Talk Your Book: The State of the Housing Market

0:04Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:34Logan, welcome to the show. It is wonderful to be here. It's been a while. Ben and I are huge fans of yours, as you know. I can't tell you how many times we send each other your tweets flamethrowing to bears, and we just really enjoy it. It's good to have you back. Logan is a data guy, right? He doesn't exist on narratives or emotions. He's pure data, right, Logan? Yes. Math facts and data really tell the story. What do you always say in your podcast? Reading is good, right? You like to read. Reading is a good thing. The history of human civilization has taught us that those that read will always have an advantage over those that don't.

1:12All right. So here's where we're going to start. Speaking of data, there are a lot of feelings in the economy and a lot of negative feelings. And I think a lot of those negative feelings are justified. I'm not trying to sweep those under the rug. Inflation has really taken a toll. The cumulative impact, particularly on housing affordability. I think everything is an offshoot from that. whether you're renting or you want to be a first-time buyer, it sucks. Let's just call it what it is. It's not a great situation. However, part of the conversation, part of the narrative that has taken hold is because of one particular data point.

1:51The narrative is 90 % true. However, I just think it's very interesting that we're using this one data point. Holy shit. The median age of the first time home buyer used to be 29, 30, 31. And it was in a very tight range for a very long time. And then all of the sudden that broke free from the shackles and it's now 39 or 41 or whatever it is. And that was the data point that was helping shape the narrative. And then last week, this guy, Conor O 'Brien came out with a sledgehammer of a chart, a couple of charts that shows, hey, wait a minute. The American Housing Survey doesn't show a major run-up in the median age of average buyers or the median age of first-time home buyers.

2:38So he's looking at the data and he's comparing the National Association of Realtor data versus a different data set. It's like, wait a minute, this whole premise is based on faulty data? Again, not to dismiss, housing affordability sucks. So that's true. And also, it's important that we have the data right. Quit giving your caveats and just say it. What is the f***ing data? Okay, so normally I wouldn't comment on the NAR's yearly survey because it's a yearly survey, but this one was - Wait, does that mean like it's just a one point in time survey? Yeah, and this one was really egregiously bad.

3:12And it wasn't even the median buyer that I looked at it when I first saw it and go, it's the percentage of first-time homebuyers was down to 21%. And then we had another national economist say, oh, dear Lord, look at that. But But if you actually look at the monthly reports for like 13, 14 years, the first time homebuyer percentage has been running between 29 to 32 percent for years. So it hasn't really changed that much. It hasn't really changed that much. So then I said to myself, I'm going to have to finally tell people what this survey is. There's 173 ,000 questions. They take homeowners. Excuse me.

3:49Wait, wait. How many questions? A hundred. No, no, no. Excuse me. it's a survey sent out to 173 ,000 people that are homeowners. And there's 120 questions. Only 6 ,000 people responded. And I was just thinking to myself, if you're a young person and you see - Where's time for that? Like, I'm not even answering anything that's 12. So disproportionately, this survey has really deviated from what kind of the trend data is. And I mean, this has been a big part of my work in the last decade that we just buy homes a little bit later in life. So I kind of, on that day when it came out, I said, hey, everyone, look at how the survey's tracked.

4:29And then nobody knew that it was only 6 ,000 people responded to it. There's 120 questions, three and a half percent respond rate. And that doesn't really go with the other data. Now, the New York Fed, how they track it, they've always had first-time homebuyers much higher than the NERs for a long time. So I would just tell people, just kind of think of the first-time homebuyer between 32 to 36. And that's kind of been the case. If you just basic take where marriage rates are, what age we get married. People rent, they date, they mate, they get married three and a half years after marriage. They have kids.

5:08The dual household incomes are still the biggest homebuyer as a percentage. 32 to 36 is really probably it. And it has been for some time. So the NAR data went into like, you know, an area that I couldn't even justify. And even the first time homebuyer percentage goes against their own data for like the whole year that they took the survey. Anti-survey for the win. It's like most surveys. I mean, surveys are just not good anymore. I mean, we're like, we're the - We've been pounding the table on that. I totally agree with you. So the fact is young people are still buying homes. Yes. Millennials actually, on a percentage basis, they were the biggest home buyers for majority of the time in the last 13 years.

