The Compound and Friends - The Suburban Housing Boom is Only Getting Started (with Logan Mohtashami)

Episode Date: September 25, 2020

Are you a buyer? The sooner the better. Are you a seller? Ask high, and take your time.Because the boom in suburban real estate was going to happen, beginning this year, pandemic or not. And it could have legs for years. That's according to special guest Logan Mohtashami of HousingWire, who joins Downtown Josh Brown to discuss everything you need to know about homebuilders, existing home sales, demographics, realtors, real estate technology, mortgage rates and more. And be sure to leave a rating and review - they go a long way! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, we are in the midst of a full-on, undeniable, wild and woolly housing boom. This is in the midst of a recession. Home prices are absolutely flying. Home building is way up. Home sales are way up. Average prices are way up. Home construction stocks are making record highs. It's all happening all at once. During the last recession, homeowners lost a combined $3.3 trillion in home equity value in a single year. That's 2008. The exact opposite is happening this time. There are a confluence of factors as to why the housing market is so different this time than the last time we went through a recession. The first thing is that the pandemic is weird. And you've got this pandemic-driven recession and shelter has become the single most important consideration in all of our lives. It's literally

life or death. Where are you going to wait this thing out? Second, the response by people who live in cities where the virus spreads more rapidly has been to get the out of town. You can understand that the suburbs have never looked more attractive, which is a very big reversal from the prior trend where people wanted to be closer to the office, have shorter commutes. They wanted to live in fashionable downtown areas with access to restaurants, nightlife, ballparks, theaters, et cetera. Nobody cares about that stuff at the moment. The restaurants are closed. The bars are closed. There is no nightlife. Nightlife is Netflix. The ballparks and theaters are closed. And as far as the office, well, the office is wherever the hell you want it to be. Additionally,

the Fed took interest rates back to zero and the personal savings rate jumped to 26%. The stock market juiced the net worth of America's households back to an all-time high. juiced the net worth of America's households back to an all-time high. We found that out this week. And then you have demography. We have a bull market in 30-year-olds. They're everywhere. The millennials are coming into their family formation years with a vengeance. And all of the ingredients that I just listed in that stew is how we get to where we are today. In the last six months, the ITB, which is the iShares US Home Construction ETF, is up 114%. The S&P is only up 44% over the same period of time, which goes back to late March. Home building stocks have almost tripled the broader stock market's performance.

And then look at the components of the ITB. They're all on fire. Home Depot, Sherwin-Williams, D.R. Horton, Toll Brothers, on fire. According to Brian Westbury, who is the chief economist at First Trust, housing starts, which is new residential construction projects, could be up 218% in the third quarter over the second quarter, a triple in new home construction. This is Myers Research. They say, quote, the new home pending sales index grew 3% month over month and 39.6% year over year. In April and May, the strength of the housing market varied wildly depending on geography. Today, nearly every market across the country is enjoying robust

new home sales. I want to get into what the National Association of Realtors is telling us because these jumps in sales of existing homes are absolutely Olympic. In the month of June, sales of existing homes rose a record 20.7% month over month. And then in July, they jumped an astounding 24.7% versus June. That's 5.86 million homes sold in the month of July, which was another new record, and it was up 9% from July 2019. We learned this week that in August, existing home sales rose for the third consecutive month. According to NAR, each of the four major regions experienced both month-over-month and year-over over year growth. So this is a national phenomenon. It's not location, location, location. It's not a job boom in a specific area where one

industry is doing really well and people are migrating there. It's across the country. Total existing home sales, which can be defined as completed transactions, and it includes single family homes, townhomes, condos, and co-ops, rose 2.4% in August from July to a seasonally adjusted annual rate of 6 million. So if you look at sales as a whole, year over year, in August, we were up 10.5% from August of 2019. In addition to this activity in existing sales, we're under housed in this country to begin with. We don't have enough homes. I know that seems shocking 12 years after the housing boom and bust, but that's where we are. Total inventory, which is houses sitting on the market right now for sale, is down 18%

year over year. There are only 1.3 million houses, less than a million and a half houses sitting on the market. And that is equivalent to roughly three months worth of supply nationwide. Last summer, it was four months. Now it's three. At the end of July, with 1.3 million single family existing homes for sale, that is the lowest count for any July using data that goes back to 1982. It's a 40-year low in inventory. And obviously, this has pushed up prices on pretty much whatever housing is actually available, provided it's not in the middle of San Francisco or in the middle of Manhattan. The median existing home price crossed above $300,000 for the first time ever this summer.

Average prices are now up 8.5% from a year earlier. And while you have this inventory shortage and this incredible situation where we just haven't built enough, we have a lot of potential buyers, people coming into their prime home buying age. The average 30-year mortgage rate is now 2.86%, which is a new all-time record low. The average 15-year mortgage is closer to two and a quarter. My jaw was on the floor when I saw that. And you've got this huge booming population of people who are going through the point in their life where it's time to buy. According to Pew Research, 52% of young adults, which they define as people between 18 and 29, are currently living at home with their parents.

