0:00

An Instagram post gets an unexpected, boost a tick, tock catches in the algorithm sometimes.

That’s all it takes to launch someone in to internet Fame.

But then what this blew up is a new podcast documentary that reveals how social media stardom is made, it’s a different kind of Fame.

0:17

That’s not always as glamorous as it looks from Spotify and the ringer podcast Network.

I’m Alyssa Perez neck.

You can listen to this flew up on Spotify or wherever you get your podcasts.

Today’s episode is about the US housing market.

0:35

You know, I thought about doing a big wind up here but the truth is this is pretty straightforward.

The housing market is kind of broken right now and it’s not just me saying that and it’s not just you thinking that and your friends thinking that when they think about buying a house or selling a house, it’s economist’s.

Its financial analyst.

0:52

They look at the supply side and look at the demand side.

They’re saying something looks broken.

Here, you’ve got skyrocketing mortgage rates, rent prices are falling.

Linked by their fastest Pace in years from their highest inflation rate in decades, Builders are shaking in their boots.

1:07

In the FED, doesn’t seem anywhere close to being done with raising rates.

That means everything that is weird.

Right now, is likely going to keep getting weirder.

Today is a very special crossover event.

One of my favorite Finance podcast, Odd, Lots hosted by Tracy, Al away.

1:23

And Joe wiesenthal is here on plain English.

Tracy, and Joe are today’s guests.

This is great news.

As for you, most of what I think I know about the housing market is basically a river that flows from the Headwater, that is the odd, Lots podcast and the online commentary of Tracy and Joe.

1:41

So it’s a thrill for me and I think you will learn a lot from this episode as well.

If you have any questions, comments, criticisms ideas for future episodes, please do not hesitate to email us at plain English at Spotify.com.

1:57

I’m Derek Thompson.

This is plain English.

2:23

Tracy and Joe, welcome to the podcast.

Thanks for having us.

Thanks for having us.

It is really fantastic to have both of you.

You are two of the most expert financial and economic guides that I know of in the entire pod scape and what I pressure.

2:39

No pressure.

Yeah.

Sorry I don’t want it.

Don’t a damn you with that phrase.

What I would.

To do narrowly is to use our time together to understand what the hell is going on with us housing market.

But since you’ve both been following this story for years, I thought we might try to do is pull together like a brief history of housing in the 21st century to understand how we got here and then where we might go next.

3:00

So, Tracy, if I could, I’d like to start with you.

Let’s go back to 2007, 2008.

How did the global financial crisis?

Set the stage for the next decade plus of the real estate industry.

Yeah, I think one thing we seem to be learning right now is that people kind of have short memories and the Assumption always seems to be well, why aren’t people reacting to this exact economic moment in time?

3:24

So, people look around at the situation, you know, after that pandemic in 2020 2021 and they say well, house prices were soaring and people were clamoring for homes and we were all talking about a housing shortage.

So, why didn’t homebuilders just build more houses?

3:40

And the answer is because They definitely remember what happened in 2007 and 2008 for them.

It was you know for anyone that survived it was a near-death experience.

They remember the capacity issues that marked pre-2008, they remember the mortgage issues people taking out lots of credit to buy numerous houses you know subpar quality mortgages, things like that and no one’s wants to rush into the market for fear of basically repeating that mistake.

4:12

Take now I should caveat that the housing market has changed a lot since 2008, but ultimately home, builders are run by people, these are people who if they were around pre 08, they definitely remember the risks of that time.

And they’re not that eager to ramp up capacity.

4:29

Housing, prices didn’t just fall for a few months as they have this year.

After the 2007, 2008, crisis housing prices fell between 2006 and 2012 according to case-shiller six, Years of housing price declines, including basically Obama’s entire first term.

4:46

And Tracy’s, you just said to put some to put some numbers on that theory.

And the theory, annual housing starts per 1,000 Americans, the previous low in the last 50 years was 3.9 in 1991.

After the great after the global financial crisis, in 2010, it felt to 1.8.

5:05

So how is he starts per capita, didn’t just fall to the lowest on record.

It fell 50 percent lower than the previous low.

On record.

We didn’t get back to 3.9 until 2019.

So by that measure at least it took a full decade to essentially dig out from underneath this absolute crash that we saw to housing in 2007-2008 Joe, what what do you want to add to this picture in terms of understanding the aftershocks were still living with post GFC?

