Housing: Locked In, Locked Out, Locked Up
01:09:23 Share

Welcome to inside economics and Marks andy, the chief economist of moody's analytics. And i'm joined by my two trusty cohoes Christians and merino. I, hi guys.

Mark, welcome back.

Mercer, yeah, welcome back. Thank you. You look rested.

You're lucky. I came back. I didn't want .

you really IT was he was.

he was really great. Yeah, you were.

You were a coast rica. I yeah was .

my first time there, and that was wonderful.

Highly right? You get the jungle or the beach to get about jungle ungan GLE.

I don't know. O cano jungle, yeah, ah all kinds of creatures, slots monkeys, amazing. Yeah.

sounds like, yeah, I was. There was a volcano that was erupting, was still opting.

No, it's not anymore. We hiked around IT. Yeah.

it's not erupting, right? Yes, I have.

And that volcano was interrupting .

when I was there. I was right. Yeah.

yeah.

right now. yeah. Well, did you get a chance to visit with his office in coastal ico?

I did not know.

We've been expanding in cost. A it's a great place.

There's one in san haz. Yeah wasn't really in san haz other than to fly in and out, right? So and then I was hours away.

But next .

time.

next time and we have a guest, we have a guest, Chris alone. Hey, Chris, how are you?

I'm doing great. Thank you for having me. How are you guys?

It's one.

What did .

are you .

say the other one.

it's all conversion really.

Did I really no way because that's so embarrassing because we just had this conversion.

We practice prince .

and I said I go to everyone in the summer time because I was seven, although you have a grandmother, uh, grandmother who .

is everyone I have, I A grandmother who SHE SHE married in, but SHE SHE stuck with alone. So.

okay, it's so bad. Carefully, I did. That is so bad. 呃， anyway, is wonderful to have you. You you're the head of merchant banking and amper security, right? I get that right.

That's right. I'm on the head of merchant banking um where where the amharic group now we were at security OK 对 for a number of years， years back in our time free crisis in the in the mortgage space.

I'm getting this all wrong.

Everything I say that's .

sorry me I remember Lorry good man lorri good is that urban and SHE for many years was the ampersand IT was amp's security when he was there.

Absolutely, absolutely a lot a lot of people in the market know us from our m her security days um but today we are a very good integrated U S. Housing platform. So we're an investment manager and Operator that provide solutions for both investors and residents in accessing housing across the country.

So while we in the mortgage space pre crisis, post crisis, uh, we've kind of deal into different equity investment strategies in both for sale and for rent, housing. Um you can think of us as vertically integrated to an extreme, right? So we have economist research and a full investment management infrastructure. And then we also have a real stay broken age, a construction unit, a property management business that are actually in the future engaging with our our residents and our homes on our platform every day. So i'm excited for the conversation today because I think we can offer a unique blend of both perspectives on the data, but also give real examples of how this data impacting people and kind of translating into neighborhoods that we Operate in across the country.

Yeah, very cool. I mean, when I vertically integrated to the extreme, that's that's A A catchy, catchy way of blaming IT. Yeah yeah.

Well, look, I I think one thing we learned as we as we pivoted from being in the security market to the actual housing market is that we needed to have all of the capabilities to control the experience for our residents from start to finish, right? So IT wasn't good enough to outsource broken age or outsource renovations, right? We just couldn't have the right quality control and and without that, we could have make scalable institutional investment products without durable underwriting. And so gradually we add A A capability after capability. And today we have over five hundred people um across the country dedicated to our housing strategies.

Well, very cool. Well you should know um because we are going to play the stats game and we're very competitive. You got a you got Christ ries here who's like a uh ah he's a he's a mortgage finance maven, formally a fani may good butcher player.

He's done very well on buddy ball. Uh he's a he's a like wine um especially in the seller in a villa in italy in the summer time and he's made a lot of money a in the crypto a market. So you that's Chris.

so you've to be capable about chri spend more time in.

Uh and of course， I on the body director is M G I C. So I keep a close view on the mortgage world as well and always appreciated the deep research that comes out of member. You guys do fantastic. Uh, you know I think it's among the best i've seen on the housing on housing finance and the housing market. So thank you for coming on. So there we're obviously to talk housing uh, housing finance, uh, a lot of topics to a kind of tackle first stop top of mind this workout rate, the third of fixed uh, Chris was just saying IT today, uh, hit seven percent and that's up from, uh, I felt like this a few weeks ago, maybe four, three, four, five, six weeks ago, we were flooding was six percent and I felt like we might go into the five think books in the housing industry would really have appreciated. But now here we're back up at six, you know back up a yellow uh of the of the rate, not not quite a percentage point, but you know within spitting distance for percentage point Chris, what's going on, on what you how do you diagnose that the increase in rates?

Well, look, I think I think we've seen a really resilient economy, seen a really resilient consumer. We seen really resilient and employment data over, over the past few weeks. And so IT feels like some of some of the themes that the the fed was pointing to when they when they adjust the rates in september um may have been overstated, right? And I think the capital markets are are still trying to escape where the puck is going a little bit.

Um rates going higher does increase barriers to home ownership, right? IT also shines a light again for us on the difference between the cost of a home verses the cost to rent the home. Um and we think it's steers a lot of consumers into the rental market because between low inventories available for sale and very high uh, merger rates, it's it's a really difficult environment to be a home fire.

Yeah when I think about the mortgage rate, the thirty year fixed rate mortgage, I the first thing I do, I kind of comes in into the ten year treasury yield, which is the risk free rate kind of the benchmark, uh, long term interest rate and then uh add a circle spread, uh to get to the fix rate, the fix morning rate.

