the mortgage and the down payment are unaffordable, I think, to help aid this conversation and it helps to bring some charts into the mix. So we pulled a few from your website. John, chart on please.

Yeah, cool. So what are we looking at here, Skylar? Yeah, so right here, you know, I'm paying attention to this so much. So this is not just home value, right? Built into this guy is, you know, how prices are changing too, but more importantly, how is the mortgage rate changing?

And I want you to notice a couple of things on this graph. One, notice that huge upswing at the beginning of the year. So that's mortgage rates going from around, you know, just above 3% all the way above 5% in just a matter of four months. That's an incredible, incredible impact to the mortgage payment. So that's going to hit boom affordability right away. But then from that moment, notice, oh yeah, then this actually. So Skylar, I i made this sorry to just jump in here real quick the top the top pane is showing the change in interest rates so it went from you know seven uh from three to seven so that's 400 basis points but the percentage on a year-over-year basis the bottom pane 30 30 years just doubled and

then some in the last 12 months. This is so far outside the realm of normal. Yeah, yeah, yeah. And that was honestly, you know, that first change over those first four months, that's the big impact of the housing market. That's the inspiration to slow down, you know, and that's, you know, supply pulling back, you know, sellers feeling interest rate lock-in, less willing to put their own home on the market for sale because, yeah, demand has fallen back like crazy. But that graph that you were shown with the mortgage payment, not just the upswing, after the upswing, then what happened from there was this, just up, down, up, down, up, down,

up, down, up, down. It's not giving anything back. Yeah. And that's mortgage rate volatility. That's now swings of 20, 50 basis points on a weekly. We saw that today with mortgage rates pulling back from 7% down to 6, 6 or wherever they closed. Yeah. 6, 7, I think now pretty close to that. That's that price stability we've been promised. Yeah, exactly. So it turns think now. That's that price stability we've been promised. Yeah, exactly. So it's not, it turns out it's not stable at all.

And, you know, especially because that mortgage rate just, it just matters so much. And if I'm already pushed up against an affordability problem because of, you know, prices, then what that amounts to is like for a lot of buyers, that's, I qualify, I don't qualify, I qualify, I don't qualify. How do you plan, you know, in that environment? So a lot, I think a lot of buyers right now, you know, sellers are thinking to themselves, like, am I waiting for six months? Am I moving forward? And that's a weird spot to be in, because six months from now, I don't you know, it's a really I don't know that I can tell you that mortgage rates are going to be lower. I mean, financial markets, we can talk about that. They seem to think that they will be.

You know, some some people seem to think that they will be, you know, some, some people seem to think we'll drift back down more than back up, but you know, I have a very, I have a very ignorant, stupid question as somebody that really doesn't understand the housing market very well, but does understand what the problems are. Okay. So that's my premise about myself. Okay. So from my understanding, one of the biggest problems with the economy is really high shelter costs, rent specifically, but just in general, that is factoring heavily into PCE, which the Fed looks at and CPI, which every normal person not working at the Fed looks at. But either way, that's one of the things keeping inflation high. If you jack mortgage rates up to

7% and introduce an ocean of uncertainty, how the hell is anyone going to build more homes to alleviate that upward pricing pressure on rents? Aren't they working against their own interests? Why wouldn't they raise interest rates, but then introduce a mechanism to cap mortgage rates so that at least people have an incentive to keep building? Or is that a dumb question and it doesn't work that way? Help me figure this out. I really don't get it.

Yeah, absolutely. So one, absolutely not a dumb question. And just the fact that one, mortgage rates it's it's something said in the financial market and financial markets are super tricky and squirrely and absolutely impacted by Fed activity right now. And there are a lot of options. So let's see. So this whole like, honestly, I think interest rates had to come up because that violent pro home price appreciation over the course of the pandemic had everything to do with everything to do with, you know, the leverage of a lifetime, super, super low interest rates that made people rush in, you know, and that kind of home price appreciation with that kind of low interest rate, it did turn home buying into winning the lottery, you know, and that's a really unsafe place, I guess, for housing markets to be right housing, buying a home traditionally, and for, you know, stability and financial markets