5:34

Well, you know obviously and we’ll talk about it more but you know obviously mortgage rates are really important driver of housing.

The as everyone knows but I think an important thing to remember is that mortgage rates aren’t everything and that mortgage rates can’t mechanically move the housing market in One Direction or another, you know, going back to regrade financial crisis P, you know, the Fed was raising rates for several years, leading up to the financial crisis partly because they looked at whatever once all is going on in housing and perhaps they were getting anxious about that.

6:09

But a lot of the worst housing lender Ding activity that Tracy mentioned came even with the FED attempting to tighten Financial conditions.

So I think that’s an important place to start that there is this sort of Behavioral element in finance in home, buying where they can’t just, you can’t just turn the economy.

6:28

Like a dial.

That’s like a little hot little cool course.

The FED is discovering that right now, but pre GFC.

There was a lot of rate hike and going on.

And yet still, some of the worst loans of the financial crisis, with the worst for all theist activity, Occurred well into the hiking cycle and you mentioned too that you know nor years of - housing prices.

6:49

So it really took several years even after the great financial crisis for things to get going again.

You know they drop rates to zero at the end of 2008.

So if you want to take a sort of surely rate Century view of the housing market, you’re going to miss so much because it’s not like cutting rates to zero at the end of 2008.

7:07

Early 2009, created this big bounce.

We’re seeing now.

Now in 2022 that the surgeon mortgage rates really is putting a freeze on housing activity.

It putting a freeze on home sales.

We are seeing this sort of crash in New housing starts and so forth.

7:27

But again and you know it’s not totally mechanical and you know, to this point about, you know, the the the number of houses that are being built.

It really was, you know, I hate to use you.

Notice is overused, cliché.

Perfect, Storm.

You know, we had we did see this big boom and housing, demand started, like middle of 2020 etcetera with the drop in mortgagor, right?

7:51

But the supply chain issues were, you know, a big part of it.

I mean there was a lot of the were a lot of homes that was demand for who are home.

Builders willing to sell it, they just couldn’t get them built.

And so you just see this sort of like brutal after-effects of the great financial crisis simply in the ability of the industry to ramp up and create more housing in line with demand.

8:12

I’m really glad you said that.

You can’t just look at what the mortgage rate is, or with the federal funds rate is and say, aha.

Now I know what’s happening to the housing market because you look back between say the 1970s in 2010, the 30-year mortgage interest rate had never fallen below 5% for a single month not for a single month that if the next decade it never exceeded five percent.

8:35

I think actually see there’s like four for exactly one month so you have this decade that really is historic in two ways.

It is a great time to get Mortgage.

You have the lowest mortgage rates that you’ve seen in a half century, but also nothing is getting built.

You have the least amount of construction for capita that we’ve seen on record.

8:52

And as you pointed to Joe, you’re also getting the sort of Perfect Storm, Dynamic of demographics.

You’re setting the stage for Supply Crunch at the exact same time.

That the millennial generation is moving into its 30s.

So you’ve got too little Supply.

Mortgage rates are really low.

Millennials are all about to turn 31, at least, you know, the Moto Millennials about to turn 30 one.

9:10

It’s really a perfect recipe.

For the rise in prices.

Tracy, one more aspect that I want to hit on before we get to the pandemic itself, is the factor of where people were living where they were moving.

Maybe you disagree with this interpretation.

9:26

But it seems to me that, like, in the first half of the decade, the first half the 2010s, that was like the year of the cities, like all the headlines were like, cities are coming back.

New York, is Raging again, and then that narrative continued to live in headlines for a while, but ever so secretly in.

9:42

Second half the decade domestic migration to cities plummeted and it was the suburbs that were booming from the sunny swoosh from the Carolinas to Texas to the upper Northwest 20 extent.

Do you think this migration story is another ingredient?

We should throw into the jambalaya?

Well, I think it kind of fits into the supply chain shortages, that Joe was just describing.

10:02

And again, one thing that we are recognizing post.

Pandemic is how bad our economy tends to be at adapting to abrupt change.

So One wanted to move to the city, they all did that City properties City, real estate prices went through the roof.

10:18

Then lots of people decide, they want to move to the suburbs.

Then we have the pandemic and the sort of shift to the suburbs gets even more extreme.

And it’s just really hard for these types of longer term assets to adjust to these rapidly shifting changes in supply and demand patterns.

