Here’s What Will Cause Mortgage Rates to Finally Fall

Dave:
Welcome to On the Market. I’m your host, Dave Meyer. Joined today by Kathy Feki. Kathy, how are you?

Kathy:
I’m great. Happy to be here with you. I had such a great time in Denver last week will all the other hosts at the host retreat.

Dave:
Yeah, it was a lot of fun. If you all were following along on social media, BiggerPockets had the host of all five of our podcasts together in Denver for a couple days for some team bonding, some learning, and we all had a very good time. It was great to see you.

Kathy:
Some improv.

Dave:
Improv, yeah.

Dave:
And then we have dancing.

Kathy:
Improv class, which Kayla and our producer suggested. We did some weird stuff. There was mooing. We were clucking like chickens. It was a good time though.

Kathy:
It was.

Dave:
But today we have, I think, one of our mutually favorite guests ever, Logan Mohtashami. We love all of our guests, but Logan, I don’t know, I think of him as an analyst’s analyst. It’s like who all the housing market analysts look up to because he’s just been doing this type of work, trying to forecast the housing market for so long and has been so right about it for so long. He’s someone I think everyone should really be following very closely.

Kathy:
And this is going to be a show that you’ll want to listen to several times. Don’t feel bad if you have no idea what he’s talking about. But the more that you listen and slow it down, repeat the more it will make sense. And it really is so important whether you’re trying to flip homes or rent homes or buy a home or whatever you’re trying to do, it’s just really important to understand the underlying factors that might affect that investment.

Dave:
Absolutely, yeah. There are some advanced topics here, not really about the housing. The housing market stuff he’s talking about I think is pretty straightforward. He talks a lot about bond yields and credit we talk about and try and explain on the show. But just so you know, you can follow Logan’s work. He has a lot of written work if you want to learn more about what he’s talking about on HousingWire. A lot of people ask me how I got into housing market analysis, one of the people I’ve looked up to and read and to sort of get my start was Logan Mohtashami. So I definitely recommend checking out his work. He posts a lot of it. He’s great on Twitter too. So if you want to learn more about the themes that he is talking about, you should definitely follow him on some other channels as well.

Kathy:
Yeah, because no matter where you go, you’re going to get somebody’s opinion on the economy and that might affect what you do and it might be the wrong advice. So again, to me listening to this and really understanding the fundamentals of the housing market is going to put you ahead of everybody because it’s the 80/20 rule, right? The masses are usually going in the wrong direction when it comes to investing, so don’t follow the masses, listen to the experts.

Dave:
Absolutely. Yeah, totally agree. It’s worth spending the time to really understand these issues like inventory, bond yields, the labor market. There’s so many things that impact housing, it’s kind of hard to focus, but Logan does a very good job narrowing it down to a couple key indicators that you should be paying attention to. With that, we’re going to get into it. But first, we’re going to be taking a quick break and then we will welcome on the HousingWire lead analyst, Logan Mohtashami.
Logan Mohtashami, welcome back to On the Market. Thanks for joining us again.

Logan:
It is great to be here. Thank you for having me.

Dave:
Well, I know Kathy and I have a lot of specific questions for you, but would love to just get your take on what’s happening in the housing market. Just in the beginning of 2023, we’ve seen a lot of whiplash data, contradictory information. I would appreciate your summary of what’s happening.

Logan:
So for one of the things we do here at HousingWire now, we acquired Altos Research, which has the weekly tracking of inventory that comes earlier than anyone else. With my work on the bond market and purchase application data, we’ve incorporated a tracker to look forward for all housing data and we give that weekly. Back on November 9th, that data line became positive. So November, December and January until February, the forward-looking housing data was getting better in terms of purchase application data was getting better, the bond market was heading lower and what was happening also on the inventory side, inventory is falling like it usually does in the fall and winter, but we have this strange phenomenon post 2020 where inventory in America actually bottoms out later in the year.
The weekly inventory pre COVID used to just bottom out in January and rise, February, March goes into the spring. But we’ve had three different events where we have late in the year demand pick up abnormally the 2020 COVID-19 recovery, the makeup demand. In 2021, we had a very odd purchase application volume surge that’s never happens toward the end of the year. And then last year we had a little bit of a surge in purchase application data from a waterfall dive. What’s occurred is that early on you hear these talking points of bidding wars again. The reality is, inventory almost got back to all time lows again, even with the biggest collapse in sales for a calendar year that we’ve seen in modern day history. So it’s a weird housing market because people have always been trained at if demand falls, supply should increase. If demand collapses, supply should increase significantly except the housing market is different because a traditional seller is traditionally a buyer of a home as well.
So homeowners have been staying in their homes longer and longer from 1985 to 2007, that’s five to seven years, from 2008 to 2023, 11, 13, in some cases, 15 to 18 years. So they didn’t really need to move as much anyway. And then when rates spiked up, what we saw after June of last year was that new listings data started to go negative. Every week it started to go negative earlier and faster than what we traditionally see, which means people just said, “Ah, I’m not moving.” And even when rates were falling from 7.37% to 5.99%, we didn’t see any new listings growth to accommodate that decline in rates.
So we have very low inventory, we have affordability issues still, and it’s just the very confusing housing market when you look at it in that light. We are refining some stabilization where mortgage rates got to 5.99% where that moved down, but within just a few weeks, rates shot back up to probably about 7% today and that just takes everything that was gained in that three months from November to the first week of February and it just pulls it back and now we see purchase application data itself is down to 1995 levels.