on our own, it should be this like, this play for financial stability, fixing your monthly payment, I get, you know, I offset, you know, I get some appreciating asset. I got some leverage that's been, you know, federally insured, which is super nice. But all of that is a little bit more about stability and steady wealth growth. This cycle that we're in is violent. So, yeah, you're right. I totally do worry because now I'm in this situation where it's not just new, you know, such as existing homeowners that are suffering from higher rates, you know, I, they don't want to move their home or move to the next

home, right? So they're just going to stay in this thing for much longer. And that's bringing available new supply down. But it's also builders, you know, after the last global financial crisis, builders, you know, the building environment, new construction just changed entirely, right? It used to be the case that they would be able to block these projects up. You know, they could find the labor, right? They'd move the labor around, you know, materials, they'd move around and boom, boom, boom, getting these jobs done. You know, after the global financial crisis, they lost a lot of workers, you know, new

construction really got pinched. And so now in this environment and now supply chain havoc, right? Like during the pandemic. So builders, the way they get these projects done is they carry debt, right? They have to wait on projects while they move, you know, the guys from this project to this one. Okay. So we're going to sabotage, we're going to sabotage new building. If we make that debt unreasonable for builders to want to carry to start their next project, right? Yeah.

So it's like we've got these long run needs, fundamental long run needs. This is a cycle around that that's really killing the incentive to keep building. Skylar, let me ask you this. Mortgage applications are down 40 something percent from their highs. Am I being hyperbolic and asking, could this be a total washout where we fall 80% or so? Because sellers are anchored to what they could have gotten six months ago. And the math just doesn't work anymore for the buyers. And also for sellers that are locked into a 3% mortgage, where are they going? They can't afford to go anywhere. Right. Right. And what we're talking about now, what you just talked

about is this tension between prices and volumes, prices and sales. So where does that mean? Well, let's say prices come down. Well, my problem right now is about discouraged buyers, right? If prices come down, I'm less discouraged, right? I'll, you know, reenter the market and then, you know, sales will be able to pick back up but if sales if prices don't come down then i still have this affordability challenge i'm you know locked in uh you know so if buyers and sellers both strike if buyers and sellers both strike where do you happen it can't happen well that's just it the prices have to break because because people inevitably will have to sell and also demographics there's 70 million million people like me that need to get into a house.

I don't know if it's 70 million, but that's the number of people my age. And we're in prime home buying years. Oh yeah, yeah, yeah, yeah. We have plenty of needs. And yeah, we absolutely. And one of the ways to think about it is, look, sales are 20% down from pre-pandemic.

So are new listings. Supply pulls back. Demand pulls back. What happens to prices? It kind of stabilizes through this. So it's kind of, I pulls back, what happens to prices, it kind of stabilizes through this. So it's kind of, I guess a good phrase would be like, nationally speaking, this might be a little bit more like buying at the beginning of the plateau than say, the top of the market. But that said, if mortgage rates keep doing if they, you know,

that's just it, if they go back up to seven, and they stay there, it's going to be a bit more of a different picture. You know, I'm, I think prices might have to correct more just to get people to reenter. So it is that balance and tension between price, mortgages, and volumes. I want to back up a little bit, Skylar. So you are, I guess, the chief economist of Zillow. What's the actual title? Give me that. Chief economist, yeah.

Oh, it is? Okay. All right. So you're so, okay. So you're talking to people in the marketplace all the time and they must be curious about trends that you're seeing amongst, uh, Zillow is the largest real estate site in the country, maybe in the world. Um, you guys, it's basically like a two-sided thing for the, for the consumer. it's like the best data, the most up-to-date on all the houses and apartments in the country. And then for the pro, it's like brokers working in a specific area could find new potential customers. Okay, so you see everything. And you guys have the data on like what people are really doing and looking for. So what have you talked about publicly that is like a new development this year in terms of the usage of the site or what people are looking for or how people are thinking about housing in general from either a consumer or a professional standpoint? Yeah, sure. Oh, interesting question.

consumer or professional standpoint? Yeah, sure. Oh, interesting question. I mean, I think some things won't be too surprising to folks like, you know, the desire to tour virtually or experience homes remotely is still very alive and well, even as we move further away from the pandemic, it kind of feels a little bit like that expectation has just permanently changed, right? I should be able to experience this unit more from afar without having to come and, you know, interact in person or whatever else. So that's one of the bigger changes. It might not be, well, maybe it is surprising or maybe it isn't. As you might imagine, in the beginning of the pandemic, if I looked at a map of any major metropolitan area, I would see the most by far, by far the most housing market pressure kind of out in the exurban ring, you know, kind of farther away from downtown as like remote work

provided that opportunity to live farther and, you know, save on commute costs. Today, that's way more balanced, way more balanced across a major metropolitan area. It really depends on where you are. So there's interest again, closer to cities. Like that's, it's normalized, it's normalizing. Yeah, normalized. And it might have a little bit more to do with the fact that it's just normalizing than, you know, we're all rushing back to downtown, right?