That's 26 million young adults living with one or both parents. That number has jumped by 2 million since February. So these are people coming home from college and abandoning the dorm. These are people who had a rental somewhere and just said, forget it. I got to get out of the city. That's a two million person jump in six months, young adults living at home. Let's assume that many of them end up renting as they move back out. 36% of households in America rent versus own. The home ownership

rate then is about 64%. We're still talking about enormous demand for new houses, existing homes, and new homes. This is Bank of America. They did a piece called Empty Nest this week, and they ask, have your kids moved back with you? You are not alone. Using census data, Pew Research estimates that 52% of young adults were living with their parents, up from 47% in February, an increase from 24 to 26.6 million. The increase is the highest for the younger half, obviously, ages 18 to 24. And they note that this is the highest share of young adults living at home since 1940. That's 80 years ago. They estimate that of the 46 million rental units in the United States, 5.5% have lost their occupants in the second quarter. So in 90 days, 5.5% of those rental units just lost the person renting them.

So that's 2.4 million newly empty rental apartments or rental homes. And that's just what we know of. Think about how hard it probably was to get a real number to do an actual census during a pandemic. It could be way higher. Stuart Miller is the executive chairman of Lenar Corporation. Lenar is the largest home builder in America. They've been around since the 1950s. Lenar builds new homes, new houses, and they build entire new communities in 21 different states, including 77 of the most popular real estate markets in the country. I want to read you what Stuart Miller said to shareholders this week on Lenar's third quarter earnings call. Quote, let me say the third quarter has been a clear point of pivot

for the housing market in general, from the slowdown created by COVID to the expansion ignited by COVID. Today, the home is becoming more and more essential to the way we live and the quality of our lives. The home, which used to be just shelter, is now becoming the hub of your life. It is our shelter and our multiple generations shelter. It is our office, our gym, our recreation center, and our school. It is Wi-Fi connected and it is automated. It is

sustainable and environmentally sensitive. It is both a healthy home and a health system. While some of these elements will change over time, some of them will become our new way of life. Regardless, home is a refuge where families thrive through the best of times and sometimes as well through the toughest of times. At Lenar, we are focused on meeting the needs and the changing appetite and aspirations of this changing world. And we have never been better positioned financially, organizationally, and technologically to meet the challenge as well as the demand. End quote. Thank you, Stuart. They cannot build houses fast enough. Cannot. And on their call,

they mentioned that they can't buy enough land fast enough. They also can't buy lumber because the prices are so high. So what they have to do as one of America's largest home builder, America's actual largest home builder, is they have to balance out the rising cost of finding people who can do the actual construction and the materials themselves and the raw land. They have to balance that out with the current demand and not do too much at once. They have to offset those rising prices and costs and difficulties in building homes with the fact that if they wanted to do it all now, they could, but it wouldn't be great for margins. So I think they're counting on rising home prices, finished home prices to offset those rising costs, but they have to give it time.

And every home builder, Tall Brothers, Pulte, et cetera, they're all in the same boat. They all have to strike that balance to not do too much now because it's going to be too costly. They all want to preserve their margins. These stocks are trading like experimental stage biotech companies that just got an FDA approval. They are just absolutely flying. And it's very peculiar to see that in the midst of a scenario where headline unemployment is still 8.4%. And you still have somewhere between 15 and 20 million collecting unemployment benefits or out of work or on a furlough or some

version of that. I don't know that we've ever seen that in American history. So home prices don't automatically always go down in recession, but they very rarely go vertical and sales volumes more so than prices. Very rarely you will see demand for both existing and new homes explode in the way that you've seen that this time, which means a lot of our assumptions about what the playbook is as investors in a recessionary environment are probably flawed assumptions. And this gets back to something I've been saying for a long time, which is that not only is it different this time, it's different every time. It's different every time. If I came to you in January and said 22 million people are going to file for unemployment the next three months, let's buy the shares of home builders, you would have said, Josh, you are, with all due respect, an idiot. But that's actually, that would have been maybe the best trade you possibly could have put on. So this is where we are. And I'm very excited because on today's show,

we're going to be talking to one of the most knowledgeable people covering the housing market in America. His name is Logan Modishami, and he is a housing data analyst for Housing Wire and a financial writer covering the US economy with a specialization in the housing market. We're going to find out what's really going on behind some of these numbers that I've shared with you, and I think you're going to get a lot out of it. So stick around. Dunk and hit the theme song. Let's get into it.

Welcome to The Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. All right, everyone. I am here with Logan Modishami. Not quite here with. Logan is in Irvine, California. He is a housing analyst for Housing Wire and I think one of the most knowledgeable people on housing in general. I'm so excited to have him with us. Logan,

say hello to the folks. Hi, it's great to be here. All right. So I'm not going to pull any punches and I'm not going to bury the lead. Let's start with, is this housing bubble 2.0 or not? It is not housing bubble 2.0. Oh, thank God. Oh, thank God. All right. We're good.