Kathy:
I am curious how much the data is skewed by the number of homes on the market. So I remember back in 2009, most of the homes that were on the market were foreclosures and short sales, so that obviously affected the median price. Are we seeing that today with such low inventory that what is selling and is that affecting values?

Logan:
There is literally no distress sales. It’s like 1% of the market right now. So the people that are selling their homes before rates fell, the pricing was getting weaker, they had to cut their prices to move product. The days on the market are still historically low, but the last existing home sales report finally got back to over 30 days. 30 days is normal. What happened during COVID is that days on market got below 20 days and I always have to say there’s nothing good happening in housing when days on market is a teenager, that means either you have a massive credit boom and homes are just flying off the shelves or you have so few homes that too many people are just chasing that few and then they just get off the market faster. We didn’t have like a massive credit sales boom we saw from 2002 to 2005, we just didn’t have much product out there.
So too many people chasing too few homes. But when rates go from 3 to 7% with all the home price gains that we’ve had, the affordability issue gets more and more. So coming off of that extreme pricing, especially early on in 2022, January, February and March of 2022, for me just personally, that was the worst housing market because we are getting 50, 60, 70 people to bid to a home and home prices were accelerated to the point that we would’ve had at least 23% to 27% home price growth last year if rates didn’t rise. So now as affordability becomes more of issue, the homes that are available out there that are selling, they’re not getting the prices that you would’ve had with the sub 4% housing market.
Outside of that, there’s still not that much active inventory out there. And that I think is the confusing part because people say, “Well, why is it inventory rising?” So you just have to think like a homeowner, right? A traditional seller is a traditional buyer. So if the affordability is an issue, then that seller is a net demand hit because they can’t afford that next house. So they don’t need to move. Their total payment levels are so historically low that you get hit on the move up buyer, move down buyer, the investor, the first time home buyer. You put them all together, you at the biggest collapse in sales in a one-year timeframe in history because the market just simply just froze in terms of the traditional buyer demand, all of them coming in together. And that’s what happens when you get rates move.
I mean, it’s one thing rates move a quarter to half a percent. Traditionally, that would be like a big move on someone. We’re talking to 4% plus move in mortgage rates in one year so it’s a shock to the system. But even with all that, we did see stabilization in the data because we’re working from a very low bar. Historically, it’s really rare post 1996 to have existing home sales go below 4 million. So we had the demand slightly pick up. Pending home sales were up, new home sales were up, existing home sales are going to be up. But then rates spiked up, oh, what? 1% again.
So the market can’t stabilize when rates are moving up and down like this because what happens is that person looking to list their homes goes, “You know what? I’m just not sure.” That’s the one data line that last year that really caught my attention, was once rates got above 6%, the new listings data started to decline earlier and faster and negative. We’re not even talking to hard cop either. We’re talking the lowest cop ever in history and we still couldn’t even get positive. So that’s a problem for demand, but again, that’s also keeping the inventory at big.

Dave:
So you’re mentioning that as rates go up, new listings are going down in that suppressing inventory. Can you explain that a little bit more? I like to dig into your thoughts on why it is that we’re not seeing more new listings in the market right now.