It's just like, at least that pressure on the burbs has come back off with, you know, the higher interest rates. So that's certainly a thing. Right now, we are starting to see more pressure in affordable units. That kind of makes sense. As affordability becomes the biggest challenge, we're seeing top tier homes slow down faster, more in terms of their price growth than more affordable homes on that lower tier. of their price growth than more affordable homes on that lower tier. So even all cash buyers are pulling back because what once was a $8 million house in this economy is no longer worth $8 million. Yeah, and I think there is an expectation that prices will start to soften. So if you're a cash

buyer and the purpose of your purchase is for the opportunity of catching home value growth, I think you are recognizing that that's, that's no longer the now moment, you know, like for a buyer, if you're a buyer, buyer, like you're trying to set down roots, right? And you're making this long run financial decision for that person that's getting a mortgage, you know, it matters that rents are also growing, it matters that stocks are also not doing very well. So even though it's not clear and apparent that buying a home right now is going to win the lottery like it did with Interest Rates for 3, it's still a very viable financial decision if I find a good match and I stay. Not a very good financially viable decision right now to flip a home very quickly, right? You'll just flip it into the soft market. So the demand from cash buyers, I think, is pulling

back a bit. Or to buy something that you can't afford. It's also not a good market to reach. Like you could reach in 2020 and 2021 and the market was forgiving, kind of. I mean, now your payments went up if you have an adjustable, but this is not a reaching market right now. Yeah, we are seeing the share of purchases or applications that are adjustable rate mortgages, of course, come up a lot as people have this intuition that like, oh, I have a six now or I have a 6.5, but perhaps in a year or two years, I might be able to refinance down to five again. So we are starting to see people trying to play with that. Like, how can I access more affordability with a lower rate now with the assumption I can refinance later. Or I'll be, I'll be making more money in

two years. That's like when I used to go cold, close shopping and I would like buy a size down like, Oh, well I'm on a diet. So like, I don't want to, I don't want to get clothes that are too big, obviously. Yeah. I also remember doing that as a much younger professional too. Just being like, Oh yeah, at the at the prime, beginning of my life. Of course, I will make so much more money one day. And then you will or you won't. Hey, Skylar, personal question. I bought a condo in South Florida at the top of the market in November.

Should I kill myself with a knife or a gun? How was Hurricane Ian to your your property? It's not built yet, so that hasn't had a chance to completely upend my life. But I'm hoping for the next one. You know, what do I do? How bad should I feel about my

life? Get it for you. Texas or excuse me, Florida is super weird of all the metropolitan areas. That's why I'm going. You know, when I was so I would tell you, hey, where home price is going to fall the most.

We run correlations to figure out where they drop in the most now. It's absolutely the most affordability strained markets. That includes Texas metro areas like Miami. And yet you're still, there's plenty of home price pressure right now, even in this moment. I think there's going to be a pause because of the hurricane and some of those, you know, the, the Western Florida

markets where they were most impacted by the fall. It'll, it'll just like go for a pause. I feel like you're telling me that I'm actually smart is what you're saying. I'm surprised by Florida sometimes, you know, it's like the sun is real. I don't know. It's clearly got an appeal. I think the sun bakes people's brains. I thought that you were going to say the part of the country that we were seeing housing pressure was like the Boises of the world, like where you saw a lot of like the tech spillovers to Austin and things like that. Those are slowing down a lot. Boise is slowing down one of the fastest.

I can't believe it. That didn't have legs. People don't want to live there. That's crazy. No, I think they just down one of the fastest i can't believe it that didn't have legs people don't want to live there that's crazy no i think they just i think of the sushi wait all right we so that was easy to see coming but i don't think the pricing in those markets in like like everyone's going to live in whitefish montana for the rest of their lives like i think everyone knows no one's going to do that but But I don't think that trend – maybe you know better. I don't think that trend was as big of a trend as we thought it was.

