PolicyCast: Two Number Whisperers Foretell the Housing Horizon

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations:

If we want to know what direction housing is heading this year, we need to know what’s going to happen to the economy. That’s why I’m kicking off the 2024 season of the Arch Mortgage Insurance PolicyCast with two preeminent economists. Parker Ross of the Arch Capital Group and Cristian deRitis of Moody’s. Where are interest rates headed, what impact will climate change have on housing, and what can we expect presidential candidates to be telling voters about the state of the economy. Parker and Cris have all the answers.

Willison:

Well, I’m delighted to host two of the nation’s foremost housing economists, Parker Ross of Arch Capital Group and Cristian deRitis of Moody’s to the Arch Mortgage Insurance PolicyCast for our first podcast of 2024. Welcome, gentlemen.

Parker Ross:

Thank you.

Cristian deRitis:

Thank you. It’s an honor to be here.

Willison:

Hey, listen, I have a lot of questions. So, let’s dive right in.

Willison:

Just recently, we heard the US economy grew at 3.3% in the fourth quarter, and that lifted the economic growth for the entire year to two and a half percent, are either of you surprised? Did you forecast such robust growth? Parker, why don’t we start with you for that first question.

Ross:

Sure. I was surprised as strong as it was. We weren’t forecasting that robust of growth, but we were expecting, you know, pretty decent growth in 2023. Which, you know, was quite the outlier view. You go back a year plus and there weren’t many. I think there was almost 90% of economists were calling for a recession last year so certainly caught everybody off guard. There’s you know, a lot of a lot of reasons for that. But, you know, certainly the fiscal policy was one of the big things and the excess savings that was still sitting in consumer accounts after the pandemic. There are a few factors that are likely [to have] lifted growth more than, more than expected, but certainly, I don’t know Cris, where you guys were to start to start the year but definitely not that surprised what we were expecting even if it was modest growth.

deRitis:

Yeah, I guess we were pretty close to your camp. We were also calling for a growth year in 2023. We’re not, we did not have a recession penciled in unlike most. But I have to say, even with that somewhat optimistic view, it was a surprise to the upside. Right? It’s clearly even the fourth quarter. Right, this last number that that Kirk referenced was clearly stronger than consensus, even stronger than our estimate. For that fourth quarter performance, I would highlight the consumer and just the resiliency by U.S. consumers throughout this entire period has just been remarkable, right? You point to the excess savings as part of that. But think of all the shocks, potential shocks that we’ve thrown at this economy between the debt ceiling, Russia, Ukraine invasion, oil prices going up. Consumers have been rock-solid in terms of continuing to spend and support the broader economy. So that’s certainly a positive upside risk that we saw.

Willison:

So Cris, the next one I’ll let you answer. Have we escaped a recession? What are the key indicators you guys are looking for?

deRitis:

Well, you know, we’re debating whether or not we call it one of the, whether or not we declare victory. At what point do you declare victory? I think we still have to wait until inflation is firmly back in the bottle. Right. We had a personal consumption expenditure inflation report out today as well, that was quite positive, shows that things are continuing to move back in. We do expect to see inflation come down to the 2% Fed target later this year. But I think we want to see that before we really declare victory, [we] want to see the Fed actually starting its rate cuts. Right? Before we declare, “Hey, we are firmly out of this out of this cycle.” So, there’s still some downside risks out there. I think it’s important to highlight those but it’s getting close, getting close to declaring victory.

Willison:

Parker?

Ross:

Yeah, no, we’re still calling for you know, a bit of a slowdown this year. I think the big, the big thing to Cris’ point is the inflation story, we also expect inflation to come in but you know, the Fed. There’s, right now markets pricing is I think around 50/50 of March rate cut but we’re sitting in kind of the main camp for the first cuts. I think they want to see more data in hand. I think the bigger concern at this point is calling, declaring victory too soon, rather than a recession, triggering recession. Certainly there’s a long and variable lag in monetary policy that is always a concern. Haven’t seen those yet. Certainly. In some sectors more than others. But yeah, I think that’s the big, the big risk is if growth continued like this, the Feds going to be much more reluctant to start the cutting cycle and then if those long and variable lags rear their head at the wrong time. You know, the second half of this year could be a little exciting. So certainly you know, expecting the Fed to get rate cuts underway mid-year, basically probably every other meeting, keep the cutting going 25 basis points, get things back to normal. They’re not cutting because of a recession concern as I was mentioning, they’re cutting to get back to normal. Five and a half percent is obviously not normal for Fed rates. So, so, they’ll probably try to get it back to the you know, the mid- to upper-2% range.

