What Does Trump’s Economy Mean for the Housing Market?
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Forecasting interest rate is an extremely difficult.

That's what I asking you to do IT is so I .

don't have to do parter in the sand for me.

AmErica has elected its next president, Donald trump, one to twenty twenty four presidential election. And when you dig into some of the data about what happened on election day, exit polling tells us that the economy was at the top of many voters minds.

So specifically, i'm curious, how did inflation and the relative and affordability of the housing market shaped the election? And what does the new political landsat mean for the housing market? If friends, it's dave and I am excited to chat about all this stuff and learn about what might happen in the housing market in the week of the election with my guest today, matt walsh from mood's analytics. Matt is of moody resident experts on the housing economy, and he's here to talk to us about how the economy influence this election and how some of trump s proposed policies may shape the future of the housing market next year and actually well into the future. So let's dive IT.

That walsh, welcome to on the market. thanks.

You ve been here. Yeah, thanks so much for having me day.

It's great to be here. This is an exciting time for economists. I feel like there's a lot of new information coming out every single day.

Most recently, we, of course, had the election. And I think in many ways, IT seems like this was sort of a referendum on the economy. Do you think that's mostly driving a lot of decision making in the recent election?

Yeah, I think that's a great point. I think it's put well too. You know it's that is on A A pretty interesting question that our economists have been dealing with over the past year.

You're in a half, you know our economies look at the data and we see that the economy is performing really well. You take your pick of the indicator and IT shows that were in good shape. GDP is running above the long term estimates potential.

The labor market continues to turn out. Jobs productivity is wages are up, real wages are up, the unemptied rate is low and stable. And you most importantly maybe is that inflation is head back towards the fed's target, but that necessarily hasn't translated into household's feeling good about the economy.

If you look at the consumer sentiment surveys, consumers are noting a bit of anxiety, maybe distress about economic conditions of the university. Michigan survey, for example, is is really consistent with like what consumers feel or how consumers feel in every session. And that's a little bit surprising when you put that in contrast with the economic data. And I think this is ultimately all to say that consumers are not feeling great about the economy despite some improvements that we've seen and despite the kind of strong metrics that .

they were noticing. You know, the election is a ultimate consumer sentiment. You know, if can so many people, right?

We're saying that the economy was the top issue on their mind. And so if they voted the party and power out, that speaks pretty loudly about consumer sentiment. I think yeah, definitely. And I think that's that's .

consistent with what we're seeing across the globe, too. There is an interesting piece in the actual times a few weeks ago that was looking at kind of how in common parties were performing uh and across the countries that have had elections of in the past year, all income of parties have lost vote share. So I think that is not something that's unique to the united states but across the globe.

And I should mention that you know and it's not just the united states that's live through this kind of inflationary period that's been across the europe and across asia as well for numerous reasons. Supply change were abandon during the pandemic um the rush invasion ukraine that that models had of energy markets and agricultural markets. Uh all of these things kind of affected the globe. And I think you these these elections over the past year were certainly in response to to some of .

that inflation. So really when we when we boiled down sentiment IT is your opinion than that? People are still frustrated by inflation like that's the number one.

Think as as you said, you look at these other indicators that lets be onest. I don't think most people really look at GDP in a regular basis or really look at real wage growth like that. They write fully.

Look at how much we're spending every single months and what how they're spending power is impacted. And as you said, you know, when you look at the CPI or you look at different measures of inflation, IT has come back down pretty considerably. But i'm wondering mad if there's a lag.

I think there is. But I guess i'll just asked you have any evidence that there's a lag between inflation coming down and people sort of just psychologically getting use to higher Price points? Yeah.

yeah, certainly. I mean, I think that's probably the most likely explanation for some of the disconnect between what consumers are feeling and and the actual performance of of the real economy. I think they have these benchMarks in their mind about the Prices that they paid before the pandemic.