So the the ten year yield is now sitting at last I look for in a quarter up that's up about half a percentage points, maybe even a little more. And that that goes to what you are to saying about the fed, uh, in expectations for monitoring because of the resilience to the labor market, uh, investors have kind of become less aggressive in their thinking about the ratio and therefore, long rates have pushed up little bit. Also, I throw me one other thing.

I just going to play this out and want to get your reaction. Uh, I think markets are anticipating increasingly a trump win in if present trump, uh, wins the reelection election thinking is his policies trade or no deportation deficits. Tax cuts in the full important is inflationary, and that's pushing up no long term rates also.

And then there's the spread and the spread is A A malaya stuff. You know everything from uh you know a mortgage originators have to get paid you know compensation for origin and mortgage. The services need something. There's the prepayment rest that's involved in investing in the security. And that also feels like that's why in doubt here too.

So the run up in the thirty year fixed mergers function of both higher tenure treasury yelled and also a wide and spread is that kind of sort of IT with your did I put too much too? I put in a lot of words in your mouth. Did I put too many words in your mouth or that is that too pretty? Well.

I I I think that I think that that's right. Um as we look out at the thirty year mortgage, I think we we believe that is likely Normalizes somewhere in the me five percent right. Kind of thinking about those building blocks of a ten year treasury may be high trees to four and and a spread of of one hundred and fifty two, one hundred seventy five basis points of of using those components, mark that that you wait out.

Um I think the the spread to the ten year, if you look back in in recent history, may have been a little bit tight just given how how big a bit that the the fed and right, what difficult to forecast specifically where that, that spread might shake out. Think that's that's what are as where are I is trained kind of mid five for the three year fixed ate mortgage. But I think what the market is on us right now is IT. IT might not necessarily be a straight line right between between here and there.

yeah. So which are referred to is the fed is IT bought a lot of treasuries and Morgan security when I was quantitative easing and now is quantitative tightening and allowing the security to run off the baLance. Y they're not selling anything, but they're lowing the to be sure and pretty ay.

And that's putting upward pressure on the spread because they're not the the there's they're acting out there, no longer the buyer and that and never a buyer at any Price and enable Price and sensitive. And so the buses are coming in now are much more Price sensitive and much more attuned to the risks of investing in in a Morgan security. Sounds right.

Yeah absolutely, absolutely. Mean, were they were uh a pretty meaningful bid for for a number of years that that tightened up that spread and and tear point. While they are not actively selling, just the the lack of buying is is likely to to provide that spread out a little bit. We think.

Chris, Chris, is that characterization consistent with the way you're thinking about things? And what what would you add to, to explain what's going on here with the mortal rate?

Now I think that's right. Uh, I I suspect this spread is gna. I think ita tighten, but I I don't expect it's gonna all the way back to even one seventy five necessarily, in short, for the reasons that you mention. So my expectation is that we we dip under six, but but not much more below that. So i'm not expecting five in a high anytime soon.

yeah. So so you're saying is the so the the ten year year old that's up fifty basis fifty sixty basis points, the spread is wide. The difference between the ten, thirty year and the ten year mortgage that spread is wide a bit too.

And uh, you're saying that you know that now that typically historically in recent history that differences about one hundred and seven five basis points inside seven five percentage points right now feels like it's around two hundred. And I do my mathematical fast two hundred fifty basis points, something like that. So that's that's a pretty widespread. But you're saying that will that two fifty will go to one seventy five, but over a long period of time, not any time this year, next year, could take a take a while for that happen.

Yeah, one surprise me. He hangs out at two hundred a while, right?

why?

Because the fed is is one factor there, right, having to have a place significant buyer know where are the other investors for. And then there is competition with other dead now, therefore issuing a lot more. So that might push up the the spread as well.

So and the volatile, i'm not i'm not sure know everyone talks about the volunteer ly coming down. I don't know if the volatility actually comes down as far as anticipate is what that spread might actually maintain a higher level. Then what we've seen historically.

yeah this is explain that you're saying because the spread is a function of the fees paid, the originators and services if a funny friday one, they get a fee for the credit that they are are basing. But the biggest part of that spread is the uh compensation that investors in the security require for the wrist k that they are going to get prepaid.

They're they're going to get the mortgage mortgage at that mortgage, uh, h at a lower rate at an opportunity time for them. And they want to get compensated for that risk in that value of that of the prepayment option, right? An option is a function of the volatility of interest rates. If you have a more a lot of movement and interest rates that spread rates have been and you're saying right and .

that in the case, I expected to reduce, but I don't know that all the way back necessary. I think there's still a lot of uncertainty out there.

Yeah, Chris, come back to you alone. So you know my kind of in in I the level set that you know somewhere and five and had to six percent, just kind of sort of where we think things are gona settle in the long run.

Just we're debating what's so what when do you get to the long run? Yeah and this is really important because we're going to go on to talk about ck in the second and you know getting rates down are critical to easing the late rate ck in getting transaction back up. But my sort of kind of thinking, you know, simplistic thinking is that that spread is a function, really a monetary policy of third policy.

So what as the fed cuts short of interest rates and hopefully the u curve becomes more positive, sloped in the volatility in the market comes out because we Normalizing rate the uh, that should be enough to reduce the prepayment risk a to industry and that will allow that spread to come back to something more typical and we get rates back down. Uh and you know I I was in that was good that anything was gonna en next quarter, maybe not even next year, but over the next couple of years of that Normalization of monetary of the the fed of monetary policy of of interest rates that that would allow for this Normalization of that spread and we get more gas rates back into the fires. Does that sound reasonable? Or my is that is much more complicated than that.

I I don't think it's it's it's a lot more complicated than that, that were. I think that we're seeing that you this this economy is not that easy for for the fed and others to get their arms around, and we're seeing the capital markets going to get that volatile point.