I think like the New York Times got excited about it because urbane, sophisticated people were leaving San Francisco and doing something adventurous. So it was like a really great story for newspapers. I'm not convinced that like millions of people really did that. but maybe I'm wrong. What do you think really happened there? Yeah. You know, I think there was so one, you know, so, okay. The news cycle first starts about Boise way back when, right. Beginning of the pandemic. And of course, you know, as an economist, I just go straight to the population growth numbers and I'm like, how long has Boise been hot? Like we just, it's just, maybe it hasn't been on radar because it was, you know, smaller because Austin had been on our radar forever.

You know, like, oh, Austin's so hot. Where, what is this Boise thing? And no, you know, Boise just wasn't on our radar because it was, I think, just out of the top 50 largest metropolitan areas because when you look at the population growth data, it was growing for a while.

So I think it will keep some of that growth, right? I think there were relocations that were related to like previously hot, you know, sharing some of this. That just accelerated like Nashville, like Austin. Yeah. Yeah, I get that. But that, I mean, I really can't overstate just the benefit of a low, low rate for a 30-year fixed rate mortgage and its ability to just absorb those price increases in a way that really wouldn't impact

the buyer too much, you know, because it spreads it out on a full 30-year fix. And at, you know, mortgage rates below 3%, that's super cheap leverage. I mean, it does the work for you, percent that's super cheap leverage i mean it does the work for you you know um so as long as interest rates were low those large home price gains could be absorbed and as soon as mortgage rates came back up they just they can't persist i want to ask you about some of the headlines that we are inevitably going to see we actually got one today so john let let's please this Zillow home value index. So, all right. Prices are up 40% nationwide versus pre-pandemic, but you're going to start to see some month over month numbers that look really gnarly. In fact, Bloomberg published one today from Black Knight Inc. showing pretty hysterically home price drops in July and August rival levels reaching the great

financial crisis. Can you please provide some much needed context for the really bad headlines that we're going to see over the coming months? And we named the video after this headline. So let's all just be respectful of me. Yeah, yeah, absolutely. So let me, I guess, let me soften the relationship between what's happening now and the global financial crisis. So please, we mentioned earlier that this is, or I mentioned earlier, this is about discouraged buyers, right? And affordability challenges. Last, the global financial crisis was about distressed sellers. It was about foreclosures and, you know, really losing the ability to hold on to your property when you went through, you know, any kind of job loss.

It was about and that was about excessive, egregious credit. Right. So many people getting access to a mortgage because of really very little underwriting standards and document, you know, income documentation or any of that kind of thing. So that when we did go through, you know, the great, the global financial crisis, the great recession, you know, these kinds of things, that kind of job loss, ooh, it hit us hard. And we had snowballing price fall because of all the distressed sellers,

lots of inventory coming on the market. This time around, we are absolutely seeing prices go soft. We're seeing current negative year over year numbers, but we're also seeing inventory unable to rise. Meaning what? are absolutely seeing prices go soft. We're seeing current negative year over year numbers, but we're also seeing inventory unable to rise. Meaning what?

Meaning what? They won't build. They won't build. What does a lack of inventory rising mean? It just means that we keep more of that competitive pressure on. So yeah, demand is falling back because of higher interest rates.

But if supply does that too, then the competition on the homes that are available just balances out a little more. We are, by the way, seeing much less competition. It'll be much more sane. Buyers won't have to waive financing and expect contingencies for most products. Some products might still be very competitive if it's really rare or something. But for the most part, you really don very competitive, if it's really rare or something, but for the most part, you really don't have to do that. It's so much less competitive. But imagine if you if we had, you know, inventory returning, or if we had foreclosures, and we just

don't expect that Dodd Frank, you know, the the law that got passed in 2000, you know, after the global financial crisis in 2012, or maybe it was 11, when it actually passed in order to, you know, after the global financial crisis in 2012, or maybe it was 11 when it actually passed in order to, you know, not go through that again, for that to never happen again, will actually help. It's making it so we do not expect foreclosures. You know, the people that got recent mortgages, there were high standards, both in credit score, income documentation, what it took to become a home buyer was really a lot, a lot more strict. And that means people, you know, won't really experience the same kind of foreclosures, distress selling that we had last time, which means prices will be more preserved. They will

go soft. You know, I think that's clear, especially in really unaffordable metros. But they might not, you know, I don't know that I can promise someone that, you know, affordability is going to be resolved next year at the national level. So I thought I thought that the that the floor was relatively high on how much prices could fall given the demographic tailwind. I thought that 5% at 7%. I'm not so sure. Well, that's just it is. And I think that's what makes it so hard to forecast at this time is because I can, we can do a thing and we can think about it and we can watch it happen. But you know, the monetary policy right now, you know, what is the Fed doing and buying and selling treasuries? And what are they doing the