Using the pandemic is kind of a rough moment in time, right? So I go to the grocery store today, I see that the cereal that I bought before the pendered c for two dollars is now six, seven dollars. And that doesn't feel good to me.

And my purchasing power has decrease substantially, even though maybe over the past year, that Price has been changed. I still remember pretty clearly that I was paying a lot less for those items before. And I think that takes a long time for summer to kind of come to terms with that inflation and comes terminal that Price point eventually that will kind of filter out of these sentiment services. But you know, I think he takes a lot of time, as you mentioned, that to come to terms with that.

Part of me wonders to if the negative reaction to inflation, which things don't get rock, no one likes inflation, but the the impact of inflation, is that made worse? Because from the great financial crisis up until covet, inflation was really low. And so I think people got really anchored to this environment where Prices were barely going up.

You know, obviously, there are areas of economy where they're going up, but in a large part, CPI was low and people forgot that inflation is sort part of a Normal part of the economy. Of course, that happened to cove IT is not Normal. But IT just feels like this swing from a like sort of historically low period of inflation back to super high inflation is .

particularly painful. Yeah definitely. And when we go to look back at the past two, three decades, the period between the great financial crisis and the pandemic, I think we will seem like a bit of an outlier um because I think going forward, we're going to have a bitch stronger flag.

I think inflation expectations are a bit higher than before, and that's attributed to two factors here. One, the labor market is a lot tighter than before. We had aging population of more retired.

There's greater competition for workers which drive up wages will throw me, drive up Prices. And there's a bit of a trend in on sharing here. So I think we were benefiting from some of the tail winds of globalized supply chains and and driving down Prices for for manufactured goods and other things. And some of that has has shifted. Um there's been a lot of talk of terrorist recently, and I think that does kind of changed the inflationary environment with next decade.

Are we gotta take a short break, but that I will get into what this economic context means for the housing market right after this.

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Welcome back to on the market. I'm here with economist matt walsh. Let's get back into IT. That's a great segway to the housing market. What does a environment with likely a higher inflation going forward mean to you for the housing market.

I think may be the most direct impact of higher inflation on on the housing will will certainly be through rates. Mortgage rates really respond to the ten year treasury yelled if we are living for uh, a time when the inflation is expected to be higher, that pushes up those those long term details and and we could expect to see that in interest rates.

Um I think kind of consistent with that the previous story of you know the last decade being a bit of an outlier and inflation, I think it's also a bit of an outlier terms of long term yids where you know things were low because the federal reserve was was doing quantitative easing pushing long term neels down. Inflation was a lot lower. Inflation expectations were a lot lower. And I think we can expect to see yields higher for longer are going forward.

Thank you for for summarizing that super help on that. We do talk about this quite a lot on the show, but I do want to just call out the reason that yields are so important is because moggi ates tend to move with the yield on ten year treasury ies. And as matt said, during the period from the great financial crisis to the pandemic, we saw unusually low yield.

So even when the federal funds rate wasn't, you know, was not at zero, like IT was coffee bourg strates were still below historic averages, right? You if you look at the long term average, I think it's somewhere around five and half six than a half ish depending on the time frame. And we were under that under five percent for most of the twenty tents.

And so moving back to environment where mortal rates are higher is unfortunate for the housing market in some ways, but IT is just a return to a Normal environment. And I don't know just looking at yields today, they're up to almost four and a half percent. It's one of the highest that they've been in the last several years.

So despite rate cuts, despite some excitement about potential stimulative effect of a trump second presidency, you'll continue to go up so that this is a selfish question because I love looked at this step. But do you think yields are going to stay in this four, four and a half percent? Ranger, do you have any thoughts on where they might go from here?

Yeah so it's a great question. It's a difficult to answer to forecasting interest strates is an extremely difficult .

that's what I asking you to do IT is so I don't have to do marter .

in the sand for me. Um so you know, I think ultimately, while we see this kind of short term divergence between kind of where the fed is going in long rates here, ultimately, that kind of flays out a little bit in and we we expect to see that long term eels follow kind of the path of the federal funds rate here as the fed cuts. I think investors expectations will match up with kind of what the fed is, is, is doing and and we should start to see long term eels come in a little bit, as I mentioned.