5:49The only time they ever kind of lose their titles when mortgage rates get above 7 % and then the baby boomers take it because they finance 93 % of their purchases. We still have near 5 million total home sales in America. The peak in the last decade was near 6 million. New home sales are still at 2019 levels. That would equate to 1 to 1.2 million more existing home sales. So we're missing roughly like 650 to 1 million mortgage buyers that would normally be here. And the affordability is a legit thing. The only time where affordability was worse was the early 1980s. So all those concerns are right.

6:28But that survey is like, now that people realize how they track it, they're like, oh. So hopefully there's a lot of people that just kind of take it with a grain of salt. All right. So the survey's bullshit, but the story is the same. It doesn't change the story. Affordability is a major issue. How does that change? What do we do? Time. It's the most painful thing for politicians and people to hear, but you have to endure. Higher rates kind of did their thing. They brought active inventory up. Price growth is slowing down. This marketplace looks a lot like the early 1980s. A lot of people don't know this, but home prices actually rose faster from 74 to 79 than what they did during COVID.

7:11Actually, 77 to 79 home prices rose faster with mortgage rates going from 8 % to 13 % than what we saw in the sub-4 % in COVID. Right. Housing was like the only asset that actually did well in the 70s besides gold or something, right? Yeah. So if you look at – I mean, the hottest home price growth period post-World War II was 1943 to 1947. I mean, that was just – home prices were just booming back then. But what happened in the early 1980s, mortgage rates got to 82%, home sales crashed. The price growth of housing slowed down. Never went negative on nominal terms, but on adjusted to inflation basis, it did.

7:47And then eventually wages grow, households form, price growth slows down, affordability gets a little bit better that way. All these ideas that we're throwing out here by the government, and I got to tell you, I have never seen the government just go full blitz mode between getting property taxes off, you're raising the capital gains to$1 million, 50-year mortgages, portable mortgages, all these. They're trying everything to get housing going again because they hear it. A lot of voters are homeowners. So they hear it on their side of the tail. And you just have to endure and let the market kind of take care of it.

8:26Your solution, it sounds to me like, is so a lot of people think, well, guess what? Prices have to fall then. The only way to make this more affordable, prices have to fall. But you're kind of saying, no, incomes will slowly rise. Prices will kind of plateau. And once those incomes reach points where it's affordable again, then people will buy. Is that your story, more or less? So when we look at the history of housing economics post-World War II, if I take 2007 and 11 out of the equation, the only time home prices fell nationally was 1990. it was like 0.7 % in 1991 was 0.2%. So we don't have much history of nominal home prices really falling outside of major distress sales and inventory exploding and those things.

9:06But we do have a period in time where affordability was worse. And if prices fall, we have to like take it as a positive because it's really hard guys. It's like the third calendar year of the lowest home sales ever. And we know home prices are going to be again, again, slightly up this year. But the fact that price growth is cooling down, even if it goes negative, it is a positive. We're so trained in our heads to think that, well, there are only two times where prices fall, we're in a recession. That's true. It's a little bit different. The whole structural of the US economy and housing changed after the 2005 bankruptcy reform laws and the qualified mortgage law.

9:44So you have to endure and not give in to the, let's subsidize housing even more with 50-year mortgages or getting rid of property taxes or stuff like that. How does time heal this? Well, I mean, here's a good example. When mortgage rates get down to 6%, every single time since late 2022, housing data gets better. Purchase application data grows, existing home sales grows, new home sales grow. So there is going to be a rate level that you could actually get some traction. What's happened in the last few years is we get down to 6%, The Fed freaks out. Bond markets anticipate a recession. That doesn't happen.