Logan:
So I used to not believe in the mortgage rate lockdown premise. I used to even write about it how I never believed it. But last year, I was open to the idea of it because I need to see three things happen for me to even start that discussion. First of all, mortgage rates got to get to all time lows. That’s what happened, checked. A lot of people refinance. Second of all, mortgage rates have to rise in a big fashion. I’m not talking like 1% or 1.5%, 2.5% to 4.5%. We’ve never had that in recent history. So that was checked, that happened. And then three, it has to happen in a year where prices are still rising. It’s not like prices declined nationally in 2022.
So you have a big affordability hit. But then I thought to myself, now I realize why I hated the mortgage rate lockdown premise. There’s a bigger story here and for me it’s the credit channels after the 2005 bankruptcy reform laws and the 2010 QM mortgage laws. Once those laws were enacted, what you have is a straight 30-year long-term fixed product. Other countries don’t have this as much as we do like Canada and Norway. So all these countries are tied to short-term debt. We have a fixed product. When somebody buys that house, every year their wages keep on increasing more and more every single year. So people are living in their homes longer and longer. Then we’ve had three refinancing ways, 2012, 2016 and then 2020 to 2021. So their total housing cost is very low, but their total housing costs was low for a long time because there’s no more short-term armed products that recast or anything. So there’s not a reason to, in a sense, list your home unless you had to move.
So when rates spiked up, it became an affordability issue. So a traditional seller would just say, “Okay, I’m listing my house now and I know that mortgage rates are at 70% and I could still buy that house, so I’m fine because I have enough selling equity. Whatever it is, I’m going to be okay.” But outside of that, there’s literally no reason for people to list their homes because the data has shown this before COVID.
So the best example I say is that 5% mortgage rates in 2018 did not create any inventory, like the total inventory data was not rising that year. But also sub 4% mortgage rates in 2019 didn’t create more inventory either. There’s this natural equilibrium between supply and demand when you list your homes and then typically you could sell that. And if you look back in inventory data from 1982 to 2023, historically we would have two to 2.5 million active listings.
The only time in history that we’ve had inventory skyrocket in a very short time was 2006 to 2011. That was in a sense forced credit sellers that could not buy a house. So in a sense, they were selling to be homeless or selling to rent. And outside of that, a traditional seller is a traditional buyer. It keeps the inventory channels at bay. Now, inventory for many years was slowly falling, slowly falling, slowly falling, and then got to all time lows right in our biggest demographic patch ever, which is the worst timing ever, but it did. Prices escalated out of control. But people that could sell their homes have a lot of equity move. Mortgage payments are fine for them. Everyone else, not really looking to sell anyway. And with rates higher, that affordability keeps the other group at bay.
So that to me explains why new listing data is for… A good example is we’ve got the new listings weekly data. We update that every week at HousingWire. This week was 45,000. Actually, it is basically near historical lows for this week. Back in 2015 and ’16, that number was 76,000. In 2019, ’20, that was 60,000, 65,000. So we’re just getting to these lower and lower and lower levels and it kind of makes sense because if people are living in their homes longer and then you have a rate increase on them, they don’t sell their homes to be homeless, right? They sell their product and they can buy another homes, which means that inventory is a wash, right? That home gets sold, they buy another one. So you don’t get really scalable inventory. That’s why I like using those four decade inventory charts in my work so people can understand that if you just took 2006 and 2011 out of the equation, inventory channels look pretty stable.
Inventory in 2000 was 2 million. It actually rose all the way to 2.5 million in 2005. My argument back then is that we had exotic loan debt structures that were facilitating people to move, right? They didn’t care where rates were because the product itself allowed you to move. We don’t have that anymore. So in a sense, you have to take the 2000 to 2005 inventory with a little bit of grain of salt. And now you just have traditional 30-year fix, basic, boring vanilla lending standards.
So that person who lists that home, unless they’re a distressed seller, they are legit. They’re probably doing really good financially, especially in this marketplace, to buy a home. And then everybody else is just staying that bait because the best hedge an American family has against inflation is their 30-year mortgage, right? Your mortgage payment, your house cost stays the same, but your wages increase more during an inflationary period. So on top of everything else that the homeowner had looking good, now their wages go even more, they refinance. Their total housing cost to their total wages at their age right now is so low that they’re being shielded to a degree with this volatility and inflation and rates. They don’t have the issues that, let’s say, a first time home buyer or a renter what have with inflationary problems and mortgage rate increases.

Kathy:
Yeah, you make such a great point about the difference between the last or the huge housing great recession of 2008. I think you say it started in 2007 or 2006.

Logan:
Yes. Credit started deteriorating in 2005, ’06, ’07, ’08. Then the job lost recession happened. So that credit chart that I used so famously, it actually shows that we had all this credit stress and housing before like four years before the recession actually happened. And then on top of all that, the recession just made it worse.

Kathy:
Yeah, so there’s so many people today that are in great fear of a housing collapse or hoping for that because they want to be able to buy. What you just said is the big difference. First of all, I was a mortgage broker back then, and of course they were exotic loans, meaning that interest rate didn’t matter because you didn’t have to make the whole payment, right? Those [inaudible 00:19:11] loans you only had to qualify at a teaser rate. So big difference there. And then the inventory levels I think were three times higher then.

Logan:
Yeah. At 2005 the active listings were 2.5 million. Today it’s 980,000. This is the NAR data. And then that 2.5 million spiked up to over 4 million in 2007. So here, sales are basically at 2007 levels and there’s a 3 million inventory gap between that period in time to now. So nobody was ever going to believe me that this was going to occur until they saw sales collapse because now they can’t… At first it was, ‘well, nobody listened to their homes because of COVID. It will happen in 2021.” Well, forbearance is going to happen. All these people are going to… Now home sales are collapsing, now they’re going to list their… It never occurred. In fact, the opposite happened. New listings, they actually declined to all time lows during the biggest portion of the rate increase.
So it’s just a different market. I think if just people didn’t look at housing as in a sense how people would trade stocks, my thing is that a lot of stock traders are really bad on housing economics because they say, “Well, everyone’s going to rush to sell to get out to take their equity” and I go, “And do what?”

Kathy:
Yeah, right. They still need a place to live.

Logan:
Where are they going to go? And then you almost have to get into a primal stage to like, if you are a father looking at your kid and you say, “Son, we’re going to sell our house and we’re going to find somewhere else to live.”
“But dad, I go to school here. You have your job. What are you doing?”
“We have to-”
“No dad. You’re not that soft. Don’t worry about it.” So people just don’t operate that when they’re homeowners. Stock traders do this all the time because they’re always on leverage. So they don’t understand. Homeowners aren’t on leverage anymore. Their nested equities are high, their fixed payments are… They don’t have the stress that leverage sectors of our economy would have. So they don’t behave in that sense how a leverage sector. So that to me explains why we had the biggest collapse in sales, but inventory is near all time low. I think the low level was like 850,000 or 860,000. We got some 980,000. The weekly inventory has been declining pretty much every week this year outside of one week that will have a thousand gains.
So we’re just a different type of market. I think it all revolves around credit channels. Those two laws in 2005 and 2010 changed everything. This is the first really good test. COVID, forbearance, the big collapse in sales and homeowners just sitting there, like, “What do you guys think we’re going to do? Well, what do you want us to do? You want us to sell our house to move where? We’re good here.” And that hopefully explains why inventory got near all time lows again this year.

