June 16, 2025 • 35 mins
Somehow, the American consumer remains quite strong. Despite higher interest rates, tariffs, general economic uncertainty and so forth, people are continuing to spend. And yet there are some pockets of weakness that you can observe, especially if you look at delinquency data for various types of credit. But even here the patterns aren’t totally obvious, as it doesn’t break down nicely among prime vs. non-prime borrowers. But there is one important divide: Do you have a ZIRP-era mortgage or not? According to Morgan Stanley housing strategist Jim Egan, there is a massive difference in how strained people are for those who locked in their housing costs prior to 2021 vs. those who didn’t. People with ZIRP-era mortgages are benefiting from low stable payments (which have declined on a real basis), as well as broad equity accumulation. Those who didn’t are much more strained in their finances. We discuss how this is playing out, as well as the state of the housing market more broadly, which has seen rising inventories, and the possibility for an overall downturn in prices nationwide.
Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Jill. Why isn't thal Joe.
Speaker 2 (00:23):
There's been this very long running now it feels, conversation
about the health of the American consumer. Yes, you've seen
all that commentary, right, So you see these headlines that
are like consumer debt at a record high, and you
see some of the sentiment surveys which have for the
past two years been coming in pretty bad. They started
to look kind of bad when all the tariffs were announced. Again,
(00:46):
they've improved a bit since then. And yet consumers seem to,
you know, pretty much keep doing what they've been doing
for a long time, which is spending, buying houses, things
like that.
Speaker 3 (00:57):
Well, they're spending, for sure, But this is the thing.
Speaker 4 (01:00):
There's all this dismal sentiment data everywhere you look, and
yet by and large, you know, you read like CEOs,
you look at the retail data, et cetera.
Speaker 3 (01:08):
It's not like that terrible.
Speaker 4 (01:09):
Companies seem to be doing fine, but there are pockets
of the economy clearly that are softening.
Speaker 3 (01:16):
There is rising.
Speaker 4 (01:17):
Inventory of homes. This is like one of the huge
stories in the economy. So there are clear areas where
high rates and stuff are having in effect. But to
your point, like it has not been some sort of
linear story of people are depressed in the economies.
Speaker 2 (01:30):
Farm But you're right, we have seen some signs of softening,
So you know, we have to ask is it going
to be different this time? Is it the start of
some sort of real deterioration in the health of the
US consumer. I have also seen some very interesting stats recently,
specifically about consumer lending and mortgages and things like that.
(01:51):
I've seen, for instance, that existing home sales are down
one point nine percent year to date and have recorded
the lowest volumes by count at this point in the
year since two thousand and nine. And when you hear those,
you know, since two thousand and nine dates, you start
to get a little worried.
Speaker 3 (02:08):
Right, this is definitely the case.
Speaker 4 (02:10):
I saw something I think it was from Redfin they
said there was a record gap between sellers and buyers
in the housing market right now. Look, this is one
area where the high rates environment, Like, there's clearly something
going on. We haven't gotten like big you know, when
rates shot up in like twenty late twenty twenty one
or whatever that was. Do you know, by the way,
(02:31):
twenty this occurred to me last night. Twenty one is
kind of a long time ago, Like I know, I
was thinking about this last night because it's sort of
a cliche to point out that the pandemic twenty twenty
was long time ago. But some of those really pivotal
years where we got the surge of the raid hikes,
we got the surgeon inflation, even that's starting to fade
into history a little bit. I don't know, maybe just
(02:53):
last night I was think about getting.
Speaker 2 (02:54):
Old and Joe, time is a flat circle. That's all
I'm going.
Speaker 4 (02:56):
But there's something like, you know, house prices didn't fall
off cliff when rates were high dramatically, which was a
surprise to some Like some people thought, Okay, they're hugging
rates dramatically. The housing market is going to be affected.
The housing market is the US economy. Therefore the US
economy will fall off the cliff. That did not happen.
But there has been this slow down and lately we've
(03:17):
been seeing like, okay, like rates are still high, even
with talk of raid cuts, et cetera. They're still high
and there's clearly this sort of accumulation of household inventory,
these imbalances that are emerging. I don't know, maybe we
will get price to clients.
Speaker 3 (03:29):
What's going to happen.
Speaker 2 (03:30):
Well, I'm glad you brought that up, because we actually
do have the perfect guest. We're going to be speaking
with someone who was very, very correct in calling that
we wouldn't see a massive house price.
Speaker 3 (03:39):
I thought it was wrong.
Speaker 4 (03:40):
I didn't say it at the time, but he came
on the podcast like, we're not going to say and
I was like, there's no way.
Speaker 3 (03:44):
I'm glad I didn't say. This is why I never get.
Speaker 4 (03:46):
Anything wrong, because I don't state prediction because you don't
have opinions. But as a matter of professional accountability, when
we were interviewing him, in my head, I was skeptical.
Speaker 2 (03:54):
All right, well that's a big maya coupla from Joe. Okay,
without further ado, then we are going to be speaking
with Morgan Stanley housing strategist Jim Egan. He's been on
the show quite a few times before. And here's where
I produce my disclaimer, which is that stat that I
just quoted about existing home sales actually came from one
of his recent notes. So, Jim, welcome back to the show.
Speaker 5 (04:16):
Thank you so much for having me back. It's an
honor to be here.
Speaker 2 (04:19):
I'm going to start, Actually, I'm going to go back
in time for a second. Let's just start. Why has
the American consumer been so resilient? And it's kind of
funny because you see people even talking about it still.
So we just had corporate earnings and there was this
funny comment from the AMEX CEO where he basically said,
our card members say they don't have any confidence in
the economy, but they keep spending, which is pretty funny
(04:41):
to me. But why this strength?
Speaker 5 (04:43):
Yeah, So I think there are a number of different
things driving the underlying strength in the consumer. We do
a lot of work across our debt analysts and Morgan
Stanley Research with our economists to kind of try to
tie these positive macro numbers to some of the things
we're seeing on a more micro level. Look the unemployment rate.
We're at four point two percent, very low unemployment rate.
(05:04):
It's been low for a few years now. And on
top of that, you've had an incredible amount of wealth growth.
There's been volatility in markets recently, but whether it's home
prices at record highs and the record amount of equity
that homeowners and sixty five percent of Americans are homeowners.
The equity that they have in their home, or the
wealth they've been able to gain from appreciating financial assets.
(05:27):
That's contributed to consumer's ability to spend.
Speaker 4 (05:30):
These tracks completely with me because I'm anxious about this
date of the economy. I read all the headlines like
everyone else. But you know, like I owned a home,
I bought a home, I have my retirement account. It
seems to be doing fine despite my anxiety. I don't
think I'm like changing my behavior anyway.
Speaker 5 (05:46):
And I think another piece to that when we think
about just the consumer balance sheet, one of the statistics
that gets quoted all the time is the just debt
service ratios debt service to income. It's above where it
wasn't twenty twenty one, but it's still it's so of
the lowest levels we've seen in the past couple decades.
The capital c consumer, the holistic balance sheet of the
consumer that still looks healthy. We don't think that the
(06:08):
consumer holistically is over levered. There might be some pockets
of pressure, but we don't think they're in aggregate overlevered.
Speaker 2 (06:15):
Yeah, so this is exactly what I wanted to ask
you because one of the things that I've been sort
of internalizing from recent years is this idea that the
aggregate hides a lot of stuff happening in the tails. Right,
And the question, I guess is always when the tails
start getting fat enough that they start affecting the whole.
And this is one reason why your recent research really
caught my interest and I actually wrote it up in
(06:36):
the All Thoughts newsletter. But you are starting to see
some pockets of strain. Describe what you're examining right now.
Speaker 5 (06:44):
Yes, so thank you for writing that up.
Speaker 2 (06:47):
Visibility was very much No, thank you for producing it, honestly.
Speaker 5 (06:51):
And I think what we're seeing and this is something
as part of my role at Morgan Stanley, I work
on the teams that look at auto credit, within asset
back securities, credit cards, all of those other consumer products.
And one of the i'll call it apparent contradictions that
we were seeing was the macro consumer data that we
were just discussing, incredibly healthy consumer keeps spending and then
(07:13):
we're seeing delinquencies climb, delinquencies climbing with the unemployment rate
as low as it was. That was something that we
had been asked to explain a fair amount of times.
We're trying to find better data to explain, and so
the impetus behind that report was to kind of say, look,
subprime auto delinquencies have been climbing to a point where
they're higher now than they've been at any point. I
(07:37):
mean some metrics there above where they were in two
thousand and eight, two thousand and nine at their prior peaks.
