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Today, the recession versus reality as most people know, the US economy is in a recession.
Last fall three-quarters of Voters told CNN that the u.s. was in a recession.
A Bloomberg economic model said, the odds of a recession by the fall of 2023 was 100%.
These numbers are a little bit strange because we are not in a recession.
We’re actually not even close.
The unemployment rate today is lower than any month.
Since the 1960s real disposable income is growing.
The economy is expanding consumer.
Spending is strong even.
Housing seems to be rebounding.
So, why is everybody not just normal people, but professional Economist to so, convinced by, so obsessed with this idea, that we are either in or at the precipice of a recession.
I have two theories.
The first theory is what I’ve called, the everything is terrible but I’m fine philosophy.
If you ask Americans about how the broader economy is going or whether American schools have gotten to political or whether America is on the right track or whether they trust the media capital T capital M, the media.
When you ask about the states of things, broadly people tend to give really depressed answers everything.
Oh, it’s in a recession media.
Can’t trust a thing.
They say Schools.
They’re a mess America, dumpster fire.
But if you ask the specifics, the answers tend to change.
How are your finances?
Oh they’re okay.
How is your favorite podcast or news Outlet?
Oh it’s great.
It tells me the media is terrible by the way but it’s great in September Gallup.
Released an education survey that asked two questions.
How’s u.s. education?
Broadly, only 45 percent said they were satisfied Calamity schools in disarray but then they asked how is your oldest child?
An 82 percent of Americans said they were satisfied.
Everything is terrible but I’m fine.
The second theory is what I’ve called.
The yo-yo economy, the news media tends to judge the economy.
I would say, based on a rolling average of everything, that’s happened in the last six months.
It is perfectly backward-looking.
And as a result, they missed the fact that the economy just keeps doing these yo-yos Furniture.
Inflation goes up.
But then it crashes used car inflation surges but then it crashes saving rates tech stocks.
Everything is a yo-yo these days up and down and when the world is on a string like this, you cannot evaluate the economy by memorizing, the conditions of the last six months and just repeating them added nauseam, you’re going to get stuff wrong.
So for example, look at housing, two years ago, 2021, the US housing market was flaming scorching red-hot last year, the market collapsed construction down home, purchases down home, prices, down, mortgage applications, everything went down and Fast.
And if you do what most media analyst do you memorize that narrative and you just pair it it for a few months and that works really, really well until things change.
And things are changing.
The rest of this episode is about the fact that things are changing fast.
The housing flash freeze is over the come back might be right here right now.
Today’s guest is Bloomberg writer connor-san.
We talked about five signs.
The housing market is set for a major comeback in 2023 and how housing turnaround will change the narrative about inflation, the recession and so much more.
I’m Derek Thompson.
This is plain English.
Connor sin, welcome back to the podcast.
Derek, thanks for having me.
So last year, you came on the show during which felt like Peak recession, fears in 2022, we had had consecutive quarters of negative, GDP growth.
People were losing their minds about the imminence of the inevitability of a recession.
And I wanted to zag and I brought you on to help me zag to predict that actually, it was not inevitable and it was not imminent that we were going to To have a recession, you explained.
All the reasons why you thought a recession was not forthcoming and at least for the year of 2020, to up till now, you were, right?
So now, I want to do another pod because the housing market seems to be rebounding, the housing market, which was crashing crashing crashing throughout 2022.
Seems like it may have hit the bottom, and the bottom just might be a trampoline because some of these numbers are going up, much faster than I anticipated.
So I texted you.
I said do you think you could summarize our potential house?
We downed in like five numbers, 30 minutes later, I had five numbers in my inbox.
So we’re going to go through these five numbers.
Absolutely ideal situation of the guests doing the hosts work for him.
By the way, before we get to the numbers.
Catch us up right?
The pandemic housing market in 2020 and 2021.
I think most people remember it was absolutely insane.
It was so hot and suddenly it all hit a wall in 2022.
So we saw mortgage rates go from three percent at the beginning of 2012.
T to 25 percent by April 26, percent by August, 27 percent by October.
And that process, really just took fires out of the market.