Dave:
It’s an incredibly helpful explanation. It just seems like there’s this large long-term affordability issue. I’m just curious how, if at all, do you see this improving? Because right now we’re just seeing the situation where inventory is stuck really low. Is this just the new normal for the inventory data or what do you expect to happen?

Logan:
I always look at people’s affordability indexes to see when do they think things are going to break. For me, it was very simple. A lot of my work is years 2020 to 2024 is going to be different than what we saw from 2008 to 2019. However, this period of time you have to worry about home prices escalating out of control. The easiest way for me to say it is that if demand stayed on trend but inventory broke to all-time lows when population is at all-time highs, that is an inflationary period, that is a supply-driven inflationary period. So housing broke out before COVID even hit us. But if you look at 2020 existing home sales, it was only 130,000 more than 2017 levels. If I average 2020 to 2021 because you can make a case that we are just doing some makeup demand and it fell to 2021, it’s still only 350,000 to 375,000 more than 2017 levels.
So why didn’t we see the housing inflation issues then? Because inventory broke to all time lows when demand was picking up. That is an inflationary period. And for me it was like as long as home prices only grew at 23% for five years, 4.6% nominal per year at peak with wage growth, everything is still intact, that got destroyed in two years. So we are already at 30% home price gains with two years. So for me, the next stage is the 10-year yield has to break about 1.94%, that’s 4% plus mortgage that the housing dynamics change. But when that occurred, you’re dealing with 30% home price gains in a very short amount of time. So there’s your hit to demand. And then also that move up buyer, moved down buyer, that person stays in their house. And that’s another hit on demand because a inventory should be looked at as demand because those people that list, 75% to 82% of the time they buy another home.
So it is a demand hit to us as a country when people don’t list their homes as actively as they used to in the past. And now with rates higher, it just doesn’t make sense. Affordability doesn’t make sense. So we’re stuck here until wages come up again, until rates and prices work themselves up. But with all that said, 6% mortgage rates stabilize the housing market. In fact, prices were firming up earlier in the year just because active listings are so low. It’s an abnormal market because we’ve never had this low of an inventory. We never had this much home price growth in such a short amount of time and then have the biggest mortgage rate spike in history.
All together, the market is trying to figure itself out. But below 6%, like for myself, I thought, “If I believed early on that mortgage rates would get below 5.75 and head to 5%, I’d have a much positive take on housing because I think those people… There’s so many people that want to buy homes, they’re ready to go, but they just need that lower rate that because inventory levels are so low, it would stabilize everything.” We saw just a glimpse of that when rates fell to 6%. And again, we see these headline mortgage rates. Rates are actually even lower than that. The builders are buying down seller concessions, so people are getting lower rates. That stabilized things, but then, bam, rates just shut up at a very quick time.
So that’s the marketplace that can’t find any stabilization. It wasn’t like this in a previous… In previous expansion rates, maybe a half or a percent, 75 basis points. So something like that, a slow move throughout the year. Here we’re just up and down like crazy again, which sellers just don’t feel comfortable listing their homes thinking, “Okay, 6%, 5.7%.” And then all of a sudden two, three weeks later, “Huh. 7%?” In some cases they couldn’t even afford a house. So I think things will change when the market calms itself down and then you can get some kind of footing in housing.

Kathy:
When do you see the market calming down?

Logan:
I’m not a Fed pivot person, but when jobless claims rise to 323,000, the bond market will start to go lower. The Fed at that point won’t need to worry about the growth rate of inflation because the labor market is turning on them. The spreads would get better. And here’s the thing, housing’s disproportionately impacted positive with lower rates. Last year, we had 4 million jobs created. But for higher rates disproportionately in a negative fashion impacted housing because the rate is the primary driver here. So in that context, you’d have a lower rate for a longer period of time. For me, it’s just the growth rate of inflation is especially going to fall 12 months from now. Even more as rent inflation, the growth rate cools down. But when the labor market breaks, there’ll be more stability in that the Fed’s verbal talk to everyone will be a more accommodative than negative.
That gives you at least a stabilization period of time, not this, “We’re going to take off again” because look, I fundamentally do not believe we have the 1970s entrenched inflation. If you’re a 1970s entrenched inflation, you are a housing boom person because rent inflation took off… In the 1970s, home sales took off from 2 million to 4 million back then. That’d be like us going from 5 million to 10 million right now. So we don’t have that kind of labor force dynamics like we did in the ’70s for that kind of inflation. But here, if the economy cools down, growth rate inflation cools down, you get more stability with lower rates and then you could get down to that 5% level. The spreads get better and you don’t have to worry about ills shooting back up again. We’re not there yet.

Kathy:
Yeah, we’re not there yet. You’re not even close with the January employment report being so robust. So when do you think it would start to fizzle out and the economy would actually slow down and we would see the job losses that the Fed wants?

Logan:
Here’s the thing. My six recession red flags went up on August 5th. The last time that happened was at the end of 2006, and that was when credit was deteriorating. The labor force dynamics are so much different now. So jobless claims just rising, the wage growth is already cooling down. So we’re going to eventually see the impact of all these rate hikes. It takes about 12 to 24 months lag time. You’ll see it in credit defaults, auto loans, consumer loans. They’re starting to pick up. But over the next 12 months, things should cool… I mean, the Federal Reserve’s own forecast is actually for a recession later on this year just because the unemployment rate gets up higher.
The economy itself is good in the sense that homeowners, the majority of consumption are household homeowners, their balance sheets look really good. Renters on the other side don’t have some of those structural protections that homeowners have. But over the next 12 months, the deterioration in credit should cool down the jobless claims data. When that starts to go, the bond market will get ahead of the Fed. The Fed will be late to the game as they always are. But the jobless claims data to me is the most important data we have in America right now. And 323,000 is not very big in the historical sense, but if we’re headed that way, that means the labor market is deteriorating. We’re still under 200,000. So we’re not there yet, but that’s what I’m keeping a track of especially over the next 12 months.