Now there's some apples to apples issues there, but you'll
see those numbers. Prime auto delinquencies have started climbing. Unsecured
consumer delinquencies are up. They're not at local highs, but
they're up. And so from a pockets perspective, we are
seeing a little bit of those delinquencies climb.
Speaker 2 (07:56):
I just want to explain the terms really quickly, but
what's the official definition of delinquency.
Speaker 5 (08:02):
So delinquency as we're talking about it here is somebody
who is thirty days past due on their loan. So
we'll either talk about it in terms of thirty days
or sometimes sixty plus days. But you've missed at least
one or two payments on a debt instrument, whether that's
an auto loan, we'll look at it for mortgages, credit cards,
and so on and so forth.
Speaker 4 (08:23):
So this is really important though, because in the aggregate
things are mostly fine, but we're seeing this rise across
different categories, which is not entirely intuitive. So what you're
saying is that there are these tails, there are these
sources of stress, but that they're not a function of
credit worthiness.
Speaker 5 (08:41):
What are they a function of might not be a
function of aggregate credit worthiness, And that's when it comes
into looking at these statistics that we need to use
to think about just kind of broadly, how the economy,
how the consumer is going to move forward. But I
mentioned debt service ratios right when we think about what's
brought debts service ratio is down to kind of some
(09:01):
of the lowest levels we've seen in decades. The mortgage
market plays a big role. The largest piece of debt
on any household balance sheet that owns a home is
almost certainly going to be that mortgage. And the lock
in effect that we've heard in the housing market, that's
a function of the fact that a majority, an overwhelming majority,
of mortgage debt in this country thirty or fixed rate mortgages.
Most of those borrowers were able to take out that
(09:23):
mortgage at historically low rates. In twenty twenty, twenty twenty one,
the effective rate on the outstanding right now four percent,
prevailing mortgage rates six point eight six point nine percent
as we're in this studio today. So when you think
about two thirds of the country or homeowners, their effective
rates at four percent are dragging down that payment. Only
(09:44):
sixty percent of homeowners even have a mortgage, so forty
percent own their home free and clear any debt. They're
not contributing to the numerator. And the thirty five percent
of households that are renters rents don't count as debt
service in these equations. They're contributing to the denominator in
terms of the income piece of this calculation, but they're
not adding to the service piece, right and or the
debt service piece, And so that's all helping to drag
(10:05):
this down and potentially missing a few pockets of specific
borrowers that are under a lot more pressure than those
aggregate numbers would suggest.
Speaker 4 (10:14):
Just to be clear, so is the story that the
stress is building basically among the unfortunate people who have
a mortgage, but don't have a Zerbier mortgage.
Speaker 5 (10:24):
I think when we started to see delinquencies climb, and
this is two to three years ago, we started to
see it subprime borrowers, and those tend to be borrowers
who in this post GFC past fifteen years, lending standards
have been tighter, more likely to be renters. We're not
capturing rent, and so their payments are getting tougher. But
then to your point, now, over the past twelve to
(10:45):
eighteen months, now prime delinquencies are moving higher. These are
households that are much more likely to be homeowners. And
what we think we're seeing there is exactly the dynamic
you're talking about. Right, If you bought a home prior
to twenty twenty one, Let's say you bought in twenty
sixteen median priced home percent down prevailing mortgage rates at
the time, that was a thirty year fixed rate mortgage.
Most homeowners who bought at that time refinanced at record
(11:09):
lows in twenty twenty twenty twenty one. And if we
just assume that their incomes have been growing along the
levels that median household incomes have been growing for the
past nine to ten years, their monthly payment is a
share of their income is eight to nine percent. Today.
Anybody who bought before twenty twenty one, that median household,
we think that payment is probably below twelve percent. If
(11:29):
you bought the past three years, as rates moved materially higher,
your monthly payment as a percentage of your income median
household probably twenty four to twenty six percent.
Speaker 3 (11:40):
This is like the most important state in the world.
Speaker 2 (11:42):
Yeah, this is like you have the haves and half
knots of renters versus homeowners, but you also have the
have and have nots in homeowners themselves.
Speaker 5 (11:51):
Yes, and so we think that the Joint Center for
Housing Studies at Harvard right, they have some great statistics
on affordability, and they will qualify thirty percent of your
income as the threshold for are you cost burdened on shelter,
So twenty four to twenty six percent. We're not saying
that those homeowners are cost burdened, but they're spending two
to three times more of their monthly paycheck on that
(12:12):
mortgage than somebody who was fortunate enough to buy prior
to twenty twenty one, which you'd think has to be
crowding out something and maybe that's it hasn't been spending
that that's clearly been the case from the data that
we talked about earlier, but maybe it's these marginal payments
on other debt service products.
Speaker 2 (12:44):
So one of the results of having a lot of
people locked into mortgage rates that maybe they got before
everything went up by quite a lot is the lock
in effect and the idea that people don't want to
move houses because they'd have to get a new mortgage
and then they would end up potentially cost burdened. And
I'm curious if we're still seeing an impact from that
(13:06):
particular or as much of an impact from that particular dynamic,
or are we at the point now where people are
thinking like, well, maybe mortgage rates aren't going down anytime soon,
and so I'm just going to bite the bullet and
do something new.
Speaker 5 (13:19):
So, if I were to take a ten thousand foot
view and answer your question, the locket effect is clearly
still playing a role. Right If we look at overall
inventory levels as a share of the outstanding housing market,
the chart still looks like there's a TYPEO given how
low inventories are. But I can't sit here like I
have been able to in the past and say we're
(13:41):
at historically low inventories, right, we are starting to see
to the point that you're making. We are starting to
see four sale inventory volumes move higher. Year over year,
inventory volumes are up almost it's almost eighteen consecutive months,
now almost a year and a half. They're up almost
twenty percent from those lows. And while that's still below
where we were we are in the fourth quarter of
(14:01):
twenty nineteen, below where we were when rates picked up
massively and inventories kind of retrenched, that's still a pretty
healthy increase where we're starting to see a little bit
more supply come on the market here, despite the fact
that the lock in effect remains two hundred and fifty selling.
Speaker 4 (14:17):
Is it just eventually, like, what is the source of
the inventory? Is it the people who have needed to
sell for a while are finally capitulating and you're not what,
I finally.
Speaker 3 (14:26):
Got to sell this house.
Speaker 4 (14:27):
Is it that there are some marginal buyers who have
dropped out because they've been waiting. I don't know what
is the source of this inventory? And this is the
longest inventory growth since the GFC.
Speaker 5 (14:37):
It's the highest percentage change when I look at year
over year growth. But we just saw with the most
recent data that came in, it's now the biggest it's
been on a year over your basis since the GFC.
It's also the second largest it's spin in the history
of the data, which goes back to the early second
nineteen eighties.
Speaker 3 (14:52):
What streak a year over year growth?
Speaker 1 (14:53):
Oh?
Speaker 5 (14:54):
Okay, Like just in terms of how much we're up now,
the question as to who is selling i'd argue probably
one of the more important questions in the housing market
right now. Yeah, so it's a question we're trying to answer,
but it's one that's a little bit more difficult to answer.
We can identify at this point where the inventory is
(15:16):
picking up more. Right You look in states like Florida
has some of the steepest increases. Texas has had some
pretty steep increases, and we get a lot of questions,
For instance, in Florida, cost of insurance increasing, Are the
ancillary costs of home ownership? Is that forcing inventory? We
don't know if that's the case. We can't empirically prove
(15:36):
that right now, but I think you combine that with
twenty twenty one was a long time.
Speaker 4 (15:40):
Ago Yeah, this was my realization last night that actually
twenty twenty one was not yesterday.
Speaker 5 (15:46):
Yes, and these people have been lack of effect has
had people stuck in their homes in a lot of
instances for probably longer than they wanted to be. Growing
families both in terms of number of children as well
as larger children, like just growing needs for more space,
if those for lack of a better word, if those
dreams have been delayed, like maybe the realization that rates
(16:06):
might not come down all that much, maybe it's time
to do that. And home prices are up fifty percent
since March of twenty twenty, Like over the past five years,
you have a fifty percent growth in home prices. It's
perhaps those homeowners with that equity might be just a
little like marginally more willing to list.
Speaker 3 (16:22):
And the economics to make a little bit more. Yeah,
this is yeah.
Speaker 2 (16:25):
Wait, can you talk a little bit more Since we're
all about digging into the aggregate and finding the different
tales here, can you talk a little bit more about
the different pockets and geographical differences between what you're seeing
in supply and home prices.
