INSIDE ECONOMICS

Mark Zandi:                       Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two co-hosts, Cris deRitis and Marisa DiNatale. Hi, guys.

Cris deRitis:                        Hey, Mark.

Marisa DiNatale:              Good morning.

Mark Zandi:                       Well, this is a companion podcast. We've got two podcasts this week. We had a nice conversation with Mark Calabria, former director of the FHFA, the regulator of Fannie/Freddie. Talked about housing, mortgage, finance, the housing policy, and let's consider that a bonus episode. And we're going to have a bit of a conversation here, not quite as long as the typical podcast, and I think we're going to focus mostly on the housing market in this conversation to kind of dovetail with what we talked about with Mark. Sound like a good game plan, guys? I didn't give you much warning on this.

Marisa DiNatale:              Yeah, sounds great.

Mark Zandi:                       But you guys could talk about anything, couldn't you? I could bring up any topic and we'd be off and running. No?

Cris deRitis:                        Almost, almost.

Marisa DiNatale:              Yeah, I can make things up.

Mark Zandi:                       Right, right, right. Is there any topic that... Oh, well, I was going to ask you, is there any topic that's off limits? There's no topic off limits on Inside Economics, right?

Marisa DiNatale:              I don't think so.

Mark Zandi:                       No, no.

Cris deRitis:                        Just some topics are more informed than others, I guess.

Mark Zandi:                       Yeah, there you go. There you go, there you go. Okay, well, let's dive right in. And one of the reasons why we picked housing was because we were talking about it with Mark, the other is we got some data. I saw existing home sales came out for the month of January, and what I thought we'd do here is, just to provide a little bit of a frame, is talk about housing demand. That's home sales, new and existing, housing supply. That's housing starts, and it could be manufactured housing, whatever we want to talk about. And then house prices. And now let's talk about demand and home sales. And we got existing home sales for the month of January. 4,000,000 homes were transacted in the month of January. Seasonally adjusted, obviously, annualized. That's pretty low, isn't it, Chris?

Cris deRitis:                        By historical standards, it is low. It's lower than last year. A year ago, it was 1.7% below that level. A little bit of a bump from December, though, so it's maybe, hopefully, moving in the right direction in terms-

Mark Zandi:                       I don't think so. I was looking at the time series. It's been around 4,000,000 for over a year now.

Cris deRitis:                        On just that one data point, looking at December and it bumped up to 4,000,000.

Mark Zandi:                       Right. Recovery has to start somewhere.

Cris deRitis:                        Exactly, exactly. So hope springs eternal. I guess part of that hope is that the inventories also rose. Not a lot, but again, you do see some additional inventory and all those sales are demand. They're also the combination of demand and supply. So you need to have more homes available to buy in order to see sales rising here. So it's a little bit of a creep up in the positive direction, but still, very low by historical standards.

Mark Zandi:                       Yeah, my sense is if you kind of just put up a picture of existing home sales, the whole historical time series, and you take a look at it goes up and it goes down, it goes all around. It feels like cutting through the volatility, the underlying sales level was about 5,000,000 units per annum. If you've got 5,000,000, it's not a great year, but it's kind of a okay, typical year. So I think a good rule of thumb is there are about 1,000,000 units home sales short of what would be typical. Does that sound about right?

Cris deRitis:                        Yeah, it might actually be a little bit north of that, historically. But yeah, I think if we were at five, everyone would be happy.

Mark Zandi:                       Happy, yeah. So what's going on? No recession. Unemployment's below 4%. People are making money. What's going on? Why 4,000,000? Why are we so low?

Cris deRitis:                        Yeah, so I attribute it to both the lock-in and the lock-out effect. So the lock-in effect is due to the rates. We've talked about this in the past, just given that homeowners with a mortgage have locked in a super low rate by historical standards, much lower than today's 7% mortgage rate, just no incentive. Very costly decision if you're going to sell your house, move into another one and take out another mortgage. So that's really a deterrent to selling homes, to moving. So that's certainly keeping a lot of inventory off the market. And then at the same time, there's that lock-out effect. If you're an aspiring home buyer, you're facing a significant mortgage payment here with a 7% rate, still high house prices. So that's certainly curbing some of the demand out there as well.

Mark Zandi:                       Yeah. Hey Marissa, do you have a mortgage? I know that might be a personal question. I don't know.

Marisa DiNatale:              Yeah, I do. Mm-hmm.

Mark Zandi:                       What's your mortgage rate?

Marisa DiNatale:              2.8.

Mark Zandi:                       30-year fixed, 2.8?

Marisa DiNatale:              Yeah.

Mark Zandi:                       Oh, wow. That's pretty good. Wow.

Marisa DiNatale:              Yeah, it is.

Mark Zandi:                       So the current mortgage rate's 7%, I assume you have some interest rate lock, right? You wouldn't move.

Marisa DiNatale:              No.

Mark Zandi:                       You would not move. Because 2.8 to seven is way too much.

Marisa DiNatale:              Right. And I couldn't. I really couldn't, even if I wanted to, because house prices where I live are so high now, coupled with the mortgage rate, I would never be able to afford the house that I live in today if I were looking now. I bought this house in... Well, I'm not in this house right now, but in 2017, so the house value has almost doubled since I bought it.

Mark Zandi:                       Oh, wow.

Marisa DiNatale:              Yeah, so I'm-

Mark Zandi:                       So it's almost like there's-

Marisa DiNatale:              ... staying put for the foreseeable future.