Fed funds rate and then, or, you know, buying and selling mortgage backed securities too. So they're doing all these things in response to inflation, in response to pressure on the labor market. And all those things are always changing and we're watching it. So the Fed is constantly threatening to change policy or update policy or even to keep going with the policy they've currently announced. And all of it changed. As we saw last week, things can change very quickly. Hey, we know you're not a Fed watcher per se, but what did you think of the Fed buying billions of dollars? I don't know if it was 30 or I can't remember the number of mortgage bonds

in 2000. I'm sorry. In March of this year. Oh, in March of this year, just buying, just you mean in order to keep their balance just generally speaking did you think that was that was that insanity overblown or did you think that there was good rationale behind what they did he did he did uh 20 months i think uh yeah so 22 months so they were so they were acting as if we were still in an emergency when home prices were up 40 yeah yeah one maybe let me just say like this is super hard to do and I do not envy the Fed their job at this moment like this. I am watching the Fed like crazy, doing a lot of Fed watch. I think at that time, it was very, very, very clear that the economy needed liquidity needs in order to keep going.

I think we can debate about whether or not it should have come at monetary policy, which by definition is untargeted. It's just like, you know, burn all the markets, you know, all the markets revved up investment, housing markets, anything that was related to debt, right? Anything that's related to debt. If you're pumping liquidity into the market like the Fed did, you're heating that up, right? And that's untargeted support. I think the good argument that they had needs to do that. But it became pretty clear that that liquidity was having a big cost and that's inflation.

And that's particularly costly for lower income households to the extent that, you know, as soon as that momentum picked up in inflation, it became clear that it'd be it'd be pretty hard to bring it back down again. As the numbers that dropped last week show, you know, the month-month growth and the pce core inflation number that the fed likes that month over month still annualizes to seven percent that's way above target of two percent so inflation is stubborn so now yeah it has to it requires a violent correction i guess but the question is if the Fed is going to use the housing market vis-a-vis the transmission mechanism of lowering the cost of mortgages, right? If they're going to use that as one of their tools, which I don't have a problem. I mean, what's the difference anymore? I don't have a problem with that. So they're going to do that. So then you get home price

appreciation after one year of that of 20 something percent. You get record high home prices in every region of the country. Case Shiller, all time high. Why do they wait for an emergency before saying, you know what, maybe it's not appropriate to buy $35 billion worth of mortgage bonds that, A, there are plenty of other buyers besides us if we step away. It's not like- So the housing market was going 100 miles an hour and their foot was still on the pedal. So that's what we're trying to understand. What could have been the logic behind that?

Yeah. The logic, I think, that falls behind that debate usually is who's full employment, right? So the Fed is pumping in money until we get to full employment. Realtors full employment. Well, but it's like, who's? Okay. So like right now when we talk about why is the Fed moving back? Well, yeah, labor markets are totally tight. They absolutely are totally tight. We've got twice as many job openings than we have unemployed. That's a tight labor market. That's inflationary. Okay. Right. Like that's why they're pulling back. But labor is tight when there are lots of jobs and when there's not a lot okay, right? Like, that's why they're pulling back. But labor is tight when

there are lots of jobs. And when there's not a lot of, you know, unemployed looking for work. So where else are the unemployed? Well, they're just not participating in the labor market, right? You know, so I have low unemployment rate, right? But I still don't have a lot of people returning. So I think the idea was at the time when we still need this heat we still need this support because not everybody is back right we've got a tight job market and that's a signal about inflation but when you look at like employment versus pre-pandemic like we only just got back to that level you know what i mean so it's there were still needs and i in some ways, there still are, right?