10:21And bond yields just shoot up. Except this year. This year, the 10-year yield isn't doing what it's done in the past few years, shoot up right higher and get 70%. I believe we just stayed down near 6 % long enough. You can get growth in sales. We've had four straight months of year-over-year growth in existing home sales. New home sales hit a three-year high. That number will get adjusted lower. But it can work. It's just that we've not had any traction for three years and then people get angry. And I understand what the White House is trying to do and what state governors are trying to do. But sometimes the best answer is just endure and let the marketplace take care of itself.

10:59That's why part of team higher rates in February of 2021 and triple down on it in 2022, the inventory data had to get up because it was a terrible seller's market that prices can escalate out of control. So you have to pay the piper and not give into the urges of trying to stimulate demand by subsidizing a sector that is very subsidized already and let it take scores. I mean, I think the last four months to show it, just getting rates down near to six, wages grow, price growth is cooling down. I would not have this feeling if home prices were up six to seven percent again this year. But we're seeing the growth slow down.

11:36We're seeing wages rise. Those things eventually in time helps things out. So Michael and I have been talking about this for a while, that we're trying to figure out what the line in the sand is for rates. When does that demand come off the sidelines? And is it still there? And it sounds to me like you think it's around 6%. So if we get into the fives, do you think that there are these people on the sidelines who go, oh, thank God. I'll sell my home again, or I'm ready to buy. Is that going to happen? So I explain it this way. We still have near 5 million total home sales. We are literally only missing a million mortgage buyers.

12:10So there's less activity, but there's still plenty of activity going on. Yeah, but wait, but who's doing the activity? Isn't that part of the problem? Like if you have a house, your house appreciated, you could afford another house. If you don't have parents that could help you with the down payment, there's such a giant portion of the population. The median age, the most populous age is 37 or maybe 38. And it's really hard for those people. It sucks shit. It's not fair. It is. But here's one. If you wanted to do an apples to apples, the new home sales market is still at 2019 levels. But that is a sub-6 % mortgage market.

12:42Like 4.75 to 5.75, they're paying down rates. Right, because the builders are giving you lower rates. They're giving it lower. So you can get demand there. The thing for me is that I just can't forecast below 5.75 mortgage rates with the Fed policy where it's at and mortgage spreads. Mortgage spreads have gotten a lot better since 2023, but it's really hard to get down below there. So I don't want to be one of these. Don't worry, mortgage rates are going to go lower. QE is going to happen. We're in a recession. And then it doesn't happen. But we do see a little bit of a positive demand curve when rates just get from 6.64 to 6.

13:15It's happened three times since late 2022. to. If you get a little bit of traction going, then maybe housing permits grow again, maybe housing starts grow again. But right now, it's just one of these things we can't keep rates at the low sixes long enough. But this year might be the first time that we go into 2026. And ARM loans are going to be sub 6 % rates the entire year, most likely. So in this context, we might have a better backdrop to maybe alleviate some of these concerns. But I'm just - Do you think that if rates fall, I think one of the things Michael's been wondering, has been predicting maybe, is if rates fall, prices are just going to go back up again because there's going to be more demand.

13:54Is that something you think will happen? Prices have been rising every year for decades and decades and decades outside of really one period of 2007-11. That's it. Now, real home prices can decline, and that helps affordability. But I always revert back to the early 1980s when everybody said nobody's going to buy a house. Everyone's going to be a renter. And all of a sudden, mortgage rates go from 18 % to 16%. Demand picks up. And then the second recession happens, 16 % to 13%. And all of a sudden, home sales start to rise again. So as long as price growth cools, wages rise, households form, there is a model for this.

14:31But subsidizing demand at this point, it's not going to be beneficial. So that's the history of housing economics post-World War II. So we do have a period of time we could reference to. but - I'm guessing that you're not in favor of the 50 year? If I had like a nuclear button to shoot a missile at it, that's pretty much I would have done. I would be totally against a 40 year mortgage. I would literally go to Congress and testify against it. But a 50 year mortgage, I'm just shooting a nuclear missile. Could you lay it out for the audience? What is so toxic about that idea? Number one, you're subsidizing the market that's very subsidized already.