Mark Zandi:                       ... there's no mortgage rate that could get you to start thinking, "Oh, maybe I could move if I wanted to." I know you've recently renovated your home, so you were kind of making it your own.

Marisa DiNatale:              That's right. That's what I did instead, yeah.

Mark Zandi:                       Yeah, did instead. Right. But if I said mortgage rates were 6%, that's not going to move the dial here for you.

Marisa DiNatale:              No, because that's still way more, right? That's still basically double my current mortgage rate and at a higher house price.

Mark Zandi:                       Right. What about you, Chris? And you can tell me, "Mark, that's a personal question. I'm not going to answer that question."

Cris deRitis:                        I'll answer any question. I do not have a mortgage. I paid it off.

Marisa DiNatale:              Oh.

Mark Zandi:                       Oh, okay. Congratulations. Congratulations.

Cris deRitis:                        I'm in a townhouse. It's not a very large house.

Mark Zandi:                       I was going to ask the same questions, but I guess I can't do that.

Marisa DiNatale:              Well, I think you could. I mean, would you move right now?

Cris deRitis:                        So I'll tell you my story, briefly. I had been looking for another place, a larger place for a while, and this is even maybe a year before the pandemic, very limited inventory, and I just kind of gave up now because of the inventory. So yeah, the interest rate is certainly a deterrent, but it's more about the inventory. There's nothing being available. And so I did the same thing, I renovated. So now I've stopped looking.

Mark Zandi:                       You're comfortable. You're comfortable.

Cris deRitis:                        Comfortable. At least for now, I have no real incentive to move.

Mark Zandi:                       Yeah, interesting. Well, in our forecast, we have mortgage rates continuing to come in. They peaked at 8% back... I don't know when that was. Maybe six, nine months ago we were as high as eight and now we're down to seven, last I looked, maybe a little higher, given what's going on in the bond market. And we have, in the long run, meaning abstracting from the vagaries of the business cycle and everything else, we have mortgage rates settling somewhere between five and a half and 6%, which is... That's going to take some time to get there, in part because of... Well, maybe I should ask Chris. That spread between mortgage rates and tenured treasury yields remains pretty wide. If we're at 7% on a fixed mortgage rate and the tenured yield is at four and a quarter, that's an unusually wide spread. But we had that spread, that difference narrowing over time and the mortgage rate coming into about five and a half and 6%.

                                                It would be, I think, instructive. Maybe you could explain what's our think... Why is the spread so wide? Why are mortgage rates so high relative to tenured treasury yields? And why do we think that spread's going to come in and we're going to sell at around five and a half and six? And since I'm asking you so many questions, one more. Why do we think five and a half, 6%, given what Marissa just said, why is that going to be sufficient to unlock housing and get more housing transactions? That's a lot. I know I asked a boatload of questions there.

Cris deRitis:                        All great questions. So I'll start with the spread itself. You're right, the spread is unusually wide. It's a bit less than it peak... I think that we peaked out around over 300 basis points, and I think we're coming in a bit, but still, the historical spread has been closer to, say, 175 basis points, somewhere around that range. So still, that's a percentage point higher than what we would expect, given that spread. So why is that? Why do we have that higher spread? I think of three main reasons. One is just there's ongoing volatility in the interest rates themselves, so rates keep moving around. And if you're buying a mortgage-backed security, or if you're a lender of mortgages, then you have to take that into account in your pricing. That volatility uncertainty certainly induces a premium here.

                                                Second key factor is just the outlook, the expectations. If you believe our forecast or you have a forecast where rates are falling, even if it's gradual, you would expect that there would be a lot of refinancing activity in the future for a mortgage that you issue today at 7%. Clearly, a lot of borrowers are banking on that. The ones who are still in the market, they're buying, they're willing to accept this higher rate, but many of them are really counting on the fact that they'll be able to refinance in the future. So that too has to affect the pricing of the mortgage. The origination that you make today may not last that long. It's not going to go out for the 10 or even 30 years. So you have to account for the fact that this might be a relatively short duration mortgage.

                                                Then the third factor I would say is the demand for mortgage lending that is out there, in terms of the Federal Reserve having been a large buyer of mortgage-backed securities during the pandemic and their effort to keep rates low. Now they're no longer doing that, they're actually allowing their holdings to run off. They're running off at a slow rate because mortgage borrowers like Marissa have such low interest rates. So they're not... They have no interest to certainly sell and also to even accelerate payments at this point. So it's not a very quick process, but the point is that the Fed is no longer that key buyer in the market, and given that hole that exists, you have to raise rates in order to attract other investors into those mortgage-backed securities. So I think those are kind of the main reasons I would cite for that increased spread. Over time, I would expect that to normalize. If we're right about our economic forecast, things get a little clearer going forward, especially as the Fed does start to cut interest rates.

                                                Bond traders should have a little bit more certainty in terms of the future. We should get maybe some other investors into the market to bid down that spread as well. So I do expect to see that spread come in and that we will end at that, what did we say, five and three-quarters, 6% long-term interest rate. Is that sufficient to really attract a lot of buyers? I think it'll be helpful, but it's not going to... I wouldn't expect that to create any type of boom.

