The Pomp Podcast - #1160 Lance Lambert | Is Real Estate About To Crash?

Episode Date: February 20, 2023

Lance Lambert is the real estate editor at Fortune Magazine. In this conversation, we talk about the housing market, mortgage applications, interest rates, federal reserve, and trends & insights across housing and rent. Lance studies the housing market day-to-day, and has a lot of information.   ======================= Announcing LYCEUM | Miami, a day-long event on March 4th in Miami Beach hosted by Pomp. We’re gathering an explosive group of experts to engage in a series of bold discussions, covering topics from investing, emerging tech, longevity, space exploration, entertainment and more.The speaker lineup includes names such as investing legend Cathie Wood, NYT bestselling author Vivek Ramaswamy, billionaire Christian Angermayer, master of Contrarian Thinking Codie Sanchez, Modern Wisdom host Chris Williamson plus many more. Listeners will receive an exclusive 40% discount on VIP and Insider Pass tickets with code POMP40.  General Admission tickets are free of charge. Spots are limited so head to lyceummiami.com to buy your ticket today. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ =======================

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. We have no advertisers on this podcast, so it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Lance Lambert is the real estate editor at Fortune.

In this conversation, we talk about the housing market, everything from interest rates and mortgage applications to the various insights, trends, and migrations that have occurred during the pandemic era. Lance studies the housing market day to day, and he has a ton of information. Some of it's data-driven, and some of it is simply the connection between these various data points, and the changes in lifestyles that people have experienced over the last couple of years. This conversation was fascinating, and I learned a lot, so I hope you enjoy it.

Once you get done listening, jump on Twitter and let Lance and I know what you liked, what you didn't like, what you agree with, and what you disagree with. I always appreciate the feedback, and Lance is active on Twitter, so he'll chime in with all sorts of data points and answer your questions. Here is my conversation with Lance Lambert. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business.

The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. at Desjardins insurance we put the care in taking care of business your business to be exact our agents take the time to understand your company so you get the right coverage at the right price whether you rent out your building represent a condo corporation or own a cleaning company we make insurance easy to understand so you can focus on the big stuff like your small business get insurance that's really big on care find an agent today at desjardins.com slash business coverage. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast

are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I've got Lance here with me. I wanted to do a deep dive conversation on the housing market. One of the main reasons for that is because housing makes up a massive percentage of the CPI. And so, Lance, I thought a great place to start is why does housing make up so much

of that CPI calculation? And how do you think about the accuracy maybe of the different price changes year over year as part of the CPI methodology for housing specifically? Yeah, I think with housing, we're now starting to see the Fed consider changing how it does housing CPI just because of the incredible lag that's there. But I think a better place to kind of get that rolling and kind of better understand how the Fed messed up here is to look back at what happened to housing during the pandemic. And this pandemic housing boom, which essentially started right off the bat, you know, even before the lockdowns were lifted and we still had jobless rates in the double digits, housing started going. And what happened there that got it rolling is that, you know, this freedom to work from anywhere and also being cramped up and not being at the office increased demand for space. And at the same time that historically low mortgage rates made it to where almost all of the properties or most of the properties on the market would cash flow for investors.

If you bought something and then especially once rents started rolling, you were you were in the green. Right. And so it created an investor rush. It created a rush from demand from these people who wanted more space and could suddenly work from anywhere. And they had historically low mortgage rates. And what was happening is that the CPI numbers were not starting to pick all of this up. And that even when we did that third stimulus package at the time, we still didn't quite understand how much housing CPI and housing inflation was already rolling at the time. If they had actually understood at the moment that housing home prices were already up almost 20 percent and that that was going to actually continue to put upward pressure for quite some time on inflation, maybe they would have not went as ambitious with the fiscal spending side. And as you watch 2021, it's bewildering. How did the Fed continue to keep rates so low when 3% mortgage rates were just feeding this beast? And inflation was just running in the housing market. And by spring 2022, we were up 42% nationally for home prices.