Willison:

You jumped ahead of me because I was gonna get bought and ask, When do you think the federal will start cutting interest rates? I was at a meeting just recently and a number of folks were saying “You know, the economy is going so well right now, the Fed doesn’t need to cut interest rates.” And Cris, what do you think?

deRitis

Yeah, so in our Moody’s Analytics baseline, we have May as the first the first meeting where they start to cut. But you’re right, given the strength of the economy seems like you know, businesses, consumers are kind of shaking off these interest rate hikes at least so far. My bias would probably be that they may wait longer at this point. Obviously, there’s a lot of data between now and even March. To be seen, but I don’t I think March may be off the table at this point, barring some other extremely impressive inflation report or some other activity but mid-year?

Ross:

I think mid-year. Yeah, no, I think the, you know, the outlook from here, certainly the consensus view, I think, for growth is still fairly weak for 2024. I think consensus is expecting growth, GDP growth to slow about half [a] percent over the next couple of quarters. Maybe they’ll get revised stuff and the next consensus survey that comes out, but the consensus continues to seem relatively pessimistic about the outlook and yet also calling for those rate cuts maybe because of that pessimistic outlook as opposed to the normalization but I’ll turn it back to Kirk of what other topics you have for us.

Willison:

So, I was wondering, this is kind of spur of the moment, but given the fact that, you know, hey, these, these rate increases were painful while they took place. But if you were to give a grade to the Fed for managing the situation, Parker, what kind of a grade would you give them on an A to F scale?

Ross:

Give them a solid B. I mean, I think the, I think they kept quantitative easing going a bit longer than they needed. I mean, you know, obviously, the housing market was doing just fine without buying a bunch of mortgage-backed securities. So I think there was not really a need to keep it going.

And they were a little bit late to the party on that, and obviously can’t give them the grade A on the transitory inflation that they were declaring back then. So, you know, they caught up in a hurry and they got, they got to a restrictive stance and didn’t overdo it, apparently, last year. So, at this point, you know, I don’t know how much credit we give the Fed to the inflation normalizing. But at this point, they haven’t put us into recession, so give them some credit for that and there’s probably, you know, there’s probably some credit due to them for what we’ve been through, so I’ll give them a B.

deRitis:

I guess I’m a little bit more generous grader. I give them at least an A minus.

Certainly, there are parts of the response that could have gone better. They were certainly late to the game in terms of starting the hiking cycle and clearly in terms of stopping the MBS purchase mortgage-backed security purchases. Okay, there we agree, that’s solid D. But overall, if you think about the extent of this period, the stress that was involved with the multiple shocks we’ve been through, I think they’ve navigated very, very admirably. I guess we’ll wait to see until what happens here over the rest of the year if inflation does indeed get back to the 2% target without a recession in the meantime, before we get the final grade, but at least in terms of this mid-term update. I think they’re, they’ve done admirably well.

Ross:

The other interesting thing is the little banking squall that we had last year where you know, that could have turned into something a lot more than just the banking squall, they certainly reacted well to that. And I mean, we’re, we’re well into almost a year since that started so the BTFP program is about to come to an end. But it seems like that was the proper response and navigated well through that so certainly getting high marks on that regard.

Willison:

Let’s turn to housing, specifically, the Mortgage Bankers Association just reported that mid-January mortgage applications were up 3.7% over the previous week, and this is despite mortgage rates that were edging up over the same period. What explains that?

Ross:

I mean, think of where we are right now with mortgage rates relative where we have been. I mean, there’s, I think there are a lot of people that were certainly turned off by the 8% rates that they were getting quoted late last year. And so, there’s a little bit of momentum from that just you know, the people that have been on the sidelines for a lot of late last year coming back into the game. Seeing a six handle on their mortgage sounds a lot better than a seven handle so although it’s obviously not back to anywhere it was a couple of years ago that that’s still enough to generate some interest and some activity. You know, there’s not, not a lot of refi activity at this point. There’s a little bit coming back for some people that I think a lot of it’s cash-out refi though at this point, as opposed to people trying to improve the rates. But yeah, I think that’ll continue even if we don’t see a big improvement in rates going forward. I still expect mortgage purchase application activity that to gradually trend higher this year. You know, I don’t think we have to get to a five handle that again, you know, I think that’d be quite a bit of activity of back to a five handle so I think just you know, the relative comparison, I think consumers are looking at this like an opportunity to get back in the market.

deRitis:

Yeah, I tend to agree with that. I’d be a little cautious to read too much into a week to week number. There’s gonna be some volatility in that MBA or any really weekly number, to say the least.

