The Pomp Podcast - #1378 Lance Lambert on 4 Mind-Blowing Reasons Why Homes Are Unaffordable

Starting point is 00:00:00 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. 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. What's up, guys? Today, I've got a special treat for you. We have Lance Lampert. He is the co-founder and editor-in-chief at Resi Club. He's the former real estate editor

Starting point is 00:00:38 at Fortune Magazine, and he spent a ton of time at leading publications like Realtor.com and Bloomberg. Lance is the foremost expert in residential real estate, and he is here to break down the four reasons why houses are so expensive. Real estate has been exploding in price. It is the most unaffordable housing market that we've had in history, and Lance is going to tell us exactly what feeds into it. This is a major crisis for the U.S. economy, and people need to understand not only how we got here, but what it's going to take to get us out of this. The idea of an American being able to go and buy a home for them to live in with their family is crucial to the American dream. Right now, that is a very difficult situation, and

Starting point is 00:01:19 hopefully Lance will help us break down what we can all do to get us in a better situation. Here is my conversation with Lance Lampert. 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. Now, listen up. If you're like me, you feel like you are at a command center when you sit down at your desk.

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Starting point is 00:05:09 I thought a great place to start this conversation is housing affordability has deteriorated at such a historic rate. What is driving such a dire situation for people to be able to buy a home in today's market? Yeah. So what's happened in housing is we are passing through a historically significant chapter and it's the fastest ever deterioration in housing affordability. It started off with the overheating of prices during the pandemic housing boom. And of course, a big part of that is the fact that supply isn't elastic, right? You don't just create a bunch of new homes out of nowhere, right? The housing stock, some of it is 100 years old. So it takes time to change that. But demand is elastic, right? And during the pandemic,

Starting point is 00:05:55 you had demand soar. And so the Federal Reserve estimates that housing supply would have needed to increase 300% to match the amount of demand, housing demand that increased during the pandemic. And so if you have a soaring of demand and supply doesn't move, what happens is you overheat and prices go up, prices and prices soared. And we have never had home prices on a national basis go up 21 percent in one year. And that's what occurred in 2021. And in total, national home prices from March 2020 through April 2024 are up about 47%. And on the decade, we're up to 51% already. Incomes have not kept pace with that, not even close. Incomes are up closer to like 20%. And then that's not even the worst of it. Mortgage rates going from around 2.5% to 3.5% during the pandemic, up to 4%, up to 5%, up to 6%, up to 7%. And right now, if you're a borrower who doesn't have great credit, you could be getting quoted close to or above 8% for mortgage

Starting point is 00:07:18 rates. And so the combination of prices and mortgage rates and the fact that incomes haven't kept pace has meant in terms of the math, this is the fastest ever deterioration in housing affordability. But it actually gets even worse than that. We've been digging in deeper at Resi Club into what's happening in the home insurance market. And in between 2018 and 2021, there was only one time that a state saw their home insurance premiums on average jump by 10% or more in one year. But last year, 25 states saw home insurance premiums jump 10% or more. And in Texas, it was closer to 25%. And so not only have would-be buyers been hit by the fact that home prices have spiked, that mortgage rates have spiked, that the typical median income worker

Starting point is 00:08:16 has not kept pace with the income or with the price spike, but they're also being hit by the home insurance shop. And then if you dig out deeper, it actually gets worse than that. And home repair costs have went up close to 50%. And so that's a big part of the reason that home insurance premiums are driving up. It's not just climate risk. Although, you know, some of the hurricanes that we had in late 2022, Hurricane Ian has played a role. It's also the fact that now to do the repairs and the cost of replacement, it's so high because we've had this inflationary shock. And so the inflationary shock has hit the housing market the hardest. And so the folks that have been hit by the brunt of this are would-be buyers who are just now getting into the market.