And what we've seen in the months since the Federal Reserve started to increase the federal funds rate and move into quantitative tightening is we've seen a series of Fed papers come out and try to better understand this housing boom. And a few things we found is that, one, the Fed has admitted that the pandemic housing boom was driven by a demand boom, not by tight supply. They have found that home construction would have needed to increase 300 percent just to match the amount of demand that was out there. And and here's the thing about this demand. It's hard to pick up in like home sales data and mortgage purchase applications because not all of the demand was satisfied. Right. Like there was only so much supply, so many homes that people could buy. The real measurement of demand is the number of people who are bidding on these homes. And it was an astronomical number of investors and buyers out there trying to get these homes during the pandemic housing boom. And so the Fed has admitted that demand drove it. That's part one. Two, another Fed paper came out and found that 39% of non-housing inflation was driven by the housing boom and the run up in home prices.

And so how does that work? Well, when home prices rise, it can create a wealth effect. And when home prices rise 42 percent in some markets like Phoenix and Boise, 60, 70 percent, it creates a big wealth effect. And that is most acutely felt on, you know, older Americans who have more housing wealth. And so for some of them, you know, that increased their spending. You know, they weren't afraid to hold back on splurges and that just fed into an inflation. And another part of it is it led to a big increase in retirements. These boomers who were like, you know what, I'm a couple of years away from retirement, but, you know, these investment properties I own, they've went up so much, I'm going to sell, I'm going to go into retirement. And that has restricted labor even more so. And so this housing boom has fed into other facets of the economy. And another part of it is also in the supply chain. You know, this housing boom, which also created a bit of a construction boom and, you know, builders just could not satisfy the demand.

There just was not enough supply and they didn't have enough labor and they just couldn't ramp up fast enough. But it overwhelmed the supply chain, all of the demand for the goods as this housing boom was going on. And keep in mind that a lot of people were moving out of cities like San Francisco and New York and L.A. and to places like Boise and Phoenix. And if you live in New York and you're in a, you know, 500 square foot apartment, you don't have a lot of shit. And so when you move to a place like, you know, let's say Tampa and you buy a single family home, three, four bedrooms, you're going to need to buy a lot of stuff. And so that huge, and it wasn't necessarily huge, but it was so quick that it overwhelmed the supply chain and it fed into inflation more so. So one of the things that's fascinating to me is this idea of the housing boom driving

this like wealth creation. In that, is this because people have either investment properties that they are selling or even maybe their primary home and they're selling and they're capturing some sort of financial gain and that kind of just goes in their bank account. Now they have this extra money. Or is it more things like kind of cash out refis or refinancing of their homes at the lower mortgage rates and the value has gone up and so they're able to actually capture some of that liquidity? Like how much of this is liquidity that's being captured in the real estate market versus it may just be kind of on paper they're actually getting wealthier and therefore that gives them more confidence to spend other money, but it's not necessarily net new money that they captured from their actual real estate or kind of home values. Yeah. So a part of the wealth effect is actually broader than housing. It's also crypto stocks,

everything. Everything was moving up so fast and everybody felt richer, right? And so that feeds into the wealth effect and that feeds into people's spending. But when housing is running like that and mortgage rates are low, for investors, that makes it very easy to continue to build their portfolios really fast. Um, and when rents are running up like they were, um, you know, and these properties are cash flowing and you can refinance your other properties, it, you know, it really feeds into that frenzy that we saw. And so, yeah, there was a huge liquidity bubble that was rolling through the economy. How much is the expectation that we will see rents come back down? Like one of the things with inflation that I always point out

is that inflation measures year over year change. But if the local grocery store or, you know, fast food joint raises prices, it is very unlikely that they are now going to go back and slash them, you know, 10, 20 percent and bring them back down. Is the same thing true when it comes to housing or rents? Or do we expect to actually get some sort of kind of market correction and find some equilibrium that may be between, you know, pre-pandemic levels and then ultimately those pandemic highs? Yeah, when it comes to price deflation, housing is one of the places that it's the stickiest, right? And, you know, between 2006, or sorry, between 1945 and 2007, home prices essentially didn't fall. You know, there was a brief 2.2% decline in the early 90s,

But really not much, you know, and it actually fed into a religion at the time of the housing bubble, which is that home prices didn't fall. So it was risk free. Of course, we learned after the rollover between 2007 and 2012, when U.S. home prices fell 26 percent, that U.S. home prices can fall. And as we fast forward to this episode, we have seen home prices come down a bit from the peak from June 2022 to November 2022. U.S. home prices have fallen 2.5 percent. If we stop there, you know, that's not really much. But if it were to continue to go and, you know, like hit some of the numbers like Bank of America thinks, which is closer to like a 10 percent peak, the trough drop that could have an impact, especially on home prices and especially in some of these overheated markets like Phoenix, Boise, Austin, you know, that would be a sizable drop from the top. When it comes to rents, rent deflation is very rare on a year-over-year basis. And even if it were to happen, it's not necessarily that people would feel it in their own rent. Rent deflation is rare.