                                                I think what it will do is just get more and more supply into the market. Given other life events, you'll see maybe homeowners rationalizing a bit that, "Okay, I'll have to give up maybe a 4%, 5% mortgage. I have to pay a little bit more, but I only live once. I'm willing to stomach that higher interest rate and perhaps I've made some great capital gains on my existing property, so that can offset it." So I think it helps to loosen the wheels, if you will, of the market. But again, I don't expect that that would cause a reduction in that rate to 6% is going to cause a real boom in the market.

Mark Zandi:                       Yeah, I guess the other thing would be it's really people's expectations around rates. I mean, the longer rates stay up where they are, I think people start adjusting upward where they think the rate is going to settle in long run. They're not going to sit around waiting for 2.8%. That's not going to happen.

Marisa DiNatale:              Not going to happen.

Mark Zandi:                       Some people might think that is going to happen because that was only two, three years ago, but another year or two of six, 7% mortgage rate, people say, "Oh, maybe we're not going back to 2.8." And then at that point with life events, as you said, they begin to think, "Okay, this isn't great. This is going to be costly, but I'm going to do it. I'm going to go at five point half or 6%."

Marisa DiNatale:              That was the mortgage rate-

Cris deRitis:                        The other factor is what happened... Oh, go ahead. Go ahead.

Marisa DiNatale:              I was just going to say, that was the mortgage rate I had when I bought my first home in Philadelphia at the peak before the housing bust. I really timed that great. It was like November 2005, I think.

Mark Zandi:                       When you bought in Philadelphia?

Marisa DiNatale:              Yeah.

Mark Zandi:                       Oh. But when did you... Oh, I guess you sold five years ago, six years.

Marisa DiNatale:              I sold 10 years later for less than I bought it for.

Mark Zandi:                       Oh, is that right?

Marisa DiNatale:              Yeah.

Mark Zandi:                       Okay. But I'm not saying here for you-

Marisa DiNatale:              But that was a mortgage rate back there then, right? Five and a half percent was pretty good. So it is all what you're used to.

Mark Zandi:                       What you're used to.

Marisa DiNatale:              Yeah. I just think there's another portion to the affordability piece. So I think it depends where in the country you are, right? So where I live in Southern California, it's extremely expensive. So the mortgage is not helpful when it's 7%. But even if we got back to two and a half percent, 3% mortgage rates, like I said, house price appreciation was just so bonkers during the pandemic that the house I live in now, which is small, is worth double what I bought it for. So I think it really depends on the market that you're in.

Mark Zandi:                       Yeah, very true. One of the interesting things... There's a lot of interesting things about the housing market, but one of the things I find fascinating is while existing home sales are very depressed, 4,000,000 units annualized, new home sales, not so much. I mean, they're not booming, but abstracting from the monthly vagaries of the data, feels like around 750,000 new home sales annualized. Which again, if I put a graph up of all the history and I take a step back and I look at it, 750K feels kind of sort of where it should be in the long run. What's going on there? Why are new home sales holding up better than existing home sales? Marissa, do you have any sense of that? Chris is the housing maven, should I throw it back to him? Do you have any sense of that, Marissa?

Marisa DiNatale:              Why is that holding up? I don't know. I don't know. I haven't seen a new home go up around me in years.

Mark Zandi:                       All right. Well, Chris, do you have a perspective on that? I mean, I've got a perspective, but what's your perspective? Why are new home sales... First of all, did I characterize the data correctly? And second of all, if I did, what's going on?

Cris deRitis:                        Yeah, I think the simple answer is just the lack of supply on the existing home side pushes anybody who is an active buyer to consider new housing. The other factor I'll throw in there is that because of that lack of supply in existing homes, the price differential has been bit away. So the new homes actually are coming in or being sold at prices that are very competitive to the existing market, which is extremely unusual. And so if you're a buyer, you're facing this higher mortgage rate anyway, do you want to buy an existing versus a new home, that new home may be quite compelling. So I think that's fueling some of that underlying demand for new homes as well.

Mark Zandi:                       Yeah, I guess the other way I'd say what you just said is builders are much more aggressive on pricing. They've been effectively cutting their price. They've been doing these so-called interest rate buy downs, essentially paying, allowing... They're getting around and helping with the interest rate lock effects. They're saying, "Okay," to a buyer, "you don't need to pay seven. You pay four for the first year, and then you pay five for the second year, then you get market rate for the third year," that kind of thing. So you're effectively buying down the interest rate, which is effectively cutting price.

                                                And in fact, if you talk to a builder, and I've talked to a few CEOs of publicly traded builders, they'll tell you that they feel like they've effectively cut prices by about 10%. That's the effective price cut that they... And that goes to your point, Chris, if you look at the median price or the average price on a new home, now very similar to an existing home, and that is very unusual. I mean, that may have happened once or twice in history other than the current point in time. So we're getting a lot more new home sales as a result. Okay, that's demand. Anything else on demand that you want to bring up?

Marisa DiNatale:              Can I ask a question about the new homes?

Mark Zandi:                       Yeah.

Marisa DiNatale:              Predominantly, what kind of homes are being built? I mean, is it skewing more toward condo or single family? What's the price point? Because I know when we would talk about this years ago, we were talking about a lot of high-end homes being not starter homes, more sort of move up McMansion type homes. So are we still seeing that kind of building or is it more entry level?

Mark Zandi:                       Chris, you want to take it?