Starting point is 00:09:05 So the vintages that took out mortgages in the second half of 2022, all of 2023, and now 24, and it looks like 2025, still going to be tough affordability. And then it's really all those would-be renters or people with their parents who haven't been able to break into the housing market. They are the ones who felt the brunt of this very fast, the fastest ever deterioration in housing affordability. So I want to take each one of these points, maybe we can dig a little bit deeper into them. So when it comes to housing supply, there's really kind of two different components. And you're much more of an expert than I am. But there's like, how many houses are we building? And I've seen data points that, you know, we are missing hundreds of 1000s, if not millions of homes in underbuilt supply, meaning that the United States should have been building more, we haven't. And so there's

Starting point is 00:09:56 just not enough homes for everyone to live in. But then also there is kind of the inventory levels where there are actually people who want to sell, but no one is willing to buy now. And so can you unpack those two things? And like, what is actually driving, you know, a 50% increase in home prices in, you know, four years, five years, that sounds insane and probably unprecedented in terms of a rate of growth. Yeah. So supply, if you're looking at the amount of home, how many homes are being built what is the stock of housing relative to you know household formation and all of that that gets into a much more theoretical debate in terms of like where is the equilibrium of the market where should we be most of those undersupplied studies uh while a lot of them

Starting point is 00:10:42 think we're closer to one to two million under built and those are the conservative studies that are just looking at okay here's the vacancy rates in the us here's how many homes are usually vacant, right? Completely empty and would like to be rented or whatever, but they're vacant. And so that's kind of their equilibrium for the market. But to get back to a historically normal level of vacancy rate, you would need about one to two million homes right now. Freddie Mac puts it at 1.5 million to be out there, but empty. So if you just out of nowhere poofed 1.5 million homes into the U.S. housing market and nobody could live in them, then our vacancy rate would go back to the equilibrium of the historical average. But of course, a lot of these researchers

Starting point is 00:11:29 are like, well, that's not really a fair study of a full estimate of the shortage, because there's also these other households that are living with their parents or haven't been formed or with roommates, that if housing affordability was better, or there were more supply, they would break into the market. And so that's kind of like the Zillows of the world that put the shortage estimate closer to like 4.5 million. But that's all a theoretical debate, right? So I am actually less focused on the theoretical side of it. Resi Club, we don't do our own analysis, but we do track the 11 studies out there that get done on a routine basis. What we focus on is the equilibrium of today's market. And so we use active listings. And active listings are everything for sale on

Starting point is 00:12:19 market right now but active listings can be moved not just by supply but also by demand and so here's how i would like people to think about active inventory think of it like a parking lot or not a parking lot but a uh a car dealership lot right so you drive by the car dealership lot and you start to notice that it's starting to dwindle right the cars are getting bought so quickly. This is like during COVID, where there was a huge rush to buy these cars. It's getting dwindled, despite the fact that maybe deliveries to the lot are the same, right? So you could have the same number of homes come up for sale, which is what we had during the pandemic. But if the demand has soared, right, and the cars are getting absorbed, or the homes are getting absorbed and

Starting point is 00:13:08 bought so quickly, that lot can get very scarce. And so as the lot gets very scarce, or the housing market gets very scarce with active inventory, the sellers in the market have a tremendous amount of leverage, right? They can have you waive contingencies, waive inspections, you know, that's where you're getting a lot of bidding wars, right? And so that's what occurred during the pandemic housing boom, is that you didn't have a drop in supply coming into the market, but demand had soared so quickly, so fast, that everything coming up was getting absorbed very fast. And then you had the bidding wars, right? So we've now flipped into a different market, where mortgage rates have went up very quickly. And the number of active listings, think again, like that car

Starting point is 00:13:55 dealership lot is gone up, you're starting to get more on the lot, or in this case, more homes available for purchase, active inventory. Ironically, though, the number of homes that are actually coming up for sale, new listings, is actually less now than it was during the pandemic. But the number of total homes for sale is higher now than it was during the pandemic. And so you're kind of wondering, well, how is that? What's happened is that the number of homes for sale is going up and continuing to rise right now very slowly, but it's rising as so many buyers have been priced out of the market, right? But what's also occurring is that there's less resale churn in the market. There's less turnover because people who have a 3% or 4% mortgage rate