Although there are some people calling for some mild corrections for rents in places like Phoenix. How do the interest rates or the Fed funds rate impact mortgages, which then impact the demand for new builds or purchasing of homes? It feels like every day I'm reading, whether it's on Fortune, CNBC, Bloomberg, Wall Street Journal, just go through all the financial media. Someone is writing an article saying mortgages are up or down based on interest rates being up or down. Is it that simple? It's just like if the rates go down, more people want to go and borrow. if they go up, they don't? Or are there other factors that people should be aware of and paying

attention to? The housing market is the most rate-sensitive sector of the economy. And when the Federal Reserve moves into its fastest rate hiking cycle in the past 40 years, it's going to have an acute effect on housing. And so we saw home sales drop at a pace that actually exceeded the 2006 drop in 2022. It was a huge drop in home sales at the pace. And we've since started to see that slow down, started to see that bottom out. We can see that in the leading data like mortgage purchase applications. But yes, where mortgage rates go, it's going to have an impact on the housing market. Now, the thing about mortgage rates is they're a long-term rate. So when the Fed is moving up federal funds rate, it's not like the mortgage rates and the 10-year yield

are going to move up in sync with it. But the expectation for where future rates will go, where there's future federal funds rates will go, helps the financial markets to price long-term rates like the 10-year and like mortgage rates. And so right now, what we've seen is we've started to see some data signal that the economy could be heating up a little more and we could have a little more inflation and what that means is the federal the federal reserve would hold short-term rates the federal funds rate up longer not necessarily go higher maybe they would but but they would at least hold longer and that sends mortgage rates up as the market prices in the future rate trajectory. So Neil Kashkari, one of the Fed officials, he said almost exactly

this, right? He said, look, if there's any sign of life in the housing market, that makes our job harder. And I saw that you were writing about this. When you see something like that, how much of the Federal Reserve's decision making is looking at the housing market versus labor, inflation, kind of other data points, right? Do you think that it is a major component, or is it just one of many data points that they take into consideration in their decisions around that monetary policy? Yeah, it's a core sector, and it's a core sector because they have so much control over it. And we've seen this now, I mean, in a very short window. When the Federal Reserve went down to 0% interest rates in March and April 2020 when the pandemic hit, and then went into a

massive quantitative buying spree, we saw housing start to boom. Now, work from home was also playing out and these other factors, but housing was running when unemployment was at double digits. And now when the economy, you know, we have like a 3% unemployment rate and mortgage purchase applications are at some of the lowest levels we've seen over the past 20 years right now. And that's in a very hot job market. So, you know, they have a lot of control over housing and they pay very close attention to it. And if home prices were actually start to, you know, get some upward momentum, I think that would really raise eyebrows at the Fed. That's not what they would want right now. They want this to cool down. They want housing inflation to cool down and to help to bring overall inflation down and also be a transmission vehicle into the rest of the economy.

So you slow housing down, and that can feed over into the rest of the economy. What's interesting about this is I saw that you were tweeting the seasonally adjusted mortgage purchase applications are down 42% year over year, which would suggest that that is a major, major fall. Now, of course, we saw them run up in 2020. But when you zoom out and you look at what was those 2020 and 2021 levels compared to the housing boom right before the global financial crisis, it didn't even register. Like it's like half of what it was then. Is it any sort of like base effect or anything to consider in terms of like, yes, it got hot in 2020 and 2021, but it didn't actually get anywhere near as hot as we saw before that major correction of the global financial crisis. And so our expectations should not be a 20, 30% correction. It should be something much more measured because really the good times, they were good. Prices were going up, but things like mortgage purchase applications never got out of hand like they had back in the mid 2000s.