Cris deRitis:                        Yeah, so single family is still the dominant property type. That's still what people want. Single family detached is the gold standard, if you will. So that's still an area, but you do see builders being very creative and responding to the market by reducing floor plan size. So you're seeing that the average or median square footage of homes is getting... It's smaller. So they're responding to some of these constraints on affordability, not only by cutting the rates, offering these buy downs, but also adjusting the floor plans to put up as many homes as they can to satisfy the demand that's out there. So I think that that's certainly a positive sign. It does vary across the country, so I don't want to generalize too much, but yeah, I think it's a real testament to the flexibility that the builders have in trying to resolve this housing deficit problem.

Mark Zandi:                       Well, I think if you go back in the wake of the financial crisis and the years after, most of the years through the... Let's say through 2018, '19, before the pandemic, builders were focused mostly on high-end housing, meaning there was a lot of demand. That's where the margins are wider. Their actually fixed costs of construction had risen during the pandemic in the wake of the pandemic, all the permitting costs and zoning issues and that kind of thing. But in more recent years, they've begun to move... Because there's been more supply at the high end, and the margins aren't quite as good, they've been moving down into the kind of more entry level. So some of the bigger... Like a DHI, it's the stock ticker for, what is it, D.H. Horton? I can't remember.

Cris deRitis:                        Yeah, D.H. Horton.

Mark Zandi:                       Yeah. I think they're the biggest builder in the country. They now have very extensive operations building kind of more, they call it entry level or new homes or kind of lower price point homes. So it's changed, but it's only been recently. And this now goes into supply, the supply issues. And here we've got a.. Despite the ramp up in construction since the financial crisis, we've got a very severe shortage of homes, right, Chris? And there's a lot of debate about this. In fact, you can talk to the realtors, you can talk to the builders, you can talk to the Mortgage Bankers Association. Everyone's got their own estimate of the shortfall. What's the right estimate of the shortfall, which means what is our estimate of the shortfall?

Cris deRitis:                        Our estimate is around 1.7,000,000. That's based on the vacancy rates. So looking at today's vacancy rate, which is very low in calculating what we would need to add in order to get the vacancy rate up to a historical average, and also accounting for what we call a pent-up household. Household formations that didn't occur over the last few years because lack of affordable housing. So put those two together and 1.7,000,000 is the number.

Mark Zandi:                       Which is a big number, right?

Cris deRitis:                        It's a huge number.

Mark Zandi:                       Yeah. I mean, current single family/multifamily last I looked is... That housing starts is, I think, 1.4,000,000, maybe 1.3.

Cris deRitis:                        1.3.

Mark Zandi:                       Yeah, 1.3, 1.4. And then throw in another 100,000 per annum manufactured homes. That's another source of supply. Let's just say we're at 1.4, 1.5, and then shortfalls 1.7, that gives you a sense of magnitude of the shortfall. It's more than a year's worth of... If the shortfall didn't increase at all, if there was no demand, it would take over a year of supply to catch up, given where we are with regard to the supply shortfall and the vacancy rate. And what is the underlying level of demand for new homes, Chris?

Cris deRitis:                        For new homes?

Mark Zandi:                       Yeah.

Cris deRitis:                        Are you saying total-

Mark Zandi:                       For new construction, let's say. I'm sorry, new construction.

Cris deRitis:                        So we have three components. We have demand from household formations, demand from second homes, and the demand from loss or obsolescence of homes and replacements. Home gets lost in a natural disaster, we have to rebuild it. And I think there's some debate around this at the moment, given our latest population statistics, but I think we had been running at something closer to 1.3, 1.4,000,000. So 1,000,000 from household formations and then three, 400,000 from the combination of second homes and obsolescence.

Mark Zandi:                       So the amount of supply we need every year just to meet underlying demand for new homes is...

Cris deRitis:                        Yeah, in that-

Mark Zandi:                       It's like 1.5, 1.6, isn't it?

Cris deRitis:                        Yeah, in that range.

Mark Zandi:                       Yeah, right. 1.5, 1.6. And that's probably underestimating things in the context of the demographics, given the immigration that's coming into the country, which we're not really... I don't think we're really... Because we're just still getting our minds around the magnitude of the immigration flows into the country. Our estimates of, say, 1.5, 1.6 underlying demand is probably significantly underestimating underlying demand. That'd be my sense of it.

Cris deRitis:                        Yeah, I think that between immigration and also there's debate about some of that pent-up demand with younger adults still living at home, and how many of those would actually move out if they could. So there might be even more demand than what we're seeing. Those pent-up household formations may be even higher.

Mark Zandi:                       Yeah, we're actually working on trying to revise... This is a process, but we're trying to think about how we should revise our estimates of population growth, household formations, all the demographic variables, given what appears to be a surge in immigration into the country. And this has not been embedded in the census data. Census is kind of the keeper of the data, and they haven't adjusted to this yet because they're slow moving in terms of adopting the data as it comes in. But if you look at a recent studies done by the Congressional Budget Office, CBO, the nonpartisan group that does the budgeting, they have to forecast the economy and therefore have to have some sense of the underlying demographics.

                                                They're estimating that foreign immigration into the country in 2023 was 3.3,000,000 people on top of 2.6,000,000 people in 2022. And this is just for context, and it's kind of a typical year before this surge in immigration, it's about 1,000,000 per annum. So that's a pretty big delta that's not in our data. It's not in that 1.5, 6, 7,000,000 per annum underlying demand, and we're working to try to figure out how to incorporate that. Sounds like that's easy to do, but that's actually pretty hard to do. There's just so many different dimensions to that data, and to figure out how immigration fits into that is difficult. So we're kind of working through that.