Speaker 5 (16:39):
Yes, So we've been trying to figure out what are
the most because we talk about home prices nationally, the
housing market is so hyper local that those national numbers
are helpful, but they don't describe the dynamics that are
going on at the ground level at any individual place
in the country. Right. And so when we look at
the growth and inventory, looking at it year over years,
(17:00):
looking at it since the fourth quarter of twenty nineteen
before the pandemic started, you're seeing the sharpest increases in
the South, right, Like you've seen it in Florida, You've
seen it in Texas, a couple of states that show
up a little bit more on the year over year numbers,
or Colorado, North Carolina. When we look at the implications
from home price perspective, what we've seen to be more
(17:20):
at least statistically significant for now are places where either
those inventory levels are higher highest compared to the fourth
quarter of twenty nineteen, which you have New Orleans eleven
of the top fourteen msas from that perspective, or in
Florida or Texas, and that's where you're seeing softer year
over year home price growth, or in some instances where
you are actually seeing prices come down on a year
(17:40):
over year basis. The other side of that coin is
the Northeast. It's New York, it's New England, it's the
northern Midwest. Those are places where inventories are still falling.
Inventories are far shy of where they were in the
fourth quarter of twenty nineteen. And to put all of
these percentages into context, rationally, inventories are down. I believe
(18:02):
it's twenty eight percent from the fourth quarter of twenty nineteen.
So to talk about places where inventories are actually up
relative to fourty twenty nineteen, that is an outlier relative
to national numbers.
Speaker 4 (18:12):
This conversation wasn't on the record, but I'm going to
quot him anyway. I was trying to my friend Connor
saying he writes for Bloomberg Opinion. Hopefully it doesn't mind
me quoting him. We're talking about this phenomenon of the
fact that inventories are very tight in the Northeast, and
one of the things that he said was that, And again,
I don't think he told this to me for publication,
(18:34):
but maybe he's written about it.
Speaker 3 (18:35):
So I'm just going to take a risk.
Speaker 4 (18:36):
That it's okay to quote him from a chat that
I had with him. But I want to give him credit,
but that there's this natural, long standing migratory pattern in
the US of people moving essentially to the sun belt
from the northern and that the way he characterized it
to me is like imagine a university town in which
suddenly for a few years no one moves out of
the town after graduation. How inventories would rapidly diminish, And
(19:01):
that because of the lock in, the mortgage lock in,
you're not getting the same sort of migration out of
the cold areas to the southern areas, and so people
are stuck in the cold areas basically, and that is
does that resonate as a reason for why vacancy rates
would be very low or inventory rates in the northeast
would be very low right now?
Speaker 5 (19:19):
So from the data that we've looked at, is common
around the migratory patterns. They didn't start in COVID when
people moved to the southeast. They were happening before that.
That makes sense to me. I don't have the specific
numbers to completely agree with that as a research channelist
on air, but what I can say as well, which
could be contributing to that, we've talked demographics in the past. Yeah,
(19:41):
and one of the underlying trends in the housing market
has been the fact that we're now at a place
where over one out of every three homes, over thirty
three percent of the housing market is owned by people
over the age of sixty five. And when you look
at where yes, there's Florida, and there's Arizona, and there's
South Carolina. But when you look at where they're more
concentrated as a percentage of the housing stock in particular,
(20:02):
it's in the Northeast. It's New York, it's in New England.
And we've rerun this analysis posts the pandemic, their tendency
to agent place has continued to get more and more prevalent.
So I think you combine some of these trends and
this is what you're left with.
Speaker 2 (20:17):
Yeah, the Northeast is nice. I'm just going to put
that out there. Nothing wrong with the Northeast. Okay, So
we're talking about an increase in delinquencies, a slight pickup
even in prime borrowers, but we're not saying foreclosures yet,
and I think that's an important differentiator. But what would
you expect to be a sort of catalyst I guess
for things getting worse. And since we keep bringing up
(20:40):
the Great Financial Crisis in this conversation, I mean back
then people were two indebted, too overlevered, and when house
prices started to fall, they couldn't keep up and everything
basically collapse. But to your point earlier, we don't really
have that level of indebtedness anymore. So what's the catalyst, right?
Speaker 5 (20:58):
So, I think there are a few things going on.
Another piece to the different levels of leverage today versus
back then was the fact of the types of leverage
we were giving borrowers. According to data from I believe
it's the FAHFA, ninety two and a half percent of
mortgage balances in the country right now are fixed rate.
(21:19):
Most of those are thirty or fixed rate back two
thousand and five, two thousand and six, almost an ARM
era and adjustable rate mortgages and not just adjustable rates
short reset arms with teaser rates option arm mortgages that
could negatively amortize, so the balance of your mortgage could
get bigger over the first couple of years of that product.
Those were payments that as we hit kind of an
(21:40):
economic hiccup, unemployment rate picks up, money becomes a little
bit more tight, and then your mortgage payment ratchets higher.
That makes it even more difficult for you to make
that monthly payment. We don't have that this time. Not
only that the home ownership rate back then was over
sixty nine percent. Today, I believe it's sixty five point
one as we walk in here. Four percentage points does
(22:00):
not sound huge given how big the United States is.
From a household perspective, that means that we have four
to five million fewer homeowners than we would have if
the home ownership rate was over sixty nine percent. So
your marginal homeowner is a lot cleaner from that perspective
that they're not necessarily going to see, certainly not going
to see that changing mortgage payment that's going to drive
(22:22):
things there. And because of our experience seventeen years ago,
now mortgage servicers have a much more varied toolkit at
their disposal to prevent them. We'll call them foreclosure mitigation options, modifications.
Speaker 2 (22:38):
In the life loan workouts.
Speaker 5 (22:39):
Basically, so it's difficult for us to foresee a place
where mortgage foreclosures pick up too significantly in the forecast horizon.
Speaker 3 (22:47):
Could we see national home price declines.
Speaker 5 (22:49):
We could, We're talking about inventory increasing. Demand has not
increased alongside inventory. Affordability is still very, very challenged. And
I mean we mentioned one point nine percent decrease here
to date from an existing home sales perspective. As supply
increases and demand stays flat, sometimes it's just as simple
(23:11):
as looking at the supply and demand piece. We've started
to see home price appreciation decelerate four point one to
three point four percent just over the past two months,
twenty five percent. A quarter of the largest one hundred
msas in the country are already seeing home price declines.
I don't think it's out of the realm of possibilities
for this imbalance of supply and demand to take us
(23:33):
through zero percent. I think that what we're talking about
from how healthy mortgage credit is the locked in home
buyer doesn't need to sell at lower prices. I don't
see a true home price correction. That's not in our
base case. That's not in our bare case. But we
do have a bare case of negative three percent home
prices by the end of this year. Base cases plus
two decelerating from here. It's slowing growth, but it's still
(23:55):
positive on the national level. But I think there is
a realistic bare case where we go below here over something.
Speaker 2 (24:16):
Can you talk maybe a little bit about the wealth effect,
because if we're talking about like how important it is
that people have locked in mortgages at low rates, or
maybe they have big portfolios of stocks and bonds, maybe
they're a baby boomer and kind of luck down in
their wealth building lives, that seems like a big factor.
And in the current environment, we've had some volatility, although
(24:37):
things are looking better as we record this on June twelfth,
So I'm just curious, like, how do you start to
look at how people feel about their actual financial assets
and financial position when it comes to making decisions about
home ownership or whether they should move and things like that.
Speaker 5 (24:52):
Yeah, and it's that piece of it. The wealth effect
in particular is something that our economists have been talking
about a lot to talk through just how confident the
consumer has been in spending over the past quarters, over
the past couple of years, and so when they think
about the consumer's ability to keep spending going forward, whether
it's smaller purchases or larger home purchases durable goods, they
(25:13):
are looking more at the financial aspect piece of this.
When we look at the growth in wealth in this cycle,
it's been more on the financial assets side than it's
been on the real estate side of things, which has
the housing strategist, with home prices at record highs, took
me a couple seconds looking at those numbers to see
that that's what that is kind of what's going on underneath.
And so when they think about the borrowers' ability or
(25:33):
the borrowers willingness and by borrow I should say consumer's
willingness to keep making those expenditures. They are looking at equities,
they're looking at financial assets, and they're looking at the
volatility there, but they do think we need a pretty
healthy correction for it to really impact that in a
material way.
Speaker 4 (25:48):
It's interesting, like when I think about wealth effect sometimes
I think of it psychologically.
Speaker 3 (25:53):
It's like, oh, people like look at their.
Speaker 4 (25:54):
Investment portfolio and it's green, so I feel good and
go out to dinner and take a vacation or whatever.