Hey guys, what's going on? I hope that you're enjoying this conversation, but I wanted to interrupt for a quick second and tell you about a brand new conference that I'm hosting on March 4th at the Miami Beach Convention Center. The event is called Lyceum Miami and tickets are completely free for anyone who wants to come. I'm bringing together many of the most popular guests from the podcast over the last couple of years. Some of the guest speakers that we've already announced are people like Vivek Ramaswamy from Strive Asset Management, or Delian and Mike Solana from Founders Fund,

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free all you need to do is go to lyceum miami.com and you'll be able to pick up a free general admission ticket make sure you claim your ticket in order to get in through the doors Lyceum Miami is going to be a great time, so come check it out. Come hang out with me, many of the popular guests from the podcast, and other like-minded individuals. Lyceum Miami, March 4th, Miami Beach Convention Center. I hope to see you there. All right, let's get back into this conversation. Well, so here's what I would say to compare the pandemic housing boom to the 2000s housing boom.

They're very different stories. what they share in similarity is the affordability factor. Right now, it is actually more unaffordable to buy a home in terms of debt to income than it was at the top of the 2006 housing bubble, which is an amazing stat. And that also speaks to why housing has slowed down so much here right now is because affordability is pressurized to a historic degree. And that'll happen when home prices jump up nationally 42% in two years, and mortgage rates spike from two, 3% up to, you know, 6%. But where the story kind of deviates, is that that last run up was really fueled by a tremendous, tremendous amount of bad loans, you know, the subprime crisis,

where they were just throwing out these loans to people who couldn't afford them. And then it also builders were got got over their skis back in the 2000s. They were building way more homes than they should have. And so as the housing market hit that top in terms of affordability and sales started to come down, cracks started to form in 2006, 2007. All of the overbuilding led to a supply glut. But as the economy started to weaken and the unemployment rate rose, a lot of those bad loan or a lot of those subprime mortgages went bad and fueled a foreclosure crisis. And so when you already had a supply glut and then you have all those foreclosures, that just puts even more downward pressure on home prices. This story is different, where in the pandemic housing boom, the boom and the run up in prices was actually driven in a large part by higher income individuals. A lot of folks who were in cities like L.A. and New York who couldn't necessarily afford to buy in those markets or they chose not to because it didn't make a lot of sense because the mortgages were so much more than rents.

And they kind of they fled out of the cities, into the exurbs, into vacation towns, into those Western boom towns, down to Miami and drove up home prices. So the story is a bit different. And this time, inventory levels are just so tight. It's different, but we can still have a correction. And we are seeing that out in overheated Western markets like Phoenix, like Boise, San Francisco. Yeah. How bad is the housing shortage? I've read a bunch of different data points on this. Some people try to say it's the equivalent of the total number of homes in Miami or kind of other ways to really highlight this. But when you think about housing shortage, how would you describe the severity of that problem? Yeah, I've tracked down calculations by about six different firms and they range from like Freddie Mac thinking we have like a three or four million home shortage in the United States.

to like Moody's and John Burns Real Estate Consulting, which are more like 1.6 million, 1.7 million, and Zonda's kind of like right there too. And, you know, it's some number, but, you know, the researchers aren't quite sure. And for perspective, in a typical year, we're building like 1.5, 1.4, you know, during the pandemic, I know housing starts got up to 1.8. So about one year's worth of home production is what, you know, is kind of a closer general consensus among a lot of these researchers. And that number rose during the pandemic because there was an acceleration in household formation. And what I mean by that is a lot of people who were remading together, or maybe they

were living with their parents, and this pandemic boom occurred where there was, you know, a more money to be made in the job market there was a lot of big offers uh their assets stocks crypto housing were moving up and uh that helped to fuel things but also people just wanted more space and so a lot of roommates were decoupling where they were like you know what i'm working from home i don't want to see you every day i'm out and they got their own place and uh so there was a lot of that going on and that acceleration and household formation and uh you know you know we can't increase home supply very quickly. And so that increased the structural shortage. From a shortage standpoint, if you talk to somebody in San Francisco, as an example,

many people will point to regulation and the inability to build affordable housing on like a government problem or a permitting problem. If you talk in other markets, they may say, yes, you can get the permit, but it takes a long time. How much of the shortage is not like market demand or kind of market structure stuff. It's more so literally just permitting problems. Either you can't get them or they just take a really long time. Yeah, I think there's a lot of factors. The National Home Builder Association definitely plays up the permitting part of it. There's also the fact that people have the power to vote and zoning can be controlled. And if people don't want a lot of high rises coming in or certain