10:38

And the other thing I would say just to touch on the structural underinvestment, That we mentioned earlier, but a lot of Economics is not set up to deal with these types of, I guess, human emotions and human preferences again.

The Assumption and economics is always that.

10:53

Everyone’s a rational actor.

Everyone will do you know exactly the most rational thing for them?

It’s not that good at taking into account long-term emotional scars that you might you know injure by being a how home builder in 2008 or I don’t know like moving.

11:11

Going to the city and having a terrible time and deciding that you want to move back to the suburbs or something like that.

The assumption is always that people are perfectly rational that they’re looking at the situation around them with perfect rationality.

And that’s not necessarily the case Jo Jump, Right In.

11:27

You mentioned in the early part of last decade, you know, The Narrative of like cities are back and that’s definitely true.

Because it’s interesting thing about, where was the Foreclosure crisis, the worst push GMC and it’s like, Arizona Nevada.

The Inland Empire From California and people like talked about like this and stayed parts of Florida, they’re awful.

11:46

But like these parts of the country are great places to live, like many of them are warm, they’re cheap, and this is a really key thing.

And so I think, you know, the other Narrative of the early 2010’s, I call the Millennials are going to want to be be homeowners at all.

They’re just going to want to rent.

12:01

They’re going to be sorely transients or whatever it is and it’s really amazing.

I think one advantage that Tracy and I have had of like working in finance media for a long time is like how many narratives like Lately fall apart and to shortsightedness of frankly, the media itself or commenters on all these things always mistaking, an immediate crisis or frequently mistaking, an immediate crisis for some sort of like, fundamental change.

12:25

But the idea that like, people were going to stop wanting to live and like Arizona, where like there’s so much land that can be built on or outside of Las Vegas.

When there’s an endless Acres that can be built on or Florida, which is like all we, you know, people are never going to want to stop moving to.

Florida is just sort of this like it’s funny too.

12:42

Right.

Respect.

Think that we ever thought these things that these would like no longer be popular places to live.

Yeah, the media has a funny habit of looking at macro economic phenomena and associating it with a cultural change.

So for example, you know, we have all recently seen this phenomena of the great resignation and quiet quitting.

13:02

This idea that all of a sudden, no one wants to work anymore.

In America, everyone wants to quit their job and when they get a job, they don’t really want to work that hard on the job.

And it’s like Well, actually, this is a total misread of BLS data.

The quits rate doesn’t isn’t isn’t pointing to people who don’t want to work anymore.

13:20

It’s pointing to people who want to continue working at a higher wage typically in low-income Industries like in the services economy.

And so they’re getting a job at TGI Fridays or another restaurant or hotel, it’s going to pay them a lot more.

That’s not suggesting a lack of interest in working.

A great resignation, suggesting a sort of boom and job, chin job switching.

13:39

I just say I am myself am guilty.

This, I wrote an article for the Atlantic 2010, 2011, Joe, you’re like, yes, Derek, you are guilty of this.

I’ve seen it time and I too am guilty.

Like discern?

No, no.

It’s right now.

Yeah, you can you can express your own guilt.

13:56

Making all gonna go to church together and do a confessional.

But in 2010 2011, I did this piece called the cheapest generation about the fact that Millennials clearly weren’t buying as many houses and cars as previous generations had.

And that maybe the suggested, a sort of cult, a shift in cultural demand and for housing and car ownership.

14:15

And at the time it was something you could generally argue with the data available to you but now 10x years later I look like a fucking idiot because Millennials clearly want to buy houses they clearly want to not only own their own place but also own hit in the suburbs.

14:30

Like they are basically exactly like their parents.

Anyone else want to join me in the confessional here about mistakes that they’ve gotten any wrong and housing last few years.

You know, a lot of us are just burnt out, right?

14:52

And so, it’s like, part of like, maybe it’s like journalists, like, read the BLS data wrong, but maybe just a lot of journalists are just like, you know, sort of like tired and stuff like that.

And then assume that their individual experience is extrapolated to everyone.

That was it?

That was me.

That was what I was going to say.

You know, my sort of like trying to forgive the has journalist For sometimes getting things wrong and just extrapolating our own experience too much.

15:14

Yeah.

Freddie and projection, let’s move to the pandemic because you guys did a great job.

I think sort of setting us up for what happened in 2020.

Again, mortgage interest rates have been low, you’ve got the millennial generation coming online, not a lot of homes been built in the previous decade and then all of a sudden the World falls off.