Starting point is 00:14:44 are like, you know what? I'm not selling this home. I'm not going out to buy something at a seven. Maybe it's because they don't want to get that much higher payment. Another reason is it's around 60% of homeowners could not even afford to buy their current home, given their current income at today's mortgage rate. So a lot of them can't even afford to make that trade purchase because rates are so high. And so you are seeing less turnover in the resale market. So less, and the example I gave earlier, it's like less cars going on to the lot. Ironically, though that lot getting more packed as the active inventory moves up so and as we get more active inventory and as some of these markets continue to go higher what you will see is deals just like if

Starting point is 00:15:33 a car dealership got a lot of cars on the lot you would start to see more deals and so we are starting to see softening in parts of florida and parts of texas some of these areas that you know they have more new construction, and the builders are doing a lot of buy downs and incentives to move that product. And so that becomes competition for the resale market. And so as you have more of that competition, plus a lot of those markets like in Florida and Texas really ripped during the pandemic housing boom, prices went up way faster than the local fundamentals. And so as that occurs, and you get more of those active inventories, some of these markets could start to see price softening and price give up but really it's it's going to all happen on a regional

Starting point is 00:16:17 by region basis and i would really recommend people who are like interested to find out is their market one of the ones that are softening or are they not softening to follow and subscribe to resi club we track eight that or 800 metros across the country 3 000 counties and then every couple months, we do data on zip code analysis for inventory and prices for every zip code in the country. Now, we've talked about kind of housing supply. Another part of this is the actual mortgage rate that somebody is going to pay. You mentioned that some builders are doing buy downs, etc. When rates get up to six, seven, 8%, you know, for many people, it's unsustainable or maybe ill-advised for them to try to go buy a house with an 8% mortgage rate.

Starting point is 00:17:05 And so builders or others are trying these different things in the market. Can you explain maybe what they're trying to do to get these mortgage rates down? And then also like your analysis as to like what works and what doesn't work for these people who are trying to get, you know, more purchases and kind of more turnover in the market with some of these either gimmicks or tricks. So builders are very smart. And unlike an existing homeowner, who's like, I am going to get the absolute highest dollar I can, because and I'll wait if I have to do it. A builder, a lot of their money is made on the volume, right? They have to sell, and they're going to continue to sell product. And so what they're doing is during the pandemic housing boom, they had complete pricing power. Their profit margins during the pandemic housing boom were higher than they were during the housing bubble by a wide margin.

Starting point is 00:18:01 They were raking in the cash. They had complete pricing power. And so as rates went up very quickly in 2022, they began to take some of that margin and deploy it to incentives that would move product. And so they would rather spend $30,000, $40,000 to buy down a rate down to 4% and maybe even $50,000, $60,000 to make it fixed all the way 30 years. They would rather do that than take a $40,000, $50,000, $60,000 price cut. Because when you do those price cuts, one, anybody in the backlog who's already bought in that community is like, hey, what are you doing, guys? I just paid this price. And so you risk cancellations in your backlog. And the other thing is, the builders want to keep those prices moving forward in these communities. So they're kind of wary of that. And they would prefer to do price cuts through affordability adjustments like buy downs. And so that's what we're seeing a lot of. And we're seeing the bigger incentives in the markets where there has been softening. and it really comes down to a market by market basis and a lot of the builders have already done

Starting point is 00:19:14 these adjustments many of them were doing them in the second half of 2022 and they're still just kind of around here they've stuck around and actually in a few markets builders have the buy downs but prices are still rising on new construction in some places and so I think when it comes with new construction, just keep in mind that it varies significantly across the country, just like with anything with housing. Now, when we go and we take a look at home insurance, you mentioned that some states like Texas, 20, 25% increase. I think you said 25 states with at least 10% increase in home insurance. I've seen a lot of people, specifically in Florida, that are worried, hey, they're just going to stop writing coverage here in the state