And those that what are the value of those embedded options and mortgages? There are really tRicky thing to to value right now, particularly environment where we have kind of sail off the map in terms of available liquidity in the housing market, the cost deferential between how consumers can can access housing and have such a vast amount of origines that, that are in the money. It's just it's a chAllenging market to to invest in into trade right now, adding that, that goes to maybe the point that, that Christmas pointing to earlier, which is that it's gonna be chAllenging to. Squoze that volatility um out of out of the mortgage .

marketplace. okay. So let's ten is part of conversation. Let's each put forward when we think the more thirty fix is going to be back to its less called equilibrium rate. Chris, one you said five and half Crystals, you said five and three quarters. I say five and three records where you have a view on this.

I have some. And somewhere in the middle high.

five seen. Okay, so so Christians, when do we get back to five and three quarters in a consistent way.

in a .

consistent way.

thinking at the end of twenty five.

early part of twenty six? O, okay, okay. That that, that seems reasonable to me. What about you?

Yeah, I I was eighteen months from now.

Okay, fine. O, K, O, K, so, okay, you can be now. So you .

looking now, I mean, I think you you're looking at like six more fed rate cuts between now and then roughly.

Yeah if you right yes, forecast. yeah. OK. Okay, very good. So hopefully that to the case because that's really key.

The getting the housing market, listen, terms of transactions, existing home sales, you you know moving in the right direction and me at least move IT up, right? I mean, I what was that? We get three point eight million existing home sales in the month of september.

Analysts, is that breakfast? yeah. And have when you have to go back in the teeth of the pandemic or the height of the financial crisis to see that kind of level activity. Yeah so it's very, very low.

And this goes to the interest ate lock uh effect that you know you had so many home owners when rates were low back uh before the first started tighten, locked in, got mortgage, a refinance and got mortgage are very low coupons, very low rates in the two and the three and when actual market rates are at six or seven IT doesn't make any economic sense for them to the existing home. Extinguish that mortgage at a low rate, go buy another home, getting another mortgage on a higher rate. The monthly payment, the increase in the monthly permit.

You know other bounds is Chris uh everyone uh excuse me, ever the whole time I I actually know, uh, uh chrystal es and mercy others. I'm i'm named this lexie are I am i've got a problem. I've got, i'm kind of lexicons y problem with names you didn't notice.

Well, at least my first name is the same.

Yes, sorry.

last name was not confusing enough. The first name is another .

like I get so confused with crag and greg and very, very problem tic, um what what do you think is gonna? You know, what are the conditions are necessary to ease up on the interest like to get home sales starting to move north? Uh here uh what what do you think needs to happen for that to a cur obviously gate but we know what will take.

Yeah so it's interesting you reference the the payment differential um which is where where everyone's focus. One of the things that we look at is also the payment differential relative to household income.

And I am by that you can at recent mortgage origination, the average household earned about one hundred and ten thousand dollars a year and with uh moderates at seven compared to kind aware the existing more install base mortals that's about uh a thousand dollar a month payment difference or twelve thousand dollars year. Think about that if you are a household with one hundred and ten thousand dollars of income, you have a twelve thousand dollar incentive to stay in your home. That's more than ten percent of your annual income.

So the barriers really high. And if we look at the the distribution of of existing mortgage, there's really not onna be very many, in our opinion that come up the sideline between a thirty year eight like seven and a thirty eight like five and a half. Maybe it's it's three million marginal origins that, that come back into the money at that level.

And of course, like there will be people who as as the three year rate moves down and gets close enough and they lean in and and maybe they have had a life change or maybe they want to moving move in their neighborhood. So they'll be they'll be more liquidity that comes into the market. One of the things that we're really focused on right now is that we're not even really close to that tipping point where the amount of incremental liquidity caused by the burn off of the lock in effect, will actually move the needle in, in the for sale housing market.

Uh, what isn't great trees?

I think IT takes time. I think that I certainly agree that the the lock and effect is going to remain strong. Uh, but there you do have more people who are seeing life go by and they are listing there also.

You do see oris coming up the twenty five percent, thirty percent year over year, obviously of a low base, but they're moving in that direction. And that's not interested related that people deciding that you know there how the current how they have doesn't only fit other needs. So they either have to trade up, trade down, move, right?

So I think I will continue to see that, but that's that's a long, slow trend, right? That takes time to turn line here or so. I don't see this being resolved any time soon.

It's kind of you are saying the paint up life that occurring because people, children to horse death, job change, retirement yeah those are things in the past. People just move and get home that fit their of their need but not going to do IT in this with the century environment.

That's right. That's right. It's and they're recognizing that there is a cost, right, the crisis, right? They're going to do the math and say, oh, there is a cost here, but maybe the the other factor is they're downsizing right? Then clearly, they may make IT up elsewhere or the moving to a lower cost area when IT comes to insurance or property taxes, right? So that might start moving.

The other thing that could happen is these are households that are paint up, uh, get to a point where they need to move and they just cut Price right at me when we know or IT seems I think we know that the market home sales are sensitive to Price because if you look at new home sales, this is the seven hundred thirty eight thousand we were talking about earlier. New home sales were uh, are back to prepare the mic levels, right? They are not.

They're not. In order to that goes to the fact that builders have I think I have this right. Builders have effectively cut Price through interest by names are saying, okay, you know you don't need to pay seven, you can pay six, you can pay five, and i'll do this for you for a year, two or three, in some cases, for the life, for the mortgage.