Dave:
Logan, just so I can make sure I’m following and everyone else is following this, just correct me if my summary is wrong here. So you’re saying that over the course of the next 12 months, you think that the cumulative effect of Fed rate hikes are going to put some downward pressure on the labor market. We’re going to start to see unemployment claims, initial jobless claims start to tick up and that will put downward pressure on bond yields because that will indicate a recession is probably coming. And like you said, bond yields and bond investors are ahead of the Fed. And so that could bring down mortgage rates even before the Fed potentially cuts the Federal funds rate, is that right?

Logan:
Yes. The bond market is bigger, faster, smarter than the Reserve. So that’s how it works. They’ve tried to get ahead of the Fed twice. I just don’t think the labor market is as bad as some people think. That’s why my forecast for 2023 was four and a quarter on the 10-year yield high, then seven and a quarter mortgage rates and 3.21 eventually over time the growth rate of inflation. Just because so much of inflation is rent inflation, CPI inflation lags about 12 months, but the growth rate is just cooling down just because it was such a high extreme level. So that in itself will bring the growth rate of inflation to where the Fed kind of wants to be somewhat in a better spot at the end of this year. Their own forecasts to even talk about it. It’s just that’s going to happen toward the end of this year. It’s going to be more apparent to everyone else.
And then if the labor market starts to soften up, that’s what the Federal Reserve wants because they believe that a tighter labor market wage growth gets out of hand. Well, wage growth is already cooling out with a tighter labor market. So if any kind of loosening or any kind of tightening in the monetary effects the jobs data, then the Fed’s doing what they primary want. They want wage growth to cool down. They want the labor supply to be bigger. So then wage growth goes down, less inflationary pressures, and then eventually the bond market will do most of their work for them and then they can sit there and debate what their Fed rate cut or rate stance is.
But to me, the bond market matters more than the Federal Reserve. I mean, we saw that just last year in October. October 27th, I wrote an article for HousingWire, The Case for Lower Mortgage Rates. Mortgage rates, I mean the 10-year yield is spiking, the dollar was getting strong, the UK was going to use its pension funds, Japan needing new regime. Usually in a short-term period, that’s kind of a short term top. Bond yields fell, it’s stabilized housing. But if you actually had weakening labor data, bond yields will get well ahead of that. And that’s what historically they have done. Not something I thought would happen early in this year, but later on, especially with the growth rate and inflation fall, things should look different.

Kathy:
What’s a little bit confusing is if there’s such low inventory in housing and it’s so unaffordable, but you have this large population looking for a place to live and forming households. You would think that rent growth would continue to rise. That’s what a lot of real estate investors are counting on is, “Wow, if people can’t afford to buy a home, they’re going to rent. There’s going to be all this demand for rent and rents will go up.” But Dave just came out with a report saying that’s not the case. So what’s going on there? Is there too much inventory in rental housing or people are just staying with mom and dad and not forming households?

Logan:
The history of rent inflation rarely goes negative post World War II. If you actually look at shelter CPI, the only time in recent history that it went negative year over year was 2010 for two months. That was the housing crash.

Dave:
Yeah, by 2%, right? It was like nothing.

Logan:
Yeah. So it was just two months. What occurred over the last two years is that the growth rate of rents were so extreme that they can’t sustain itself. So that’s what people are talking about. I think there’s a confusion. The growth rate cooling down from 15% to 3% doesn’t mean rents are going negative in a big fashion. It’s just that the growth rate cools out. And then you have a lot of apartments that are under construction that’ll come online too. So you put those two together, the growth rate of rents falling down to let’s say 2% to 3% growth instead of 15% to 18%, that really impacts the inflation data. So I think there’s an overreaction into the rental deflation story because the reason why rents don’t go negative is because most people are working, right? But because of the violent swings to the upside, you get these violent swings to the downside.
This is the history of global pandemics. This actually happened with the Spanish rule. We had this big major rent increase and then the rental deflation period and the history of pandemics are like this as well. So we’re just in getting back to normal.
And if you look at the CPI shelter inflation data, post 1980 was pretty stable. The three times it bursted up was in the 1970s, right? That’s when we had a labor force demographic push. We didn’t have enough homes for renting and rent just took off all the time. So oddly enough, the people that are big inflationary people in theory would’ve to be major housing booms people. We just don’t have that kind of labor force dynamics like we did back in the ’70s. So the growth rate cooling down is not like a major rental deflation. There’s going to be some cities that go negative there. We’ve seen this from time to time. Certain cities actually show negative year over year data and then they stabilize out. That’s what I was thinking was going to happen back in September when I went out to CBC and said, “Hey listen, CPI shelter is going to lag all year long, but it’ll be evident to everybody in America by January and February that the growth rate is just cooling down.” So growth rate cooling down and negative are two different things entirely.