15:32

A cliff in the middle of March.

Joe, tell us here what happens in the middle of March monetarily and fiscally That affects the housing markets.

The next two years.

I mean I think that what’s incredible about that month March and April 20 20 is we basically had like the shortest depression of all time.

15:52

It really may have been just simply a matter of weeks like from like mid-February to like the end of March and so we basically saw all Commerce more or less certain grind to a halt and then immediately people started buying again but what happened was is Tracy mentioned all those home builders you know that everyone has like these Like memories of the times, you know all kinds of Industry were basically shut down like oh, it’s happening again.

16:16

We’re going to, you know, we’re going to have another housing slump.

This is 2008 again, it’s totally understandable.

The initial jobless claims were soaring and says I know people are going to be able to like pay their mortgages if they don’t have a job.

People are going to certainly by do hogs if they don’t have that.

16:32

If they don’t have jobs and will instead what happened was the fiscal response was extraordinary so by and large household balance.

Cheap shot up.

You had the rates, drop to zero.

So if you had a job and if you had income who’s actually a good time to buy in the industry, everyone just got completely flat footed.

16:52

And the boom was so intense and right after such an intense drop.

And so, we really eat, if you see it, in Lumber, like all the Sawmill is a lumber yard sale down their inventory. 20, like let’s get out of this and then write from.

Then you just saw this industry that could not keep up with the demand and the supply chain with her twin.

17:10

Though, is whether his Lumber, or whether it’s garage door is whether his roof tiles.

But there’s washing machine, never able to, like catch back up from that sort of like standing start in the middle of, in Spring of 20, 22 C.

I want to ask you about the demand side here.

There was one study from the Federal Reserve Bank of San Francisco.

17:27

That found that remote work was a key driver of the surge in housing prices between 2020 and 2021.

I mean, the market just went insane.

People felt so Cabin Fever.

Did that it that I feel like Not only was the decline and mortgage rates in federal funds rates, a huge factor in the pandemic, weirdness of the housing market.

17:48

But it was also the fact that just suddenly a lot of people with means wanted to move.

Right?

Yeah.

Well, this kind of gets back to the point.

I was making about how economics isn’t that good at taking into account?

Really sharp shifts in preferences.

So you know, everyone decides, they don’t want to live in the city anymore, they want more space because they don’t want to be cooped up with their husband or their wife.

18:10

Or they’re little kids like screaming in the background while they’re trying to do Zoom calls and the market isn’t really set up for that.

No one anticipated that in 2020.

We would suddenly have a significant proportion of the population who would suddenly want to change job will not change jobs and change cities and do their job in a different way.

18:29

And then similarly, if I could just go back to the supply side for a second, you know, to Joe’s point on the under capacity in the housing market, everyone was making Asians in early 2020 based on the information at the time and what a lot of companies saw and here, you know, I’m trying to I’m trying to help the the reputation of journalists, I guess it wasn’t just fearful to misunderestimated what was going on?

18:55

There are plenty of business owners who did this to people.

Who said, oh like look what’s happening in the market, a depression is coming.

This is going to take years to resolve.

Let’s cut back on orders.

Let’s cut back on investment.

We don’t want to spend money, we want to be really conservative at this time.

19:10

It turns out that wasn’t really the right move because people because things got better very very quickly.

But we were left with the impact of that decision, from everything from Lumber to, you know, washing machines, that maybe use semiconductors.

We had a semiconductor capacity struggle to build back up mostly because we had a lot of car companies that cut back on their orders and that kind of put pressure on the entire chip supply chain.

19:36

So it was a sort of cascade effect of Is the impact of decisions that turned out to not be that correct.

So the supply side is pulling back, the demand side is pushing ahead.

The market goes insane, inventories fall to record lows, there’s nothing for sales.

19:53

So prices Skyrocket.

You’ve got people promising to name their kids after the people selling their home.

It’s total pandemonium, let’s move forward.

So you have essentially the conditions for an inflationary Market.

Case-shiller home price has absolutely sir Soar in 2020 and 2021.

20:12

And obviously you have General headline inflation and core inflation and this is where I want us to.

Finally, walk our story into the year, 2022, the late covid years, the inflation Year.

Joe, let’s start by talking about interest rates, you guys just did this really interesting podcast about how the spread between the federal funds rate with the Federal Reserve controls and mortgage interest rates has never And higher.