The housing bubble boys, as I've called them, have been probably the worst economic group we've seen in the last eight years. And 2020 will go down in history as probably one of the biggest whiffs ever from a group that just doesn't believe in economics. There's more trolling than anything else for clicks. And the reason maybe my work was popular this year is I've been talking about year 2020 for 10 years now. I've been waiting for this period for a very long time. So when the pandemic came, I stood my ground and said, hey, listen, we have a five-year period right now in America

where we have the best housing demographics ever in history, and we have the lowest mortgage rates ever in history. You guys are kidding yourselves that you're talking about a bubble crash in demand. Okay, tell me about the demographics. So demographics are interesting because you can see them coming years and years in advance, but the implication of demography doesn't always go the way you thought it might. when they turned 65 were going to start dumping their stocks en masse and that that was going to produce a crash. It turns out boomers are living so long, they can't afford to part with their stocks. They're going to need them to fund 30-year retirements. And so that call could have gone against you if you just went by how many people are going to be what age. But what made

you stay on your ground and what did you see coming that maybe other people didn't? I would tell you like, there's a lot of conspiracy theories in economics. And, you know, when you talked about, you know, age of 65, you know, the first boomer hit 2008 at 62. So there was something called a silver tsunami too, in housing that inexplicably all baby boomers were all going to sell their house in one month and home prices were going to crash 60 or 7%. That didn't happen either. For me personally, I've always had this same principle for 10 years. The United States housing market was going to have the weakest recovery ever from 2008 to 2019. Demographics were actually going to get worse into 2008 to 2014. Purchase application

data five years into the expansion, adjusting to population hit the lowest levels ever, you know, even with mortgage rates low. Then we work our way up to years 2020 to 2024. And there we have the proper age. I think that's the missing factor is people didn't realize, you know, in this country, we rent, we date, we mate, we get married three and a half years after marriage. We have kids and then people buy homes. And that was always a year's 2020 to 2024 story. So what I talk about now is we have a lot of replacement demand. You know, existing home sales are not anywhere close to where they were in 2005. So when you have replacement demand and then you have nested equity,

you have homeowners who have the best loan profiles I've ever seen in my 24 years of finance, you have enough demand to keep things at bay. Even with the pandemic, which again, dries rates down, it keeps what housing, that huge demographic demand there. And then with the lowest mortgage rates ever, boom, you get what we have right now. And even right now, existing home sales are still negative year to date. We're working our way back up to being

flat to positive. So we did a lot of running around and not much total movement. You had a huge jump this summer, month over month over month, but we still have to make up the ground from January, February, March, April, when basically you couldn't even see a house. Yeah. And I would say this, when I think about 2020 and housing, I actually think about February, pre-COVID, for the casual observer, they might not have understand that February housing data was the first time since the early part of the century that everything broke out. You know, housing was always an underperforming sector versus the economy. But I've been waiting for this year, 2020, for a very long time.

And then what I saw in February, basically, if there was no COVID-19, existing home sales not only would be positive now, it'd be up 400,000 to 500,000 from last year. Now we're just fighting our way back to flat and should be positive. You're saying we would have had the start of a housing boom this year regardless. But the summer months are amazing for housing. And you're saying that would have maybe happened more slowly throughout the course of the year. You know what? We would have had better housing data for the existing home sales market if COVID wasn't here. And I think nobody talks about that because I just don't think people focus on the data that much. But if you look at back in February, the purchase

application data is good for one thing. Usually the second week of January to the first week of May, that's the heat months. That's basically tells you how the year is going. We had double digit growth, but we also broke over 300. That's one of my long-term calls I had back many years ago is that the purchase application data will never hit 300 until the years 2020 to 24. We had very good growth. What is that? Logan, for people that don't follow this stuff as closely as you do, what does that mean? Purchase application data going above 300? You're basically having weekly data at 300,000.

And that's, you know, if you- 300,000 new applications to buy a home. To buy a home for the existing home sales. If you look at that chart, we're working our way up there and we got there this year. And that's something I've been looking for for a long time. And that was all pre-COVID. So I think a lot of the mistakes that I see right now is that people think, well, the only reason housing is doing well is because everyone's leaving the city and everyone's going to the suburbs. And once that's- That's what I think. That's my opinion. But you're saying this would have taken place regardless.

That has been happening for years. People have been buying homes, bigger homes, if they need to, in cheaper suburban areas for some time. These cities are really expensive. So there's a certain type of home buyer that makes that kind of money to live there. But people have been moving out for some time. It's just that housing tenure is at 10 years, right? So people, you know, when I'm talking about housing, people are living in their homes longer. From 1985 to 2007, that was five years. So we pushed that all the way up for 10 years. Why? Because we've been building bigger and bigger homes for decades.

People don't need to move as much. But now, you know, you have this massive, the biggest demographic patch in America right now are ages 26 to 32. The first time median homebuyer age is 32. So you have the biggest housing demographic patch, and then you have the lowest mortgage rate. So if I was to correct a housing theme is that we had this before COVID hit. It's just that COVID is such an economic shock, and it's such a big story that everybody completely forgot the February data. So, I mean, housing starts itself was up 40 percent year over year in February. That was before COVID. So there was a lot of good housing data before.