And that's an effect of Price cut. And once they you know, as they do that, we are seeing buyers come in and buy. So one other way that the interest like could obey is if sellers aside, the you know they they cut the Price ten percent because these interest bite on the new home market is effectively ten and fifty percent Price cut. I believe if you do do the good Chris, have everyone that, uh, that sound right .

to you IT does sound right in in theory. But in the practice, what we're actually seeing right now is that sellers are listing their homes at a premium to wear V, C, in transit value, right, with R, A, B, M models of every home across the country. And I was thing add about a five point premium to that intrinsic value, which is as greater of premium as we've ever seen.

So IT almost feels like the cell side of the market is getting more opportunistic and less serious about finding that clearing Price and potentially cutting Price to to find a buyer. And that's materializing on on our numbers in one in ten listings actually just being pulled without ever finding a clearing Price. So what we see the the same twenty five thirty percent increase in in available inventory that Christmas was referencing earlier, the pricing expectations of cellars and and buyers are diverging in, in this market based on what what we are seeing in our da.

Now that's interesting. So despite the pen of life, there is not pet up enough for them to start becoming more aggressive on pricing. In just the opposite, they they feel like they've got at the apprehend here are willing to .

church a premium. Yeah and one of the things that, that we we say here, so it's a little catchy, but we say the housing market today is locked in, locked out and locked up.

Yeah.

locked in. We talked about right, that the locked in effect, locked out. I also mentioned earlier it's a really difficult market to be an aspiring, right.

And then locked up, we mean by that is that buyers want lower Prices because of higher costs of ownership and sellers want higher Prices because of higher replacement cost, right? So there's A, A, A winning bid ask in the U. S. Housing market that's impairing liquidity, right?

嗯嗯， i like that. That's catchy. Locked in, locked out, locked up.

Do you go? No, go.

I chance like a lot of locks 是 lot。 Lux, yeah, can you had not luck all that? Yeah well, what let's let's turn to another kind of related issue. Uh, and that is, uh, the comfortable housing shortage. And uh, so you know we got this in the existing market.

We've got this interest ate log, which is a resulting in a very depressed level of home sales, existing home sales a on top of the head in we we have this extraditing shortage of homes available for sale and red, particularly a when I say affordable, particularly in art of the market that are the low end of the market, uh, or in the middle of the market high, the market, I think less so. There seems to be more supply, particularly in the rental side, uh, and that doesn't feel like there's a severe shortage or maybe be if surfed in housing on the higher into the market. But in the middle parts of the market, the bottom parts of the market and you look at vacancy rates is pretty clear, there's a very severe shortage.

Did I character right? Do do you agree with that characterization? Um does that sound right to you, Chris?

IT IT does. And we think that that that shortage is caused by think two important factors. One is very difficult to build at affordable Price points, convictions, the cost of capital accel or just make IT very chAllenging.

The second thing is there's there's a prety nic ant problem with obsolescence of our existing housing stock, where in a lot of instances, the right thing to do is to rehabbing existing home and reintroduced that to a new family at an affordable Price point. And obsolescence kind of continues to to nibble away at the market, particularly those affordable Price points in establish communities. So we we see that every day, uh, particularly with our our rendering cohorn. And one of the things that we're trying to do is combat both of those um headwinds, both new homes and combating obsta lessons to try to redeliver to the market um affordable housing .

solutions IT. But IT seems I think you make a great point that the the fundamental problem is the cost of building because of all of zoning, permitting, labor costs, building materials, appliances, pretty much everything that goes into a new home for both for rent, for home mothership is up a lot. So therefore, if you're builder and you need you, you need your own return on top of the cost. When you actually build a home, the the Price point that makes you all the arithmetic work cover all your class and then a return this is too high just yeah too pricing .

yeah that's that's absolutely right. Um and and one of the biggest variables going back to some of your points on zoning and and other things for from a building's perspective is this time right time extends capital cost, extends risk and particular in the capital markets we've been in, it's been very difficult to build for builders to go far enough out the the risk spectrum to deliver scalable solutions, particularly at affordable Price points. Um I can give you the example of something that I think worked well for everyone, which is that we were developing a parcel in north CarOlina with the intent of delivering rental homes and we did all the permitting, we did all the horizontal .

development.

So all the all the roads and sures and utilities and things were in um and before going vertical, we went out and kind of took a poll of of builders in the area if they would be interested in taking on the vertical development.

And because we already had the permits done and we already had the utilities in the roads in the sures, we had multiple binders from some large national home building platforms because they knew that they could get in there and they can limit their time, limit their capital markets risk and deliver more affordable housing, right? And so that was, to us, a really powerful key study that if you can take down some of these risk factors that all participants in the housing market are facing, that you can, in fact, unlock supply at affordable Price points. But if you can't take down those those barriers, then it's it's gonna be very chAllenging.

you know uh uh uh vice present Harris put forward a housing plan, has A A lot of moving parts, but the the one significant part that goes to supplies to just provide tax breaks, tax subsidies to lower the cost for building, to put up more home. So in the case of rental, uh to expand the low income housing tax credit program, that's there's no a lot of uh, problems with that programme, but it's tried and truth been around a few decades.

People know how to scale IT. Uh and then on the a single family side for home motorable tax to straight up tax breaks for home builders that build homes below a certain Price point. The idea again, IT goes back to it's about getting the cost down sufficiently that and doors get a return that they need and getting to a Price point that's more affordable. What do you think about that approach? Uh, how does that that makes sense to you?

Well, the the first thing I can say is where fans of anyone that wants to bring productive solutions to the table, right? So we need more housing, both for sale and for rent. And we think that we can be a partner with either side of the ao by delivering some of the capabilities that we have. But I want to highlight st, we have a term that we call the missing middle, right? So if you work and you have savings, you can buy a home and and things like downpayment simple programs can increase access for those households because they already meet the credit box to get a mortgage and maybe they need to get over the hump on on a down payment, right?