But listening to you, it's just crazy. Like if you
have a twenty nineteen or twenty twenty one vintage mortgage
and you've been investing in the market for some time,
regularly putting money in a four own K or maybe
some taxable account. You have a very strong inflation hedge
(26:19):
because you have this recurring payment that has not gone up,
assuming it's fixed, and you're just sitting on this boatload
of capital gains. That is just that's not psychological, that's real. Now,
whether the degree to which you can monetize it is
obviously questionable, because if everyone's trying to monetize it at
the same time, that could shrink. But just on your
(26:40):
paper like, that's great, that class of person who has
that situation is just an extraordinary large cushion and margin
and a sort of winning on every front right now.
Speaker 5 (26:50):
Yes, the households that were homeowners before the pandemic hit
in March of twenty twenty or made what was probably
a pretty scary decision to buy twenty or twenty twenty one,
those are the households that, on the perspectives that we're
talking about, to the points that you're making, we're really
big winners here.
Speaker 3 (27:08):
Huge winners.
Speaker 4 (27:08):
Payments have stayed flat even at a time of galloping inflation.
They're sitting on all these capital gains. There are wages
that probably just assume they have a normal job, have
gone up marginally. So just the nominal payment of the
mortgage relative to how much they're pulling in is probably
fallen over the last four plus years or however many.
Speaker 3 (27:26):
I mean, it's pretty nice.
Speaker 2 (27:27):
Well, since we're talking about people who lucked out in
their wealth building, I want to go back to baby
boomers for a second. So what if the narratives that
we hear when we're talking about housing is this idea
that one day the older generation is going to pass
away and eventually a big segment of the housing market
is going to become unlocked and available for sale, maybe
at lower prices. Who knows. Is that still something that
(27:50):
you're sort of incorporating into your longer term forecasts or
have you seen anything change on that front. I guess
in the year or so since we last spoke to you.
Speaker 5 (27:59):
So it is something we're still incorporating when we think
about housing. Not over the next two to five years,
but this is really a longer term, like this is
a ten year plus aspect to this. But we very
much subscribe to the narrative that we are underbuilt and
undersupplied from us housing holistically, and we get asked the question, well,
how do we fix the underbuilt aspect of this? Or
(28:20):
how do we fix the aggregate undersupplied aspect of this,
And it's we do come back to this. Right to
the point I made earlier, more than one out of
every three homes in this country is owned by somebody
over sixty five. From nineteen eighty through twenty twelve, that
was twenty five percent was effectively flat. It's increased pretty significantly.
It's very regionally concentrated where those homes are owned. And
(28:42):
eventually we do think that that's the supply that starts
to help fix this, but it's an eventually thing, and
not nearly in our two to five year forecast, horizing.
Speaker 2 (28:50):
And then the other thing I wanted to ask you
is do you speak to home builders at all to
try to get like a read on maybe new supply
of housing coming onto the market. And I would be
really curious what I guess the atmosphere is like right now,
because on the one hand, you know, things seem okay,
but on the other hand, you have a lot of
uncertainty over the long term outlook, lots of policy questions
(29:12):
and things like that, and I guess I'm wondering, like
how they feel at the moment.
Speaker 5 (29:17):
So I don't want to attribute what I'm about to
say specifically to homeowner commentary, but we do have to
look through all of this when we think about our
pillars of the housing market, the supply aspect of that,
which is both existing listings, which we've talked a lot about, but.
Speaker 2 (29:30):
The builder commentary.
Speaker 5 (29:32):
Right, I don't want to ascribe this to homebuilder commentary,
but what I do want to say when we look
at the new supply of homes, single unit housing starts,
building volumes. Look, we work closely with our economists, as
I've been talking about in our policy team. Tariffs, right,
effective tariff rate now elevated versus where it's been historically,
even if it isn't as high as we might have
(29:53):
feared earlier in April. The primary way that's going to
flow through the housing market is, in our view, home building.
The cost of goods to build homes going higher, immigration policies.
When we look at different sectors of the economy, the
sector with the largest percentage of foreign born workers construction,
so the cost and availability of labor also going to
be contained. Home Builder confidence has been coming down this year,
(30:16):
and when I look at all of the housing statistics
that we forecast, what has been weakest in twenty twenty
five is single unit housing starts. Over the first four
months of the year. We're down seven percent versus where
we were in the first four months of twenty twenty four.
And we think that we are significantly underbuilt. So if
we're going down and we're undersupplied, like we do, think
that that from a home price perspective, provides a little
(30:38):
bit of support.
Speaker 4 (30:39):
So we have widespread view that there are not enough
homes either in the short term or in the long
term in America, and the trends are going in the
wrong direction.
Speaker 2 (30:47):
Awesome, all right, Well, on that happy note, Jim, thank
you so much for coming back on Odd Lots. It
was great as always.
Speaker 5 (30:54):
Thank you so much for having me.
Speaker 3 (30:55):
Thanks Jim, transat.
Speaker 1 (31:09):
Joe.
Speaker 2 (31:09):
That was such an interesting conversation and I always enjoy
hearing from Jim. One thing I really like is that
he has all the numbers like in his head. He's
not looking anything up when we talk to him. He's
just you know, I guess he thinks about them all
day every day and so he remembers them. But I
gotta say, like the number that sticks out to me
(31:30):
is that variation between someone who bought their house in
like twenty sixteen versus someone who bought it in twenty
twenty four And I guess it's eight percent versus twenty
six percent of their housing costs something like that. That
is just insane, Tracy.
Speaker 4 (31:46):
I'm on the website Know Yourmeme dot Com right now
because I am looking for the source of that meme
of the girl whispering in the ear of the other girl,
and I just keep imagining it.
Speaker 2 (31:57):
It's like he has a mortgage, right said he bought
t has a Zurpiera mortgage.
Speaker 4 (32:02):
But like I always knew that intuitively by the way,
it came from the movie Aquamarine.
Speaker 3 (32:07):
Which I had literally never heard of, and the one
actress I didn't know that.
Speaker 4 (32:11):
Yeah I didn't and an actress named Jojo no last
name is whispering to Emma Roberts. Anyway, I just thought
I would say that now since I'm on the page,
and maybe people would find that to be useful. But
I did not appreciate quite. I mean, yeah, of course,
I sort of intuitively understood that if you had locked
in a mortgage at some point in the twenty tens
or really nailed the timing and twenty twenty or twenty
(32:32):
twenty one. That was great, But I don't think I
had like quite appreciated just how massively that gap is.
What is the prospect of that going to change anytime soon?
Like there's going to be these two you know, this
sort of division in society where it's like, hey, you
have a lot of people living in homes and they
don't have a mortgage because they're old and they've aged
in place b than the lucky people who have this
(32:53):
mortgage edge.
Speaker 2 (32:54):
And then everyone else, everyone who rents.
Speaker 4 (32:56):
Or because they had to buy in twenty twenty four
or twenty twenty three because for whatever reason, and now
they're paying a massive amount of their income in their
mortgage paper.
Speaker 2 (33:05):
But I do think this is also a really great
example of why it's important to look beyond the aggregates
and the sort of you know, single average number and
kind of dig into the tails.
Speaker 4 (33:15):
Well, just on this point too, a lot of like
scare headlines or scare posts on Twitter. It's like, look
at the surge in delinquencies or whatever, or versus two
thousand and eight, two thousand and nine, and sort of touched
on this, you know, one of the things that I
do think is important to note, and Jim mentioned you
know you have to be careful with apples to apples comparisons.
Is that, like some of these effects can be magnified,
(33:38):
not because there's like a massive deterioration and credit worthiness,
but because there was so much extension of lending during
the boom time, et cetera. Like you sort of have
to be careful with some of these statistics because things
can change.
Speaker 3 (33:49):
A lot for different reasons at different times.
Speaker 2 (33:52):
Anyway, No, I mean, the home ownership market is structured
very different, really different to what it was in two
thousand and eight. Oh, we should have asked about the
gcs and Fanny and Freddie. Oh well, maybe next time
we do that next time. Shall we leave it there
for now?
Speaker 3 (34:05):
Let's leave it there.
Speaker 2 (34:06):
This has been another episode of the Oudlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (34:12):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Krman, Rodriguez at Carman Ermann dash O,
Bennett at Dashbod, and Kelbrooks at Kilbrooks. From our odd
Laws content, go to Bloomberg dot com.
Speaker 3 (34:23):
Slash od lotch. We have a daily newsletter and all.
Speaker 4 (34:25):
Of our episodes, and you can chat about all of
these topics, including housing twenty four to seven in our
discord Discord dot gg slash.