15:07You're going to, the mortgage rate is actually going to be higher, about half a percent or maybe even higher than that for the 50-year mortgage. So it's not going to be that much savings. And the principal and interest payments is hideous. Like the net interest costs, the equity build is hideous. So no, I am 100 % against that. And the portable mortgage, it sounds great, but we don't have a portable mortgage market. Like you can't go back into those contracts for those rates that are you know, three, four, 5%, like 70 % of the country still has rates 5 % or below. You can't just make them portable mortgages.

15:44It's something maybe you could discuss and try to think about in the future, but we don't have that. It's just going to have to endure, but they're throwing everything. I mean, I would tell you this, if the Republicans are talking about the capital gains getting up to a million, you know, there's something there with their, with their party, because that disproportionately impacts New York and California positively. And they're, they're still bringing of that out there because you have a lot of baby boomers. You have a lot of baby boomers who are sitting on some really good capital gains. And you have a lot of baby boomers in Florida and Texas that are, hey, our cost of housing has gone up because of property taxes, get rid of that.

16:20So it's definitely predicated to the Republican voter that tends to be a little bit older out there that are homeowners, what we're seeing by the government. But I would just sometimes not doing anything might be the best solution. Let time kind of heal itself. I agree with you. But if we're throwing ideas against the wall, I don't like any of the ones that they've put forth either. You sent us this chart that shows the spread between the 30-year mortgage rate and the 10-year is finally coming down. In 2025, it's lower than it's been the last few years. That's one of the things that has made mortgage rates even worse the past few years is the spreads blew out.

16:53Part of that is because we went from such low rates to high rates in such a fast amount of time. It changes like bondholders didn't want to own those mortgage-backed securities. Do you think it makes sense for like the Fed to say, hey, we want to get the spread to come in? Like, would that help at all? Would that do anything? I'm against MBS purchases as well. Here's the confusing part about this. Nobody knows about mortgage spreads. Like 99.9 % don't understand it. So I've been trying to teach people this. And I think the confusion has been people believe that mortgage spreads would never improve unless the Fed goes in there and starts buying MBS.

17:25That has not been the case for decades and decades and decades. So as volatility compresses, as the Fed rate cut cycle comes in, rates go a little bit lower. Spreads should improve. I think there was only four of us in 2024 that said spreads are going to improve in 2024. And in 2025, the spreads improved to the peak forecast this year. So positive in that because spreads tend to get a little bit better when yields go up. So we had a much different dynamic going into 2026. We just need to keep rates low sixes, high fives, and just get a little bit of traction going. And maybe that'll take the heat off of trying to do subsidization of the housing market at this stage.

18:07What's the argument against buying mortgage bonds to tighten spreads? Because we're almost there. We're almost back to normal. I think at the lowest point we got to, how I tracked the spreads was about 2.12%. I mean, the spreads are different going back to decades. I mean, we've had spreads even near 1%, but 160 to 180, we're 30 basis points away from anything normal. So we're almost there. It'll take its course. I think that's the thing that a lot of people wanted, Pulte, to reduce the fees of GSEs. And the problem is that if they're trying to take the GSEs public, they're not going to do anything with their pricing models because they're talking to bankers on that.

18:50So I'm just, my belief was that the mortgage spreads were going to get much better in 2025. So that's happened. So we should, we should be almost back to normal toward the end of next year. And then we didn't have to do MBS spreads or anything like that. One of the problems with online discourse, especially with housing, is that people talk regionally, but maybe you're talking nationally. And oftentimes we're talking past each other. Like housing is such a local phenomenon. Can you talk about that dynamic? So majority of the inventory growth, I would say, let's say in 2024 was Florida and Texas, right?

19:24So Texas usually doesn't have like very high price growth. It did. And their property taxes are much higher. So the total cost of housing is higher there. Florida has structural issues with insurance and do people want to live there? But one thing that's happened is that migration is a little bit less to those two states. And they were living off of that migration. So those two states are dealing with an affordability issue, taxes issue, insurance. Do people want to even stay in the western part of Florida with hurricanes? You don't know if FEMA is going to bail you out. So there's all these things that Texas and Florida, Colorado, I would say, is much different.