If you work and do not have savings, your in this missing middle right, where you don't have government subsidized rental support, but you don't qualify for a marriage and probably also don't have a down payment, right? And so when we think about a number of these initiatives that are that are being followed, we think that they're all productive for different segments of the market. But we continue to see an underserved segment that has outgrown multi family, that out earned housing choice boucher and other government subsidized rental programs.

But is not going to be able to access a mortgage or achieve the savings required to be a homeowner. And that's a really chAllenging demographic for the government to reach directly. And we're seeing that come through in some of the proposals. So I think the proposals can all be complimentary. We welcome all of them, but there's there is a neglected demographic cohort in the middle where we think we can support them from from the private sector.

interesting。 Uh, course studies. You want anything in on this part of the conversation on the formal housing shortage?

Yeah I guess second the second the the fact that just existing everyone as an interest in uh resolve ving IT, but the we also have a lot of special interest. They are going to a prevent IT, right? The imbaLance is is strong uh, everywhere you go.

So no, every every little bit helps. But I am not so confident. I think it's more a question of time and demographics that ultimately resolve this. Yeah well.

I I didn't think I never assume about VP Harris supply side proposals. Just pret pretty straight ford just cut taxes for builders, both on the renal side and on the hudson ship side to just address this.

The cost to bring down the cost and allow them to get the return they need at a lower Price point that's more affordable for for buyer, for renters and buyers is a kind of is because as you as you is your pointing out addressing each of the individual cost, going to building a home like the zoning or the permitting or labor, you know, addressing that's incredibly hard and difficult in in is that you can if federal government can't really have much say into what zoning and permanent is going to be at the local level. So almost like I don't have they don't have the tools to do IT. So given that this approach, least my thinking, my thought Prices around is that IT IT overwhelms those other costs.

You know, this straight forward, you don't have to pay tax as you pay a lower tax rate is right to the bottom line. So IT, this makes IT, you know much more, makes IT easier to do the thinking. The first thing to pension for you to build a home that as a as a Price that is you know more competitive that resonate. No.

you still need the a the local government to play ball in terms right if you just the physically is not the location to build the problem, even if the cost is zero, right right you right so that's the that's that's the hard part in right the national, the federal government doesn't have the two to force, right? But uh, that building, they can put out some carrots, perhaps some some incentives, but think very difficult uh, to unseat the incomes here because you have if you're a home owner, you have incentive, right? You want less supply.

You 哎， cry, you see, you see, i'm dealing with with this guy. He's very, very pessimistic. I am very so are you still I think .

where where, where Chris is right though is that uh local governments, they they need a playbook for public private partnership. One of things we run into a lot when we're dealing with local municipalities is really good intentions to deliver housing solutions, but they don't know where to start.

Um an example this we we we were working with the a city kind of in the in the southern united states, they just got a huge manufacturing uh multination corporation to build a manufacturing plant uh in and around their their city. They know they are getting tens of thousands of new jobs. They know they have a housing shortage and we can tell them, based on the profile of those jobs, what type of housing they're likely to need.

So we can tell them what solution they need, but bridging from everyone, knowing what they need to, actually knowing how to catalyzed the reaction that they want and you have that housing delivered is really, really difficult. And so one of the things I don't know if it's the federal government that can do IT, I think we can probably help in the private sector. But giving local municipalities of playbook on had had to develop public private partnerships to deliver housing solutions could be a really powerful and scalable thing across the country.

And you haven't seen anything like that.

There's nothing like that. No, we we haven't seen that. We haven't seen IT.

And it's a it's a big chAllenge for local. Many of them don't come from the housing sector. Many of them aren't. For me, with the capital markets is a chAllenging thing for them to ultimately drive progress on. I'm very sympathetic to where their their starting point is, and that's where that's where the resources are needed.

Kay, I want to come back and talk about home owner ship and in in, in the context of the work are doing in, on, on by a rent and by the build in that kind of work because I know you do not like work there before. Is you that just play the state game um the game which before the start, the rest of the group tries to figure that out best? That's one that's not so easy to get right away, one that's not so hard we never get IT.

And if it's that proposed, the topic at hand, housing, housing finance, all the Better doesn't have to be but that would be, uh, that would be Better. Uh, and we always begin with. Marisa, marisa, are you ready to go here on the on the site game? Yes, okay, excEllent. great. Europe, four .

percent.

eight point four percent.

Is that a growth rate?

No, it's not.

Is an interest or no if they share to share a point four percentage something. No, mero is IT .

share. IT is a um .

oh oh boy.

it's it's a it's a ratio.

something to something.

something to something.

Is the related affordability as an affordability? Okay, eight point four percent of existing homes could afford their own home. No.

you mean .

be bad. A point four percent of population. Oh, is IT no, I was going to say a point four percent of the population of of uh households develop more than fifty percent of their income to housing.

no. okay. Uh, can you give us another clue?

IT is something that we I IT is ratio that we calculate using our house Price index. Yes.

alright, eighty four percent of homes are overvalued.

said is that the the single family homes are overvalued by eight point four percent as of september, and that's the lowest that it's been since the end of twenty twenty one. And that goes to two things, slower house Price appreciation in the single family market because there's not a lot of activity, buying activity, right, and rising incomes that are making things a bit more affordable than they've been in the past three years. So this is using our moody's analytics house Price index right.

right? This way that sounds low to me on IT.

IT does sound low. You will become a customer to the .

right h course avalon. You, you, you will you point out another other, do something you calculate where valuations are significantly higher.