They pulled back in April May, and they really, really pulled back in September, October and 2022 was a large respects, the market, trying to figure out what to do with that because you had lots of home buyers, who sorry homeowners who got in these pandemic, three percent mortgages and they said fine.
We’ll just say no problem and a lot of maybe would be sellers said we would rather rent out.
Or just not sell.
Then transacting this Market at the same time.
That a lot of buyers either couldn’t or wouldn’t transact in the market.
So, it became kind of a standoff for the rest of the year and the question heading into January was okay.
He for slow, mortgage rates are high.
What are things going to look like after the holidays?
When people come back and assess market conditions?
And what we’ve seen is a really explosion and demand over the past five or six weeks.
It’s so crazy to think like how insane the housing market was in 2020 and 2021, and then just how quickly it totally froze up.
It’s like, you know, there’s viral videos where they’re in like Antarctica, or, like Northern Minnesota during a polar vortex.
And I take a pot of boiling water, and I throw the boiling water into the air, and it crystallizes suddenly into ice and snow, like, I, maybe you’ve seen those like viral videos.
This was basically the housing market for the last three years.
Like, you went from uncomfortably scalding to the point where I’m writing, Takes like month after month saying, I think housing can’t get any hotter.
Now I think housing can’t get any hotter and the FED starts.
Raising rates mortgage rates.
Go up fashion.
They’ve gone up in decades and it just instantly instantly becomes ice cold building confidence to Klein’s every month.
New home, sales Fall practically every month between January, 22 and October 22.
And that leads us to this rebound where we might go from ice cold to hot again.
So the first number that I want to bring up that explains, US housing market, today is six percent.
The average 30-year mortgage rate, is has now fallen to 6% from 7 percent, which is where it was in the last quarter of 2022.
What’s going on with rates right now?
And why is this may be the most important story to begin with when explaining the housing market.
Yeah, so the question really in 2022.
Heading into 23 was what level of mortgage rates will get the market back into balance and we can argue about what balance looks like whether it’s flat home prices or I think I’ve been transactions but when great that 7, it was just like, okay, this is clearly a level that has frozen the market and some people said 5% was a level that would sort of unfreeze the market, because that’s what it was in Spring before things sort of slow down.
Toll Brothers luxury.
Home builder actually said that they thought 6% was the level.
That would be workable for people.
And that’s sort of what I thought it would be because you’ve seen home, prices have come down a little bit.
Little more in markets, like Boise and Phoenix.
That were overheated, but nationally there down about 2 to 3%.
And then in comes, I kept growing because jobs are really strong and I think it’s some extent.
The sticker shock of going from seven to six all of a sudden made it seem like this isn’t so bad and there’s also been some changes in terms of this notion of mortgage rate by Downs that both home, builders and home sellers have employed where it’s not quite what we saw during the peak of the home buying frenzy in the mid-2000s, but they might give you two percent off.
Your mortgage rate for the first year, one percent off.
For the second year, you saw To qualify for the eventual higher rate, but it’s a way to for homebuyers, to sort of swallow, the sort of affordability challenges for, at least, for a couple years.
Can you help me understand this Divergence between the federal funds rate that the Federal Reserve controls and mortgages?
Because last year we saw mortgage interest rates.
Go up pretty much in tandem with the FED raising its interest rate but the FED is still raising rates even if it’s by less 25 basis points in the last announcement.
But the mortgage rate is actually falling, why are we seeing that Divergence?
So, two reasons for that one, is that mortgage rates tend to be benchmarks more to 10-year treasury rates, rather than the overnight fed funds rate that the FED raises and lowers every month.
And that’s just because I’m worried pays down over time.
The average amount of time people spend in a home tends to be about seven years.
So that’s just sort of the part of the curve where mortgage rates said, and because markets anticipate that the FED will be done raising interest rates sometime this spring, Ring, they immediately went from okay.
If we know where we think the FED will Top out rates, we can start to project when they might cut rates and it’s debatable whether or not too many Cuts have been priced.
But a fair number of cuts have been priced in 2024, which then lowers this 10-year rate, which then lowers mortgage rates.