We just can't do it this way. I guess I agree with that. I guess the question is not whether or not there are still needs. It's that maybe at a certain point, the Fed looks at Congress and says, your turn. Congress has acted a lot. They've done a lot. They did a lot in 21. They probably did more than they should have. But like the more I guess the mortgage bond buying part specifically

is more offensive intellectually than the Treasury bond buying part. Yeah. So I guess that's what Michael and I are. You can tell they're struggling. You can tell they're struggling a little bit with what to do, because, you know, when they talk about unwinding the balance sheet, you can see the U.S. Treasury balance come down and the mortgage backed security balance does really crazy. Still crazy. This will be this unwinding.

That part is going to be real painful for a housing market that is clearly already deflationary. I feel like the Fed is like galvanizing the entire world against them, probably in the wrong way. There was a headline today from The Wall Street Journal. U.N UN calls on Fed to halt interest rate increases. You see, Michael, the UN bought a lot of FANG stocks. I know we're all speculating. Do they blink? Do they blink? Do they think that... Here's what I

suspect Jay Powell thinks, not that I know what he's thinking. Yeah, right. He must be thinking that we're so close. We're so close to like really having the desired intention, whether or not they go too far and break something. We'll see. But to turn maybe dovish now and potentially unwind and have the market soar and unwind all of the hard work that we've done would really be a shame. What might he be thinking here? what do they see that we don't yeah that's interesting um i think there are i didn't you know in terms of one i

again i really don't envy this job you know this would be so hard as an economist watching these things you know i, I think I often think like, wow, it really will be hard to pull back on inflation. You know, inflation is very painful. Just watching these numbers. You know, I think this is really challenging. I think one of the most challenging aspects about their job is that they're not the only central bank doing this work at one time. And that's why you have people weighing in, you know. But don't good other central banks follow they follow our lead no not always yeah i mean i mean our dollar is big you know dollar is

a big deal so in that way we all do work together for sure um the the environments are very different like if you think about uk and canada even those are way more adjustable rate mortgages so they're much more worried i think in some ways about what's going to happen to home prices given their monetary policy i mean in some ways when you're thinking about what's going to happen now as i said that 30-year fix is pretty isolating because it locks you in you know we got a lot of homeowners that have a mortgage rate way below what the current mortgage rate is, and they keep that for 30 years. They lock that in for a long time. I mean, that's what's insulating our home prices because the supply will pull back.

Anyway, I'm just going back to what I think we've already keyed on. Yeah, I don't know that I can say. Maybe I'm just, you know, this is the economist club, but I don't know what I would do in their shoes looking at what they are looking at. I think it is the most extraordinary problem and challenge. And I'm sure that's a cop out. I really need volatility to come down from healthy mortgage markets. I'm waiting at least for us to get used to the Fed doing what they're doing, making their announcements. And, you know, financial markets and Fed will hopefully get used to the Fed doing what they're doing, making their announcements. And, you know,

financial markets and Fed will hopefully get used to each other here. So even if we don't have mortgage rates, you know, able to come down significantly at the end of this, at the very least, they'll stop doing that. I want to pivot to two topics that for anyone in the housing market are really important. One is taxation. And then I want to ask you about insurance, which I think is the next shoot. That is the next inflationary shoe to drop. Everyone's rates are going way up. Reinsurance is going way up. We'll talk about that in a second. On taxation, somebody explained this to me that lives in Texas.

And I thought this was really interesting. And I don't think a lot of people really understand the impact that this has on the various housing markets. Where I live, Michael and I live in the same town. We live on Long Island. And where we live, if you do work to your house and you improve it, like if you add a swimming pool or a dormer or like almost anything, you get assessed at a higher tax rate. They're almost like penalizing you for improving your property, which if you care about the neighborhood you live in, kind of seems backwards. In Texas, they have a land tax.