types of multifamily housing, you know, they can fight against that stuff. But I think here is a good point to be made about this story right now and why it's so complex. I think anybody would agree that San Francisco has a housing shortage. Anybody would agree to that, right? I think that's right. But right now, home prices in San Francisco, among all the major markets, are down the most from the peak. And it's already erased 17 percentage points of its pandemic housing boom growth. And so there's a huge structural shortage in San Francisco, perhaps the biggest in the country, but home prices there have come down the most among all the major markets. So what's going on? Well, things overheated and you can have prices drop even if an asset is, if there's a

shortage of an asset if there's an overheating. And so I think that's a part of why this housing story kind of breaks people's minds because they're like, well, prices can't come down unless there's an oversupply. Well, it's like, well, not necessarily. It can happen. And it's actually happening the most in the places with some of the biggest shortages, which is kind of ironic. So one of the pieces of information that gets scrutinized the most, and I get people writing to me every single day is this idea of the CPI calculation itself. And obviously, we mentioned that shelter makes up, I think it's somewhere around 33% or so of it. When you look at shelter across the pandemic, both in kind of the upswing and now in the downswing, the numbers

that were being reported by the BLS were much lower than apartment.com or Zillow or name your kind of private company. And I think why a lot of people had questions about this was the BLS from a methodology standpoint in some cases they're like literally calling and saying like hey what was your rent last year what is it this year right and kind of doing much more archaic type you know data collection and synthesization zillow or a loop net or an apartment.com or one of these websites they have you know in some cases tens of millions of data points around the country and they're watching on a day-to-day basis both price changes in terms of the ask but also where those are clearing. And so when you evaluate the housing market, how much weight do you put on the BLS and

kind of the official shelter mechanism or measurement versus some of these websites that may be reporting what appear to be much higher numbers, both in the good times and bad times? Yeah, I think there are serious flaws with how the Fed does its reporting on housing inflation um and i i think they've realized that and they're gonna have to get better at reading the data you know how housing cpi is done is it's rent and then it's rental equivalence which is like owner's equivalent rent of their residence uh which is like calling people and asking you know how much do you think you could rent your home for which is kind of crazy um in my opinion But look back at when the last stimulus package was passed.

What was it? $2.2 trillion. At the time, housing CPI was 2%. Home prices that month were up on a year-over-year basis like 16%, 15%, 16%. And there's a huge lag into the CPI. and housing is just a huge leading sector. I think just the way that we track inflation, the way the media talks about it is definitely flawed.

I would hope the way that the central bank does it, I hope they understand how it actually works and are looking at the leading indicators. But the story of inflation was occurring long before it was in the headlines. Another piece of this story that I found fascinating is, I was talking to somebody who is a luxury home builder and what he said to me at one point during the pandemic he goes we've kind of gone pencils down we've stopped uh taking on any new clients and I said oh it's that good and he said partly but he goes also we can't predict the prices of

many of the inputs for the home so there's some easy things like the price of lumber is exploding and so we don't know what it's going to be in three or six months and so it's hard for us to price out a home if we have kind of this variable we can't predict but also we're having trouble with the supply chains in terms of getting windows or other types of components of the home. When you see that stuff happening, is there a way to evaluate the impact of starting, stopping, supply chain disruptions, the price of the different commodities exploding? How much of that is affecting the actual changes in prices of homes? Or is it just too complex? And we've got to kind of throw our hands up and say, hey, look, economies are economies. They're

very complex machines. And we shouldn't try to actually understand these various nuances that may just be impossible to measure? I think if we take a step back and we look at this pandemic economy, it's a story of shocks, of demand shocks and supply shocks. We grinded the economy to a halt. We restarted things in different sectors very quickly. When the vaccines rolled out, Travel really took off fast. We then had one of the quickest rate hiking cycles, which completely grounded housing transaction activity way down by the end of the year to, you know, decade lows. And, you know, this economy, it's just it's out of sync still. And I and I, you know, we you look at the headlines and you look at these macro economists, they still don't know where things are exactly headed. You know, everything, you know, it ranges right now from we're teetering on recession to we're going to have a soft landing to inflation is going to overheat again. And it's unpredictable. And I can understand how some businesses, you know, have a hard time making decisions in that type of macro environment where even the experts are not just they don't.