And then, of course, mortgage rates go down lower. It just keeps the demand at bay. And that nine weeks that we lost, it wasn't so much of the demand. It's just the natural shock of the virus. You know, we didn't know how many people could even look at homes, could even buy a home. After, you know, four weeks, purchase applications started to come back up again. So we lost probably four or five weeks. You know, we were positive year over year, then we got as low as 35% down, and then we were starting to work our way back 18 straight weeks of positive year over year growth, averaging 20% working at pre-cycle highs, which was today as well. So yeah, this is a story about the two things that drive housing demographics and mortgage rates. The rest is just stamp collected. Let me throw one thing back at you though, that I'd love to get your take on.

There is some element. I understand that people have been leaving the cities and as they come of age, buying homes for years. But the pandemic, I think, really shines a light on the fact that you can work for Google and not have to work out of Google's headquarters in Chelsea. You can work for Twitter and not have to sit at Twitter's headquarters. And what that does is it expands the range of possibilities for where the employees of these companies, and now every company, I think, can make their home, which I think accelerates the drive into the suburbs. If your employer doesn't care as much how far you are from the office, then why would you care? This is true. And I could kind of prove that

thesis to a degree. But I would say, number one, existing home sales are still negative year to date, right? This is not like we're up or total existing home sales is at six million. We're just working our way back. Google, Facebook, Twitter, all the techs, they don't really employ that much people. But you can see it in San Francisco. What's happening in San Francisco right now? Condo supply is much higher than single family.

So there's where I would argue that you can make a thesis there. If you are living in an 800, 900 square foot condo, that's probably 1.5 million in San Francisco, and you have two kids and you're in a two bedroom, you're thinking, wow, I don't have to live near the office anymore. Those people are putting their homes on the market and they can move 10, 20, 30 miles east. I still think that is the marginal home buyer. It does impact and it does help because one of the things that I've talked about, we have great replacement buyers with that demographic coming in. If we get any movement on people just buying up or buying down, you can keep that existing home sales demand at bay. And it's very actually, and this is probably a good point of reference for everybody. It's really rare in the 21st century to have an existing home sales print under $4 million.

It's only happened three times. The tail end of the housing bubble years, which goes into my weaker demographic batch. The home buyer tax credit, which was just artificially induced. And then one month of COVID sales at $3.91 million, and we just shot back up. We have a lot of people that just need a house. And you just have to look at it in that way. But now, years 2020 to 2024, biggest demographic patch ever, lowest mortgage rates ever. Credit never went really tight.

I think one benefit we have in 2020 is that Freddie and Fannie were not publicly traded companies with no government banking. 2020 is that Freddie and Fannie were not publicly traded companies with no government banking. If that wasn't the case, I might have a little bit of a different mindset, but it wasn't. We just had marginal loans. I think about 4.5 to 6.2% of loans that could have been done before March 9th had a problem getting done. That means 93% of traditional loans that people do to buy homes were there. And I think that's a huge, a lot of- What percentage of mortgage loans are backed by Fannie and Freddie? I mean, just that Freddie, Fannie, and FHA are more than 75% of loans right now.

Okay. And they're not going anywhere. They're not going anywhere. But the traditional loans, a 30-year fix, Freddie, Fannie, FHA, VA, they're there, right? Because the government can take losses. They don't have to all of a sudden type their credit up for the capital ratios. So that was one of the unsung heroes of 2020, that the GSEs were already in conservatorship. If they weren't, if they were publicly traded companies, their stocks would have gone down. They might have stopped. They might have stopped, closed the spigots. We would have actually tried to get

them back into conservatorship. That's the thing we would have wasted. We had a congressional hearings. What's going on. We would have wasted at least two or three months trying to get them back in. Logan, are you, are you, are you saying that, uh, some things are better managed by the government than by the private markets are way too big to be publicly traded. I mean, I've been saying that for years before this started and think about it. We've had back-to-back cycles where Freddie and Fannie are better in the government. They're just too big there. I mean, they need, they need so much capital and they're just not, well, they need different, they need different incentives. They need a mission. So, so run by the government, the mission is provide loans to make housing affordable and to keep the market stable.

When they're public, the mission is earn profit. Right. Your duty is to the shareholders. So you're not giving forbearance. Are you kidding me? You're not. You know, you know, so these two are just simply too big. And think about it. We just had the longest economic expansion ever, longest job expansion ever. We have had the best loan profiles

ever recorded in history in my books. And our family has been in banking since the late 1950s. And it was because Freddie and Fannie were part of the government. It wasn't that they were, there was this myth out there that if we take all lending and give it to the private sector, they'll charge higher rates and more lending. No, it doesn't work that way. When rates go up, lending goes down. So I just think that these two are just way too big to be publicly traded companies without any government backings.

And I don't think that's ever going to be the case. I remember writing an article in 2011 saying, Freddie, Fannie, Guantanamo Bay. These three things that people talk about they're going to get rid of, there's never going to get rid of any of them. There's just some things that are just going to stick with us forever.