20:02That's just a straight affordability issue right there. So you take those states. You know, in the 1990s, when national prices fell 0.7%, like Southern California, it fell like 25%. So you have history where you don't have much happening in the national data, but you do have regional sections that get hit harder than ever. Do you think that people are taking these regional sections now and they're looking and saying, hey, housing prices are falling in Texas and Florida. That's going to be bad for the rest of the country. Do you think people are making a big leap there that they shouldn't? People have been making big leaps on housing for as long as I can remember, and most of them have been trashed for a long time.

20:39Most of these people are anti-Central Bank people who just 24-7 do important. So it is the third calendar year of the lowest home sales ever. If you look at how the inventory channels work post 2010 qualified mortgage, in 2005, inventory went from$2.5 million. I'm using the NAR data straight to$4 million. We had$15 million loans in distress. We don't have that marketplace. And hopefully that explains pricing in 2023, 2024, and 2025. So nationally, you don't have that kind of marketplace, but regionally you do. And those areas are getting more affordable, right? So the market takes kind of care of itself in that matter.

21:19So I know a lot of people look at that as negative. You know, I know Wall Street thinks that there's no way you could have, you can't have a recession or, you know, it's very recessionary for home prices fall, but we've had home prices fall in Austin. We've had home prices fall in Florida and people are still consuming goods and services because the credit quality of homeowners are much better. So I'm just in the camp is kind of let the market take care of itself. And if I didn't see housing data get better with rates heading down towards 6%, you know, I wouldn't be saying, you know, we can get sales to grow.

21:51But last four months, year over year growth in existing home sales, three year highs. And this is with rates just getting down towards six. So we've seen this play out before. So I'm just saying that subsidizing housing at this point with any new products or MBA or anything might not be the best solution. So the one solution that almost everyone comes back to, it seems like, is, okay, we've got all these ideas that just kind of put a band-aid on the wound. Why don't we build more housing? So how and when is that ever going to happen? Do you think that we're just going to be at this shortage for a very long time?

22:28Because it seems like that's the thing. People say there's too much red tape. We're not allowing builders to build. Do you think that there's anything that we could do to actually allow the builders to make more homes or do you think they're just happy doing what they're doing? I have a total different take on this. I never thought the builders underbuilt in the last decade because new home sales had the weakest recovery ever. The builders only build off of their own demand curve. So the existing home sales market is their competition, right? So they just care about if they can, they sell homes like a commodity.

22:57So for decades and decades and decades, if you look at the builders, whenever total completed units for sales gets to 120 ,000, they stop building, right? Because it's going to hurt their profit margins. So housing permits have been in a recession. Housing starts have been in a recession. In June of 2021, I told everyone when rates go up, this is all going to end because the builders don't look at housing like people do. The builders are here to make money because they are not the march of dimes. So you're asking somebody to go against their interests by putting their head down and build. So right now they have a lot of completed units for sale there.

23:34Thankfully, the big builders have profit margins to use to do this. If they did it, it would be even worse. So unless you have some kind of system where the government basically pays the builders, hey, listen, we'll buy these houses off you, just build them. The builders are just always going to work with their supply and demand equilibrium. And that's been the case for decades and decades and decades. And it's not surprising to me that starts and permits are at recessions. When rates go lower, every single time rates head down to 6%, the builder's confidence rise, new home sales rise. Even in 2023, single family permits started to rise again.

24:08But they have to be able to make money on this. And I just don't think you're ever going to see a housing expansion that people want. All right, Logan, last question. What is your favorite? Maybe we already covered it. What is your favorite nonsensical argument where you bring out the Daniel Day-Lewis gangs in New York meme? Well, the thing is that, and I always say this, the worst talented people we have in America are like housing crash doomer men. And most of these are anti-Central Bank people. Like they're just 24-7 doom porn. So I always show the inventory charts and I go 2005 to 2008 had a vertical.