Well, the one the one that I was pointing out, IT, was the homes that are being listed for sale relative to R A B M model of those homes. And so these listings are coming out five percent above what we would think would be a fair Price for the home. And that's creating A A wider did ask in the market.

But we we also direction in a service point four percent. But I agree with what marisel was pointing out, which is that single family homes in general are screening as overvalued, but wages are are catching up and H, P. A is is slowing down. And so that that gap is is shrinking a little bit well.

is IT remind me the way we calculate that? Is that based on a looking at Prices is relative to rents or relative to incomes or or both?

Do you know is that both cause it's relative to what we think the fundamental value is.

And I thought I was both to the current Price relative to our estimated fundamental value, the fundamental values driven off of income as well, construction .

cost. Ll.

yeah I I was gonna say IT, it's unlikely that I could be compared to the cost of of renting a comfortable home because on on our numbers that delta between the cost of ownership and the cost of venture ship of of a comparable home is is about forty percent.

wow. Yeah, I think is the way I kind of think about this is when you are thinking buying a home, becoming a home on, or you get two, two kind of decisions make, the first decision is, can I afford to buy a home? So I look at my income and I look at the interest rate, I look at the monthly payment.

I compare that you know to my uh and do the downpayment that I think, but it's really the first decision is relative to income. And then once I determined that I can buy home, then the question, should I buy home? You know, what is IT? What is the home relative to renting? So the first two step decision Prices in the first step is house Price to income.

The next step is house Price to rent, right? So did this is saying, you know, it's still IT. We we know that it's very difficult to for to buy a home. But and even if you overcome that hurdle or still it's still not it's questionable whether you should because how a high relative to underlying .

rates and construct relative rats. So ah that I think there there's another uh, dimension. It's so you're getting to IT a little bit with the cost Oliveros cost to rent, but it's also can I buy the home .

I want yeah .

because with home Prices that have grown at a rate much faster than incomes and with higher interest strates, if you were in the market for a home three years ago and now you need to get back into the market for a home today, in many instances, you're going to be looking at uh, uh, much smaller or older home in a very different neighborhood, possibly different school district, right? There's a there's a big product component to IT too outside or just the affordability metrics. It's can I get the home that I want?

你好， good point, good point. Chris. Do you want to go next? Chris alone? Do you want to go next?

Okay.

your girls, my boy.

I my my start is twenty four percent.

okay. And it's obviously housing .

related house, uh.

is a share of something .

that's right. It's a share or something.

Um it's the share of home buyers that are first time home bars. no. Okay, just what's that?

I was gonna guess .

that yeah I mean, typically, the share of home sales at our first time buyers are, I think, thirty five percent, but it's got to be a lot lower than that right now. So it's not that is IT. The share of homes purchased by for cash is it's .

a share of the home home market. It's a share of housing stock. It's a start about .

housing stock. The housing stock, new homeless are of listings truder.

No, twenty four percent of the housing stock is a housing stock. The housing stock. It's not not .

the lessons that oh.

it's an age more than .

on the right track now more than .

fifty years old or something, it's got to be a big number. It's a shocking number, isn't IT.

So can can I .

tell if it's the .

other way around? So twenty four percent, the percent of homes that were built this century, so U. S. Single fAiling homes were built in the nineteen fifties than in the two thousand tens.

Yeah, true. Make sense. Yeah, right.

Twenty one million homes were built before one thousand hundred and seventy nine. So when I go back to get of talking about the need to combat obsol lessons, yeah, like the good news is these homes are well located. Yeah, for bedroom I have backyard.

They're good school.

The bad news is, yes, there are thirty, forty, fifty, sixty years old.

Yeah, OK you you make a great pots. You're saying this. The is a big problem. There's no one to answer to the problem, but one of the biggest, most obvious waste dresses, just go look at the existing stock.

I picked IT up and it's in the right place already or close to and more affordable, and that may help significantly dressed for housing shortage. Just the point, part point Christians, you you've made this point. You know, did you write a whole.

whole paper? I.

nobody said IT, yes, nobody read IT. I did. I read IT.

I read that those great. That was great. yeah.

We make in this point for a long time. We ve got now now the number escapes me. How many millions of homes that are vacant, unoccupied, right? Not seasonal, right? They're just sitting there. So many of them probably do need to be fixed up. That's why the others maybe tangled up in some legal or family know nobody knows what to do with grandma's house right type of situation right um so yeah that there is is the answer lie in plain site, right? I think that was the title of the that was totally hey.

Chris Allan, you see that he's pretty catchy too.

you know, locked in, locked out, locked up, right? I like, think IT, i'd love to be, i'd love to read the paper. I'll be, i'll be your second reader.

Chris. The way I I D, I D, I read IT, I read every number one, one.

number one be .

the second one to read IT OK. So you say they need to be fixed up. I mean, what are you like when when you are citing these vacant, unoccupied homes? Who owns them?

Sometimes are just the abandoned you know like if you go to parts of silly, if you just bribe and filly go from feels like mild that you know the homework but there there completely vacant. They may be owned, but it's unclear who has titled that's part .

of the choose who yeah actually in her right might be .

tied up for your years yeah, yeah, yeah.

I don't think it's investors. I don't think they're hanging on and big gest a large degree. I think it's more this, maybe mom and smaller after animals think it's going to be those corporate investors there too savy for that, but they are onna dispose those properties.

So then when you're and this is for you, Chris a as well. I mean, so when you're saying they need to be fixed, stop. So what what do you propose investors come in and and buy homes and fix them up and sell them at a lower Price point? Or you're talking about more like public policy cities, that sort of thing .

IT IT IT could be either um but to give you a sense when when we rehabs to home on on our platform, we are investing thirty to forty thousand dollars in that home at at our cost, right, with economies of scale and a national supply chain. So at a consumers cost, that will be twenty thirty percent higher.