Starting point is 00:20:03 florida what is the solution is it just the market forces take over um and people are gonna have to get comfortable paying a higher price or are there things that either structurally can be done or maybe a homeowner can do uh to really try to you know make this one of the lesser impactful uh components of housing affordability for them so i talked to some uh insurance folks and some think that the worst for commercial and residential could be just about over as we've kind of moved through this inflationary shock and then uh the results from the catastrophic losses at the end of 2022 which it doesn't get talked about a lot but hurricane ian that hit in southwest florida is the third costliest hurricane in u.s history um 100 over 100 billion dollars in damage

Starting point is 00:20:53 And so it's possible that time is the best solution. But some of these states, because keep in mind, these insurance commissioners are politically appointed. So they've been fighting off these increases that a lot of these are actually directly from the inflationary shock and from the housing inflationary shock. And so these insurance commissions have been fighting it. And so in some states, you've seen fewer increases in insurance. And instead, you've had more of the insurers be like, F it, I can't even profitably make money in the state, I'm out. And so that latter example is more of like California, where they have fought more of the increases through the insurance commissioner and more of these, you know, insurers have left the state. So it'll be interesting to see how it all plays out. But I think the thing to keep in mind is that a lot of this is tied to the inflationary shock and the housing inflationary shock, which it looks like the worst is behind us. and when we go and we take a look at kind of the national housing conversation it seems like maybe the government metrics or kind of you know the you know economists are coming out and they're saying hey housing affordability is bad but the pain that people kind of you know on um the day

Starting point is 00:22:16 to day basis feel almost feels impossible like there's no way to get ahead how am i ever going to be able to buy this i think the median home in america now is like 400 or 500 thousand dollars And so in a world where that number seems to keep going up, I think a lot of people ask themselves, you know, how much money am I going to have to make in order to be able to afford this thing? And to your point, housing prices have exploded at such a rate and wages haven't kept up. Do you think that we can ever kind of right size this? Like, is there a world where housing prices stop going up or wages are able to recover at a fast enough pace to kind of find some sort of equilibrium? you? So you have a very wide school of thought here. You have the school of thought like Goldman Sachs, which they believe that the lack of supply in the market will continue to push

Starting point is 00:23:08 national home prices up by around the historical average of like four and a half percent for the next four years. Then you have groups like Moody's, where their chief economist, Mark Zandi, he essentially believes the housing market, because the fundamentals are so strained, that we are still headed for a period of softening where prices barely move up for several years, incomes continue to move up, and that helps to put the housing market into a bit more balance. So we have been through this a few times where housing affordability has deteriorated, not as fast as today, but you've had some others. And so a classic example of that would be the late 70s into the early 80s, where you had a huge inflationary boom in housing. And during the

Starting point is 00:24:04 whole 70s decade, home prices went up 100%. Or no, actually, they went up around 150%, I believe, and inflation was up 100%. So housing took off well above wages. And then you had interest rates into the early 80s that not only went to 10%, not only went to 15%, they actually topped out at the average 30-year fixed mortgage rate in October 1981 at 18%. Actually, a little interesting bit of history. Halloween number two, that Friday, the 13th in October, was actually the second worst ever mortgage rate ever. So pretty scary release state. And so what happened afterwards is that nominal home prices, home prices didn't crash. But you had after you made it through a bit of the 80s, you had about a 10 year period in the US

Starting point is 00:24:59 where real prices on many years were declining as inflation and wages outpaced home prices. And that was still true until a lot of the early 90s. And that's what healed the fundamentals of the housing market then. Then we had another deterioration, which is the early 2000s. Home prices, you know, they actually jumped double digits during the 2001 recession year. Rates went lower. And that was kind of the start of another housing boom. and prices were still going up 03, 04, 05.