Dave:
Yeah. Just so everyone knows, I was citing, I think on Instagram, Kathy, you’re probably talking about, an apartment list report was covered in the Wall Street Journal. They were specifically talking about multi-family and new leases. Logan, I’m sure could expand on this, but there are a lot of different ways you can measure rent. And so this is basically not factoring in people who are renewing their lease. It’s basically people in large metro areas who are looking for a new lease in a multi-family unit. They were showing that there was actually real loss, very minor, one or two percentage points in the median rent price. But I think when you look at the holistic sense of all rent, to your point, you factor in single family homes, renewals, all those things, you’re probably not seeing the same thing.

Logan:
One of my favorite charts I like to share with rent is the post World War year over year rents. The ’70s was extremely high. We had three times when rent inflation took off. Here we’re just going to have one pandemic boom rent inflation and then it goes back to what it was post 1981. Very stable.

Dave:
Growth rate.

Logan:
Yeah. Just that initial boom we see in pandemics, they all tend to fall down eventually. We see this on a lot of pandemic charts. You see this big spike up and then… You know the [inaudible 00:38:21]. And it gets back to normal because the only reason it doesn’t go back to normal is that either demand is booming out of control. Like labor force growth somehow just took off. Again, people just sprout it out of somewhere and they need homes and everything else or the supply is still so low. So it’s a balancing act that happens with after the pandemic. So it was a big talking point in mind last year, but again, 12 months down the line from October, it’ll be more apparent to everybody and things just get back to normal. We haven’t abnormal in a very long time. So it’s going to be weird to people.
But that first move up and that first move down’s going to be wild and then it’s just going to get back to how things used to be not only here in America but around the world. But when you have an event like COVID in a globalized world, things just don’t work normal right away. And then that’s the history of pandemics going back 700 years, right? You have that initial inflationary burst, then you have that disinflationary, and then you find that normal trend that was pre-pandemic. And we’re just in that downward trend right now for some of the data. I mean, shipping costs from China to port of that Long Beach went from 2,000, like 18,000, now it’s back to 2,000. So these charts look very familiar when you look at other pandemics in time.

Dave:
Kathy hit on something I wanted to ask about, which is about household formation, which is key to demand. You write a lot about demographic demand and the largest generation in the US hitting their sort of peak home buying age. But we’re in this era where housing and rent are extremely unaffordable by historical standards. I’m just curious if you think that will lead to a slowdown in housing formation, at least in the short term?

Logan:
Well, part of the formation that we saw during COVID, work from home. I mean, the biggest variable change in housing economics that I’ll ever see in my life, I mean literally you move and you don’t have to change your job. That was not something any of us had to deal with before. If that slows down naturally, the household formation slows down in terms of a new household being created. But also when rent inflation gets too big, you have people getting roommates again. So we had a brief period of time where people were creating more households than maybe would’ve been anticipated. And that is retracing itself back. And then on top of all that, you’re dealing with massive inflation on the home buying side and home renting side. So there’s going to be households that just simply don’t get formed that would’ve been formed in that sense. That’s where the affordability issue comes into place.

Kathy:
So Logan, you’re really tapped into the credit markets having been… Well, being at HousingWire. What about what’s happening in the commercial world? Because we hear about this commercial real estate apocalypse coming and all these loans coming due and people won’t be able to refinance. Are you concerned?

Logan:
You’re going to see companies default on some of their products. I think one of the things that I’ve realized that a lot of people just assume a lot of these commercial buildings could be put into housing. A lot of these commercial buildings cannot retrofit themselves to housing. So I think a lot of people thought, “Well, the commercial industry can be saved if they make those apartments or anything.” There’s only so little that can be done in there. So eventually in time either they default or they negotiate with their note holder. So it’s not a promising look for certain people. I know PIMCO just defaulted on one of theirs. But people tell me, “Well, aren’t you concerned about the consumer?” What does that have to do with the consumer? It has to do with the actual people that work for the company. But if you’re telling me, “Well, a consumer is working from home and not their office,” what does that mean?
Less driving. What does that mean? More money either bank, right? So in the consumption set for the consumer, it’s fine. Remember, we are a consumer-based economy. It’s how much we spend as a consumer. It’s not in a essentially commercial industry. The property taxes that states and cities get, yes, that’ll be an issue, the companies themselves, the people that work there, but in the sense of higher mortgage rates or higher short-term rates is more detrimental in real estate than what the commercial industry is to the general economy. And that shows you the economy still expanding. While all this has been here for 24 months now, we’ve been talking about when is the commercial boom and you’re going to see an impact there, but it also shows that the reason that’s happening is a lot of people are working from home and they get to save that money for gas and that’s more disposable income. That’s why consumption is still solid still.
So there’s a pro and there is a negative effect to that, but as of right now, there’s a bigger pro case to be made with that because of all those people saving money on driving than the commercial industry defaulting and credit risks spreading to banks. Eventually, you’ll see more and more defaults. But as of right now, the consumer balance sheet is front and line and key to the US economy and that still is holding up very well. We’re seeing some deterioration on the auto loan side from the subprime market, which is traditionally the case. And then whenever you have a sector recession such as housing, you see deterioration in that. But in general terms, consumption is just holding up. Balance sheets are looking good, especially for homeowners. So they’re not effective as much with higher long-term rates or higher short-term rates because the biggest debt cost they have has been fixed. It’s been fixed for a very long time and it’s just gotten cheaper for them.