And the other part that goes into mortgage rates, is a risk spread between mortgage rates and treasury rates.
And that’s a function of volatility and sort of complex Financial stuff, but as sort of financial markets have settled down over the past few months, that spread has started As well, which is what them lower mortgage rates.
She’s saying it’s conceivable that in the next few months, even as the Federal Reserve continues to raise rates by say 25 basis points.
Every few months, we might still see, 30-year mortgage rates?
Hold Steady at 6% or maybe even decline a bit.
It’s possible to get the climb maybe up to another half percent.
Just because the mortgage spread again, the the difference between mortgage rates and treasury rates is about 50 to 75 basis points, higher than historically.
And so it’s possible that spread for compressed, as people get more comfortable with the conditions on the ground.
The second number is 500,000 and here we’re talking about National Housing inventory.
If you’ve heard me talk about housing and any other podcast on this show, you know, that inventory is one of the numbers and I’m always looking at.
So last year in 2022, National Housing inventory.
The number of houses sitting on the market fell, to a record low of 250,000.
It doubled in about six months.
It’s from the beginning of the year to the end of the year.
Peaking just shy of 600 thousand and now it’s falling again.
Houses are getting scarce err on the market which could put pressure on prices.
This is all these are all figures from Altos research Connor.
Why is inventory?
Such a critical stat for us to focus on and what is this number telling us?
So inventory is really, how many homes are for sale?
And it sort of gets you to the point of what would make a home price, go down.
And it’s typically more people trying to sell when people ready to buy and if there just aren’t that many homes for sale, it’s hard for prices to go down, especially at a time when demand might be coming back and what’s really interesting about this decline in inventory in 2022.
Again, we’re already in the mid February and we’re still making lows that we haven’t seen since last June is that if there aren’t enough existing homes to buy that it makes homebuilders potentially more interested in building new homes to sort of fill that Gap and that Home Building sort of impulse leads to construction and jobs and sort of pushes.
A lot of the GDP type measures of economic activity.
Yeah, I think for people who are listening and should have gotten confused about sort of the relationship between inventory and and home prices, just basically think of it as pressure, right?
That lower inventory puts pressure on housing, prices to go up because it’s there’s fewer houses on the market plus more buyers.
That means that, you know, it that there’s naturally that less of that, that smaller Supply is going to force prices up.
And that’s what we seem to be seeing.
One of my favorite housing analysts are Bill McBride, says that we tend to see tube.
Items in, in the real estate market, we see a bottom in housing activity and then we see a bottom and housing prices.
So, you know, if you look at the inventory start to change direction, right?
It was Rising rising Rising throughout 22.
And now it seems to be falling again.
That might just predict that prices are going to do the opposite inflection point that they have been falling for a while, but they might come back up the third number that I want.
Want to throw at you or that you initially through.
It me is 2014 the year 2014.
So last October new home sales were lower than almost any month in the last 10 years.
It was one of the worst months for new home sales that we’ve seen basically this Century.
If you exclude, the great for the, the global financial crisis.
So that’s a situation where the boiled water was well and truly Frozen in January for this year.
We do not have official numbers yet but according to some projections from private sector companies, new home sales and January are supposed to be higher than any non covid month since at least 2014.
So new home sales could really trampoline from these decade lows.
What are you seeing in terms of the prospects for new home sales?
So it’s difficult because right now, so much of the volatility month to month and housing activity has been due to changes in mortgage rates.
So if mortgage rates surged back to eight percent, that would freeze the market again, but if they fell back to five and a half percent, we might have a booming market.
And so when we’re trying to project where are things going to go, it’s really a function of mortgage rates and since mortgage rates have hit six percent in recent weeks and sort of people who want to buy a home last year.
But maybe we’re scared or had affordability issues.
Have decided to come back to the market in January.
We’re seeing this huge rebound and sales so it almost makes you have to think about.
Does the data tell you enough about where things are going or do you think about the fact that there are buyers out there who want to buy homes, who maybe are just responding to mortgage rates and predictions about where home prices will go over the next few months and enter the market or exited based on shifts in those in that thinking, To sum up everything that we said so far.