                                                Okay, so we've got this really severe shortage of single family housing, and clearly, this has become top of mind. This feeds into the affordability crisis because there's no supply, and if there's no supply, that means higher house prices and you mix in the higher mortgage rates and people can't afford to buy a single family home. So this has now become a very significant top of mind issue for people and starting to play into the presidential election. It's an election issue. Should policymakers do anything about this? And/or what should they do? How should they respond? Got any views on that, Marissa?

Marisa DiNatale:              I think you see an attempt to address this in a lot of places all over the country. I mean, I know here in California, just the plight of homelessness has been top of mind to every policy discussion, every election, all over the state. And this goes in big part to housing affordability. So you see it being addressed in Los Angeles, trying to build housing, trying to repurpose office buildings, hotels, to house people. There is a big proposition on the ballot here in California that we will vote on next month that will provide a lot of money trying to address homelessness. And a big part of that is affordable housing. So I think, and we will talk to Mark Calabria about housing policy, and we've had other guests on here talking about housing policy, the kind of cool thing about this problem is that it's local.

                                                I think you can do things at the federal level to try to address it, but really when it comes down to it, it really is... Oftentimes has to be tackled at the local level. So we can have all these mini experiments going on all over the country and try to see what works and what doesn't work in terms of addressing this. Usually from the supply side, that's how they're going to try to address it, either by incenting builders and investors to get into the market to build more affordable housing or by taking existing housing and trying to incent builders to do something with things that already exist. So I think there's a lot of experimentation underway. I'm not sure, maybe you guys know if there's something out there that... At least at the local level that looks to be successful so far, I think a lot of this is yet to be seen.

Mark Zandi:                       Well, that's a hopeful perspective on it. The other is, because so local, it's very hard to address. I mean, what do you do at the federal level?

Marisa DiNatale:              That's right. That's right. Yeah.

Mark Zandi:                       Right.

Marisa DiNatale:              I think it's very hard to address it at the federal level. I think most of it has to be done at the local level. You have zoning laws that differ widely, wildly across the country. Just the availability of land and space to build is hugely different. Like I said, I haven't seen a new house go up in my neighborhood in... I don't think I ever have. There's just no room for it. So you either have to tear something down and rebuild it, or it has to be an existing home sale. But then you have other parts of the country where there's much more room to build and less restrictions on building.

Mark Zandi:                       Well, in our conversation with Mark Calabria, again, pointing to the podcast that's the companion to this one, we talk about the low income housing tax credit, the LIHTC, which is a tax subsidy to builders to get them to produce more affordable rental housing. Chris, you're not a fan of that, and I don't know that we need to go into that because we did, to some degree, in the other podcast. But if not that, then what? What should policymakers do? Should they just throw up their hands? I mean, what should they do? What do you think?

Cris deRitis:                        The simple answer to this complicated issue is zoning. We need to change zoning laws. That's the-

Mark Zandi:                       But good luck with that. I mean, come on, that's-

Marisa DiNatale:              But that has to be done at the local level, right?

Mark Zandi:                       That's got to be done on a local-

Cris deRitis:                        It does have be-

Marisa DiNatale:              Yeah.

Cris deRitis:                        Well, local level, there are some states where, at the state level, they have some control. I think Oregon and some other states have instituted things at a higher level. But yeah, you're right. For the most part, they are very much localized decisions. It's not easy, but I think at the federal level, there are some carrots that can be dangled out in terms of funding of particular areas, making funding conditional on changing zoning.

Mark Zandi:                       They would call that a stick, they wouldn't call that a carrot. You're not going to get transportation funding unless you change your zoning laws, is what you're saying.

Cris deRitis:                        Well, you will get transportation funding-

Mark Zandi:                       Okay. All right.

Cris deRitis:                        ... if you change your zoning laws.

Mark Zandi:                       Right.

Cris deRitis:                        Okay, some carrots and sticks. But you're right, it's not easy. The LIHTC, I'm not against it, I just don't know that it really helps to move the needle all that much. I think builders... If you gave builders the opportunity to build, you change the zoning so they're not restricted to build single-family detached homes with large lots as they are in many parts of the country, they will be very creative and come up with... They will fill in town holes. They can adjust their construction to achieve their margins and maximize the opportunity that is made available to them. But they're, in many cases, restricted by these regulations and that forces them, that causes them to adopt incentives that lead to misuse of some of the land, I would argue. So I think until we get some of those attitudinal changes, it's going to be more piecemeal type of incremental adjustment here versus some large sweeping federal law that suddenly leads to a lot more housing.

Mark Zandi:                       Yeah, it feels like this is going to be a problem for a long time to come. And given the numbers we just described, it's not getting better, it's getting worse. I mean, we've got a 1.7,000,000 shortfall where we need... Even not incorporating a new demographic data on immigration, we need 1.5, 1.6,000,000 every year, and we're producing 1.4, 1.5,000,000. So vacancy rates are going to remain very low, rents and prices are going to remain very high. I mean, it's going to be very, very difficult. The homelessness problem's going to be very pernicious. Getting new households into homeownership's going to be very difficult. The homeownership rate's going to be under a lot of pressure. Feels like we're in store for a pretty tough decade or two here in terms of the housing issues. Would you disagree with that?

Cris deRitis:                        Yeah, if you look ahead 15, 20 years, things will change. The demographics are going to be very different.

Mark Zandi:                       That's a great point. That's a great point.