Speaker 2 (34:33):
Odline and if you enjoy Odd Lots, if you like
it when we talk about the lucky homeowners versus the
unlucky homeowners, then please leave us a positive review on
your favorite podcast platform. And remember, if you are a
Bloomberg subscriber, you can listen to all of our episodes
absolutely ad free. All you need to do is find
the Bloomberg channel on Apple Podcasts and follow the instructions there.
(34:54):
Thanks for listening
Speaker 1 (35:11):
It
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Jill. Why isn't thal Joe.
Speaker 2 (00:23):
There's been this very long running now it feels, conversation
about the health of the American consumer. Yes, you've seen
all that commentary, right, So you see these headlines that
are like consumer debt at a record high, and you
see some of the sentiment surveys which have for the
past two years been coming in pretty bad. They started
to look kind of bad when all the tariffs were announced. Again,
(00:46):
they've improved a bit since then. And yet consumers seem to,
you know, pretty much keep doing what they've been doing
for a long time, which is spending, buying houses, things
like that.
Speaker 3 (00:57):
Well, they're spending, for sure, But this is the thing.
Speaker 4 (01:00):
There's all this dismal sentiment data everywhere you look, and
yet by and large, you know, you read like CEOs,
you look at the retail data, et cetera.
Speaker 3 (01:08):
It's not like that terrible.
Speaker 4 (01:09):
Companies seem to be doing fine, but there are pockets
of the economy clearly that are softening.
Speaker 3 (01:16):
There is rising.
Speaker 4 (01:17):
Inventory of homes. This is like one of the huge
stories in the economy. So there are clear areas where
high rates and stuff are having in effect. But to
your point, like it has not been some sort of
linear story of people are depressed in the economies.
Speaker 2 (01:30):
Farm But you're right, we have seen some signs of softening,
So you know, we have to ask is it going
to be different this time? Is it the start of
some sort of real deterioration in the health of the
US consumer. I have also seen some very interesting stats recently,
specifically about consumer lending and mortgages and things like that.
(01:51):
I've seen, for instance, that existing home sales are down
one point nine percent year to date and have recorded
the lowest volumes by count at this point in the
year since two thousand and nine. And when you hear those,
you know, since two thousand and nine dates, you start
to get a little worried.
Speaker 3 (02:08):
Right, this is definitely the case.
Speaker 4 (02:10):
I saw something I think it was from Redfin they
said there was a record gap between sellers and buyers
in the housing market right now. Look, this is one
area where the high rates environment, Like, there's clearly something
going on. We haven't gotten like big you know, when
rates shot up in like twenty late twenty twenty one
or whatever that was. Do you know, by the way,
(02:31):
twenty this occurred to me last night. Twenty one is
kind of a long time ago, Like I know, I
was thinking about this last night because it's sort of
a cliche to point out that the pandemic twenty twenty
was long time ago. But some of those really pivotal
years where we got the surge of the raid hikes,
we got the surgeon inflation, even that's starting to fade
into history a little bit. I don't know, maybe just
(02:53):
last night I was think about getting.
Speaker 2 (02:54):
Old and Joe, time is a flat circle. That's all
I'm going.
Speaker 4 (02:56):
But there's something like, you know, house prices didn't fall
off cliff when rates were high dramatically, which was a
surprise to some Like some people thought, Okay, they're hugging
rates dramatically. The housing market is going to be affected.
The housing market is the US economy. Therefore the US
economy will fall off the cliff. That did not happen.
But there has been this slow down and lately we've
(03:17):
been seeing like, okay, like rates are still high, even
with talk of raid cuts, et cetera. They're still high
and there's clearly this sort of accumulation of household inventory,
these imbalances that are emerging. I don't know, maybe we
will get price to clients.
Speaker 3 (03:29):
What's going to happen.
Speaker 2 (03:30):
Well, I'm glad you brought that up, because we actually
do have the perfect guest. We're going to be speaking
with someone who was very, very correct in calling that
we wouldn't see a massive house price.
Speaker 3 (03:39):
I thought it was wrong.
Speaker 4 (03:40):
I didn't say it at the time, but he came
on the podcast like, we're not going to say and
I was like, there's no way.
Speaker 3 (03:44):
I'm glad I didn't say. This is why I never get.
Speaker 4 (03:46):
Anything wrong, because I don't state prediction because you don't
have opinions. But as a matter of professional accountability, when
we were interviewing him, in my head, I was skeptical.
Speaker 2 (03:54):
All right, well that's a big maya coupla from Joe. Okay,
without further ado, then we are going to be speaking
with Morgan Stanley housing strategist Jim Egan. He's been on
the show quite a few times before. And here's where
I produce my disclaimer, which is that stat that I
just quoted about existing home sales actually came from one
of his recent notes. So, Jim, welcome back to the show.
Speaker 5 (04:16):
Thank you so much for having me back. It's an
honor to be here.
Speaker 2 (04:19):
I'm going to start, Actually, I'm going to go back
in time for a second. Let's just start. Why has
the American consumer been so resilient? And it's kind of
funny because you see people even talking about it still.
So we just had corporate earnings and there was this
funny comment from the AMEX CEO where he basically said,
our card members say they don't have any confidence in
the economy, but they keep spending, which is pretty funny
(04:41):
to me. But why this strength?
Speaker 5 (04:43):
Yeah, So I think there are a number of different
things driving the underlying strength in the consumer. We do
a lot of work across our debt analysts and Morgan
Stanley Research with our economists to kind of try to
tie these positive macro numbers to some of the things
we're seeing on a more micro level. Look the unemployment rate.
We're at four point two percent, very low unemployment rate.
(05:04):
It's been low for a few years now. And on
top of that, you've had an incredible amount of wealth growth.
There's been volatility in markets recently, but whether it's home
prices at record highs and the record amount of equity
that homeowners and sixty five percent of Americans are homeowners.
The equity that they have in their home, or the
wealth they've been able to gain from appreciating financial assets.
(05:27):
That's contributed to consumer's ability to spend.
Speaker 4 (05:30):
These tracks completely with me because I'm anxious about this
date of the economy. I read all the headlines like
everyone else. But you know, like I owned a home,
I bought a home, I have my retirement account. It
seems to be doing fine despite my anxiety. I don't
think I'm like changing my behavior anyway.
Speaker 5 (05:46):
And I think another piece to that when we think
about just the consumer balance sheet, one of the statistics
that gets quoted all the time is the just debt
service ratios debt service to income. It's above where it
wasn't twenty twenty one, but it's still it's so of
the lowest levels we've seen in the past couple decades.
The capital c consumer, the holistic balance sheet of the
consumer that still looks healthy. We don't think that the
(06:08):
consumer holistically is over levered. There might be some pockets
of pressure, but we don't think they're in aggregate overlevered.
Speaker 2 (06:15):
Yeah, so this is exactly what I wanted to ask
you because one of the things that I've been sort
of internalizing from recent years is this idea that the
aggregate hides a lot of stuff happening in the tails. Right,
And the question, I guess is always when the tails
start getting fat enough that they start affecting the whole.
And this is one reason why your recent research really
caught my interest and I actually wrote it up in
(06:36):
the All Thoughts newsletter. But you are starting to see
some pockets of strain. Describe what you're examining right now.
Speaker 5 (06:44):
Yes, so thank you for writing that up.
Speaker 2 (06:47):
Visibility was very much No, thank you for producing it, honestly.
Speaker 5 (06:51):
And I think what we're seeing and this is something
as part of my role at Morgan Stanley, I work
on the teams that look at auto credit, within asset
back securities, credit cards, all of those other consumer products.
And one of the i'll call it apparent contradictions that
we were seeing was the macro consumer data that we
were just discussing, incredibly healthy consumer keeps spending and then
(07:13):
we're seeing delinquencies climb, delinquencies climbing with the unemployment rate
as low as it was. That was something that we
had been asked to explain a fair amount of times.
We're trying to find better data to explain, and so
the impetus behind that report was to kind of say, look,
subprime auto delinquencies have been climbing to a point where
they're higher now than they've been at any point. I
(07:37):
mean some metrics there above where they were in two
thousand and eight, two thousand and nine at their prior peaks.
Now there's some apples to apples issues there, but you'll
see those numbers. Prime auto delinquencies have started climbing. Unsecured
consumer delinquencies are up. They're not at local highs, but
they're up. And so from a pockets perspective, we are
seeing a little bit of those delinquencies climb.
Speaker 2 (07:56):
I just want to explain the terms really quickly, but
what's the official definition of delinquency.