20:41

What is that about?

So I want to break it into two and I’m going to let Tracy talk about the spread between but I you know, but I want to talk about the underlying the FED to start and then Tracy can talk about the spread but I think there’s something really important here because I’m looking at rates right now, you know, in 2020 late 2020, the FED holds its Jackson hall meeting and a bad time.

21:05

The unemployment rate was still quite elevated and they to you.

So again, the story keeps coming back memories of the great financial crisis.

The big imperative for the Fed was let’s not make the mistake that policy makers made post great financial crisis.

21:21

And start hiking rates, prematurely before the unemployment rate comes down, like let’s let’s solve the employment Puzzle.

First before we do anything because there’s a lot of regret about early tightening and early, austerity pose, G of c.

And so what that means is, you know, you mentioned this housing, boom.

21:39

And We would talk about this housing boom that started in 2020 answer but all the way through 2021 the fed you know still kept raids Rock Bottom because there was still so much work to do on the employment side, a very unusual situation to have this absolute boom in housing.

21:56

A lot of people feeling wealthy due to the stock market.

A lot of people holding on to their jobs Etc.

So you have this boom but sort of no rate side response.

And as such, you basically have like Rock Bottom rates, All through 2021, even with the case-shiller surge, they are talking about.

22:15

So when we talk about mortgage rates, obviously, part of it is government rates and part of it is that spread.

I just think it’s sort of worth thinking about the, the calculations that the Fed was thinking on raising rates and why they didn’t raise rates sooner in 2021 and is because there was still so much work to do on the employment side of the Mandate that maybe Tracy could do a summary of like that spread between Federal It’s in mortgages.

22:41

Are you and Tracy?

I’m no, I’m a third.

You just a second.

I just want to pause there to say that.

So, double down on Joe’s point because I think it’s so important that policy makers seem to always be fighting the last war.

You know, we had austerity after the 2007, 2008 crisis, certainly the UK had even worse austerity in part because people are looking back to say, you know, the early 90s rate of the early 90s recession saying, okay austerity or, you know, tax increases and spending cuts for the right medicine, then switch the right medicine.

23:09

Now, But then you see that austerity gives you this prolonged unemployment, prolonged economic weakness.

I think liberals and people on the left successfully Lobby.

A lot of influential policymakers to say you can’t do this again and so we have the opposite response in 2020 and maybe we’ll maybe the pendulum will swing right back to austerity in whatever the next recession is but I just want to sort of pause on that point because it’s a great sort of conceptual point.

23:35

That policy makers seem to always be fighting the last war on the unemployment rate was 5. 9% in summer 2021.

So it’s not crazy.

The policymakers were still so focused on that.

It did come down rapidly but I just think it sort of speaks to what the data at that point.

23:51

Was looking at which was that no there really still was a lot of work to do on fulfilling on getting people back to work.

All right, I’ll let Tracy pick it up.

The other thing I was going to say is I think one of the things we’re learning right now is also that interest rates are just a real.

I know it’s a cliche to say this now but just a really blunt tool to solve all the Comic problems in the economy.

24:12

And to that point, you know, when we look at mortgage rates, like mortgage rates are not just the sum of whatever the Federal Reserve sets Benchmark rates.

As there’s a whole ecosystem attached to the mortgage market, and that influences how mortgage rates are actually set.

24:28

And this was the topic of our recent Autobots episode.

It’s the fact that, you know, the average fixed rate 30-year mortgage right now is above 7 percent, which is the highest it’s been since 2001 but that Actually much higher than you would think.

It should be just by looking at Benchmark rate.

24:45

So the interest rate or the yield on equivalent 30 year, treasuries, right now is that something like 4%?

So the spread between those two has gotten a lot higher and that’s not because of stuff that the FED is doing.

Although it has stepped away from the MBS Market.

25:02

A lot of it is just down to the behavior of particular, MBS buyers.

Light commercial banks are like big bond funds.

Ones who do not want to be buying mortgage-backed Securities in a rising rate environment because there’s not that much payout for them.

25:19

And what are the thing that’s happening here is the inventory Market is frankly, very confusing to me, so I’m looking at Bill McBride’s data.

Right now, the 90-day average inventory Nationwide is roughly at November 20, 20 levels, but inventory is still down 40%, compared the 2019.