I think we also have a very strong psychological component in the housing market today, right? Given the very low levels of inventory and the strong levels of demand that are out there and people are feeling the pressure to move if they do find a property that that they can afford that they like, and they’re even willing to pay a little extra or you know, take out that higher interest rate mortgage, just to get in the door, perhaps with an anticipation that rates will be coming down, they’ll have a chance to refinance to a lower rate and in the future. And I think that scarcity of the available inventory just creates a lot of anxiety that “lizard [brain] buying” kind of kicks in for folks and you might see people reacting the way that you might not think is particularly logical given the movements and the rates themselves. So where do you think mortgage rates are gonna go in the next six to 12 months? So I do expect that they will drift down perhaps getting closer to the 6% level, perhaps maybe more in 2025 the spread between the 30-year fixed-rate mortgage and the 10-year remains quite elevated, but it has started to come in. I do expect that to, to continue to come in further as we get lifted more investor activity especially if the economy is improving. We remove some of the uncertainty or the volatility in those interest rate markets that should help to get that interest rate back down to something just under 6% would be my long run equilibrium. And that’s based on an assumption that the 10-year Treasury will hover around 4% consistent with nominal GDP growth. And then that. that spread comes into something closer to 200 basis points versus 300. Historically, it’s been closer to 161, 170. So still allowing for the fact that maybe there won’t be quite that spread tightening all the way back. Given that the Fed is no longer in the market purchasing MBs and that it will hold when it comes to investor demand. But nonetheless, I would expect to see us kind of dip down to that maybe five and three quarters, let’s say would be a long-run equilibrium.

Willison:

And Parker, do you agree?

Ross:

Yeah, roughly, I think we’re a little bit lower on the long-run equilibrium, but you know, the near term, alluding to before probably in the low 6% range seems reasonable with the timing of the Fed rate cuts and assuming the economy continues to hang in there. You know, getting around low 6% Makes sense, but the long run I look about similar to the concept of the nominal GDP, you know, being roughly over the 10-year, but I think about more in terms of where that the Fed is at in the neutral rate in the long run if they’re getting back to two and a half percent, you know, 150 basis point yield curve between the fed funds and 10 years is actually pretty, pretty significant compared to what it has been over the past many decades. So especially in periods of relatively equilibrium periods, not that we’ve had many for much long period of time, but you take that 250 and you layer on maybe 75 basis points to 100 basis points of a yield curve slope there, then you’re getting into the, you know, three and a half, maybe three and a quarter range for the tenure. So later on. I agree. Probably 20 basis points make sense for the mortgage spread. I don’t think we’ll get there this year. I think that’ll be 2025 story for all the reasons you mentioned. So yeah, getting into the fives maybe next year and you know, stabilizing around maybe that five and a half percent range or so.

Willison:

So, if there’s a long-term trend and going down. Would you suggest that consumers might want to consider an adjustable-rate mortgage now versus a fixed?

Ross:

I mean, I don’t think there’s much of a pickup right now in terms of taking scrapers. The fixed-rate, I think was a different story previously, so I mean, it’s tough to qualify, you know, at the adjusted rate and, you know, there’s more strict guidelines around qualifying so and typically you’re gonna be fixed for probably five to 10 years. So I personally have an adjustable-rate, and I do recommend them but it’s always you got to do the math for each individual to figure out the scenario but yeah, right now, if there’s not much pickup to doing the adjustable-rate, I just go fixed and, yeah, probably refinance in a year or two whenever rates are a bit lower, which I think that’s part of why mortgage federal stay a little bit more elevated, too, because that’s what mortgage bankers are expecting as well, that prepayment rates are going to be higher in the future than they are today. And so they’re baking that into that mortgage spread.

deRitis:

Yeah, I agree on all points there.