Speaker 5 (08:02):
So delinquency as we're talking about it here is somebody
who is thirty days past due on their loan. So
we'll either talk about it in terms of thirty days
or sometimes sixty plus days. But you've missed at least
one or two payments on a debt instrument, whether that's
an auto loan, we'll look at it for mortgages, credit cards,
and so on and so forth.
Speaker 4 (08:23):
So this is really important though, because in the aggregate
things are mostly fine, but we're seeing this rise across
different categories, which is not entirely intuitive. So what you're
saying is that there are these tails, there are these
sources of stress, but that they're not a function of
credit worthiness.
Speaker 5 (08:41):
What are they a function of might not be a
function of aggregate credit worthiness, And that's when it comes
into looking at these statistics that we need to use
to think about just kind of broadly, how the economy,
how the consumer is going to move forward. But I
mentioned debt service ratios right when we think about what's
brought debts service ratio is down to kind of some
(09:01):
of the lowest levels we've seen in decades. The mortgage
market plays a big role. The largest piece of debt
on any household balance sheet that owns a home is
almost certainly going to be that mortgage. And the lock
in effect that we've heard in the housing market, that's
a function of the fact that a majority, an overwhelming majority,
of mortgage debt in this country thirty or fixed rate mortgages.
Most of those borrowers were able to take out that
(09:23):
mortgage at historically low rates. In twenty twenty, twenty twenty one,
the effective rate on the outstanding right now four percent,
prevailing mortgage rates six point eight six point nine percent
as we're in this studio today. So when you think
about two thirds of the country or homeowners, their effective
rates at four percent are dragging down that payment. Only
(09:44):
sixty percent of homeowners even have a mortgage, so forty
percent own their home free and clear any debt. They're
not contributing to the numerator. And the thirty five percent
of households that are renters rents don't count as debt
service in these equations. They're contributing to the denominator in
terms of the income piece of this calculation, but they're
not adding to the service piece, right and or the
debt service piece, And so that's all helping to drag
(10:05):
this down and potentially missing a few pockets of specific
borrowers that are under a lot more pressure than those
aggregate numbers would suggest.
Speaker 4 (10:14):
Just to be clear, so is the story that the
stress is building basically among the unfortunate people who have
a mortgage, but don't have a Zerbier mortgage.
Speaker 5 (10:24):
I think when we started to see delinquencies climb, and
this is two to three years ago, we started to
see it subprime borrowers, and those tend to be borrowers
who in this post GFC past fifteen years, lending standards
have been tighter, more likely to be renters. We're not
capturing rent, and so their payments are getting tougher. But
then to your point, now, over the past twelve to
(10:45):
eighteen months, now prime delinquencies are moving higher. These are
households that are much more likely to be homeowners. And
what we think we're seeing there is exactly the dynamic
you're talking about. Right, If you bought a home prior
to twenty twenty one, Let's say you bought in twenty
sixteen median priced home percent down prevailing mortgage rates at
the time, that was a thirty year fixed rate mortgage.
Most homeowners who bought at that time refinanced at record
(11:09):
lows in twenty twenty twenty twenty one. And if we
just assume that their incomes have been growing along the
levels that median household incomes have been growing for the
past nine to ten years, their monthly payment is a
share of their income is eight to nine percent. Today.
Anybody who bought before twenty twenty one, that median household,
we think that payment is probably below twelve percent. If
(11:29):
you bought the past three years, as rates moved materially higher,
your monthly payment as a percentage of your income median
household probably twenty four to twenty six percent.
Speaker 3 (11:40):
This is like the most important state in the world.
Speaker 2 (11:42):
Yeah, this is like you have the haves and half
knots of renters versus homeowners, but you also have the
have and have nots in homeowners themselves.
Speaker 5 (11:51):
Yes, and so we think that the Joint Center for
Housing Studies at Harvard right, they have some great statistics
on affordability, and they will qualify thirty percent of your
income as the threshold for are you cost burdened on shelter,
So twenty four to twenty six percent. We're not saying
that those homeowners are cost burdened, but they're spending two
to three times more of their monthly paycheck on that
(12:12):
mortgage than somebody who was fortunate enough to buy prior
to twenty twenty one, which you'd think has to be
crowding out something and maybe that's it hasn't been spending
that that's clearly been the case from the data that
we talked about earlier, but maybe it's these marginal payments
on other debt service products.
Speaker 2 (12:44):
So one of the results of having a lot of
people locked into mortgage rates that maybe they got before
everything went up by quite a lot is the lock
in effect and the idea that people don't want to
move houses because they'd have to get a new mortgage
and then they would end up potentially cost burdened. And
I'm curious if we're still seeing an impact from that
(13:06):
particular or as much of an impact from that particular dynamic,
or are we at the point now where people are
thinking like, well, maybe mortgage rates aren't going down anytime soon,
and so I'm just going to bite the bullet and
do something new.
Speaker 5 (13:19):
So, if I were to take a ten thousand foot
view and answer your question, the locket effect is clearly
still playing a role. Right If we look at overall
inventory levels as a share of the outstanding housing market,
the chart still looks like there's a TYPEO given how
low inventories are. But I can't sit here like I
have been able to in the past and say we're
(13:41):
at historically low inventories, right, we are starting to see
to the point that you're making. We are starting to
see four sale inventory volumes move higher. Year over year,
inventory volumes are up almost it's almost eighteen consecutive months,
now almost a year and a half. They're up almost
twenty percent from those lows. And while that's still below
where we were we are in the fourth quarter of
(14:01):
twenty nineteen, below where we were when rates picked up
massively and inventories kind of retrenched, that's still a pretty
healthy increase where we're starting to see a little bit
more supply come on the market here, despite the fact
that the lock in effect remains two hundred and fifty selling.
Speaker 4 (14:17):
Is it just eventually, like, what is the source of
the inventory? Is it the people who have needed to
sell for a while are finally capitulating and you're not what,
I finally.
Speaker 3 (14:26):
Got to sell this house.
Speaker 4 (14:27):
Is it that there are some marginal buyers who have
dropped out because they've been waiting. I don't know what
is the source of this inventory? And this is the
longest inventory growth since the GFC.
Speaker 5 (14:37):
It's the highest percentage change when I look at year
over year growth. But we just saw with the most
recent data that came in, it's now the biggest it's
been on a year over your basis since the GFC.
It's also the second largest it's spin in the history
of the data, which goes back to the early second
nineteen eighties.
Speaker 3 (14:52):
What streak a year over year growth?
Speaker 1 (14:53):
Oh?
Speaker 5 (14:54):
Okay, Like just in terms of how much we're up now,
the question as to who is selling i'd argue probably
one of the more important questions in the housing market
right now. Yeah, so it's a question we're trying to answer,
but it's one that's a little bit more difficult to answer.
We can identify at this point where the inventory is
(15:16):
picking up more. Right You look in states like Florida
has some of the steepest increases. Texas has had some
pretty steep increases, and we get a lot of questions,
For instance, in Florida, cost of insurance increasing, Are the
ancillary costs of home ownership? Is that forcing inventory? We
don't know if that's the case. We can't empirically prove
(15:36):
that right now, but I think you combine that with
twenty twenty one was a long time.
Speaker 4 (15:40):
Ago Yeah, this was my realization last night that actually
twenty twenty one was not yesterday.
Speaker 5 (15:46):
Yes, and these people have been lack of effect has
had people stuck in their homes in a lot of
instances for probably longer than they wanted to be. Growing
families both in terms of number of children as well
as larger children, like just growing needs for more space,
if those for lack of a better word, if those
dreams have been delayed, like maybe the realization that rates
(16:06):
might not come down all that much, maybe it's time
to do that. And home prices are up fifty percent
since March of twenty twenty, Like over the past five years,
you have a fifty percent growth in home prices. It's
perhaps those homeowners with that equity might be just a
little like marginally more willing to list.
Speaker 3 (16:22):
And the economics to make a little bit more. Yeah,
this is yeah.
Speaker 2 (16:25):
Wait, can you talk a little bit more Since we're
all about digging into the aggregate and finding the different
tales here, can you talk a little bit more about
the different pockets and geographical differences between what you're seeing
in supply and home prices.
Speaker 5 (16:39):
Yes, So we've been trying to figure out what are
the most because we talk about home prices nationally, the
housing market is so hyper local that those national numbers
are helpful, but they don't describe the dynamics that are
going on at the ground level at any individual place
in the country. Right. And so when we look at
the growth and inventory, looking at it year over years,
(17:00):
looking at it since the fourth quarter of twenty nineteen
before the pandemic started, you're seeing the sharpest increases in
the South, right, Like you've seen it in Florida, You've
seen it in Texas, a couple of states that show
up a little bit more on the year over year numbers,
or Colorado, North Carolina. When we look at the implications
from home price perspective, what we've seen to be more
(17:20):
at least statistically significant for now are places where either
those inventory levels are higher highest compared to the fourth
quarter of twenty nineteen, which you have New Orleans eleven
of the top fourteen msas from that perspective, or in
Florida or Texas, and that's where you're seeing softer year
over year home price growth, or in some instances where
you are actually seeing prices come down on a year
(17:40):
over year basis. The other side of that coin is
the Northeast. It's New York, it's New England, it's the
northern Midwest. Those are places where inventories are still falling.