Cris deRitis:                        Which also adds to some complication as well. Because if you're a builder with that longer vision, are you going to really ramp up all your activity today if you know that the demographics are going to adjust in the long run?

Mark Zandi:                       I think that's still far enough away in the future-

Cris deRitis:                        Probably.

Mark Zandi:                       Yeah, that you would-

Cris deRitis:                        Probably. But nonetheless, I think it's something-

Mark Zandi:                       Kind of like you're in the fossil fuel industry, you're saying. You know demand is going to ultimately weaken. Do I really want to make that as big investment state? In the fossil fuel industry, though, those investments, they're 30-year, 50-year investments, right?

Cris deRitis:                        Yeah.

Mark Zandi:                       But you make an interesting point. And the point, just to make it clear to the listener, is that demographic shift here. Unless immigration really changes to a significant... Unless this surge we're seeing now is sustained for an extended period, barring that, you're saying population growth, household formation growth, this source of demand for new housing is going to weaken, meaningfully weaken. Meaning we're going to need several hundred thousand new homes a year, not 1.5,000,000 new homes a year. And that's a very different kind of environment, and this housing shortage will go away at that point. But that's a generation from now.

Cris deRitis:                        That's right. That's right.

Mark Zandi:                       That's literally a generation from now, something like that.

Cris deRitis:                        Tough to tell that to a young adult looking for a home, "Just be patient."

Mark Zandi:                       Right, yeah.

Marisa DiNatale:              I guess one other thing that could be done at the federal level is we are lacking construction labor, which has been a hindrance to home building as well. So immigration reform would, potentially, go a long way toward increasing the labor supply in that industry, which has been hampered really since the financial crisis where a lot of labor left the country and never came back. So that's one thing that could be done at the federal level. It might be marginal in terms of the cost of building, but it is a factor that we keep hearing about. It keeps coming up when we ask home builders what's preventing them from meeting this demand that's out there. And that's one of the factors that always gets mentioned.

Mark Zandi:                       Yeah, and I guess tariffs on-

Marisa DiNatale:              Materials.

Mark Zandi:                       ... on Canadian lumber that the builders always bitterly complain about that. And of course, in this presidential election, former President Trump's talking about additional tariffs. Anyway. Okay, let's turn to... So we talked about demand, we talked about supply. Let's talk about house prices and timely, we just, I think released yesterday the Moody's Analytics Repeat Sales House Price Index. Is that right? And the reason I know this is because Chris was sending me an email telling me my home in Vero is falling in value.

Marisa DiNatale:              Oh, no.

Mark Zandi:                       I could feel the glee in his... Somehow the Schadenfreude in his email to me.

Cris deRitis:                        Not at all, not at all.

Mark Zandi:                       Not at all? Okay.

Cris deRitis:                        I know you just want to keep track.

Mark Zandi:                       Just pointing it out. Just pointing it out.

Marisa DiNatale:              He takes no pleasure in that.

Mark Zandi:                       No pleasure in it.

Cris deRitis:                        Not at all.

Mark Zandi:                       Particularly because the prices have risen so much.

Cris deRitis:                        Exactly.

Mark Zandi:                       Yeah, right. Yeah. Anyway, so what did the MAHPI say?

Cris deRitis:                        So it was positive over the month and certainly over the year. So from December to January, we're up 0.3%. So a little bit of an acceleration. It was 0.2% the month before. And then year over year, it's 5.8% growth, which is-

Mark Zandi:                       Oh, boy. Because it's still outstripping income, right?

Cris deRitis:                        Yeah, yeah. So it still remains very, very robust. The growth is stronger at the lower end of the market, kind of consistent with everything we've said. A bit weaker at the higher end, but still positive and strong.

Marisa DiNatale:              What does that look like regionally?

Cris deRitis:                        Regionally? Well-

Mark Zandi:                       Vero's down, Vero's down.

Marisa DiNatale:              We know that.

Mark Zandi:                       We established that.

Cris deRitis:                        Yeah, some of the areas that experienced some of the greatest appreciation, parts of the South, parts of the West are weaker in terms of their growth rate. I think there was one state where it was actually, it did turn negative. I think maybe Wyoming, but you have to be a little careful on some of the data, a number of transactions, given the low volume. But yeah, West and the South sees some weakness. There's some growth still in the Midwest and the Northeast where you do have metros that might be still providing more value on an absolute dollar basis. They're attractive, more attractive, I guess, to aspiring home buyers. But yeah, for the most part, it's an adjustment.

Mark Zandi:                       You produced that nice map of all the metropolitan areas in the country, 400 plus, and you show them if they're... On a year over year-over-year basis, are prices declining, are they up zero to five, five to 10, and 10 plus? And I did notice... And of course, the red is a decline. I noticed Texas has a fair amount of metropolitan areas with declines. Anything going on there? Or is that just the fact that they rose so much in value since the pandemic and this is just a bit of a correction? Anything going on?

Cris deRitis:                        I think that's certainly part of it, just normalization if you will.

Mark Zandi:                       Normalization.

Cris deRitis:                        But also the supply. So Texas is... Some of those areas are areas where you can build, where the regulations aren't as strong. So you've actually seen... I think Austin has had a bit of a building boom, and you've seen rents coming in, prices coming in as part of that.

Mark Zandi:                       Yeah. Just because the magic of supply, we just need supply and we'll get some affordability.

Cris deRitis:                        Yeah.

