Podcast Summary
Housing market's resilience despite rising mortgage rates: The housing market rebounded from a dip due to low unemployment and lack of forced sellers, leading to record-low inventory and price stability, benefiting homeowners but challenging potential buyers.
Despite historic run-ups in benchmark interest rates leading to higher mortgage rates, the housing market experienced a tiny dip and then rebounded, resulting in the shortest housing bear market ever. Principal Asset Management, a real estate manager, uses a 360-degree perspective to identify compelling investing opportunities, harnessing local insights and global expertise across public and private equity and debt. The housing market's resilience in the face of rising mortgage rates can be attributed to the lack of unemployment and forced sellers, leading to record-low housing inventory and price stability. This dynamic has been a theme in recent episodes and is a key factor preventing a significant housing downturn. Homeowners have benefited from this situation, while potential buyers may find it challenging to enter the market. The housing market's behavior defied expectations, highlighting the importance of considering various economic factors when making real estate investments. For more information, visit principalam.com, and remember that investing involves risk. American Express Business Gold Card offers rewards for businesses with top spending categories like transit, US restaurants, and gas stations. Terms apply. Learn more at American Express dotcom/businessgoldcard.
Housing market's supply and affordability dilemma: Mortgage rates rise, but homeowners' fixed-rate mortgages keep inventory low, causing affordability challenges. Existing homes dominate transactions, and new construction meets demand, keeping prices stable despite affordability concerns.
The housing market is experiencing a unique dynamic between supply and affordability. Mortgage rates have significantly increased, leading to affordability challenges. However, many homeowners are able to hold onto their homes due to fixed-rate mortgages, keeping inventory low. Existing listings make up the majority of transactions, and despite the rise in interest rates, homebuilders are increasing new home construction to meet demand. This situation has resulted in a market where affordability might suggest lower home prices, but homeowners' unwillingness to sell and the limited supply of new listings keep prices relatively stable.
New home sales, starts, and builder confidence on the rise: Despite a decrease in the backlog of homes under construction, new home sales growth is mainly driven by multi-unit starts, not overall demand for shelter.
The housing market is experiencing a significant increase in new home sales, housing starts, and home builder confidence after a decline in 2022. This trend is driven by a decrease in the backlog of homes under construction due to supply chain issues and labor constraints. However, it's important to note that the growth in new home sales doesn't necessarily indicate an increase in overall demand for shelter, as single unit starts have historically made up the majority of housing starts but now make up a smaller share. Instead, multi-unit starts are driving the growth. Additionally, household formation, which saw a surge during the pandemic, continues to be a key question in predicting future housing trends.
Stronger-than-expected household formation: 1.8 million new households formed in past 3 years, driven by higher headship rates, defying demographic expectations
The trend of household formation has been stronger than expected over the past three years, with approximately 1.8 million new households formed, compared to the estimated 1.2 to 1.5 million based on demographics. This increase can be attributed to higher headship rates, meaning more young adults forming their own households. The base case forecast for house prices is currently flat, despite some negative year-over-year prints, which are expected to be short-lived. This shift in the housing market was an out-of-consensus call last year, but it has since become more widely accepted. It's important to note that the data discussed is slightly lagged, and the trends mentioned may continue to evolve.
Mortgage rates and affordability impact on housing market outlook: Low refinanceable index and potential for lower mortgage rates could bring more demand in a tight supply environment, leading to higher home prices, while affordability concerns and rising mortgage rates pose downside risks
The housing market outlook is influenced by various factors including supply, demand, affordability, and credit availability. However, the speakers identified potential upside risk due to the low refinanceable index and the possibility of lower mortgage rates, which could bring more demand in an already tight supply environment. This could lead to home prices climbing more than expected. Conversely, downside risks include the possibility of home prices not climbing as much as expected due to affordability concerns, such as rising incomes or falling wages, or a sharp increase in mortgage rates. The unemployment rate was also mentioned as a potential risk factor, but the speakers focused more on the impact of mortgage rates and affordability on the housing market outlook.
Improved mortgage market and lending standards: The housing market is stronger today due to improved mortgage market structures and stricter lending standards, reducing the likelihood of affordability issues and defaults.
The housing market today is in a much stronger position than it was during the 2008 financial crisis. The structure of the mortgage market and lending standards have significantly improved, making it less likely for homeowners to face affordability issues or default on their mortgages. Additionally, servicers have more tools to help borrowers stay in their homes during economic downturns. However, there are concerns about the potential impact of increased regulation on banks' willingness to underwrite mortgage credit and their ability to hold onto mortgage-backed securities. This could lead to higher mortgage rates and less availability of credit. It's important to keep an eye on these developments as they could impact the housing market in the future.