25:35

So there’s not a lot of houses on the market, but the pipeline right now, Is really really strange and it speaks to the fact that something in the housing market seems kind of broken.

There are a record high number of houses, under construction today, but newly listed homes are way way down.

25:53

So maybe Joe you’re nodding along to this.

Maybe you can help me understand what’s going on with inventory right now.

So I think there’s two things.

The number of homes that are under construction, I believe, is in large function, this sort of ketchup of all the supply chain, The issues that we’ve talked about.

26:12

So, if you started a, if you started a house, have you started building ones, you know, again, the windows may have finally come the roof for the garage door.

And so, you had this situation for a long time in 2021 or housing starts breaking ground on the new house with far outpacing housing completions, whereas you actually like, get the house done.

26:32

And this Gap was persisted for a long time.

Now, housing starts are plunging, but I think we’re mostly seeing these housing completions The house is under construction is essentially a function of this long unusually large lag time between the start and the completion.

26:47

And there’s still some room to go on that, but that’s, there are not a lot of, like, starts in the pipeline as for the inventories, the basic issue is you be kind of crazy to sell your house right now.

Unless you have to remember, it’s a DOT, a great buyers Market because mortgage rates are so high.

27:04

If you’re going to move and buy a new house, you’re going to get a mortgage.

That’s right.

That might be like double what you’re paying.

So there’s Is this huge gap between, you know, what, everyone is paying versus what they would get.

And so basically there’s just a you would, you know, you might sell your house if you’re moving, if you’re moving to a new city for a job, I suppose you might sell your house if you lose your job and can’t pay your mortgage.

27:28

But the unemployment rate is below for /, is three and a half percent and initial, jobless claims and barely take tub.

So there is not a big increase in sort of like, forced economic Sellers and honest and you might sell your house if you’re getting a Worse or something like that, but even then maybe not.

27:43

Because again, it’s just not a, it’s not a, there’s very, no, there’s no great reason to sell.

So we’re in this very strange Market where it’s neither a buyers Market, nor a seller’s market.

And so, it’s essentially just a sort of Frozen market and it’s the, the entities that are really bearing.

28:00

The brunt are anyone, whose business is transaction.

So, it’s like, if you’re a realtor, it’s a very painful time, you’re just in the business of transactions, but whether a house or Seller is sort of it’s a standoff and it’s not clear how that’s going to end.

It’s so interesting because you would think or at least one might think, I might think that the flash freeze recession that we got in 2020.

28:21

That’s what would have Frozen the housing market, right?

It’s a flash freeze recession.

It sounds like the sort of thing that freezes the housing market.

Instead, it didn’t do that at all housing market went totally berserk the response to the inflation that we got after.

The pandemic is what’s Frozen.

28:37

The housing market what Tracy said, mortgage rates are rising Even higher than you would expect given the rise to federal funds rate.

Inventories are still low.

The there are a lot of houses that are under construction but you would be a crazy person to list your house unless you really, really had to get out of there when you put all of this together and you think we’re in a kind of intermission right now, a kind of a kind of frozenness in the story of the housing market.

29:03

The 21st Century doesn’t it mildly suggest that in a few years things are just going to get crazy.

Again, that Millennial was still really want to buy houses.

You gotta record high number of homes under construction, you’re going to have a lot of stuff coming online.

I mean, are we just maybe in a period where a couple of years from now?

29:21

We’re going to say wow it’s all back to being as frothy as it’s ever been.

Well, I think this is why we’re seeing opinions about the future direction of housing.

So polarized at the moment.

So there are some people who see rates going to you know, 20 plus year high and say, well, obviously, this is going to be terrible.

29:40

For the housing market, it’s going to be just like 2007 or 2008.

The whole thing is going to fall apart.

We’re going to have massive price declines, especially in all those areas that people rush to move into post pandemic and that experience the highest price increases.

But then you have opinions like the one that Joe just laid out saying, well, actually, there’s a lot of reason why people would just stay in place.

30:02

And if we’re not having that many housing sales at new transaction prices than actually house, prices might not move around.

That much at all because of this lock-in effect and I think the real wild card here and Joe kind of alluded to it.

It’s going to be inventory, right?

30:17

We have a bunch of baby boomers who unfortunately start you know dying off and you have that glug of ending inventory suddenly released to the market that’s going to put pressure on house prices.

If you have a big recession where the unemployment rate actually starts to go up and people do start to lose their houses that’s obviously going to add Inventory.