Inventories are far shy of where they were in the
fourth quarter of twenty nineteen. And to put all of
these percentages into context, rationally, inventories are down. I believe
(18:02):
it's twenty eight percent from the fourth quarter of twenty nineteen.
So to talk about places where inventories are actually up
relative to fourty twenty nineteen, that is an outlier relative
to national numbers.
Speaker 4 (18:12):
This conversation wasn't on the record, but I'm going to
quot him anyway. I was trying to my friend Connor
saying he writes for Bloomberg Opinion. Hopefully it doesn't mind
me quoting him. We're talking about this phenomenon of the
fact that inventories are very tight in the Northeast, and
one of the things that he said was that, And again,
I don't think he told this to me for publication,
(18:34):
but maybe he's written about it.
Speaker 3 (18:35):
So I'm just going to take a risk.
Speaker 4 (18:36):
That it's okay to quote him from a chat that
I had with him. But I want to give him credit,
but that there's this natural, long standing migratory pattern in
the US of people moving essentially to the sun belt
from the northern and that the way he characterized it
to me is like imagine a university town in which
suddenly for a few years no one moves out of
the town after graduation. How inventories would rapidly diminish, And
(19:01):
that because of the lock in, the mortgage lock in,
you're not getting the same sort of migration out of
the cold areas to the southern areas, and so people
are stuck in the cold areas basically, and that is
does that resonate as a reason for why vacancy rates
would be very low or inventory rates in the northeast
would be very low right now?
Speaker 5 (19:19):
So from the data that we've looked at, is common
around the migratory patterns. They didn't start in COVID when
people moved to the southeast. They were happening before that.
That makes sense to me. I don't have the specific
numbers to completely agree with that as a research channelist
on air, but what I can say as well, which
could be contributing to that, we've talked demographics in the past. Yeah,
(19:41):
and one of the underlying trends in the housing market
has been the fact that we're now at a place
where over one out of every three homes, over thirty
three percent of the housing market is owned by people
over the age of sixty five. And when you look
at where yes, there's Florida, and there's Arizona, and there's
South Carolina. But when you look at where they're more
concentrated as a percentage of the housing stock in particular,
(20:02):
it's in the Northeast. It's New York, it's in New England.
And we've rerun this analysis posts the pandemic, their tendency
to agent place has continued to get more and more prevalent.
So I think you combine some of these trends and
this is what you're left with.
Speaker 2 (20:17):
Yeah, the Northeast is nice. I'm just going to put
that out there. Nothing wrong with the Northeast. Okay, So
we're talking about an increase in delinquencies, a slight pickup
even in prime borrowers, but we're not saying foreclosures yet,
and I think that's an important differentiator. But what would
you expect to be a sort of catalyst I guess
for things getting worse. And since we keep bringing up
(20:40):
the Great Financial Crisis in this conversation, I mean back
then people were two indebted, too overlevered, and when house
prices started to fall, they couldn't keep up and everything
basically collapse. But to your point earlier, we don't really
have that level of indebtedness anymore. So what's the catalyst, right?
Speaker 5 (20:58):
So, I think there are a few things going on.
Another piece to the different levels of leverage today versus
back then was the fact of the types of leverage
we were giving borrowers. According to data from I believe
it's the FAHFA, ninety two and a half percent of
mortgage balances in the country right now are fixed rate.
(21:19):
Most of those are thirty or fixed rate back two
thousand and five, two thousand and six, almost an ARM
era and adjustable rate mortgages and not just adjustable rates
short reset arms with teaser rates option arm mortgages that
could negatively amortize, so the balance of your mortgage could
get bigger over the first couple of years of that product.
Those were payments that as we hit kind of an
(21:40):
economic hiccup, unemployment rate picks up, money becomes a little
bit more tight, and then your mortgage payment ratchets higher.
That makes it even more difficult for you to make
that monthly payment. We don't have that this time. Not
only that the home ownership rate back then was over
sixty nine percent. Today, I believe it's sixty five point
one as we walk in here. Four percentage points does
(22:00):
not sound huge given how big the United States is.
From a household perspective, that means that we have four
to five million fewer homeowners than we would have if
the home ownership rate was over sixty nine percent. So
your marginal homeowner is a lot cleaner from that perspective
that they're not necessarily going to see, certainly not going
to see that changing mortgage payment that's going to drive
(22:22):
things there. And because of our experience seventeen years ago,
now mortgage servicers have a much more varied toolkit at
their disposal to prevent them. We'll call them foreclosure mitigation options, modifications.
Speaker 2 (22:38):
In the life loan workouts.
Speaker 5 (22:39):
Basically, so it's difficult for us to foresee a place
where mortgage foreclosures pick up too significantly in the forecast horizon.
Speaker 3 (22:47):
Could we see national home price declines.
Speaker 5 (22:49):
We could, We're talking about inventory increasing. Demand has not
increased alongside inventory. Affordability is still very, very challenged. And
I mean we mentioned one point nine percent decrease here
to date from an existing home sales perspective. As supply
increases and demand stays flat, sometimes it's just as simple
(23:11):
as looking at the supply and demand piece. We've started
to see home price appreciation decelerate four point one to
three point four percent just over the past two months,
twenty five percent. A quarter of the largest one hundred
msas in the country are already seeing home price declines.
I don't think it's out of the realm of possibilities
for this imbalance of supply and demand to take us
(23:33):
through zero percent. I think that what we're talking about
from how healthy mortgage credit is the locked in home
buyer doesn't need to sell at lower prices. I don't
see a true home price correction. That's not in our
base case. That's not in our bare case. But we
do have a bare case of negative three percent home
prices by the end of this year. Base cases plus
two decelerating from here. It's slowing growth, but it's still
(23:55):
positive on the national level. But I think there is
a realistic bare case where we go below here over something.
Speaker 2 (24:16):
Can you talk maybe a little bit about the wealth effect,
because if we're talking about like how important it is
that people have locked in mortgages at low rates, or
maybe they have big portfolios of stocks and bonds, maybe
they're a baby boomer and kind of luck down in
their wealth building lives, that seems like a big factor.
And in the current environment, we've had some volatility, although
(24:37):
things are looking better as we record this on June twelfth,
So I'm just curious, like, how do you start to
look at how people feel about their actual financial assets
and financial position when it comes to making decisions about
home ownership or whether they should move and things like that.
Speaker 5 (24:52):
Yeah, and it's that piece of it. The wealth effect
in particular is something that our economists have been talking
about a lot to talk through just how confident the
consumer has been in spending over the past quarters, over
the past couple of years, and so when they think
about the consumer's ability to keep spending going forward, whether
it's smaller purchases or larger home purchases durable goods, they
(25:13):
are looking more at the financial aspect piece of this.
When we look at the growth in wealth in this cycle,
it's been more on the financial assets side than it's
been on the real estate side of things, which has
the housing strategist, with home prices at record highs, took
me a couple seconds looking at those numbers to see
that that's what that is kind of what's going on underneath.
And so when they think about the borrowers' ability or
(25:33):
the borrowers willingness and by borrow I should say consumer's
willingness to keep making those expenditures. They are looking at equities,
they're looking at financial assets, and they're looking at the
volatility there, but they do think we need a pretty
healthy correction for it to really impact that in a
material way.
Speaker 4 (25:48):
It's interesting, like when I think about wealth effect sometimes
I think of it psychologically.
Speaker 3 (25:53):
It's like, oh, people like look at their.
Speaker 4 (25:54):
Investment portfolio and it's green, so I feel good and
go out to dinner and take a vacation or whatever.
But listening to you, it's just crazy. Like if you
have a twenty nineteen or twenty twenty one vintage mortgage
and you've been investing in the market for some time,
regularly putting money in a four own K or maybe
some taxable account. You have a very strong inflation hedge
(26:19):
because you have this recurring payment that has not gone up,
assuming it's fixed, and you're just sitting on this boatload
of capital gains. That is just that's not psychological, that's real. Now,
whether the degree to which you can monetize it is
obviously questionable, because if everyone's trying to monetize it at
the same time, that could shrink. But just on your
(26:40):
paper like, that's great, that class of person who has
that situation is just an extraordinary large cushion and margin
and a sort of winning on every front right now.