Mark Zandi:                       Interesting.

Cris deRitis:                        Back to zoning.

Mark Zandi:                       Yeah. Okay, so in our forecast, I'll have to say, we've been... I feel very proud of our forecasting prowess over the last year or two because we never called for recession, we kind of avoided that pessimism. At least most of us did, avoided that pessimism. But nonetheless, we have said some forecast errors, and the one error is around house prices. We expected house prices to weaken meaningfully in the wake of the Fed rate hikes back in 2022. And actually, initially they did. I mean, back in 2022, prices declined as the Fed jacked up interest rates. But in '23 last year, prices stabilized and by years end, were rising again. And now coming into 2024, as you say, they're rising up 5.8%. I think this is a new record high in terms of existing prices.

Cris deRitis:                        Yep. We're at a new record high.

Mark Zandi:                       So where do we go from here? What's our outlook for house prices going forward? And prefacing it by, we haven't gotten this right so far, particularly difficult, but what do we think is going to play out here in terms of prices going forward?

Marisa DiNatale:              And why did you get it wrong?

Mark Zandi:                       Yeah, why did we get it wrong? I'll let Chris answer that question.

Cris deRitis:                        All right. Thanks, Marissa.

Marisa DiNatale:              Chris, why did you get it wrong?

Mark Zandi:                       Yeah.

Cris deRitis:                        Thanks, thanks. I'll answer that question... The extent of the lock-in effect, it's a lot stronger than initially I expected. That plus the willingness of... The affordability, even though it's record low, it certainly is keeping a lot of buyers out, but 32% of home sales now are all cash. So they're still-

Mark Zandi:                       Is that right? I didn't know that.

Cris deRitis:                        Yeah.

Mark Zandi:                       Wow.

Cris deRitis:                        That was in yesterday's report.

Mark Zandi:                       That would've been good... We're not playing a stats game, obviously, but that would've been a pretty good stat.

Cris deRitis:                        So you still have buyers out there that have other means that are not dependent on the mortgage rate. It's that combination of the lack of supply, but still strong demand that led to the house price growth and what I got wrong, I guess, in terms of the extent of that.

Mark Zandi:                       I was there right with you. I got it dead wrong. Okay, so going forward-

Cris deRitis:                        So short term-

Mark Zandi:                       Yeah, what's going on? What are we going to-

Cris deRitis:                        Short-term, expect still fairly solid growth here because of the supply demand imbalance, but I do expect that we will get some... Basically my forecast is fairly flat. Those forces of some increasing supply coming online, life events. Some additional building is going to continue to put some downward pressure on price and the affordability continues to be a factor. And the longer that mortgage rates do remain at an elevated level, that's going to continue to make it difficult for some buyers. So for those reasons, I do expect that we'll see that push-pull in pricing over the next year or so. But again, short term, I don't see a dramatic decline anytime soon because of the imbalance.

Mark Zandi:                       So prices are high, affordability is low. I mean, you look at price, the house prices relative to people's income, so household income, kind of a tried and true measure evaluation. You would argue the market's overvalued. Prices are really high relative to income compared to what's happened historically. And obviously, that goes to the affordability crisis. People then naturally ask the question, "Are we in a bubble?" Because we have these valuation measures, house prices to income, house prices to rent. And if you look at them relative to long run trend, they would say the market is more overvalued today than it was prior to the financial crisis and that we consider to be a bubble. Given that, what I just said, would you consider what's going on now a bubble?

Cris deRitis:                        Well, I guess I would define a bubble only by the fact that it pops. Overvaluation that deflates gradually over time, which is kind of the forecast we have here, I don't consider that a bubble, given the... I guess a bubble is violent, in my opinion, that you would have some event that really causes prices to decline. Instead, I expect that we're going to normalize into or come back to more of an equilibrium price to income ratio with flattening house prices, some growth in income, mortgage rates coming down, so you can adjust back into this level of pricing. Basically, pricing got ahead of itself. It's going to take a little bit of time here for incomes to catch up as prices go flat.

Mark Zandi:                       Marissa, do you have a different answer?

Marisa DiNatale:              I think you need other characteristics, like you need a lot of speculation over leverage. You don't see now. Things are extremely unaffordable, but that is, as we discussed, an issue with... It's a supply issue. It's just lack of inventory in the market that are keeping a floor under prices in a lot of these places. I don't see a lot of speculative buying and building going on.

Mark Zandi:                       Yeah, in my view, a bubble is speculation, meaning you've got investors in the market that are buying with the sole intent of flipping that property quickly to make a buck. And to make it even more serious is if they're doing that with debt, with leverage. I mean, that's what was happening back in the bubble before the finance... That was a bubble because there was just a lot more investors that were flipping, they were quickly buying... They lied, in many cases, about the fact that they needed a mortgage and they said they were a homeowner, they were buying it as homeowner, but they were actually an investor. And then taking that and then moving on, selling and getting that profit. That kind of speculation, greater fool's theory, "I'm going to be able to find a greater fool than me to buy this property out before everything falls apart," was the crypto market, for example, or the equity market back circa Y2K.

                                                That's a bubble. You don't see any of that now. I mean, the investors you see now, they're buying their hold. They're buying and renting the property out because rents are so high. They're not buying with the intent of selling quickly or flipping. There's some of that in some markets. We actually track that. We look at extra transactions, and there was some of that creeping into places like Phoenix, the really high-flying markets back in the teeth of the pandemic, but you're not seeing that now. In my view, the market is overvalued relative to incomes and rents, but we can explain it by what you just said. There's just no supply, physical supply or because of the lock-in effects. It's not because of speculation. This is not a bubble. This is not a bubble that is going to burst.