The land tax appreciates maybe by one percent a year. You can kind of set your watch by it and you don't get taxed on any improvements that you make to the property. So as a result, cities like Austin are beautifying at a rapid rate because the land tax is slowly ticking up, but the landlords can do really nice stuff and get higher rents. Do I have that right? And if I do, what do you think is the right model for a municipality or a state to adopt? Sure. Oh my gosh. What a funny question. So one, I'm very good at this. I'll just say as a public facing economy that there is no right model and you know, that there'll be a special model for

each, but, but, but, but the economist in me, and I think you hit on this. Right. So just from an economist paradigm. Right. What's going to make a tax more successful? What's going to be successful about it? It has less unintended consequences. Right. That's what our economy as an economist for it's all about. Yes. You know, so unintended consequences. I can avoid them if the tax is less likely to impact my decisions. And you're absolutely right. Economists, I mean, classic, classic economists, like we're talking super old guy economists, like no, I mean, just like 100 years ago, kind of economists would have advocated for taxes on land because it would not impact your decision making. You have, you know, windfall profit that has nothing to do with you doing anything. And so that's generally the argument for those kinds of things from an economist perspective. They wouldn't have unintended consequences because your choice never comes into it. Except maybe if you captured, comes into it. Okay. Maybe if you captured, I mean, there is, you know, capture of local, you know, land use and zoning and, you know, existing homeowners might not want more density or whatever else the, you know, the not in my backyard play, but otherwise there's really not a lot of, there's much less impact on your decisions. Do we have to, do we have to worry as homeowners or renters or landlords?

Do we have to worry about all of a sudden high inflation catching up to us in the form of new insurance rates? Because the people I talk to in property casualty are like, dude, you have no idea the things I'm hearing on my conference calls. Yeah. And I think that so let me just say this is already an experience for a lot of people in California. This is your experience in any kind of like high wildfire zone. Of course. You probably saw your insurance go up in the last two to three years significantly. Florida as well, not just for like what your gut, anyone who's not around in Florida might think, you know, oh, it's because of flooding and sea level rise and climate change. There might be a little bit of that going on. But, you know, actually, in Florida, you're going

through where a lot of Florida insurance companies, private companies are going insolvent. Can't provide flood insurance anymore and stay in business. Without going to the state provider, which is generally much more, it's really the insurance provider of last resort, usually much more expensive. And in general, that's a challenge. So a lot of people are experiencing this. And if you think about, well, okay, before this pandemic crisis, you know, climate change was the crisis we were talking about. And over the course of the past two years, we're seeing more and more reports come out of the SEC, out of FHA, out of FHFA. So housing, and that's housing regulators, security regulators, you know, underwriting regulators, you know, all these regulators coming out and saying these are the changes that will have to happen because of climate change.

And they think a lot about insurance markets. Theoretically, though, this keeps housing related shelter related inflation high. Like this is like one of those pressures that's like working against the Fed almost no matter where it takes interest rates. pressures that's like working against the Fed, almost no matter where it takes interest rates. Yeah. And then but this one probably is a little bit more location dependent. And there's probably a lot what makes this really challenging is there's a lot more opacity around it. You know, in terms of it, it'll be in some cases home to home jurisdiction to jurisdiction. This will be really this is hard. This is probably the hardest information to surface out if you think about it as well, because you likely have to do more fact finding

in order to know, right? Contact your, you know, work with the mortgage company to figure it out, right? What do you need that actually qualified for this mortgage? Absolutely. Skylar, can I just tell you that you're awesome? Oh, yeah. I mean, I love that. Yeah, sure. We really, the chat is going crazy. We really appreciated having an expert

to talk to us about this stuff because the headlines are getting scarier and it's nice to have some context. We're going to do a little bit of a lightning round. We're going to have everybody throw some ticker symbols at you and you could just say buy or sell or if you want to add some time frames.

Oh, no. We're already looking. No, I don't want to say buy or sell to anything. I'm not going to. Listen, you're great. Diversify. Diversify. Good. Very good. Look at you. Look at you. Where could people follow you for more of your commentary and insights? Do you have a blog? Do you have a Twitter? What do you suggest? Yeah. I mean, Zillow.com slash research is my home base, uh, for sure with, and you can get data and blog posts and insights there. And then, you know, at Skylar Olson nine on Twitter. Um, you know, every time the fed has an FOMC meeting,

I tweeted up, you know, so. Okay. All right. Awesome. So everyone go ahead and follow Dr. Skylar Olson and check out Zillow.com slash research for more of her information. We appreciate you coming on tonight. Thank you so much. Guys in the chat, thanks for coming through. Great job, John. Great job, Nicole. We will see you guys. We're not on tomorrow. I know you're going to miss us. We're going to miss you too, but New Animal Spirits Wednesday, and we will see you at the end of the week for the compounded friends. Good night everybody Good night. Bye