It's not that they're not close to a consensus. They're a polar opposite ends of the spectrum. And it's not just one or two spectrums. There's like three different directions here. And it'll be interesting to see how things continue to move forward and where we head next. What has the impact been on various house-related stocks, right? So whether they are home builders, they are some sort of supplier of home builders, maybe even some of like the real estate businesses that are publicly traded. Any insights there in terms of how this like big swing and now what appears to be some deflation

has impacted many of those stocks? Yeah. If you're going to take all of the real estate stocks and try to put them into a bucket and look at them, it's not going to make a lot of sense because you look at the builder stocks and relative to the S&P 500 and some different stocks in the economy, they've done fairly well, despite the fact that we've seen mortgage purchase applications fall 43% year over year. But then you take some of the companies like Zillow, Redfin, Opendoor, which all had iBuyer businesses, and they've really went down. Opendoor at the height was $34, their stock, and they became a Fortune 500 company. They're trading at $2 now, Opendoor. And what happened for them is that they were buying up these homes,

they were an iBuyer, and they were really heavy in a lot of these overheated markets like Phoenix and Las Vegas. And once the market rolled over and prices started to correct, they were a bag holder and they had to sell these homes. And so Glenn Kelman, the CEO of Redfin, told me that they had a commitment to their investors and that they were going to do whatever happens, whatever it takes to move the homes, essentially. And so every two weeks in those markets, they were pricing things down 2%. And so not only were they taking big losses, but they were accelerating the corrections in markets like Phoenix, like Las Vegas. And we're still seeing that play out. Opendoor still has a lot of homes in Phoenix. I think it's around 800 homes. And

they're still dropping prices. And it'd be interesting to kind of see how that plays out. But in real estate and the stocks, it's a little bit all over the place. And so some of the iBuyers are in trouble. Some of the digital platforms are in more trouble. But the builders who had really incredible margins during the pandemic housing boom, don't let them tell you that lumber was making it to where they couldn't make money. They were making a lot of money. These were the best margins they've had that I can see in the data.

And so right now they've just given up on some of the margins. They've come down in price. They're doing mortgage rate buy downs where if like, let's say it's a 6% mortgage rate right now, they can buy you down and buy points on it to where you get like a 4.2, 4.5% mortgage rate. That's going to eat into their margins, but they can do it because their margins were so flush. And for them also, the builders, you know, there is this structural shortage of homes. So in theory, they should do a lot better than some of these other real estate companies. And the one that's been the most affected, of course, is anyone on the mortgage side, because not only are mortgage purchase applications down 43% year over year, refinances are down like 80, 90%. The refinances are just done right now. Uh, you know, there was a huge boom when mortgage rates were two, 3%, but now that we're up, uh,

over, you know, we're at 6.6% today. It just doesn't make a lot of sense for a lot of people to refinance. Is there a bifurcation between the luxury market, um, in housing and kind of everything else? Do you see different behaviors or, or kind of different impact on prices between those two markets? Yeah, right now I would call this housing correction and the housing downturn. I would call it a bifurcated downturn and a bifurcated correction. You look at a market like Chicago, and according to Kay Schiller, they're not even down 1%. You look at San Francisco, they're down double digits. And what we've seen happen is we have it bifurcated by the markets that weren't as overheated and then the ones that were, and the ones that were correcting more.

But also, at the lower end, the lowest-priced homes, the lowest tier of pricing, they have not seen prices drop as much because rents are so high, and that's really lighting a fire under entry-level buyers' feet, and they're still having to go out. Whereas at the higher end, we're seeing a bit more of a correction, and it makes sense. you know, higher income individuals, they've seen their stocks come down, you know, they don't have to buy. And so we've seen more, you know, weakness there than we have at the entry level. And of course, other markets like vacation markets and further out into the exurbs and places like that have also seen bigger corrections in many markets. What about the major metro rental kind of environment? So New York is the one I'm probably most familiar with where during the pandemic, Tons of people fled. Prices came down significantly. It seemed like they were going to stay down.