Willison:

We’ve seen that a lot of news since the start of the pandemic about certain cities becoming overvalued as people rushed out of higher cost regions. You know, Phoenix, Boise, Austin are three that come to mind. You guys think that the post-pandemic migration is slowing?

deRitis:

I do, I actually have some data out I think just yesterday or today. We have data that we collect through our partnership with Equifax that we’re looking at credit reports to measure or examine how migratory patterns are, are shaping and we find that this data is a little bit more forward-looking or certainly gets updated much more quickly than post office data or IRS data that might be and it is showing some evidence of slowing migratory patterns overall. I don’t think that’s a surprise, even you could just look at the existing home sales and see that they’re way down to clearly people are not moving, buying and selling at the rate that they were previously. But at the same time, it also suggests that perhaps that urban flight that had been going on [is] maybe slowing down as well. We’re sorry we’re certainly seeing younger folks preferring perhaps to move in more urban areas perhaps given the cost of housing elsewhere. And even for other age groups and also seeing some of that slowdown in the in the exodus from those areas. But by and large, some of the broader patterns out west of those are still in place, just not quite at the rate that we saw during the height of the pandemic.

Ross:

And I’ll defer to Cris on that. He’s got much better data than I have available at my fingertips on the migration data. But one thing I think is interesting is obviously everyone knows Austin was a hotspot, then obviously it’s not the hotspot anymore. But the interesting thing is it’s still leading growth, right. So it’s slowed and the housing market got a bit over its skis, but it’s not like the growth just turned off. It’s still one of the fastest- growing markets out there. There’s still [growth] but there’s also a lot of destruction in the market. So that’s the interesting thing looking across, you know, Nashville, Austin, Phoenix, Boise. They were some of the highest- growth markets, remain some of the highest-growth markets, but also have a lot of supply coming online; affordability and valuations a different story. And so it’s actually interesting even across those you don’t have the same price activity. It’s not like they’re all down similar amounts. You look at Phoenix, it’s actually started to kind of stabilize a little bit earlier than Austin has. Austin still going through some lumps there and, you know, Boise is in a little bit better shape. So, it’s interesting looking at the different dynamics across markets. That, you know, although you think of those mentally as kind of the same types of markets are having very different outcomes based on some of that construction activity with the relative supply of you know, news, the new construction is versus demand, and they’re all half of those different levels of hotness, multiples of growth.

Willison:

So Parker, I know you’re constantly looking at geographies from a, from a risk standpoint as an insurance economist. So let’s turn the tables a little bit. What are some cities or regions that you think are undervalued and why do you view them as maybe promising markets?

Ross:

I don’t know if there’s a ton of undervalued markets left. There’s some opportunities in areas that are less overvalued, maybe, but certainly, you know, the amount of home-price growth we’ve seen across all markets was extremely robust over the past few years, and certainly far outpaced income growth. So just about across the board we see most markets as either close to fairly valued or overvalued. But, you know, some of the Northeast is interesting. You talked about Connecticut, my home state. I don’t know that I would call it undervalued, but certainly it’s on the more affordable spectrum relative to incomes. And you kind of continue to see that as extremely tight. Not a lot of homes available for sale. Prices continue to rise because of that. There’s, you know, large, large labor markets nearby that have high incomes that can support those prices and, and so also up in Boston, Boston has been one of those markets that’s less overvalued than others and has, you know, relatively tight markets. Philadelphia is an interesting one that I guess Cris probably can speak to that more than I can. I don’t know Philadelphia the way he does, but it’s an interesting one that you know, has been a bit more robust than you probably would have expected otherwise, but remains relatively affordable and has obviously good labor market opportunities nearby.

But yeah, most of the you know, the West, half of the U.S. is certainly on the more overvalued side. We see a lot of those more stretched and Florida’s getting there as well. But, but yeah, some of the Midwest, Cleveland, some of the Ohio market, the Northeast or some of the areas that are on the more affordable and less overvalued end of the spectrum that still have probably a bit more opportunity to get in without as much downside risk on home prices.

deRitis:

I’d agree with that Midwest, Northeast, eastern parts of the country again, perhaps reflecting some of those migratory patterns. One market that you know, if we just do a clean screen if you will, on, on affordability or overvaluation, looking at growth, trend growth versus a fundamental growth, San Francisco rises to your top to topple this because prices have come in. So relative to their history, they actually look like reasonable, actually undervalued. But then you have to, of course, overlay expectations for future economic growth and understand what’s what the demand pattern might look like there and have they had a structural shift, perhaps, in terms of that relative valuation, so we use our valuation got about as a first cut to rank order some of these metrics, but I think you want to be a little careful not to just take the data right at face value, because there could be some of these cross turns there. Yeah, the same principle rises again. I certainly hope they do.