Kathy:
And were you referring to office when you say that?

Logan:
Just a general office, yeah.

Kathy:
General office but not multi-family or storage or other commercial?

Logan:
Yeah, not in that sense. I know there’s a lot of short term loans that are given in the multi-family industry and then maybe two years out if the numbers don’t work. But the reason why we were still consuming, the economy still in the expansion mode is that the household balance sheets in America. If you look at them on paper, they just look good and we still have almost a trillion dollars in excess savings still from COVID. So eventually, that wears off. Net interest costs are rising for households. So over time that does impact demand enough to bring sales downs where people have to be let go. We’re just not there yet for the US economy.

Dave:
So it sounds like, Logan, in general, you think that in the rest of this year maybe we’re looking at more of the same, a lot of volatility with mortgage rates. Is that right?

Logan:
If I really believe that rates could get below 5.75%, everybody would change their housing takes because it’s the duration of rates going lower and staying lower and then everyone’s comfortable. And because sale levels are so… I always tell people this is the lowest bar… Well, I mean it’s such a low bar, we could all trip over it. I mean, monthly sales getting to 4 million, post 1996 there was COVID of course that was just nobody was doing anything. 2008, and during that phrase, when a credit deteriorated, we got below 4 million, it’s really rare to be at these levels or go lower than these levels. So the bar is really low. And we just saw what happened. The market stabilized from just 7.37 to 6%. So if you could go below that, all my housing thing changes, but early on in the year, I’m just not there until the labor market breaks.
If the labor market breaks, then it becomes into sense a net positive for housing because rates fall. And the reason that’s a net positive is majority of people are always working, especially in even recession. And especially home buyers at home sellers because there’s no credit risk like we saw from 2002 to 2008, they get the benefits of lower rates and then home buyers get the disadvantage of higher rates even when the economy is expanding. So my whole housing mind changes, but it needs jobless claims to rise and the growth rate of inflation fall that it’ll be more evident toward the end of the year.

Dave:
And what do you think that means for prices on a national level?

Logan:
So 2023 was the first time I had forecasted price declines since going back to 2011 and 2012. But it was also based on mortgage rates needing to be above 5.875. So I have a rate target because this is my affordability index that goes all the way back to 2013 and there’s a big talking point of minds in 2019. The products that are available, the homes available for sell, when rates are above 5.875, especially toward 7, it just costs more, right? So some of the sellers have to just bring their prices down. It’s not like an epic collapse or anything. And pricing has actually been deferred so far this year when rates went lower. So when rates got to 5.99%, mortgage rates were actually lower than that just because of the buy downs and a seller concession. So that would’ve negated my call in a sense.
But now that we’re back up here, that’s the portion to where the homes that are available, even though inventory’s low, to sell product, you have to be willing to cut prices. The builders do this. The builders are very efficient. The builders sell their homes like a commodity. So they don’t have any shelter worry or anything. They cut prices, they cut rates. New home sales just beat, it’s the highest in many months. Home sellers are just different. They’re more stingy and sometimes things take longer, but it’s a rate story and an affordability story. It’s not a supply story. I cannot, with a conscious, tell people there’s the supply story. We’re at all time lows basically. So it’s not that. It’s just an affordability issue and it really depends on the rates. So if rates went below 5.875 or headed toward 5%, I’d have a much different take on housing. It’s just I’m not there with the economy yet, but if jobless claims arise and especially toward the second, you could see the rate situation getting better, but not early on.

Dave:
All right. Well Logan, thank you. This has been super helpful. Are there any other last parting thoughts you think our audience should know?

Logan:
The history of inventory bottoming out later is a post 2020 phenomenon. We should be getting the seasonal increase in inventory sued. It’s just not normal to have it in March and April like we’ve seen, but it should be there. The bidding wars that you’re hearing, especially in the northeast, there are parts of the US that are basically at all time lows or in some cases even lower. It’s just a product issue, right? So sometimes people think, “Well, the housing market is hot because I have 25 people coming to a…” Because there’s only three homes in the neighborhood, right? So millions and millions of people buy homes every single year. It’s just that the lack of listings right now with rates being high might make it seem that the housing market is coming back in a sense. But you could see it in the purchase application demand data, we’re just not there.
But the early on in the years, especially January, February, and March, we just don’t have that seasonal growth in listings just to balance out some of the markets. So be careful of the early year talking points that you could… We’ve seen this now the third year in a row where seasonal demand, our seasonal fall and inventory will get a little bit of increase toward the end of the year and it makes it seem like things are hotter right now, but it’s just a supply issue. And until we get back to 1.52 to 1.93 million total active listings, I would be perfectly happy with that. But now that the days on market are above 30 days the first time really post COVID, that is the closest thing we’ve had to a normal housing market. For some perspective, it was like 101 days back in 2011 when demand was down. Now it’s 30 days with 2007 sales levels, but it’s just the active listings are so slow.
So it has always been a supply story with housing and it’s still a supply story. And again, a traditional seller is a traditional buyer. If they don’t list, that’s a negative for demand and a negative for inventory.

Kathy:
Which explains why new home sales were up last month. Builders can be a little more flexible, a little more reasonable. They’re paying down points to get the rate down and hopefully they’ll do more of that.