Speaker 5 (26:50):
Yes, the households that were homeowners before the pandemic hit
in March of twenty twenty or made what was probably
a pretty scary decision to buy twenty or twenty twenty one,
those are the households that, on the perspectives that we're
talking about, to the points that you're making, we're really
big winners here.
Speaker 3 (27:08):
Huge winners.
Speaker 4 (27:08):
Payments have stayed flat even at a time of galloping inflation.
They're sitting on all these capital gains. There are wages
that probably just assume they have a normal job, have
gone up marginally. So just the nominal payment of the
mortgage relative to how much they're pulling in is probably
fallen over the last four plus years or however many.
Speaker 3 (27:26):
I mean, it's pretty nice.
Speaker 2 (27:27):
Well, since we're talking about people who lucked out in
their wealth building, I want to go back to baby
boomers for a second. So what if the narratives that
we hear when we're talking about housing is this idea
that one day the older generation is going to pass
away and eventually a big segment of the housing market
is going to become unlocked and available for sale, maybe
at lower prices. Who knows. Is that still something that
(27:50):
you're sort of incorporating into your longer term forecasts or
have you seen anything change on that front. I guess
in the year or so since we last spoke to you.
Speaker 5 (27:59):
So it is something we're still incorporating when we think
about housing. Not over the next two to five years,
but this is really a longer term, like this is
a ten year plus aspect to this. But we very
much subscribe to the narrative that we are underbuilt and
undersupplied from us housing holistically, and we get asked the question, well,
how do we fix the underbuilt aspect of this? Or
(28:20):
how do we fix the aggregate undersupplied aspect of this,
And it's we do come back to this. Right to
the point I made earlier, more than one out of
every three homes in this country is owned by somebody
over sixty five. From nineteen eighty through twenty twelve, that
was twenty five percent was effectively flat. It's increased pretty significantly.
It's very regionally concentrated where those homes are owned. And
(28:42):
eventually we do think that that's the supply that starts
to help fix this, but it's an eventually thing, and
not nearly in our two to five year forecast, horizing.
Speaker 2 (28:50):
And then the other thing I wanted to ask you
is do you speak to home builders at all to
try to get like a read on maybe new supply
of housing coming onto the market. And I would be
really curious what I guess the atmosphere is like right now,
because on the one hand, you know, things seem okay,
but on the other hand, you have a lot of
uncertainty over the long term outlook, lots of policy questions
(29:12):
and things like that, and I guess I'm wondering, like
how they feel at the moment.
Speaker 5 (29:17):
So I don't want to attribute what I'm about to
say specifically to homeowner commentary, but we do have to
look through all of this when we think about our
pillars of the housing market, the supply aspect of that,
which is both existing listings, which we've talked a lot about, but.
Speaker 2 (29:30):
The builder commentary.
Speaker 5 (29:32):
Right, I don't want to ascribe this to homebuilder commentary,
but what I do want to say when we look
at the new supply of homes, single unit housing starts,
building volumes. Look, we work closely with our economists, as
I've been talking about in our policy team. Tariffs, right,
effective tariff rate now elevated versus where it's been historically,
even if it isn't as high as we might have
(29:53):
feared earlier in April. The primary way that's going to
flow through the housing market is, in our view, home building.
The cost of goods to build homes going higher, immigration policies.
When we look at different sectors of the economy, the
sector with the largest percentage of foreign born workers construction,
so the cost and availability of labor also going to
be contained. Home Builder confidence has been coming down this year,
(30:16):
and when I look at all of the housing statistics
that we forecast, what has been weakest in twenty twenty
five is single unit housing starts. Over the first four
months of the year. We're down seven percent versus where
we were in the first four months of twenty twenty four.
And we think that we are significantly underbuilt. So if
we're going down and we're undersupplied, like we do, think
that that from a home price perspective, provides a little
(30:38):
bit of support.
Speaker 4 (30:39):
So we have widespread view that there are not enough
homes either in the short term or in the long
term in America, and the trends are going in the
wrong direction.
Speaker 2 (30:47):
Awesome, all right, Well, on that happy note, Jim, thank
you so much for coming back on Odd Lots. It
was great as always.
Speaker 5 (30:54):
Thank you so much for having me.
Speaker 3 (30:55):
Thanks Jim, transat.
Speaker 1 (31:09):
Joe.
Speaker 2 (31:09):
That was such an interesting conversation and I always enjoy
hearing from Jim. One thing I really like is that
he has all the numbers like in his head. He's
not looking anything up when we talk to him. He's
just you know, I guess he thinks about them all
day every day and so he remembers them. But I
gotta say, like the number that sticks out to me
(31:30):
is that variation between someone who bought their house in
like twenty sixteen versus someone who bought it in twenty
twenty four And I guess it's eight percent versus twenty
six percent of their housing costs something like that. That
is just insane, Tracy.
Speaker 4 (31:46):
I'm on the website Know Yourmeme dot Com right now
because I am looking for the source of that meme
of the girl whispering in the ear of the other girl,
and I just keep imagining it.
Speaker 2 (31:57):
It's like he has a mortgage, right said he bought
t has a Zurpiera mortgage.
Speaker 4 (32:02):
But like I always knew that intuitively by the way,
it came from the movie Aquamarine.
Speaker 3 (32:07):
Which I had literally never heard of, and the one
actress I didn't know that.
Speaker 4 (32:11):
Yeah I didn't and an actress named Jojo no last
name is whispering to Emma Roberts. Anyway, I just thought
I would say that now since I'm on the page,
and maybe people would find that to be useful. But
I did not appreciate quite. I mean, yeah, of course,
I sort of intuitively understood that if you had locked
in a mortgage at some point in the twenty tens
or really nailed the timing and twenty twenty or twenty
(32:32):
twenty one. That was great, But I don't think I
had like quite appreciated just how massively that gap is.
What is the prospect of that going to change anytime soon?
Like there's going to be these two you know, this
sort of division in society where it's like, hey, you
have a lot of people living in homes and they
don't have a mortgage because they're old and they've aged
in place b than the lucky people who have this
(32:53):
mortgage edge.
Speaker 2 (32:54):
And then everyone else, everyone who rents.
Speaker 4 (32:56):
Or because they had to buy in twenty twenty four
or twenty twenty three because for whatever reason, and now
they're paying a massive amount of their income in their
mortgage paper.
Speaker 2 (33:05):
But I do think this is also a really great
example of why it's important to look beyond the aggregates
and the sort of you know, single average number and
kind of dig into the tails.
Speaker 4 (33:15):
Well, just on this point too, a lot of like
scare headlines or scare posts on Twitter. It's like, look
at the surge in delinquencies or whatever, or versus two
thousand and eight, two thousand and nine, and sort of touched
on this, you know, one of the things that I
do think is important to note, and Jim mentioned you
know you have to be careful with apples to apples comparisons.
Is that, like some of these effects can be magnified,
(33:38):
not because there's like a massive deterioration and credit worthiness,
but because there was so much extension of lending during
the boom time, et cetera. Like you sort of have
to be careful with some of these statistics because things
can change.
Speaker 3 (33:49):
A lot for different reasons at different times.
Speaker 2 (33:52):
Anyway, No, I mean, the home ownership market is structured
very different, really different to what it was in two
thousand and eight. Oh, we should have asked about the
gcs and Fanny and Freddie. Oh well, maybe next time
we do that next time. Shall we leave it there
for now?
Speaker 3 (34:05):
Let's leave it there.
Speaker 2 (34:06):
This has been another episode of the Oudlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (34:12):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Krman, Rodriguez at Carman Ermann dash O,
Bennett at Dashbod, and Kelbrooks at Kilbrooks. From our odd
Laws content, go to Bloomberg dot com.
Speaker 3 (34:23):
Slash od lotch. We have a daily newsletter and all.
Speaker 4 (34:25):
Of our episodes, and you can chat about all of
these topics, including housing twenty four to seven in our
discord Discord dot gg slash.
Speaker 2 (34:33):
Odline and if you enjoy Odd Lots, if you like
it when we talk about the lucky homeowners versus the
unlucky homeowners, then please leave us a positive review on
your favorite podcast platform. And remember, if you are a
Bloomberg subscriber, you can listen to all of our episodes
absolutely ad free. All you need to do is find
the Bloomberg channel on Apple Podcasts and follow the instructions there.
(34:54):
Thanks for listening
Speaker 1 (35:11):
It
Hosts And Creators
Joe Weisenthal
Tracy Alloway
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy And Charlamagne Tha God!
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.