Ross:

But it’s an interesting case study too, because you have, you know, San Francisco and Connecticut have similar effects in terms of the out-migration, out-migration generally. But, you know, maybe a little bit more extreme in San Francisco than in Connecticut. There’s, there’s, there’s kind of a steady stream of people out, out of Connecticut in the northeast to more affordable markets. But there’s also a steady stream of people moving out of the cities into the suburbs. So it’s an interesting mix. But yeah, different very different price behavior and like Connecticut and Boston than what you have in San Fransisco.

deRitis:

Absolutely.

Willison:

And if there’s one constant barrier we’re always hearing about when it comes to housing affordability is about lack of supply. So, you know, depending on who you’re talking to, it’s 3 million shortage, 6 million short, which we can face the worst shortages and what steps do you see local and state governments taking to address the problem or what steps should they be taking to address the problems?

Ross:

I can start with I mean, in general, I think the easiest way to look at places that are most undersupplied are the places that have the highest price-income ratios. I mean, if there’s almost by definition, if the price taken ratio is extremely hard, and that means that if a market where, for whatever reason, the, there’s land supply regulation, that, that you don’t have enough supply to keep things relatively steady. So, you know, in some of the high-cost markets, like New York and San Francisco that you know, have land availability issues as well. As regulatory issues in terms of getting construction underway. You see extremely high price to income ratios, and they trend higher over time as well because this is not the supply coming online. So certainly, building more housing is an interesting way to address that and Los Angeles is a place that’s taking an interesting approach to relaxing some of those regulations to getting at us as we call them accessory dwelling units. Basically, legalized so that people can play, you know, small living quarters in their backyards or on the properties that they couldn’t otherwise and you know, provide the additional supply to the market that should allow more balance there, but definitely defer to Cris, see if he has any thoughts on that?

deRitis:

Yeah, so clearly zoning is the key here. The zoning restrictions that prevent density clearly have a have an impact. In terms of keeping house prices elevated and rising.

It’s a real challenge given the NIMBYism, not in my backyard movement, right. Everybody agrees in theory, oh, we need more houses, right. There is a deficit however you measure it, and all the numbers are, are large, whether it’s 2,000,003 or 6 million. Up there. And we all agree that yes, we need more supply, we have zoning is likely the major regulatory hurdle, but then very difficult to, to move on that at a local level. So, I say for the local governments a challenge but one they have to continuously educate folks on increasing density increasing the supply of housing is a benefit in the end it’s your makes your community more attractive for businesses and makes your community want a destination for families. And other households forming there. So obviously, we need to be smart about the growth and the reform. But that’s … I don’t see any other way around it. I don’t see another solution without addressing that. That’s somebody’s problem. Even that though, I will submit is not it’s not going to be an overnight solution. Right. So we do have areas across the country that have changed their zoning, right, have liberalized but it’s doesn’t mean that the next day you have suddenly builders coming in to put up additional units. It’s gonna take time, but if we don’t take that first step, it’ll never happen.

Willison:

So, there’s a new challenge that seems to be emerging when it comes to affordability, climate change. And wondering just you know, in your view, How will climate change alter that national regional housing markets in the coming decades? Which areas you think face the greatest risk of natural disasters? And how might higher homeowner insurance premiums begin to impact housing prices?

deRitis:

Yeah, I think you hit the nail on the head there with the last statement. I think there’s this there has been this idea of climate change. Being this threat that is often the distance, multiple decades away. And that may be true in terms of the most deleterious impacts of climate change and how, how severe storms are frequent storms may occur, but we’re already facing the impacts today. From a housing perspective or your homeowner’s insurance. Both availability and cost is already having a very significant impact on certain markets. I expect that it’s going to continue to spread and grow. We continue to hear about insurers exiting entire states like California and Florida. Given the regulatory environment, the fact that they can’t, in their view, charge a premium that is sufficient to cover the risks. And therefore, you’re going to continue to see that having a very negative effect on the ability of households to pay right to actually insure their homes if they can’t find the insurance and then potentially ripple effects on the mortgage market. If insurance is no longer available in certain areas, that’s going to certainly have an immediate impact in terms of cutting off the supply of mortgage credit. So, I think I think the most important takeaway is it’s already happening today, right, like something that’s far off in the future. And we’re going to continue to see the impacts and higher costs impacting certainly states in the South. Florida with a lot of hurricane exposure areas with certainly wildfire exposures. As well as we think about California. But then, increasingly, you could see additional storm activity in the middle part of the country, right? Areas that are surely subject to hail and windstorm. Those could become more intense as well, drought in certain areas. I don’t think we can just focus on a couple of areas that can identify today. We have to think a little bit more strategically or globally in terms of the impacts here.