                                                Okay, so I don't think, Chris... Of course, I've been wrong about house prices, I could be wrong again, but it'd be shocking to me if we saw some kind of violent move down in price. If there's going to be weakness in price, it's going to be kind of a grinding down in price over time as people... Life happens, people have put homes up for sale on the market, and you start to see more inventory and you see some prices... To actually transact the price, sellers have to bring down their price a little bit, and you see some grinding down on price, but I'd be shocked if we saw some big move. Unless we had a recession, that might be different.

Cris deRitis:                        I was going to go there. A provocative question, even if we have a recession.

Mark Zandi:                       Yeah, exactly.

Cris deRitis:                        Would you expect to see prices fall dramatically?

Mark Zandi:                       Because in that case, then mortgage rates are coming in.

Cris deRitis:                        Right.

Mark Zandi:                       And the people who have jobs saying, "Oh my gosh, here's my window. I'm going to walk through it." So I'm not even sure. You're right. I'm not even sure that would happen. I guess it depends on how severe the recession is, but you're right.

Cris deRitis:                        It does, but I think a key differentiator this time is the leverage piece that you mentioned. There's a lot less leverage today. So even if we have a recession, it's not going to be as damaging for a lot of borrowers. They could hang on, especially with a lower interest rate.

Mark Zandi:                       Yeah. And that's maybe where we end the conversation in terms of... We've been talking about housing, let's talk about quickly mortgages and mortgage credit quality. I mean, delinquency default rates on mortgages have been very, very low, and that in part goes to the low unemployment, but it also goes to the fact this run up in house prices. I mean, I think, correct me if I'm wrong, Chris, but in our house price index, it's up almost 50% since the start of the pandemic. So if you go back, the pandemic was four years ago on the nose, you go back four years ago, look at house prices in that four-year period. Up 50%, 5-0. That is a lot of equity that's been built up in people's homes, and people are not going to default on their home if they've got equity in it because they can just turn around and they sell it. So feels like, correct me if I'm wrong, it feels like mortgage credit quality under almost any scenario here is going to remain very good. Anybody disagree with that?

Cris deRitis:                        Overall?

Mark Zandi:                       Overall.

Cris deRitis:                        You can find some pockets.

Mark Zandi:                       Yeah. And also, I guess you can see the home equity lending has picked up for obvious reasons, the equity and high cost of credit card debt and people need cash. So maybe we see some weakening in credit quality for home equity lending, second mortgages. But I'd be surprised on first. Marissa, I interrupted you.

Marisa DiNatale:              I was just going to say, unless you bought a house in the last two years where we have seen a deterioration in credit quality for very recently originated loans, both personal loans, credit cards, even mortgages, there's some evidence of that. But the vast majority of people, if you bought a house before the pandemic, or even in 2020, mortgage credit quality is good, and they have so much equity that even if house prices fell 20%, most people would still be sitting pretty. So you're right. In contrast to 2007, 2008, where equity was just being wiped out so people were walking away, this is a very different situation. You'd have to have some catastrophic decline in home values for another foreclosure crisis to happen.

Mark Zandi:                       Oh, sorry. Go ahead, Chris.

Cris deRitis:                        I was going to say, and then on top of that, you mentioned foreclosure. Are we ever going to have another foreclosure crisis? It seems like they're just-

Marisa DiNatale:              Because credit quality is-

Cris deRitis:                        Pull out the moratorium playbook.

Mark Zandi:                       That's a good point. You're saying that the GSEs, Fannie/Freddie, FHA, they're never going to allow... If people start getting in trouble, they're going to come up with mitigation and different methods to try to keep people out of losing their home in foreclosure. It's just not going to happen again.

Cris deRitis:                        That seems to be-

Mark Zandi:                       Of course, the underlying mortgages are a lot better too than... We've got a 30-year fixed rate unlikely... They're not two-year subprime arm, like before the financial crisis, though. But you're saying even if people started getting into trouble, they may not ever get to an actual foreclosure sale, at least not to the degree that it has been historically, because policymakers just won't allow that to happen.

Cris deRitis:                        Yeah. I think in the other podcast with Mark Calabria, he could explain some of the details there.

Mark Zandi:                       Well, that's a good way to end this podcast. So you can listen to this one and then go off and listen to the one we did with Mark, which I think was very informative, both historical recounting, but also looking forward. Anything else on the housing we want to bring up? I thought that was pretty comprehensive. Anything else you want to bring up before we go, other than my home in Vero? I forecast many things, some I'm confident in, some not so much. I'm pretty confident this home's going to be... Well, maybe not as confident now that I think about it. I was going to say, I'm confident it's going to be worth more 10 years from [inaudible 00:55:19].

Marisa DiNatale:              Climate is changing fast, Mark.

Mark Zandi:                       I know, that's why that entered into my mind. Oh, no.

Cris deRitis:                        You got rid of the seaweed problem, though, right?

Mark Zandi:                       Yeah, no seaweed.

Cris deRitis:                        That's good.

Mark Zandi:                       That's good. Yeah, yeah. Okay. All right. Well, thanks for the conversation and we're going to call this a podcast. Dear listener, we'll talk to you next week. Take care now.