And that's a really significant investment for a consumer to make in a home that by in large is gonna be around to three hundred thousand dollar home right at the affordable Price point. If you're a consumer and you have that type of capital to invest in a home, you are more likely to use that as a downpayment on a home most likely at a different Price point. So there does need to be some incentive for either the private sector or the the public sector to invest. Those dollars are in affordable homes that are that need rehabilitation, right? Because it's it's unlikely that owner, occupants or or consumers will choose to do that or will have the financial means to do that directly.

Yes, there is A A A A piece of legislation out there that also is part of the hearth uh housing plane, the neighborhood home tax credit, which is designed for this purpose, right, uh, to provide a tax subsidy for renovation to make a you know, work out, uh, because the the the economics don't quite work in some of these older urban areas. Read a lot of stock. You just can't can't make a the rithmetic doesn't work.

You need some form attacks up today, but that that's never become law. That's been kind of kick in around a while has been become law. Don't know if that's going to work on.

Maybe we should just move on at this point because I just wanted to talk little bit about the investing you guys are doing in terms of a buying property and then renting the property. And thank you. Also a building to rent as well.

You mention that early. There's a lot of controversy around that in the context of home ownership. You know home ownerships under a lot of pressure. Previous reasons IT is been declining in the concern it's been expressed is that you know if investors like you come into a market um buy homes uh that from a home owner and then rent that home out, IT becomes more difficult to increase. Homeowner ship and and obviously, home mothership has been a go, a political for many, many decades across many administrations.

Thinking, thinking being, the homeowner ship is the best, best path forward for creating generational wealth, particularly for minority groups where they don't have a lot of wealth. How do you what do you think about that? How do you respond to that?

I think the the first thing that we focus on is, is our residents and and whose living in the homes that we're delivering to the market as rentals. And now i'll give you a couple of states on that, right? So in the united states, home owners, and well above one hundred thousand dollars a year, they have a credit score. And amid seven hundreds, they're more likely be married and they are less diverse than than home rectors. Home renters earn half as much as the first group, the credit scores, and amid six hundreds, there are more diverse, less likely be married and equally likely to have kit.

right? So we just zoom out and we think collectively, private sector, public sector, where should we commit our resources, which cohorn is in more need of support? I think we'd all likely agree it's it's that second cohort of renters, right? And so once we can kind of find common ground in supporting that group, then the question becomes what is the what is the best way for them to access safe, secure and affordable housing, right? And we talk a little bit about the rehabilitation and the investment that we're making in in these communities.

Um we can talk about in the level of service that institutions can provide, very similar to multi family, right in by twenty four seven service amends so on. So 4 and so I think it's easy to understand why uh for the single family render the resident experience and the opportunity and the access that rehabilitating existing home and welcoming that， that family into that community is a really attractive option for them. Um I know that there is a lot of focus on institutions buying homes.

I can tell you that we and our peers on western two percent of homes being Operated as rentals today. Um and when we grow out a bit on homes, we we actually acquire way less than five percent of the homes that, that we bid on that we think we can deliver in affordable way to a renter. So we're not setting the Price.

We're not dominating the market. Um but in instances where there's homes that need a little bit more investment um and should be delivered to that rental cohort, um we we provide an are really attractive way to deliver that solution and that should be attractive to consumers. I think we think this should be attractive to the government and regulators as well because we can we can reach that cohorts that that I think we will all says is underserved.

of course, the two percent of nationwide. I think the other concern is that, you know, there certain parts of the country, larger in the south east may be in the texas, over in to partial the mountains west, where this is a much more significant part of the housing stock. No get if you go into the places like a temple IT IT, we're talking I I don't know what the numbers are, but they're meaningful ly higher than that. Uh, I think is that a reasonable concern?

I think it's a reasonable concern is a fair question to ask. But from our perspective, that's also where this demographic of single family renters with right in in the united states, like you had to have a seven twenty credit score, again, a work age ah, you have to have tens of thousands of dollars of savings put down the down payment.

Um there's a lot of really important jobs and really important industries that, that don't deliver that financial profile to families in these communities. And so I think our our market for print that of our peers is really a demand driven um solutions oriented footprint. And and that's I think what is important for people to to keep in mind.

you are also in the build rent market to you mention the case uh, in point earlier in the conversation, is that a growing part of your business as well. Is that a more even more broadly, is that becoming uh more uh uh a place for institutional money to go to to build homes because that there, I think is much less concern and resistance, right? Because you're adding to the housing stock and easing the affordable housing shortage. And um you know I think everybody's on board with that. Is that something that becoming more commonplace, more prevalent?

Absolutely, absolutely. I look where we we in and our peers, I think struggle from some of the same chAllenges in going out the risk spectrum in volt capital markets that the traditional builders would face um but introducing new housing stock, we absolutely believe that that's a key part of the housing solutions that, that our communities need.

I I would say that we've observed a lot of new build homes are in the second and and third ring around employment centers just because that's where you can source large tracts of land, right? That's where there's the space to do that. So it's very logical.

Um one of the chAllenges we see with that is that IT doesn't afford renters the same type of access to establish communities with establish school districts that owners might have. And and we think that, that would be fair for renters to have access to those communities as well. So it's it's a baLance, right? It's a baLance. But we absolutely believe that, that building new homes is is critical to meeting the needs of consumers today.

Christine is going away in here on add or put forward. I yeah i'd .

concurred more housing right more supply. Um no, I think the concerns about certain community certainly bear taking a question look at.

I often wonder though about the um the proposals that are put forward to try to mean rate the situation, right? If you just uh let's say you restrict corporate investors, well, this if that just shift over to mom on pop investors, right? Have you really solved the problem that are after? And and I think it's very difficult to design a legislation that can actually no soly uh cater to first time home buyers.