So I will be shocked if they actually become publicly traded companies without any government backing. Okay, so you talked a lot about existing sales. I want to pivot to home building. I read that inventories are now at a low. We haven't seen since the 1940s. We have basically three months worth of inventory on the market or approximately 1.3 million houses for sale. And that is just not nearly enough to cover the type of demand that you're talking about coming from the millennial generation. What has to happen there? What is happening there? I think this is the most complicated story in housing. We just had the

weakest new home sales cycle ever in history, which means naturally we're going to have the weakest housing starts sales ever recorded in history. What has happened now is that housing starts, I don't think would ever get to 1.5 million until the years 2020 to 2024. The builders have a problem. They have this massive existing home sales market that is the biggest competition ever, right? So they cannot simply, they'll never overproduced homes because they'll kill their margins. So everybody keeps on talking about it. And I say this, people are going to say this until they die. We need to build more homes. We need to build more homes. It'll never be enough. You're saying?

The builders just won't do it, right? The builders simply won't do it. But, but if you get deficit financing from the government and take some of these NIMBY rules out, if you're serious about building more homes, which I don't think anybody is, I think it's lip service. You need the government to come in and provide assistance because the builders are doing exactly what they should do. They build based on their demand curve, not what housing pundits always say. So if you're an advocate-

Hold on. Let's back up so I understand that. So in other words, the home builder industry, they're not saying, oh yeah, this country needs more homes. Let's get to work on that. They're saying, where can we make money building homes, but not too many that we wreck pricing? Yes. And I'm going to give you a great example. 2018. 2018 mortgage rates got back to 4.75 to 5%. What did it do? It created monthly supply to spike up above six and a half months. My rule of thumb is if monthly supply goes above six and a half months and sales are down, the builders aren't going to build. They're going to halt back on savings. in 2019. We spent the entire 2019 getting rid of that excess supply. Housing starts were flat, right? The builders are doing exactly what they need to do. They build based on their own demographics, the demand curve. What is their own demand curve? Is that a function of the regions they operate in? They have a much older, wealthier home buyer versus the- New builds. New builds. Yeah. Yeah.

New home buyer is older, makes a lot more money. Think about this. The existing home sale market is this big. These are cheaper, older homes geographically all over. The builders, every decade that goes by, they're just going against this massive market. So people always say that, well, inventory is low, they should benefit. It was the weakest new home sale cycle ever. You can see this in builder stocks, right? They get overbought, they get oversold, you know, they go up and down, but they've never really broken out. Now- They're breaking out now. Now mortgage rates are low, right? They benefit with lower mortgage rates. When mortgage rates

get higher though, for myself, it was like once the 10-year yield gets above 2.62%, the builders are in trouble. That happened twice in the last cycle. Now we're at under 1%. You got to be mindful of the builders going out when rates go higher. Why? Because they can lose that marginal home buyer that's going to go, hey, wait a second, I could get a house, you know, almost twice as big as, you know, and not that much expensive than this new home. Like this new homes are so expensive compared to the existing home sale market that I don't think people can understand that the existing home sale market is just a better option for home buyers. But those that make the money,

right, they can get it. And it's such a small market. We're talking about 700 to 800,000 homes versus a 5.4 million existing home sale market. So the builders are doing exactly what they're made to do, make money by building homes. Can they even capitalize on that moment when they're talking about it being difficult to acquire more land? Because those prices are going up too. You need labor. And now you have raw material costs for the first time in a long time becoming a bigger factor. Can they really strike while the iron is hot and capitalize? I think there's limits for decades to come. That's just a by-factor of an older country. We've built a lot of homes in the past five, six decades. Those homes stick. People

live and die, but those homes are still around. I just think it's, it's difficult for them to get escape velocity. That's why you have to be mindful of mortgage rates with new homes. It's just a, it's just a different kind of buyer, but also we've got a lot more people that are ages 45 to 47 too, in the years 2020 to 2024. So housing just has this built-in demographic demand in this five years. What do those people do in their... Those are the new home buyers, people in their 40s? A lot of them are move-up buyers. You do have some first-time home buyers for new homes. And one thing the builders did that's actually very positive for housing and economics, after 2014... You got to remember, 2014 was the biggest miss in new home sales history. The people

were looking at 20%, 30% home sales for that sector. That sector barely was positive just because mortgage rates went to 4.5%. After that, the builders go, wow, we're not going to keep on building bigger and bigger homes. The makeshift of sales has been smaller and smaller. It looks like median new home sale prices are falling, but they're not. They're building smaller and smaller homes, which competes against the existing home sales market. That to me is one of the most important things in housing in the last 10 years that the builders got the memo and go, we're just going to provide a little bit more smaller homes so we can compete against this existing home sales

market. If you just look at a new home sales chart going back for four or five decades, you can see even with this move, we're kind of adjusting to population. We're kind of nowhere where we're overheating. But you've got to be careful. Like right now, I'm telling people, be careful of the builders when the 10-year yield goes above 1.94%. I know historically, that's like really low. My mortgage rates are low. But every time when mortgage rates rise to a certain level, builders get hitisting home sales, not as much. So I think if anybody's looking to trade the builder stocks, just remember, as long as rates are low, they're going to be okay. But they do get hit even at four and a half,