We’ve seen in mortgage interest rates have started to come down a little bit that seems to be spurring more new home buys more new home buys means that inventory is going down, and is inventory goes down.
We should expect housing prices to go back up.
You put all that together and it’s starting to sound like the housing market, which really entered a dead zone in 2022 is getting hotter.
This is all looking at the demand side though.
And so now, I think we should bring in the supply side and the third number that I should be the fourth.
That I have for you is 40% since October of last year and October really seems to have been kind of the bottom of this housing market since October of last year.
Horton and Lennar the two largest publicly-traded home.
Builders are up 40%. 40% stock appreciation.
In the last five months in last five months with these two large home.
Builders what are you looking at?
When you look at Dr. Horton, and Lennar.
So the question for Home Building stocks in 2022, wasn’t just what?
Our sales likely going to be in the future.
It was well home prices fall so much that these large inventories of land and houses under construction that they have will turn into losses because they were marked on their balance sheet at a certain price level certain valuation.
But if home prices were to fall 30%, that could be off significantly.
And then the stocks could crash.
And what’s happened is that, you know, we’re now in February.
And so, we got through those really tough months, they continue to sell homes, they continue to report earnings and now they’ve cleared that back.
But some extent and now they have lower mortgage rates and higher demand for seemingly this year to work with.
So they sort of benefit from the concern of lower home prices and what it was.
And now there’s also the prospect of much better demand this year and maybe in 2024 as well which is really shifted to thinking of what the prospects for the homebuilding industry.
Look like over the next 12 or 18 months.
What about the cost of inputs?
That was a huge problem in 2022.
Especially early 2020 to there were all these fears that the input costs for all of these houses was Going to Skyrocket, which is going to make it really unappealing for these Builders to build homes because the cost is going to going to rise commensurately, have we seen those costs come down a little bit for things like Lumber and Plastics we have and they’ve talked about the fact that lumber prices have have.
Because of that, that cost, I saw one estimate that for a certain size, townhome, the decline in the cost of lumber would mean a seventy thousand dollars savings for Builder on the cost side.
That’s how much the drop in.
Lumber had an impact of.
And then, to the extent that Sort of Trades and construction and labor that loosens up and it’s no longer as pandemic crazy.
It has, it has been.
There’s the prospect of Cost Cuts is there as well.
So you can see stabilizing home prices while their costs come down, which all that would flow through into higher profit.
Margins down the road.
This gets into what I’ve called, the yo-yo economy.
I feel like there’s a lot of economic analysts, not you and hopefully not me, but definitely a lot of economic analysts who for whatever reason, tend to Anchor their analysis of the economy.
Me to whatever was happening six months ago.
And if that’s your mode of economic analysis, you are well and truly EFT.
In terms of trying to understand this economy because everything keeps changing over six month intervals.
So, for example, you saw in just the category of something like, you know, durable goods used car inflation went absolutely berserk and then it came down and it was - durable goods inflation went.
Absolutely berserk stuff like Furniture.
I think people remember, maybe like a year Ago.
It was so unbelievably expensive to buy new furniture.
The overseas shipping cost from Shanghai were skyrocketing but those came all the way back down, computer cost semiconductors had this, boom, and bust cycle, we saw it in terms of savings rates, we saw it in terms of tech employment, you know, with the, with the hiring going on in Silicon Valley and we might be seeing it in housing and it just goes to show that like you, you can’t Hold on to or Embrace an economic narratives and just stick with it for six months without continuing to check that narrative against emerging numbers because we really are just in an unbelievably bizarre economic period, where things just keep going up and down back and forth, pendulum in all the time and I think to your point on housing, we look at gross domestic product product GDP and how in the past and the last two quarters of 2022 group. 3%, which to something with an offset of what happened in the first half of the year which was very weak but housing detracted over 1% each quarter from GDP because we saw housing starts fall.
If you were home sales, all that flow to through into lower GDP.
And if we start to see that housing is now inflicting higher and it’s gonna start adding to GDP going from like a minus one on GDP to say.
Plus half percent is like increasing Trend GDP by percent and a half and at a time when forecasters are looking for only a half percent of He grew up in 2023.