I mean, I think we can expect to see things higher for longer and a mortgage rate that's a bit Morgan sisters with the longer run average rather than um you kind of the artificial, I don't want to say artificially low, but you know suppressed kind of heels that we saw in the prior decade um but I do think we we see you know the modesty ate not at seven percent. I think that comes in about a half basis point over the next few months um and ends maybe twenty twenty five at six, averaging around six five to six. Okay.

alright, I like IT because similar to what i'm saying, it's not like at some super bolt claim. But I was looking at some forecasts for yields and IT said know half way through twenty twenty five in the betting markets basically have IT at you know three point six, three point seven percent for a ten year yield. And right now the spread is two hundred and twenty five basis point.

So that would put us right around six percent, something like that. So given that you know that more gage rates will hopeful ly come down from where they are today as of this recording, it's about seven percent. So that would be substantial benefit.

But overall, IT seems like most people believe border rates aren't going below maybe five and a half as kind like the lower bound I feel like for the next year or so. So like what does that mean for housing affordability? Because we're at a four year low and even the more good rates could help once I going to help that much.

Yeah, yeah. And I I think this this kind of is a good time to mention. Maybe my my favorite statistic here. We've got a bit work to kind of compare the level of affordability today to the level of affordability that we saw in twenty nineteen and kind of what IT would take for incomes or house Prices or the more gravy to change to get us back that level.

And for the more to trade, we would need to see something that is consistently four hundred sixty basis point decline, all l equal to get us back to that point ninety level. And that is something that is totally out of the cards for for you know the next few years oh my. G so you know to put a number to IT, we need pork rates to get two point six percent um for us to see that level of affordability.

Well that's not if IT. I mean did average markets even get to two point six percent? I don't think they ever did.

I know some people have tools. Love that is like two, nine. I that's right.

Two six, yeah, yeah. If you're lucky, you have that, have that. Two nine, I don't know you.

Two six is yeah. It's like you're going to be calling your grandkids about your two nine mortgage .

because never get rid of that. That's right. That's right. Um so I I think that really goes to show you know how strained affordability is and and kind of what I would take for us to get back to that level.

We saw twenty, twenty and really puts into perspective what this kind of modest decline in market rates would mean for the healing market overall. And ultimately, you know that's all else being able able I think we can expect to see incomes rise and house Price appreciation moderate of IT. So we don't need to see that kind of level of decline or store affordability, but it'll be a slow progress to restoring affordability. It'll take a lot of time for that. Took kind of play out in the housing market in us to restore some level of equilibrium and baLance.

Just to summarize for everyone and just remind everyone that affordability in the housing market is largely impacted by merger rates. But the other variables are housing Prices, of course, and real wages, basically how much people are getting paid and if they can afford those homes.

So I think just to underscore IT, that was saying is that we would need borger ge rates to get to a level we've never seen before to restore affordability back to twenty nine levels because since twenty nine Prices have gone up so much that we would have to basically competitive more with lower more graduate to make up for those increased Prices. And even though real wages are up for the last year, so there was a few years during the pandemic that eo wages, real wages were down. So that obviously didn't help affordability either.

So bad, I need to ask you one of my favor questions to ask economist right now. And I get to ask this, which is a great part of my job. There is sort of this narrative, at least in my world, and maybe years two of the housing market analyst, that some people say that you know Prices have to come down or appreciation is going to stagnate because there's this underlying belief that affordability needs to return to somewhere near the long term average of affordability. Do you think that's the case? Or do we have sort of a new Normal in the housing market where housing is just less affordable?

So I think that's the base case. The most likely scenario is that at the housing market is so unaffordable, we expect to see in tory slowly come up as the morning tate comes in, incomes slowly catch up to kind of what is sustainable with the level of Prices today, and home Prices kind of move sideways in the meantime over the next few years. But I do think that there are some risk.