For example, ler, it's IT becomes very wishy in terms of how you actually design this. I just think that there are the priorities that we should be focusing. And this seems a bit of a bit of a red hearing in terms of you get this huge supply issue.

Let's go focus that. Let's focus on those vacant homes. No, I think this is a secondary third order type of effect of anything.

I think I think that in the case of the legislation in your right, there might be a big gap between theory and what actually happened. But the I think the the one thought IT one thought behind the legislation to try to address this issue, if if you know he needs a dressing, is a tax kind of the tax advantage that lorge investors have over individuals.

Uh h and I think there the legislation is trying to level the playing field again in in theory level of the playing field in terms of uh of uh uh uh of of the kind of the tax uh consequences of of owning home versus investing in the home. Does that resonated all course on IT? IT does IT does.

Um we're we're in favorable of of a level playing field and their solutions that we can we can deliver um under all all the proposals that your that you're putting forth, I think we would prefer right to to have fewer frictions than more. We think that those benefits generally flow through to the resident right. IT allows us to invest more in the home that allows us to avoid the mainland.

IT allows us to keep an incredibly high standard of service. IT allows us to take more risk in longer term development projects and introducing new housing stock. So think all of those all those things that are perhaps perceived as advantages, the institution, whether in the capital markets or a tax code or or what have you um we're endeavor to pass those through to the consumer to provide them safe, secure and affordable home. And to the extent that frictions get introduced, we we may not be able to do that as frequently for as many consumers.

Well, let's in the conversation this way. Um if IT feels like to me the housing market is just out a wag, it's this I don't know how to you describe IT. It's just like you know interesting like like I like your locked in, locked out, locked up.

It's like really a mess. And IT took us a while to get into this mess. Feels like IT all started develop back a generation ago before the financial crisis. And here we are.

Uh, when does this market every kid back to something, let's just call IT Normal, you know, a something that we feel where Prices and rents, uh, you know, are affordable for the typical american. Is that is that a fair question? Uh, have you got a Christine? I we got Christine is first because maybe unfair.

How would you answer that question? Is they are ever getting back to Normal? Is this like, you know, we're going to be living with this now it's .

a fair question OK. If you look at the long run, I mention this early long run demographic trends in that direction, right? So if you take this self fifty years birthrates and what not um you get a market that is back to back to that type of using there.

No no demand because the household formations can be so low.

Well, that there's no the demand comes in and the supply keeps I assume the supply keeps hugging along. I don't see that supply. I don't see that yeah I come yeah yeah must must read the vacant homes yeah but I don't see the home builders, right?

Even if even if you remove some these obstacles that they really you know accelerate or double their production, I think they're kind of doing what they can do. And they can do maybe a little bit more, ten percent more, but I don't see real ability to suddenly wrap up supply. So I think IT just takes time.

So what you're saying is we we we could be the case that were you know you look at completion of homes were probably one six, one point seven million. If you throw a manufactured housing, something like that to get that up is hard, is hard and may never happen.

But the way for the market to come back to something Normal with vacancy rates that are more typical or ransom Prices are more affordable, you you look at a decade from now, fifteen years from now, assuming no meaningful change in immigration policy, just given aging of the population, domestic population, that means that slowly but surely, the market will write itself. And fifteen years from now, generation from now, will be back. If I IT wall be locked in, locked up, you know, locked in, locked out, locked up, it'll be, or walked out IT will be something more Normal.

That's what you're saying. That's what i'm saying. Okay, uh, I have alone. What do you think that?

Yeah I I was just gonna years years .

um I I I wish that we had .

a chrystal all that would tell let's how this all ends up scroll out. But OK, I think the good news is there's there's a lot of focus around IT. There a lot of there's a lot of ideas being generated um and so you hopefully we can all kind of come together and start ship away. But even if we are able to stop digging a deeper supply deficit and and write the ship is gonna take A A A number of years to kind of get back to an .

equilibrium, I feel like I actually feel Better about things with this conversation because, you know, we highlighted, Christa reads in your perspective on renovation and repair. And IT feels like a way to go. And then this, I like this kind of give me a road map or guide book.

I think he called IT for municipalities to address some of these frictions that exist, that I can get more supply. That seems like a reasonable things to go to do as well. So I feel Better about IT merit. What do you think are you on board with the generation a generation from now things Normalized, are you?

Yeah, I mean, I think the way I think about IT is the Youngest, the Youngest baby bombers are sixty this year, right? And I think there is going to be this transfer of housing from the baby bombers either dying and leaving to their children or or downsizing, right, getting out of the big homes they're in, moving to something smaller. So I think you're naturally just through that alone.

Gonna have a big, big amount of supply coming on the market over the next ten to twenty years. I means happening now it's been happening, but as you move ten, twenty years out, it's gonna. I think it's gonna master. I know much of the baby boom is on that Younger end of the spectrum.

No OK are any parting words on the group and else any other topics wanted. Tackle, I know what's getting late, the game and we as Christians hang on for a while here. So appreciate that a anything else reduction or the really good we're good.

Okay, course everyone I wanted thank you for you know coming on and and uh uh very difficile topic. Housing is a really complicated issue. Uh I and obviously very important one because IT is the cost.

Housing is the single most important item in most I think in everybody's budget, right? Is anybody whose budget where housing is the most important thing, I think is the most important thing. So very critical. So thank you for coming on. Really appreciate that.

Yeah thank you. Yes, IT IT was awesome to join big fan of the podcast and we we appreciate thank you.

thanks. And with that, dear listener, we are going to call this pot test take care now.