You can see a clear quickly how sort of much much higher growth might be in this year than people thought coming into the year.
It’s a good point and you’re getting a little bit of head of where I wanted you to go, because I’m going to ask about recession, recession, implications of all this analysis in, just a second, but it’s such a good point that I think and not enough people are staring closely, it just how significant this housing rebound is not just for sellers, not just for buyers, but also for anyone looking at whether the u.s. is going to enter recession before we get to a full analysis of the implications of the housing market on the possibility of a recession.
Let’s hit the last number that you threw at me.
Number number 5 is 45 45.
This is a prediction number rather than a factual figure, and I’m going to let you set this one up.
Tell us about the monthly sentiment survey of home.
Builders put out by the nahb and why 45 is an important number for us to look at So this is a monthly survey of homebuilders where they go, you can just find anywhere between 0 and 100 where 0 is the housing market is completely dead. 100 is things are on fire, and it’s never been hotter and fifty represents neither growth nor contraction, and this index had fallen significantly from the Potomac highs.
In 2022 were by December.
It hit 35, which is sort of pretty deep contraction and close to where it was at the pandemic closed in March, and April of 2020.
And then in January, we saw Very small rebound 237 but that was really when people just started to see because it’s the survey is probably people are responding to it in the early part of the month.
And so we really hadn’t seen the full impact of how strong housing demand was that at that point.
And we get this number Wednesday, this week and sort of to set up how quickly this could shift during this yo-yo pandemic.
Economy between May 20 20 and June 2020.
So, right when the housing market started taking off that index went from 37, which is pretty strong contraction. 258, which is sort of modest expansion in a single month.
And I think we could be seeing I’m sort of more modest version of that this this month where we go from 35, or 37 in January to a much, much higher number.
I think maybe more like 45, but if it went into expansion territory, wouldn’t totally shocked me just because we have seen that big of a swing so far in 2023.
What would it mean for?
Now, let’s move into the possibilities of recession.
I’m interested in you explain to me what this really would mean for the general economy.
Because as we talked about last year, once again, you have a ton of economists and banks that are predicting a recession in 2023.
I think, at one point I saw the Wall Street Journal report that nearly 100 percent of major Bank analyst, projected a recession in the next year and a half that number, I think.
Has fallen a little bit, but if everything that we’re talking about really comes to play out.
If the buyers come back into the market, as mortgage rates stabilized around six or even five ish percent, as Home, Building picks up and only among places like in our.
But also among all sorts of private home, construction companies around the country, and we start to see residential investment pick up.
That’s a huge part of the economy.
It seems like our Are the odds of a recession have to come down.
If we start to see that.
Homebuilder number go from the 30s to the 40’s, the 50s.
Yeah, I do the fact that the housing market turned on a dime and slowed, as much as it did in the latter part of 2022.
And we didn’t even see Trend economic growth, let alone below Trend or recession, for that to go from sort of a pretty deep contraction to growth in a very short period of time.
Would suggest, that not only will we avoid recession, but we could be talking about re acceleration and overheating by the middle of this year, which unfortunately would say, maybe six percent, mortgage rates are too low and the FED would need to somehow engineer them higher wire to prevent the kind of inflation that people are worried about right now.
Why should this is really where I wanted to get to because?
And I want to try to set this up in a way that doesn’t utterly confused listeners.
But the Federal Reserve is walking on a wire and on the one hand obviously it doesn’t want to raise rates so quickly and so dramatically that it plunges, the US economy into an unwarranted recession but that’s not happening right now.
Unemployment is at the lowest rate that it’s been.
I think since 1969.
The labor market is pretty hot and if housing comes back the combination of a relatively tight, labor market and a growing housing sector, could mean that even as the Federal Reserve is trying to bring inflation down from 7 26 25 24 to in the 30s or 20s, it might sort of hit a floor around say Say 4%, which I think most people, the Federal Reserve are going to consider too high to not continue to raise rates.
So they put the question to you this way, do you think there’s a possibility that the housing market bounces back?