5%. Historically, that's low. They just lose the marginal home buyer. And you compare a new home versus an existing home, apples to apples, you can see the difference in price. So that's the thing I would be mindful of. What accounts for the premium? People just saying, now I don't have to do any renovation and I can sort of customize the new home as it's being constructed and no one else has ever lived here and I'm willing to pay up for that? Yeah. It has all the bells and whistles. I mean, it's just a superior house versus an existing home, but you're paying a lot for it, right? You can get the, yeah. I think that's the premium is that when you go, and plus you're also designing your own home. So the people that have money are buying the new homes. It's

just that it's a very small marketplace. I mean, literally you're talking about 5.3 million versus 700,000. So it's not like it needs. I think one of the questions I got this year is that how can people be buying homes? 20 million Americans lost their job. Like, wait a second. We always had 133 million people working. Nobody ever thinks about that. We always focus on the unemployed like we should, but nobody like, wait a second, we have 133 million people working. The existing home sales market only needs 4 million new mortgage buyers a year. Right. It's not like everyone buys a new house every year.

Yeah. It's not like an iPhone where everybody needs to replace, you know? So when you got 133 million people working, mortgage rates are near all time loans. You got the best demographic patch. That's why in March and April, you you know i was writing those articles for housing my housing is not doomed wait till july 15th everything's gonna be okay and look what happened right the fear of the virus right the the initial shock of the virus was very impactful i i tell people we were hoarding toilet paper when we should have been buying homes the people that bought homes when people were hoarding toilet paper when we should have been buying homes the people that bought homes

when people were hoarding television they had no competition like now look you're you're going against three four five six bids right now in certain neighborhoods yeah so that the fear of the virus and the change of behavior you know my i live in irvine very nice neighborhood i have an albertsons that's always stacked there's's no foods missing. Literally, it looked like Venezuela, right? There was nothing there. That is not normal, right? That is the emotional fear of a virus. And it took over the country. And then after a few weeks, we're like, hey, majority of people are working. We got checks out to people, you know, retail sales came back, everything started coming back. So housing, naturally, in this brief period in time, did very well. contemplating this idea of having to conduct both school and work in our homes and even a gym. And so the demand for a bigger house probably has more to do with the pandemic than demographics.

Marginal factor. Okay. Not big enough to show up in the data. I just think that there are certain buyers that go, you know what? I want a bigger home. I can do it now. This has been also happening for some time that some people just need that extra bedroom for their kid. So there is some demand coming into that. I know a lot of people go, well, the biggest percentage growth in the existing home sales

market was the 1 million homes. The 1 million home market is very small compared to the national market. So just be mindful. Velocity of data or weightings can go crazy when people think, well, the entire housing market is just this now. If that's the case, then the new home sale market will have a benefit because it's a bigger home. It's a new home. It has all these. I just don't buy that. I just think that millions of people buy a home to live in and mortgage rates are low and we're making it up. Are mortgage rates too low to the point that we're in danger of repeating the excesses of the prior housing boom where people buy more house than they need or buy two houses because

why not? Two is better than one. Or are the banks more restrained now and more in control of that type of behavior? Where do you stand on – because look, let me just say one other thing. A regular person goes about their day and they hear three different stories from three different friends of theirs at the supermarket, whatever. So-and-so just sold their house and got a million dollars for it. This one got 1.1. Oh, my cousin got 1.2. What do you expect them to come away thinking? They're going to say, this is another f***ing housing bubble all over again.

Here's the thing with the housing bubble. It was from 2002 to 2005. If you look at real home price growth, it was double digits all those again. Here's the thing with the housing bubble. It was from 2002 to 2005. If you look at real home price growth, it was double digits all those years. If you look at purchase application data, it was skyrocketing. We don't have that now. Existing home sales are still negative. Last year, real home prices, adjusting to inflation equivalence of rent, was negative. So we had this longest expansion on the lowest mortgage rates ever. Not much going on really in housing. There was a natural five and a half to six million total home sales level. I've never forecasted 6.2 million or above total home sales

ever from 2008 to 2019. This year was the first year that I could do that just because of the demographic demand. And real home prices just look nothing like what we saw from 2002 to 2005. Purchase application data demand looks nothing. Why? Because credit is just back to normal. Credit being back to normal. You know, a lot of people made the mistake about the housing bubble was created by the Fed, right? We just had the lowest mortgage rate with the longest expansion ever. And we saw no bubble demand. There's no speculation demand going on. It's just that this period in time for myself, my biggest concern was that real home prices could take off for three reasons. Number one, housing 10 years at 10 years, people staying in their homes longer,

mortgage rates are going to stay low. And then you have this massive demographic demand. So yesterday we saw median home prices up 11.4%. We have to be mindful of this going out because I think this is a difficult problem to solve unless you want to do deficit financing and build more homes or restrict credit to kind of cool down the market. But this cycle looks nothing like what we saw in 2002 to 2000. It doesn't look any real home price gains, nominal home price gains, purchase application data, existing homes, new home sales. We are nowhere close to what we saw back then. And that's good. But I'm still, it's funny. A lot of people were talking about 30, 40, 50% home price crashes. I'm worried about real home prices taking off during this period. And look what happened this year with the greatest health economic and health shock ever. What happened? Housing outperformed.