Ross:

Yeah, I think it’s interesting. I mean, you can I think Redfin added a nice tool on their feature, even access to the climate risks, you know, to the different markets that you’re looking at. But I think they also found that consumers are continuing to flock to those markets that have climate risks. And so that’s what, to your point. I think a lot of people view it as something far in the future doesn’t impact them. But maybe if they’re new to the area, they find out how it doesn’t impact them and then also the homeownership, sorry, the homeowner’s insurance is something that has set in your face impact of wow, my homeowner’s insurance just doubled.

Maybe it makes people think twice once they’re there. So that’s the interesting thing as we went through this, this pandemic that shook up where everybody lives. And had all this increased migration of people going to new areas, but you have property taxes are starting to go up, you know, based on all of the price gains that have that have happened over the past couple of years and those bills are going to be coming due and people are seeing valuations adjust higher. But yes, certainly on the climate front, the homeowner’s insurance is the most immediate impact. I think that homeowners feel aside from the actual damage from the climate events that are happening.

deRitis:

So, I suspect that the low interest rate environment we had kind of papered over some of those issues. Okay. I see that there’s a higher insurance I’m going to have to pay for as a as a consumer as a buyer, but I’ve got this great rate, so I can make that trade-off. Now that things have changed, and even though we expect interest rates to fall, they’re not falling all the way back to three, 4%. I think now we’re gonna start to see more of that.

Effect of a higher premium or higher property taxes, taking a bite out of house price growth, at least the trajectory maybe not going negative, but I would expect that some of these areas are going to see a sharp slowdown.

Willison:

So, it’s natural in our line of work. We talk a lot about homeownership and that the high cost of buying houses means that an increasing number of Americans are renting. And Harvard’s Joint Center for Housing Studies just issued a report saying that housing is unaffordable for half of Americans renters. 22 million Americans are paying more than 30% of their income for rent and utilities. And only half of those above 11 million are paying more than 50% for their rent and utilities. How do you think we have addressed this problem?

deRitis

I think the answer is the same. It’s supply right to more and more units that will help rent growth to flatten and if not fall in certain markets. I think, I think we’re already seeing some of that right. We are. over the past year we’ve seen rent growth; you know, come in sharply, right. One reason why I believe overall inflation is going to come in this year is that that shelter component of both CPR PCE inflation is going to continue to fall and feed in.

In order to continue down that path we need to continue the supply of multifamily apartments. We have about a million units under construction today. So I do expect to see that that’s going to continue to put some downward pressure on rents over the next couple of years here as more of that supply comes online.

But we need to keep that engine going, right? So that means making sure that we have adequate number of construction workers, building supply costs don’t increase. There’s adequate financing for these apartment buildings in order to keep those rents climbing up again or accelerating the future. The key is to continue to increase the supply and that goes back to some of the zoning questions as well.

Ross:

It goes back to the zoning and then also, the, you know, there’s some areas with rent control policies in place but certainly don’t, you know, don’t make builders excited about building in markets like that, but yeah, certainly the supply will be significant over the next couple of years. But part of where the Fed’s policy has really been built is in the multifamily sector. Those high financing costs and carrying costs once you come to completion certainly impacts multifamily income flows and net income flows.

And so that’s we’ve seen a pretty big downturn in permitting activity. So, we, you know, after the next after those million units are delivered, then the continuous supply of multifamily is likely to taper off rather rapidly. So you know, based on the trend of permitting, that should happen over the next you know, year and a half, two years down the road, we should see a pullback and all those units coming online obviously get through it, but that certainly that’s going to be a concern that we get a little bit of bullwhip effect there, we go from all of the supply coming, record supply in many decades. To dialing it back too much and then we ended up having strong rent growth again, that makes it unaffordable again for winter.