30:41

And if you do get that big supply-side response, you know, if all the homebuilders suddenly decide as you just laid out Tarik, the actually things are going to be fine in a year or two.

We should ramp up production.

Now if you had lots of capacity coming into the market because of that, I think that could have a downward effect on on house prices as well.

30:59

So it’s a really weird moment in the housing market and that’s kind of why you’re getting these very, very different opinions.

So, let’s say a friend comes to you.

And says, what should I do?

Like it looks like mortgage rates are going to be high for a while.

Like, Tracy just said, but what does that mean for the market and specifically, whether I should wait things out, indefinitely to move Joe, what would you say?

31:24

You know, even in the old days people in like, come to me and they would say, oh, I’m about to buy a house that the mortgage is that they’re offering is 4.8, should I wait with Kevin?

I was like, man.

If I knew the answer to what, like rates were going to do or anything, It’s like, do not ask me, I’m just a journalist, you know.

31:41

Look I think I could comes down to end this sort of gets to.

I think I’ll say, I’ll say two things, you know, one of the tragedies of this sort of like what we’ve seen with housing starts is like we’ve had the demand for shelter, just keeps going up, right?

31:57

And also demographically, it is like, on sort of unambiguous that like Millennials are like Prime demand time now etcetera.

And so like it’s sort of this Tragedy that the housing market, the supply side is so cyclical and when the fact of the matter is, we just need more shelter and the fact that like the raising rates to cool inflation and maybe the rate hikes will work to cool.

32:21

Inflation will see.

But like it is this sort of like unfortunate that one by products that we’re going to clobber new housing starts when they’re clearly insufficient and clearly you know below where they were 15 years ago, it’s sort of its perverse, right?

It’s sort of like it’s worsening.

32:38

The On if someone says you know look I think it’s plausible that in a couple of years late if you buy a house right now that in a couple of years rates will be lower and you can always refine the rates go higher than to be had happy to buy it.

I think it’s sort of comes down to I, it’s very cliche advice but it’s like my get my advice to a friend.

32:59

If someone said it was like well if you like the house and you see yourself staying there for a long time and you need the shelter and you want the stability.

I mean there were big Disadvantages of renting, right?

So it’s like, if you rank, you don’t know where you’re going to live from year to year.

You don’t do it right.

You’re going to have for your new, your etcetera.

33:16

So if the other puzzle pieces are in place where it’s like, it makes sense to buy this house for all the reasons you want to stay there you like the house.

You like the stability?

I gotta bite the bullet.

Just do it.

Tracy, do you have advice for my hypothetical friend?

Well as someone who bought a house earlier this year I might be slightly biased.

33:37

But I mean Think to Joe’s point just that I think one of the big things that we have learned from the pandemic is this tension between reacting to short-term developments and then reacting to longer-term, secular Trends and people humans have a tendency to overreact to particular situations and it turns out it takes a lot of time to correct, bad decisions or just for the economy to switch gears.

34:06

And really you kind of Someone to come in and try to smooth some of those business cycles and you know, one of the things that has emerged from a lot of are all thoughts.

Episodes is the idea of a lot of this risk-taking.

The smoothing effort should be undertaken by governments or authorities that have the capital and have the sort of Deep Pockets and the willingness to try to smooth these really sharp business cycles and then maybe we wouldn’t end up in a situation where the FED has to cool.

34:38

Inflation by raising interest rates that’s going to take a big chunk out of housing Supply, and that’s going to come back to haunt us in a few years.

When Millennials are still going to be looking for houses.

Yeah, paging employee America.

Ganda armor, not create some kind of, yeah, some financing mechanism of housing, strategic housing, Reserve University.

34:59

Jake rental units.

Which are, you know, you know, it’s great, you know, I don’t know.

Like if people remember what you can find, there were articles written in 2009.

Where people were calling on the government to demolish houses, on the argument, that what we have this huge glut of houses.

35:17

And as long as that blood exist, that’s going to put downward pressure on the price of existing houses.

And as long as there is downward pressure on the price of existing houses, then, you know, that holds back the banks, that hold back to Consumers, that hold.

And so, there were calls like demolished house.

35:33

Obviously, there’s a terrible idea because people need shelter, but I do think again.

It does speak to the sort of, like tragedy that something is crucial as housing Supply, which we all need, whether we’re homeowners, or renters and zipping.