Why? Demographics and mortgage rates. All right. So when you say you are worried, you're worried that we'll have another affordability crisis, or you're worried that we will potentially get into a bubble situation. What's your call when you say 2020 to 2024, what do you expect to happen during this next phase of the cycle? This was my biggest concern, that nominal home prices will take off above 4.6% every single year going out. Now, if you look at per capita income and home prices- We're not going to see that kind of appreciation in income. per capita income and home prices. We're not going to see that kind of appreciation in income.

Yeah. Per capita income was always higher than home prices from 2008 to 2020. Not a lot of people know this chart. Len Kiefer does a really good job. My brother from another mother, he kind of shows this extremely well. We had pathway to get home prices higher. We're basically there now. So that's why I was concerned always about 2020 to 2024 is that we're actually crossed between per capita income and home prices. So this is the area where home prices could take off. Now, I would say again, COVID-19 took demand off the table. If we didn't have COVID-19, we could see much stronger home appreciation this year than what we saw right now.

So I'm just mindful of that because I think it's a difficult problem. It's not a housing bubble. It's not a credit bubble, but it's just sticky. It's just sticky inflation that sticks there. And it's very difficult to solve. It's just a slog and it just will impact the marginal home buyer. So that is actually my concern over the next four years. Now, maybe the forbearance solves that problem next year where we get a little bit more supply.

But this notion that home prices were going to fall 30, 40 percent because nominal home prices were back to 1996 level and mortgage rates are much lower. It just it doesn't make sense. So just that you just have to focus on that. There is no credit bubble. There's no housing bubble. But the demographics are just really good right now. And mortgage rates are the lowest points ever. Those two things drove this year, even with a pandemic virus, because right now we still have over 140 million people working. But that demographic patch, that 26 to 32, biggest ever in history. And then those first time homeowners and even baby boomers, they have so much equity, they can move around if they want to.

That keeps demand at bay. And now with restrictions and some of the things and the fear of the virus gone, you can see what happened with housing. We're working our way back up to be positive for the year. So I want to pivot and ask you about rentals and rentals of single family homes, which I think is a fairly novel concept to a lot of people. There's a publicly traded company. It's a real estate investment trust that I personally own called Invitation Homes. And I think there's one other in the space. But basically, they bought up, these are private equity firms, bought up all these single family homes during the crisis,

and then they turned that into a rental business. So now, let's say you can't afford to buy a house or you don't want to buy a house because you don't want to get stuck somewhere based on the nature of your career or whatever, you can rent a single family home. I think Invitation has the largest portfolio of these, maybe 80,000 of them. Is this a wave of the future, the best of both worlds? You don't have to live in an apartment building, but you don't have to get a mortgage and get stuck in a town? Okay, well, here's one thing about rents. When people talk about housing affordability crisis, affordability crisis is a deflationary event. So demand is still rising for both rent and housing.

So certain people cannot buy a single family home. Like in my area, my zip code, a single family home is $1.8 million. So there are families that have two or three kids that are living in two-bedroom condos that cannot afford to buy a house, especially in these coastal areas. So what do they do? They rent. They can rent. They can't qualify for a house because they don't have the down payment. They can rent a single family house

though. They don't have to be in a condo. They don't have to be in a condo. And plus, literally, if you live in the coastal areas, if you just go 15, 20 miles east, things get cheaper. So there's just a certain kind of home buyer or an aspirational home buyer that cannot buy these very expensive single family homes in certain cities. So the rental market to that, I think that makes sense for that kind of person, you know, especially if they're having kids. This is why having kids is so important for housing, because it makes you move, right? You know, you can literally live in an apartment your whole life if you don't have kids right but if you have kids you gotta move somewhere right so either you buy a bigger house you move out and say well whatever it is you need bigger space and i think that's why that goes into my years 2020 to 2024 storyline is that you know people get married in the 30s and now if

you look at marriage uh ages it's gone it's It's risen for some. Yeah. So this is a time where you can get people renting and you can get people buying homes. It's just that when mortgage rates go up higher, that marginal home buyer does get hit. But it's just that we're talking about the two most prolific housing drivers in the history of America. And they're both here at the same time. So we just have to be mindful of that and get off of these conspiracy theories about housing. The Fed, the bubble boys, I call them now the forbearance crash bros. These are marketing gimmicks, troll camp armies that just, they're not economic people. And this is why housing is outperformed. Logan, what do you make of a lot of this new wave of fintech startups that are purportedly going to re-engineer the way the housing purchase experience works?

I think Opendoor just went public or it was a SPAC deal. And I know there have been quite a few in the last couple of years that people have been excited about. Is that impact marginal or do any of them strike you as potentially disruptive to the way we buy and sell houses? Right now it's marginal, but what has history shown us? Technology, when it makes it efficient, it'll grow, right? Nobody ever thought about looking at a home through a Zoom or any kind of thing like that. People are doing that now. I think it's at a very young stage right now. And so because it's at a young stage, it's going to grow per demand.