Housing Market Price Appreciation: Shift to Remote Work, Low Mortgage Rates, and Household Formation: The housing market is experiencing significant price appreciation due to remote work, low mortgage rates, and household formation, but affordability remains a concern with tight lending standards and underweight mortgage demand.
The housing market has experienced significant price appreciation due to a perfect storm of factors including the shift to remote work, historically low mortgage rates, and a surge in household formation. However, affordability may remain a concern as mortgage demand is expected to remain underweight, and lending standards are likely to stay tight. The supply of homes and population migration are key factors to watch for home price growth in the future. Additionally, the trend of high-income earners leaving densely populated areas and moving to less crowded locations contributed to the housing boom, but this wave may be reversing as some companies are bringing employees back to the office. As a leading real estate manager, Principal Asset Management leverages a 300-degree perspective to uncover opportunities in the market, delivering local insights and global expertise across public and private equity and debt.
Supply crunch in the housing market: Airbnb hosts and institutional investors won't solve it: Despite a housing market supply crunch, neither Airbnb hosts nor institutional investors are expected to significantly impact the issue, leaving weak demand and rising prices as the market's defining characteristics.
The housing market is currently experiencing a supply crunch, leading to rising home prices despite weaker demand. The speakers discussed potential sources of additional supply, including Airbnb hosts and institutional investors, but neither seems poised to significantly impact the market. Airbnb hosts, who may sell their properties if they can no longer rent them out, could represent some supply, but the speakers believe it won't be enough. Institutional investors, such as iBuyers, have been active in certain markets, but the number of homes they've purchased is not a large percentage of the total housing market. Additionally, the demand for these institutional purchases may have contributed to home price appreciation in those markets. Overall, the speakers expect the supply crunch to continue, leading to a housing market characterized by weak demand and rising prices.
Baby Boomers' Home Ownership Contributes to Low Housing Supply: Baby boomers' home ownership, mainly those over 65 and bought before 2000, is a significant factor in the current low housing supply due to their unforecloseable homes and lack of need to sell. However, economic conditions could change their decision to sell, impacting housing supply.
The large number of homes owned by baby boomers, many of whom are over the age of 65 and bought their homes before 2000, is contributing to the current low level of housing supply. These homeowners, who have seen significant home price appreciation and are less likely to have mortgages, make up a third of all owned homes in the United States and their homes are virtually unforecloseable. This situation, while not the base case, could lead to a significant increase in housing supply if economic conditions deteriorate and these homeowners decide to sell. For now, affordability and supply are no longer worsening at historic rates, but are not expected to improve substantially or deteriorate significantly. The direction of travel for these two metrics is important to watch as they will influence the housing market moving forward.
Experts track housing market recovery closely, but progress is uneven: Experts predict a housing market recovery, but it's not evenly distributed. Existing sales, single unit starts, and home prices will show improvement compared to the first five months, while new home sales are projected to grow year-over-year. However, the divide between single and multi-family units and homeowners and renters is becoming more pronounced.
The housing market is showing signs of improvement after a significant downturn, but the recovery is not evenly distributed across all sectors. According to Jim, experts are tracking housing activity, sales, and starts closely, and they believe the biggest declines are behind us. Existing home sales, single unit housing starts, and home prices are expected to be down for the full year but will show improvement compared to the first five months. New home sales, on the other hand, are projected to show year-over-year growth due to the lock-in effect keeping existing inventory off the market. However, the segmentation of the housing market between single and multi-family units and between homeowners and renters is becoming increasingly apparent. While some benefit from cheap mortgages, others struggle to get on the housing ladder, leading to a potential long-term divide. Additionally, the infrastructure improvements since the 2008 housing crisis have helped mitigate some of the risks, but the refinancing boom's tail could have unappreciated consequences for those who did not take advantage of it.
Mortgage rates may not impact housing market significantly due to locked-in rates: Many homeowners have already secured mortgage rates below current predictions, limiting the impact of potential rate drops on the housing market
Despite the possibility of mortgage rates dropping significantly, it may not have a significant impact on the housing market due to the large number of homeowners with locked-in rates. Jim Egan highlighted this issue, explaining that even if mortgage rates went back down to 4%, a rate far below current predictions, it wouldn't move the dial much because many people have already secured rates below that level. This situation is contributing to the current frustrations in the housing market. Additionally, Tracy Alloway and Joe Weisenthal mentioned their new podcast, Money Stuff, where Matt Levine and Katie Greifelt will discuss finance and Wall Street news every Friday.