Starting point is 00:25:38 Then 06, they kind of were chilled out for a bit. Seven fell a little bit and then 08 was the crash. And so in that period, we had a nominal crash in home prices that restored housing affordability. And so it's really a question of, you know, what is the restoration process look like for housing affordability? this go around. And you did have other markets at the time, like Canada, that didn't see the 08 crash. They didn't even get a housing affordability improvement. And so now when

Starting point is 00:26:14 you look at the charts, Canada's housing affordability is just off the charts. There's never been a market that you can find in history where they're that far detached from incomes as right now in Canada and also like New Zealand. Are there things that the government could do to alleviate some of these problems? Like we see, you know, student loans became a huge issue and they're basically forgiving loans and kind of doing all sorts of things. And people will debate whether they should be doing it, whether it's going to work or not, but at least, you know, they're trying. Is there areas in housing that you think government can or will step in and try to provide relief? You know, I try to be cautious here because I like to cover housing as a

Starting point is 00:27:01 journalist and not as much of like, you know, a policy expert. And I like to provide wiggle room because there could be maybe different solutions. And, you know, it's so hard to actually solve things through government intervention because they start with it. They have several programs and, you know, they already have had a tremendous number of programs and we still saw this deterioration. But one thing I would say to keep in mind is that housing is a very unique part of the economy where the Federal Reserve and central banks, not only in the U.S., but across the world, use housing and residential investment to cyclically speed up the economy and cyclically slow down the economy. And so when interest rates went very low during the pandemic and the Fed was

Starting point is 00:27:51 buying a tremendous number of mortgage-backed securities, and mortgage rates fell down to a 100-year low heading into 2021 at 2.6 that we hit on January 7, 2021, what you saw is that the Federal Reserve and the central banks were using housing to pull us through the COVID-19 lockdowns. They accelerated housing and they essentially pulled forward or pulled, you know, what would have been transactions in the future. And they happened in 2020 and 2021. And then now we're we are at the back end of that where we've moved from quantitative easing to quantitative tightening. And so they are using the housing sector and residential to to slow down the economy because they want to try to slow down inflation, soften the labor market. And so when you live in a world where the Federal Reserve and central banks are constantly speeding up and slowing down housing, it makes it distorted to where you aren't.

Starting point is 00:28:57 it's not it's a little less based on the market fundamentals and you're kind of getting pulled from other directions and so if there was you know and you know a complete free market for housing maybe it would be a a bit different story um but i i don't a hundred percent know it you know it gets complicated because you have the interest rate cycles you have the unemployment cycles And you have the fact that housing is, you know, something that, you know, the Fed and the central bank wants to speed up and accept and decelerate it at other times. And Lance, maybe before we let you go, just quickly explain what Resi Club is and what you guys are doing and, you know, who is it for and what do they get if they subscribe? Yeah. So Resi Club, our goal was to be your data driven gateway to the heart of the U.S. housing market. Our audience spans from everyone from homeowners, buyers, renters, sellers, to all the industry pros, home builders, agents, loan officers, really any stakeholder across housing.

Starting point is 00:30:07 And we're not writing to just one audience. We just want to help everybody understand what's going on in the housing market. And we have a huge regional focus where we are looking at 800 metros, 3,000 counties, and every zip code in the country and doing it for home prices. And then also for active inventory, which in our view is the supply-demand equilibrium of the market and kind of suggest to us where prices could be soon heating up or slowing down or maybe even correcting. And people can find us at resiclubanalytics.com. They can sign up for our free newsletter. We also have a premium newsletter, Resi Club Pro. It's three additional articles per week, access to my housing tracker for prices, my housing tracker for inventory, and just a lot more data and charts and exclusive interviews with executives across the industry. And this, you know, we talk to everybody from like KB Holmes, CEO, to Sean Dobson at Amherst, one of the largest institutional players.

Starting point is 00:31:13 We really are tapped into what's going on in housing across these different sectors. Amazing. I highly suggest everyone go and subscribe. ResiClubAnalytics.com. Lance, thank you so much for your time today. We'll definitely do this again in the future. Thank you. Thank you.

The Pomp Podcast - #1378 Lance Lambert on 4 Mind-Blowing Reasons Why Homes Are Unaffordable

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