So I don't know if it's ever going to be the market. Real estate agents are like a cabal. They have this market. Every technology thing that's been thrown at them, they always find a way to win. But this is something that can be really exciting, I think, 10 or 15 years from now. It's just at a very early stage and people like efficiency. What's stopping Jeff Bezos from listing houses on Amazon and giving prime members a 1% commission for buying or selling on his platform? Personally, I think he's afraid that, you know, uh, regulatory will kick in. So the only thing stopping him is, uh, the op, the optics. I would say that's the biggest reason he hasn't done it now.

There's no technological reason why Amazon isn't doing your mortgage, your title insurance and the buy or sale of a property. None. Amazon is, is trying to get into the mortgage business right now. And eventually they will get into the housing business. I just think right now they need to be careful about getting into too many sectors. I know a lot of people in the housing industry were kind of, oh God, if Amazon comes in, you know, they just, they, if you're, if you're a realtor, you're saying, through here. I just think there's right now people want to go into a house. They want a realtor. There's that relationship aspect. So it'll take time. But man, I mean, housing itself, one of the reasons why housing is still expensive, productivity in construction is the worst, right? We were building homes with hammers 50 years ago. We're still building homes with

hammers now. But now technology can make housing cheaper in the sense that it could be more efficient in buying and selling homes. I honestly think Amazon is just going to go, wait, we go into this, we're going to get, you know, we're going to get the Elizabeth Warren types that just basically say, no, you got to break this off. You can't do this because they can take losses where other companies can't. Right. The irony of it is they would go into it and probably lower the cost for both buyers and sellers in the process. At this moment in time, it's just probably too much to take on for them. They're not money poor, right? So you have to advantage, just advantage. Are you really going to get an advantage if you think the government's going to break you up?

I want to ask you, what is Berkshire Hathaway doing in real estate? So they bought, I think, one large realtor and then maybe a couple of others and bolted it on. And then they changed the name to Berkshire Hathaway Real Estate, which I thought was brilliant. How big of a player do you think they are currently versus what they could be? Cause for me personally, when I see that brand name, uh, I say, yeah, I want to work with Berkshire Hathaway. Um, that I thought that was very interesting because you don't see them slap their name on anything else.

They bought used car dealerships. They're not selling them as uncle Warren's, you know, a car dealership. So like what, what made them do that? And how big could they get? Biggest demographic patch ever. He wants to be part of that. So, and, and, you know, housing is very marketing, right? You know, you have these housing bears and it just seems like it's a very markety gimmicky uh sector uh so berkshire hathaway old stable dull well you know come to us yeah relationships we're not here to sell you uh this or that we'll just want to we just want to be part of your service we almost don't even need your money we're berkshire hathaway yeah so i think that that is a play there because again we've always had this theme that you

know housing it's always the best time to buy record. You know, it's just there's a marketing aspect in real estate that, you know, there's a lot of scars left after the housing bubble years. And it's just that this guy has this reputation being dull and boring, but it's good and it's stable. And also, again, it goes back to demographics, transactions. You know what? People need homes to live in. I think one of the big mistakes I see the housing bearers make is that they focus on price only. Price, price, price only. There are some really big housing bearers that say, why would millennials buy homes? It's going to fall 20% or 30%. They act like

podcast stock traders that are getting margin calls at 1201. That's not how people buy homes. They buy homes. It's the cost of shelter to your own capacity to own the debt. This is not a speculative, oh, everybody's flipping homes and making 20, 30- That's not what's going on right now. This is people buying primary residences and they're- Primary residences homes. The one aspect that's different about this cycle than the previous one is that cash buyers as a percentage of sales is still double what the historical norm is.

So in a low interest rate environment, if you're looking for yield rents. Right. You know, and we're going to probably zero interest rate policy for maybe 10 or 15 years unless unless we get inflation to pick up. So that aspect gives you another layer of demand. It's not 60% or 70%, but 15% to 20% of the market is cash buyers. And to me, it's yield, right? It's not so much flipping. Early part of the, after the bust, you saw these people buy these bulk homes and then sell them for 60% or 70% in auctions.

But now I think there's always going to be a healthy amount of cash buyers that are looking for yield. It goes to your rent thesis. There are some people that are always going to run. In a barbell economy, there's always going to be renters. So they need rental units. And again, we have a lot of older stock homes that need rehabbing, that need to be upgraded.

So I think the rent play is here just because one third of the population are never going to be homebuyers unless they get married and the dual income factor kicks in. So I think that rent story is always going to be there. All right, Logan, we're going to leave it there. Where do you want people to follow your research and get your latest writings on this topic? Just my name, loganmotoshami.com, Facebook, Instagram, Twitter. It's all open to the public. No cost, no marketing, no nothing. Everything's free. We spread the knowledge out there. Awesome. You're the man. We're going to check in with you again as this housing boom continues.

Hopefully, you're right through 2024. And then you'll tell me exactly when I should sell my house, right? You'll give me the heads up? Yes. You're the man. Thanks so much, Logan. Thanks for being on the show. We'll talk to you soon. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights.

You can watch all of our videos at youtube.com slash thecompoundrwm. Talk to you next week.