So determined by cyclical factors.

35:50

This is something that I’ve learned a lot from our Nevada and Scott are not employed America.

They’ve been on an episode of this podcast.

If listeners want to go back, we did an episode on gas prices and their plan on sort of stabilizing gas prices.

And one thing that I definitely learned from them is that there is a benefit to having Being a Goldilocks price in a lot of these industries that it’s a.

36:11

In in oil, if the price gets too high, you can have a recession, but if the price gets too low, then a lot of these oil companies don’t want to invest in production of new oil.

And so you have a supply chain crunch down the line, which means the prices are higher later.

You could say the exact same thing for houses that when housing prices, get too high, it’s really bad.

36:28

But when housing prices are seeing to be in some kind of, you know, deflationary cycle who and why if you’re a builder and your right mind, would you build more houses if you don’t want to do that?

Um, I wanted this is this has been great.

You guys had every single point that I wanted to hit.

I want to just end with a little Kota on rents.

36:45

Rent growth in 2022 has been super hot and but apartment list and Zillow are now showing that rents are falling at their fastest Pace in the last few years, as we head into winter, where they’re probably just going to fall seasonally even further.

And that’s a little bit of disinflation.

37:00

It’s a little bit of seasonal effects because people don’t move a lot in December, especially if you live and say, you know, Boston Maine.

You guys have done several episodes on the Jank.

Enos of rent inflation.

Measures Tracy, how do you make sense of where the rent Market is right now?

37:17

Let me make the question as specific as possible because I don’t want to go like rent:, explain.

Do you think that the Federal Reserve is properly?

Assessing what is happening in the u.s. rental market?

Oh man, that is quite a question.

37:35

Let me think how to approach this But I mean, this kind of comes down to how like, how the FED looks at inflation overall and the idea of stripping out such vital things as shelter and energy and food prices from their measures just because they’re volatile.

37:52

And yet they are the things that all of us actually need to live in like those pressure.

You know, rental prices have been going up.

There is an ongoing debate about whether they’ve overshot whether or not they’ll fall hard and fast.

Now I think There’s an element of some of the corporate profit taking story in the, in the rental market as well.

38:14

So this idea that will maybe people are raising prices because they can in the current environment.

Maybe landlords are taking advantage of some of the current headlines, to raise their rents and especially in places like New York where people are used to double-digit rental increases.

38:30

No one is really going to complain that much until until the labor market, really starts to falter and then we see some pressures on Salary and things like that, but it’s it’s a tough one.

Joe Jerome, Powell calls, you.

He says, hey, how should the rent inflation?

38:47

Picture affect my plan to continue raising the federal funds rate, point seven, five percentage points point five percentage points, what is your counsel to Chairman Powell?

Come on, come on, come on.

Everyone should follow his work.

39:08

He knows more about these measures of inflation than literally and when I was probably a good guest on this show in some way because he’s just so good at explaining how these things are.

And one of the things he said was that look, there is this lag between the so-called Market ranch, with a Zillo, apartment list which are turning down and the The measures that the BLS head, but he also learns, and there’s some reasons for that one is that these Market rents are new rents or as most people’s rents aren’t adjusted very often because you know, they’re on 12-month leases and so forth.

39:39

And also if you’re renewing, the lease is probably anyone who rents knows if you have a good relationship with the landlord and you usually make your payment, they’re probably not going to jack up the rent to the absolute Market Max, right?

That doesn’t usually happen right away because they want to keep you that want to miss a month.

39:55

So what the flip side is Is the official measures?

They move much slower.

So they’re probably will turn down at some point relative to what we’re seeing with these online prices, but it is just a, there’s a good reason why it’s a slower price, a slower adjustment.

40:12

It doesn’t mean that one is broken the other and the other thing that O’Mara said and I’ll just leave them because I don’t know anything for it.

That your nose is that the economist at the Federal Reserve are fully aware of this.

So it’s not like they’re just getting their numbers from the BLS and saying well this is what we see.

So you know they look at All these other things that we can look to online, you know.

40:30

I so I don’t know.

They all that is a sure way of saying I don’t know the answer but I suspect that I have very little insight.

That Jerome does not have from his staff has all right.

Joe wiesenthal Jacy.

Holloway thank you so so much.

I really appreciate it, guys.

Thanks Derek.

40:47

That was a lot of fun.

Thanks Derek.

Thank you for listening.

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41:03

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