Logan:
I wrote this article recently, I said, the home builders are so lucky. Back in 2007, they had 4 million active listings to deal with when demand was down. Here, their balance sheets are great, there’s not that much competition and they’ll pay down points. They’ll get people what they want to because they want to move product. Like a lot of people, they see these charts and they’ll go, “Most homes are under construction. Inventory’s going to blow up.” We have 68,000 new homes available for sale. That’s it.

Kathy:
Wow.

Logan:
The peak of the housing bubble crash was 200,000. That was it. So I don’t think people understand how the builders work. They don’t flood the market with homes. They build a home in a timeline where they think they could sell, they deal with the cancellation rates, they kind of, but they don’t push those homes in the marketplace. So they have more homes that are under construction that haven’t even started yet than the active listings that they have.
So don’t look for the builders to give you a lot of inventory. They won’t. Their business model is different. It has to come from traditional sellers. And if new listings data’s not growing, we’re kind of stuck here. And that’s always been one of the bigger fears about this period, that we get stuck. Nobody wants to sell, nobody wants to buy, affordability issues. So we have to work our way back to normal.
The one positive thing is that the days on market is above 30 days. I actually officially took off my savagely unhealthy housing market theme that I had from this one last February just because that, because now it says like, “Oh, that’s something normal. Your home doesn’t fly like this.” Everybody has the bid against each other. So there’s parts of the US that still has to deal with that just because they’re listing for so low. But on a national basis, it is a good thing that we’re above 30 days.

Dave:
All right. Well, Logan, this has been a masterclass. Thank you so much for helping us understand what’s going on. This is really incredibly helpful understanding some of the real lead indicators and things that are driving some of the behavior that we’re seeing in the market. So thank you. If people want to follow your work, like I know Kathy and I do religiously, where can they do that?

Logan:
HousingWire. We have a new thing called the HousingWire Tracker. It’s the freshest up-to-date weekly inventory data, look at the bond market, purchase applications, economic data to give people a kind of a forward-looking look at the housing market before the kind of conventional data comes in. Especially on the inventory side, we have access to weekly inventory at every zip code in America. So we try to give people a heads-up on what we see that will show up in the data lines maybe a month or two out.

Dave:
I didn’t put this together that you’d be on the show, but I was playing around with that today. I just noticed it for the first time. It’s very cool for nerds like us. So yeah, definitely check that out on housing market. It’s just housingwire.com/housing-market and you can see all that. Logan, thanks again. It’s always fun to have you. Hopefully we’ll have you back when more crazy stuff happens so you can explain it to us.

Logan:
Definitely. Sounds good.

Dave:
Kathy, what’d you think?

Kathy:
I think this is one of those shows I’m going to be listening to two or three times to absorb it all. He’s just such a wealth of information.

Dave:
Yeah, absolutely. He is someone I’ve always read and listened to and I think he’s just got such a good unbiased, data-driven, numbers-driven understanding of the housing market that really surpasses pretty much anyone I know.

Kathy:
Yeah. And it’s usually counterintuitive or opposite of what you’re seeing in the headlines, but for me at least, it gives me something to focus on. Like you said, just focus on not so much the unemployment rate, but the jobless claims.

Dave:
Yeah, absolutely. I really think that this backs up a lot of the things we’ve been saying and thinking about that there’s a lot of noise, there’s a lot of data to be following, but what the Federal Reserve is looking at with bond markets, which again, just as a reminder, mortgage rates track bond yields, not the Federal funds rate. What these people are looking for is at the labor market and in January we saw this huge, pretty unexpected jobs report that showed strong hiring. And that’s why rates jump back up. They went back up from about 6% to now to about 7%.
And so Logan’s point that until the labor market “breaks,” basically meaning it’s not running so red hot that workers have this tremendous wage power over corporations and their employers that things are not going to stabilize. So that’s definitely something we look at, but something you can all start to check on here. He gave a very specific number, I think it was 323,000 or something per week. And just for reference, for anyone who’s listening to this, we’re at about 192,000. So there’s a long way to go, but most people believe that it will head towards that number by the end of the year.

Kathy:
Which again, it’s like living in opposite world. We don’t really want to see people lose jobs.

Dave:
Right.

Kathy:
Unfortunately, that’s what it’s going to take to get the Fed to slow down their rate hikes.

Dave:
Well, something interesting is that jobless claims could almost go up without people staying unemployed long term. Because what Logan’s talking about is known as initial jobless claims, which is basically when people get laid off or fired, they could file for these benefits, but they might be off it the next week. You don’t really know. So there’s two different types of unemployment data you can look at. You can look at sort of these consistent enduring jobless claims that are ongoing, it’s called jobless claims. But since right now there’s still 10 million job openings in the United States. There is a scenario where layoffs happen, but people quickly find jobs maybe at a lower paying job. I don’t know if it’s exactly one to one. But it’ll be interesting to see what happens here, because even when jobless claims were going up in December, the unemployment rate didn’t really move.
So something that really defies all logic, and as Kathy said, no one’s hoping for people to lose their jobs. We’re just trying to explain the calculus that the Fed is doing in their head because they have this dual responsibility of fighting inflation and trying to ensure maximum employment. So it’s sort of this tightrope that they have to walk, and right now they’re favoring… They think the more important issue is to fight inflation and acknowledging that that could cost jobs.

Kathy:
Yeah.

Dave:
All right. Well, yeah. I’m going to go listen to this one again. Very interesting. Thank you, Kathy. We appreciate you being here. Thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.