And when I say risk here, I I I guess like alternative scenarios to that where home Prices can sustain faster appreciation because there might be this new equilibrium. And home Prices where households are willing to contribute a larger share of their income to the residence is sustaining higher home Price growth. And I I think a lot of that is due to some of the structural changes that we saw during the pandemic.

You know people today are are looking for more space. Um I A good example of this you know when I moved in the pandemic and I I needed to two bedroom house because I needed an office. I don't go into the at the office every day so i'm willing to spend a bit more money because i'm spending a little bit lesson on commuting that I also need this work space. So you know could be the case where now that we need more workspace and more room or contributing more of our income to our houses also, people could be, you know, finding to the increased competition that we've seen over the past few years and willing to stay in their residences a bit longer than before.

What you said though, that and i've heard this echoed from a bunch of other people as well, saying that the way to restore affordability is is is not that Prices are onna crush, but sort of a gradual like a combination of things were come down slowly. Real wages continue to grow and appreciation is relatively flat um over the next couple of years. So i'm curious, does that mean I don't know if you or mood's analytics does uh, house Price forecasts, but do you think appreciation or do you have numbers that you're expecting for home press precision in the coming years? yeah.

So we do have a house Price for cast and nationally, year over year were about one percent by the end of twenty twenty five, which is a pretty much and IT stays in that range through you know twenty twenty six before things kind of restore some level of baLance. And and we see home Prices return to that, we pandemic level of hours about five point point five percent. Think this is kind of wear nominal house Price gains.

Um are you okay? So ah to put some numbers to IT. Now across the united states, I think we see a bit of a spread here where places like in the northeast things perform a bit Better and that that simple because the housing markets are a bit tighter in terms of supply. We haven't seen the increase in invitation that we've seen in place as like southwest and the mountain division or the the south east in places like fda, the Caroline us and and others um where we've seen invitation ies return in some cases back to their pretendedly Normal. Now that's still low kind of relative to history, but it's it's an improvement from those is really tight pandemic years.

Just to clarify one one thing you said when you said one percent growth next year, that real growth or nominal.

that's nominal growth. So that's that's namal growth. So if you look at you of the real Price gains here, pretty much zero or or slightly below zero.

And just to clarify for people, real basically means inflation. Adjust that a nominal means non inflation, adjust that. So as asking that sometimes economists, we do this, we'll say one percent growth in what we mean is one percent over inflation, which would be real growth.

But math, that this was nominal growth, which means one percent. And then you subtract inflation for that a lot of times when you're thinking about investing returns. And so let's just assume inflation stays around three percent next year, however goes down.

But i'm just saying like given that assumption for this example, real returns would actually be negative two percent, right? Because you have one percent growth minus the rate of inflation. So super interesting.

Uh, mad. It's counter to what you hear, right? Because I think a lot of folks believe that because rates might come down in the next year that that's going to fuel appreciation.

But that sounds like you think differently. And i'm hoping because this is a nerdy bunch, we ve got listening to the show. If you could explain this to us a little bit mechanically. sure. Does that mean that you think doma dd is gona stay low or supply is going to come back at the same place of demander? Like what happens so that Prices stay so long as IT hasn't happened for a long tap?

Yeah yeah. I think IT is IT is a little bit counter intuitive, right? When you have interest rates come in, we would expect to see some demand come back online. And I do think that some demand will come online um, but we will see a greater increase in inventory.

I think there's a lot of evidence that when these interest strates come in, we will expect the the more good great lock in that you we will all talk to back to the past two years start to dissipate and more inevitably come back online. There has been a lot of construction, both on the multi family side and the single family side that's that's coming online. And ultimately, that will alleviate some of the supply and straining that, that we've seen that have end up home Price gains, right? That, that really kept a floor into Price appreciation.