There was talk of, you know, New York's dead, all the normal stuff you would expect. But it appears to be coming back. And I think now New York rents are either at or near all time highs. What has been going on there, like specifically in these major metros? Yeah, I think some of it is, you know, some of those places were due for a bit of a rebound as in some of the employers. started to bring people back to the offices. And New York's a little lucky where they're more heavy finance and those employers have been more willing to bring people back. You look at like Goldman Sachs. And so I think that's helped to strengthen not only their rental market, but also their housing market relative to the rest of the country as we go through this

correction. And when you see the housing market going through this correction, what gets us out the other side? Is it just Fed and kind of them providing relief? Or are there other things that you're looking at that potentially could allow for a muting of the correction, but also some sort of recovery? Yeah, I think when it comes to the correction, and I don't want to make too many predictions, but I could go off of what other major real estate firms are thinking right now, which is that affordability needs to improve a little bit here. We're too pressurized. We're at the very upper bounds of history right now in terms of affordability to buy a home. And that can come down through three mechanisms. The first mechanism is that incomes rise. And we are seeing

incomes rise, but it's nowhere near the rate that home prices have went up. But incomes rising here could depressurize this a little bit. The second one is if mortgage rates were to come down more, this is the one that could really move the needle the fastest. And we did see as mortgage rates came down from like 7.3% in November to 5.99% in early February, we did see some depressurized affordability and some people moving back into the market, but now mortgage rates went back to 6.6%. If they were to come back down further again or go back even to 5.99%, that would help. And the third one is home prices. And so the longer that the other two take to play out, incomes rising and mortgage rates falling, the more that we see this third lever pulled, which is prices. And we have seen it pulled a little bit. We've deflated 2.5% nationally between June 2022 and November 2022 on a seasonally adjusted basis.

But if it takes longer, that third lever will continue to be pulled a little bit, I believe. Another question I have is around this 30-year fixed mortgage. You mentioned it's up over 6%. How does that relate historically? Is that a near all-time high? What has been the highs, and how does that kind of look when you just zoom out a little bit? Yeah. So as mortgage rates went up to 5% and then made a beeline for 6%, a lot of people on Twitter, especially older Americans, were like, hey, 6%, whatever. That is not expensive historically.

You know, we had 18% mortgage rates in 1981. But you have to look at mortgage rates with prices and with incomes. And when you take everything into account, this is one of the least affordable housing markets ever. in american history it wasn't when home prices went up 42 percent in spring 2022 but once you added the mortgage rate spike on top of it once mortgage rates doubled we went all the way up into the top of the historical bounds so a six percent mortgage rate today when accounting for prices and winning accounting for incomes is comparable to a you know a 12 13 14 mortgage right back in the 80s. My last question for you or kind of last topic I want to discuss

is this whole idea of the real estate market for investors. And I think what's been fascinating is we've seen an explosion of like the short term rentals and kind of Airbnbs and all this, especially among young people who are like, I'm going to buy this single family home and I'm going to rent it out or whatever. Any insights there that you've seen over the last two to three years around uh the investment side of the real estate market have there been kind of a mirrored approach of the boom and bust cycle um or is it maybe bucking the trend and actually investors are having a different experience um than uh than people who are just using it for primary uh kind of homes yeah so we've seen investor activity rage during the during the pandemic housing boom

People going out and trying to get short-term rentals, trying to build their, you know, portfolio of homes they own if they're a landlord. We've seen more flipper activity. Actually, flipper activity got as high as it did during the 2005-2006 peaks during the pandemic. And we've seen just an explosion there. We've seen institutional investors dive into the market. There was a lot going on during the pandemic housing boom. And, you know, part of that is there was so much liquidity out there, and they wanted to grab up a lot of this run up in home prices. But also, you know, when mortgage rates go down to two, you know, two, 3%, and that moves the payments down, there's a lot of cash flow in these properties and a lot more properties cash flow, and are just enticing to investors, and they can refinance their other homes and then take on more properties. So there was a huge run up in investor activity during the low mortgage rates of the pandemic housing boom.

But we've seen that since come back down. And we've especially seen a pullback in the bigger buyers, the bigger top dogs pulling back of their home purchases right now. And, you know, in flippers right now, this is a very hard time to be a flipper, especially as we have those market corrections out west. What about the geographies of Austin and Miami? Actually, as I'm thinking about this, we've talked a lot about San Francisco, New York and those areas. One of the narratives, whether accurate or not, is that lots of people were fleeing the San Francisco's and New York's and they were moving to the Texas and Florida markets. There's a report, I think, that came out at the either December or January from Goldman Sachs that all of the folks in Miami were running around and celebrating saying, hey, every other housing market in America is going to go down except for Miami, according to Goldman Sachs. How do you look at these markets that were, you know, I would characterize as winners from the pandemic migration?