So convincingly that by the second half of this year, like even some people that consider themselves somewhat dovish will be saying I think the Federal Reserve needs to keep raising rates by Point 25 or even point five percent.
That is my concern.
And as much as we’re talking about a rebound in the housing market, right now, since the jobs report that was so strong about a week and a half ago, mortgage rates have shot up quickly and it could reverse.
We’ll see what happens with the data this week, but they’ve shot up from 6 to 6 now percent.
So we could already be seeing the market start to respond to this and saying.
Well, if the housing market is responding this well 26 percent, mortgage rates.
This thing needs to cool off more to accomplish the feds inflation goal and we could be saying maybe seven percent mortgage rates are what we need to prevent.
Vent the sort of economic overheating, which is really tough for people like you and me where we want to see our friends, be able to buy homes and nobody wants to see a housing market like last year.
But it it’s this weird situation where maybe to fix the inflation goal in the short term, you have to just keep crushing the housing market.
What do we even call this, or what would it?
How do we situate this outcome?
In terms of vocabulary that people use about hard, Landings versus soft Landings.
So, to refresh people who aren’t familiar with this, this Arcane economic glossary hard.
Ending is the idea that the Federal Reserve in trying to land the inflation rate from 7 percent to 2 percent crash-lands the economy because we get a recession on our way down to two.
And as a result it’s hard on the American people.
On the other hand people have talked about hoping for a soft Landing.
That is we Glide the plane down from seven, six five, four.
We glided down to say, 2.5 or 3% and everyone basically says.
Jerome Powell has done his job.
What would it mean for the Federal Reserve?
To essentially, bring inflation down to like let’s say 4 percent.
We’re talking like this to take its core inflation down to like four or that were high 3%, but the housing market takes off.
And as result pushes up residential prices enough, that inflation starts to creep up.
Again the Federal Reserve has to keep raising rates.
I mean, what kind of what would we refer to this outcome as?
So I’ve heard people talk referred to it as a no Landing scenario and that’s sort of probably a temporary State of Affairs because the Fed believes that that’s where we are.
They are going to respond more forcefully.
I believe anyway and you know will have to shift maybe sort of repeat a more mild version of what we saw last year where we have its overheating economy and they realized maybe 5% interest rates wasn’t high enough and they’re sort of now trying to calibrate things a little bit higher.
Not the sort of massive rate, hike cycle, we saw last year, but it turns out that maybe six or six and a half percent rates gets them to where they want to be and we’re just going through you know that the next Evil of this yo-yo economy.
As we figure out what actually gets us to the kind of balance that the FED is looking for, right?
It’s almost like you know in in flipping it from hard Landing versus soft Landing speaking about housing.
It’s like we want to avoid a hard take off, right?
We want a soft takeoff.
We want housing to try to find some way to stabilize at a slightly higher equilibrium, right?
Maybe nahb around like, you know, 48 to 52.
Maybe we have, you know, Increase in new home prices but things don’t go berserk.
But we want this kind of soft take off in housing that will allow that housing component of inflation to stay low, even as all these other elements of inflation, whether it’s, you know, services or durable goods, also stay low.
So they can be brought down into the three.
Yeah, the way of thinking about it is I think stable growth is okay to the FED because you could say as Supply chains and things work out, things will just sort of work themselves out.
Declining growth is certainly good for inflation standpoint.
Accelerating growth is probably the thing that can’t tolerate.
If really do have the unemployment rate at its lowest level, since the 60s and then growth is surging higher.
It’s hard to see how we’re going to have two percent inflation in that world.
So we really need to need to get from, you know, maybe it’s just that the housing market is ice cold.
Now we’re warming up and then will stabilize at some point the spring and we can all believe a sigh of relief.
But right now the acceleration that I think we’ve been getting this year is probably not the kind of thing that we can sustain or that the FED would tolerate.
It really is.
Is the weirdest economy.
I mean, every number that goes up goes down, six months later.
Every number that goes down, goes up, six months later.
So, I guess we should probably do is just wait to see the direction of housing for the next six months.
Then bring you on some time in the fall.
To follow up on your predictions kind of sand from Bloomberg.
Thank you very, very much.
Thank you for listening.
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