So as that in which where you come online, that, that kind of help alleviate some of the type markets and and bring Prices in a little bit. So they will some response from demand, no data about IT, and we will see sales increase. They're at a really little level now. They they are going to head back up of the next year. But ultimately, that, that Price of something .

will continue to slow OK to the interesting take, how do you forecast that supply will come online faster than demand will return? So some of .

IT is construction, and we are observing a lot of construction and some of IT is resale supply. You know really it's mix of the two. I think it's uh, it's a great question, is a difficult one to answer too, right? Um but giving kind of where we are with affordability IT just IT seems it's a pretty high hurdle to clear to bring a lot of those households back into the market.

And me right now, just some back of the envelope math that we've done, there are a tone of pental household formations that just have informed and won't form because housing affordability is so low, and we think that continues. So even though that the market is under supplied from from a number of units perspective, those households are penned up. They are kind doubling up.

People are living at home longer. We don't think that they're coming back anytime soon given where affordability is, and that will really keep demand you surprised for some time. Well.

to me, that's like sort of a million dollar question for next year, right? If as rates started to come down, which things we'll come down a bit ah does demand or supply come on faster proportionally? What happens there sounds like matter as colleague mood's believe that inventories is going to come up faster than demand, which is going to not necessarily some Prices downward, but very modest nominal growth is what they're forecasting. Okay, time for one final word from our show sponsors, but stay with us will get match insights on how the terrace in trumps plan, my impact, the housing economy right after this.

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If friends swoon back, let's pick up where we left off that if I could change topics a little bit, i've got you captive here. I'm going to ask you to help educate me. A lot has been made in the campaign and since the election about tariff s so no expert on this.

Can you just give us an overview? I think we all know tariff s are basically a duty, basically attacks on imported goods. Tell us your thoughts are like what implications this might have for the economy and the the housing market.

So uh you know essentially as you man terf is a is attacks on on imports as paid by the importer. You typically as economists don't really like terabits because if they're pay for by american consumers and what that looks like as a Price hike for consumers. And yeah, it's not these global manufacturer taking advantage of of their comparative advantage and push Prices lower.

This is kind of an artificial Price high. You know I think what this means kind of in general for for the economy, you know crop is talk a lot about terrorists. And I think you know on the campaign trail, he seems to have kind of lean TOTO across the board type about ten to twenty percent on all goods from all importers.

Uh that would be a substantial Price hike for for many. Um we've run some scenario and mood's analytics to look at kind of what the I i'm effect would be. Now keep in mind, these plans have have little details in terms of kind of implementation and timing. Um so this is just kind of a general one time Price hike or attacks and how that kind of filters to the economy overall. And what that looks like is a chase about a percentage point of growth, uh, over the next year, assuming that the the terms are implemented day one and um you a two percent increase in inflation over the next year as well.

If so, you know, i'm i'm no expert on this, but just to play devils advocate, sure that I am never listening, fully understand. But what is the and that couldn't you just instead by american made goods? Is that sort of the idea behind implementing terrorists? Is is that not possible because there's enough american supplier? Or where does you by economists think like where does that logic break down? Yeah so I mean.

I think that that is the argument that's the political argument, is that we can get return these supply change back to the united states and and use of american workers, but that's incredibly Priced right to pay american wages is lot higher than than paying some foreign workers to manufacturer these goods um and and we simply don't have the manufacturing capacity. We've moved away from manufacturing and a lot of these economies for other you know industries that are now you know staff with american workers so that you know returning the supply chain, returning the manufacturing back to you really just not feasible. So ultimately will still have to source those inputs from foreign countries, but now they won't .

just be more expensive. okay. Yeah, i've write a lot IT seems like got most economists ten to ten to think along similar lines. I'm curious if you have any thoughts on what potential terrorists might mean for the housing?

You know I think there's this is an interesting question because you know there have been paraffin place uh on canadian number for a while um and on troops s first term, he implemented these terrible twenty eighteen. And there's been a bit of work done to kind of quantify the the Price effects of those taft because ultimately the home builder needs to buy that number and pay those terrace and pass on those cost consumers and the national social of home builders have have done a bit work on, you know how much that tariff had cost builders.