Do they still have pretty healthy data and tailwinds to them? Or should we expect some sort of cooling off there based on the various people you see reporting on this? Yeah. So what we've seen is that the high cost markets out west, the L.A.'s, the Seattles, the San Francisco's have went into market corrections price wise as soon as mortgage rates spiked. And the feeder cities from them, Colorado Springs, Austin, Phoenix, Boise, all of those places have also had corrections. You go east, the high cost markets on the east have not seen it. The New York's, right? DC's as much, although a little more in DC and a little more in Boston, but still nothing like out west. And then Miami has not either, really. And there has been a little bit, but nothing crazy. And so we've seen a lot more resiliency on the eastern side of the country than the western side of the country. Why is that? We're still trying to actually figure it out because they're, you know, Miami is very expensive relative to incomes right now. And so is Tampa and a lot of the southeastern markets.

But a part of the reason that they might be more resilient than the places like Phoenix and Boise. and in particular for Miami is you have a lot more cash buyers, right, coming in, especially from like Latin America and these other places abroad. And they don't really give a shit about where mortgage rates are because they're a cash buyer. And so there's less of a rate sensitivity for them. And also, you know, the elephant in the room is tech. Out West, you know, the tech market just dominates. And we've seen a huge pullback and the equities for tech stocks, especially for a lot of the unicorn types that were, you know, leading a lot of their, you know, employees to go out and buy homes as they got closer to IPO and they had the huge run ups. And we saw a lot of that during

the pandemic. So I think some of its job market and then some of it's also resiliency of demand. Yeah, it's fascinating to think about the cash buyers and kind of the impact they can have in a market because they don't care about the mortgage rates. Are there other markets outside of Miami, which, you know, the joke is that Miami is the capital of Latin America, but like, are there other markets where there's a lot of cash buyers and we see a similar dynamic? You know, when I look at the United States and, you know, there's not really a U.S. housing market there is and there isn't. But, you know, as you kind of break it up, you can kind of group places. A few of the places that you can't really group are like New York. It's like its own thing. It's a very weird, interesting market. San Francisco is one of those places. And I also think that Miami is as well. And, you know, it's a very unique market.

And another factor for Miami, take Miami and Austin. Both markets saw a huge draw during the pandemic. But Miami, there's not as much home construction relative to Austin, which has all of the space outside of the city. And so as Austin started to boom during the pandemic, builders really ramped up in the Austin metropolitan area. And so now once mortgage rates spiked and the demand for those new homes slowed, inventory built up much, much faster in Austin. I think inventory year over year is up like 200 percent in Austin. And from the bottom, I think it's like three or four hundred percent. And so it's just a different market than Miami. yeah and Miami just has more resiliency right now yeah that's crazy um when you wake up in the morning what what data points do you look at to evaluate how housing is doing like are there one

or two data points you're like these are the ones that I put the most weight on yeah every day when I wake up and I check the financial markets I go look at the 10-year yield because mortgage rates although you know they don't you know the the spread between them kind of has fluctuated and has actually gotten bigger during the pandemic, they move in sync, right? So if the 10-year yield goes up, usually mortgage rates are going to go with it. And so I'm looking at that every day because mortgage rates are the most important factor right now for the housing market. That makes a ton of sense. Lance, I could talk to you all day about this stuff. It is somewhat of a nuanced conversation around financial data, but I think it really is a huge story in terms of

what's happening across financial markets. Where can we send people to find you on the internet to read the articles that you're putting out for Fortune or follow along with your tweets? Yeah. And I, you know, I really appreciate you having me on. You know, I think you do a lot of great stuff. And you can find me by Googling Lance Lambert Fortune. You'll find my author page and you can also find me on Twitter at News Lambert. Awesome. Lance, thank you so much. We definitely will do this again in the future. Hopefully next time we talk, the housing market it will be booming. Everyone will be getting rich and we won't have so much bad news, but I appreciate your attention to detail and the various articles you write. I highly suggest

anyone who has not read your stuff to go do so. And then you're a great follow on Twitter. So I recommend doing that as well. And we will definitely talk again in the future. Appreciate it. Housing, housing, housing. Thank you.