Willison:

Parker, there’s been continuing debate in our industry about the role of large institutional investors and their purchase of homes. Do you think institutional investors and single-family rentals are helping or hurting housing affordability?

Ross:

I don’t think it’s, I mean, it’s certain markets that certainly have an outsized impact and but at the end of the day, those large institutional investors can also probably operate their rental properties a little bit more efficiently than mom-and-pops can, so I mean, if they can have staffs of maintenance crews that they don’t have to hire, you know, a random plumber to come by and fix the pipes. So, I think the, they have economies of scale there that could make the overall process more efficient and maybe have better, both better price opportunities for renters, from them being involved. And also, you know, having them there creating the demand for those single-family rental type units. Being able to buy like entire communities and you know, be an investor [in] an entire community certainly helps. with the supply story. So, you know, yes, if it’s overly concentrated and everyone’s swarmed into a single market, and it’s it certainly doesn’t help in the short term in terms of the price activity that results for everybody, but over the long run, you know, I don’t see it as a as a bad thing for for the housing market. I think it’s just another way to hopefully get more supply to the market and have additional backing.

deRitis:

I agree with you there [is] a lot of talk about institutional investor but my, but the fact is that they still command a very small share of the total housing stock. So, to suggest that they are the ones that are responsible for all this house-price appreciation, it seems a little bit of a stretch. To your point that you have to be aware of the concentrations, right? We don’t want one-company towns to show up, of course, but I think the examples of that are pretty few and far between. They’ve also the fact is if we do have a bit of a softer patch in the economy if things were to soften in the housing markets, having those investors there can also be beneficial, support housing, housing throughout the cycle, right. We don’t want that severe pullback all the sudden in construction, for example, because house prices are suddenly crashing. So they do provide a beneficial role as well in terms of keeping a constant level of demand, potentially, throughout the cycle. Keep making sure that we continue to grow the supply rather than having re fits and starts in terms of new construction at different points.

Ross:

And that was interesting. You saw, during the, you know, when demand really collapsed when rates first started spiking, you saw some of the institutional investors step in and purchase like I said almost entire communities that weren’t intended for single-family rentals, but hey, you know, you got, you got a bulk buyer now and a point where you don’t have any demand or at least don’t have the demand that you thought you had so that they were able to step in and smooth through the homebuilder concerns at points like that, whether it’s the multifamily or single-family side, you know, having somebody with deep pockets whenever times get tough, but it’s nice to have participants like that in the market.

Willison:

So, a couple more questions here: It’s an election year, so let’s try to have some fun with politics. When Bill Clinton won his first election for the White House, his campaign was driven by that famous expression: “It’s the economy, stupid.” Cris, pretend that you are an advisor to a Republican presidential nominee. What’s the message that you would have him or her telling the voters that would increase the GOP’schances of regaining the White House?

deRitis:

Oh, wow. Okay, putting me on the spot here. I guess.

Willison:

I’m going to ask Parker to take the opposite stance advising President Biden.

deRitis:

I guess step one is to you know, I guess with any economic report, you can pick and choose the data that you look for it, for, we’ve been kind of touting some of the strength in the economy. When it comes to growth in the labor market. Right. I’m going to point out the, or emphasize aspects of weakness. It’s still the high, relatively high level of inflation, right, although we might be trending down and snap back down to a target level. Certainly, if you think if you talk to the person on the street, right, inflation remains a real issue, right? Yeah, the growth rate is maybe moderating, but to many or most households, I would suggest that they are really focusing on the levels, right, and things are more expensive today than they were three, four years ago. Right. So clearly that’d be that would be part of the messaging. Perhaps on a more forward-looking basis, if we’re thinking about housing in particular, might emphasize perhaps, a platform that would encourage an easier regulatory burden for home builders, ways to increase supply through zoning reform, other programs to encourage more capital into the homebuilding market to encourage that greater supply to address some of these real concerns in terms of both home prices and rent prices being high relative to incomes. Maybe I’ll leave it at that.

Willison:

What should the Biden economic message vie for his reelection campaign?

Ross:

Hey, they saw the inflation, real incomes are returning, the outlook looks good. I mean, what What’s there not to like right now? Sure, things are pricier than they used to be. But the outlook is bright. And, you know, we’ve mission accomplished at this point.

Willison:

Well, this has been a great way to kick off 2024’s podcast series. Thanks very much for taking the time today and I look forward to talking to you guys again soon.

Both:

Thank you so much. Appreciate it.