Anything across the board that was about nine thousand dollars for a new single family home for these builders, which does drive up the cost of of new homes under the those builders have to source that added costs from somewhere. Um you know I think if we look at kind of the anticipated effect over the next few years, you know IT will undoubtedly raise Prices. But by how much, I think is an open question.

And the reason I say that is because builders have done a lot of in the past few years to promote affordability for buyers. They've done great bay downs to can counteract the effect of higher rates they've covered closing costs, theyve give the discounts. They've been sacrificing their margins for transactions, for closing transactions. And I wonder if builders will do the same, they would kind of take a hit on their margins here that are still very inflated from prepare delic to internalize these cost to keep buyers at least interested in in the new home market and in in purchasing new homes. So you know, I do think you will raise Prices, I think will raise Prices across the board. But you know, I wondered by how much here, at least on the new home sales side, there's an indirect effect there too, which I think is important to mention that I mean, if if we're going to institute terrace across the board and you some higher for other countries, that will be inflationary and that will mean a response in the bond market and higher rates um and that ultimately will hurt demand if if more creates stay higher for longer.

Got IT. okay. I hope sorry if these very rudimentary questions, i'm still learning about tariff s but is there any chance that the Price increase that you're saying you know from terabits? Is that short term as that sort of a sustained amount of inflation is IT like a short term pain for long term benefit? Or would the inflation stick around?

Um it's a great question um and I I think this is a one time Price hike. But typically what happens is the supply chains get rerouted to other places and that could lead to higher Prices that have been more of a sustained pace. You if the manufacturing was to be brought back to in the states, that can mean higher Prices for a bit longer.

And this isn't just like one time. IT takes a long time for this Price to play out the economy. So know maybe IT is one year higher Prices for longer, but that does take A A bit of time to get to filter through the larger economy.

Yeah because every again, I don't know if it's specific to terrorist, but we saw this during the inflationary period. We just went through that like IT started in one industry, then that cool down and then I went to another industry that was kind of like this walkable situation where inflation was high in one area that they would go hide in, another area that was just sort of like rippling out through the economy, which made IT feel, at least to me, like was dragged out over a really long period of time because there is, you know, we were always seeing some area that had really hot inflation. Yeah.

that's exactly I mean, I think the you kind of the auto insurance inflation that we saw today, you can trace that back to the supply change disruptions during the pandemics so that I mean that four years to play for the economy. And if that was uncomfortable, I I mean, I think the same thing is true of of these tariff. S I mean, I could take a long time for this kind of play out filter through.

Well, thank you for educating me on this matter, and I really appreciate IT before we get out of here, is there anything else you think that our audience should know about the housing market heading into twenty twenty five?

I mean, I think um there are a couple narratives in the housing work key themes and the housing work for twenty twenty five. I think one is this kind of a structural under supply of housing that state support instruction. By our estimate, we have one point nine million units undergoing t and that dogs include some of the the pen of household formation that I mentioned earlier that, that have an otherwise form because of low affordability.

And I think that does kind of support the idea that home Prices won't decline on a nominal basis. And I will support, you know increase demand for struction. Should there be uh, limited supply builders that prevent the that construction from happening, whether it's from vast deportation or you know slower increases in in immigration into the united states because of a change in policy? I think we could see some risk of higher Price appreciation over the next few years if we are able to kind of sustain the building that we expect to see given that shortage of housing.

okay. Well, good to do and something that will definitely keep an iron on this show over the next year that thank you so much as has been a great conversation. Appreciate you sharing your insights with us.

Yeah, thanks so much for having me today.

It's great fear. Of course, we will link to match information of the show notes if you want to check out more about him and his team, what they're doing and moody analytics. Thank you all so much for watching or listening to this episode of on the market we will see against you.