Logan Mohtashami on how we build more homes

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about housing starts, inventory and mortgage rates.    Related to this episode:   ⁠The only remedy to build more homes? Lower mortgage rates | HousingWire⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠  https://www.housingwire.com/articles/the-only-remedy-to-build-more-homes-lower-mortgage-rates/   Enjoy the episode!   The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get

Transcript

00:00Welcome, everyone. My guest today is lead analyst Logan Motoshami to talk about housing starts,

00:11inventory, and mortgage rates. I want to thank our sponsor, Rocket Close, for making this episode

00:16possible. Logan, welcome back to the podcast. It is wonderful to be here. It's Friday morning,

00:24just got off a CNBC interview and fortuitous timing with the topic at hand. Builders' confidence is

00:33four points away from the COVID-19 lows. Housing permits are still at recessionary levels and

00:40falling lower. But the existing home sales market, like I talked about on CNBC, has had 15 straight

00:48weeks of positive year-over-year data. So the builders and the new home sales market has

00:54always had an advantage against the existing home sales market for the past few years. So the

00:59question is, has the turn tied for the existing home sales market versus the new home sales market?

01:07So this is so interesting because anytime you're talking about something, you want to separate it

01:13out. If it's purchase apps, if it's whatever, home sales, if it's whatever, you're like,

01:16there's new home sales and there's existing home sales. And these two things do not cross. Tell us

01:22why the new home sales market is so different. So this is actually a very interesting story.

01:29In the previous decade, when I started writing about housing economics, my baseline case in 2010 was that

01:35we were going to have the weakest housing recovery ever and new home sales in particular. And housing was

01:42more affordable, rates were low, there was more inventory, but the builders were at a disadvantage

01:47because there was a lot more active inventory that was cheaper. The builders' corporate profit margins

01:53weren't that good. So it ended up being the weakest housing cycle for new home sales, weakest housing

02:00construction cycle ever. Because remember, sales and construction move together, right? And I think a lot of

02:07people had just had bigger expectations. But here it comes years 2020 to 2024, household formation of

02:13corporate balances there. Everything is in a much better shot. However, builders had a very unique

02:19advantage. It reversed, right? And the new home sales market was never exploding or booming like it did

02:25during the housing bubble years. So here comes 2022, new home sales are falling, housing permits are

02:32falling, cancellation rates, and then November 9th came. And November 9th is our infamous day. And at that

02:41point, the forward-looking data started to get better. However, it was more beneficial to the builders

02:47because advantage, disadvantage. Inventory was still low, but they can pay down rates. So we have this

02:55unbelievable huge gap. Traditionally, like new home sales is like 10% to 13% of sales. It rose up to about

03:01like 28% or 33%, around there. A very high level in the 21st century because they can offer 6% plus

03:09mortgage rates. They had the balance sheets of big publicly traded companies. So their sales levels

03:15is at 2019 levels. Even today, where the existing home sales market is still at what I would always say

03:22all-time lows when you adjust it to the workforce back in 2008 level. So here it is, this unbelievable

03:27gap where it was the reverse. So for a while there, the builders are just completely outperforming

03:33because their total units of completed sales were very low. They were able to pay down rates. But as

03:38inventory started to increase for them, as completed units started to increase, and then rates stayed

03:45elevated, it's starting to cost more to do the pay downs. And now they're at such high levels of sales

03:53versus the existing advantage, disadvantage. The existing home sales market, because it's working

03:58from the lowest levels ever, has had 15 straight weeks of positive year-over-year growth in the

04:03purchase application. And affordability, inventory is rising. There's more choices. Price growth is

04:09slowing down. They don't sell homes as a commodity. It's a buyer-seller's broke profile. For the

04:14builders, there's margin pressure. There's a supply increase, especially in the South. So much of their

04:20building over the past few years have been in the South. Totally different marketplace. Again,

04:25if the 10-year yield goes lower, mortgage rates get down to 6%, a lot of issues are solved for the

04:31builders, and existing home sales can grow. We just don't have that monetary policy yet.

04:36So that was my theme on the CNBC interview, is that a lot of people say, well, lumber prices and

04:42labor costs. I say, homies, man, 10-year yield goes down to 380. You get normal spreads.

04:47All this stuff is let go, right? That's just how the world works. The 10-year yield

04:53rules all. So in this context, the existing home sales market has the ability to slightly

05:00outperform the new home sales market this year. And so far, we've seen that in the data lines early on.

05:07It also explains why we can't build our way out of the housing shortage or housing crisis or

05:13affordability crisis, which you wrote a very good article about, I don't know, a couple years ago

05:19now.

05:19June 21st or June in 2021, when everyone was like, we're going to have a construction boom. And I go,

05:27oh my God, you kids are so cute. Wait till rates go up and it's not going to happen. And then oddly

05:34enough, next year, rates went up. And literally, if anybody looked at the housing permits data,

05:40walking dead, nothing. COVID-19 recession levels. But you always hear this is that we're going to

05:46have a construction boom. No, you're not. You people do not understand how businesses are run

05:51in America, right? So it's a lot of journalists and progressives who believe in socialism and

05:58conservatives who say that we need more. Guys, it's a business. They are here to make money. This

06:04is why we coined the phrase, they are not the march of dimes, right? So when rates get elevated,

06:10right? Luckily, the big publicly traded builders have enough corporate profit margins to actually

06:15pay down rights. Imagine if that didn't happen. Where's new home sales? We're at less construction.

06:22We're at less new home sales. So we have an advantage in that, but it just shows that there's a

06:27natural equilibrium between supply and demand and the builders sell homes as a commodity.

06:31And that's how it works. So it's not shocking that if you look at the permits data, not gone

06:36anywhere. Housing starts data, not gone anywhere. New home sales, when rates go lower, sales pick up.

06:42When rates go higher, sales go down. Hasn't gone anywhere. There was never a construction boom,

06:47right? It was all a fabricated lie into thinking that people just put their heads down and go,

06:53we're just going to build so much supply and there's going to be millions of homes. That's not

06:56how the builders have ever operated since the 1960s. This is why I always like to show those

07:01charts going back to the 60s. Hey, listen, rates went up. Oh my God, the construction falls. Oh my

07:05God, rates go down, construction picks up. So if you want more housing construction, you need lower rates.

07:12And if the last two years, two and a half years have not explained this to you, homie, there is

07:17nothing I could help you out now because it is clear as crystal. Okay. So that's true. And we know

07:23that's the biggest factor, but it doesn't help builder confidence when they're looking at higher

07:28lumber prices, when tariffs are very uncertain, what's going to happen. I mean, that doesn't help

07:33throwing that into this environment. Sarah, what was lumber prices during COVID?

07:39I know there were 1500 per board or whatever versus. And how, how is new home sales doing back then?

07:46It was doing good. Why? Builders had, well, we're working with 3% rates. Now we can't get to 3,

07:564, 5 with Fed policy right now. Remember 65 to 75% of where the 10 year yield and 30 year, it's a slow

08:02dance. Do you like my outfit today for CMC? I do. It's, it's very bad for the guy, right? You know,

08:09I, I, I, I, I should have dressed down a little bit, but I just came back from a club, but which I

08:16never do. In any case, um, back then mortgage rates were lowered. Demand was higher. Lumber prices

08:24did not matter. So why does president Trump want lower rates? But said, and everyone knows if the

08:3010 year yield goes lower and they do have tariffs, right. And if lumber prices do go up, they saw this,

08:36they saw all the inflation. Oh my God. We couldn't even get garage doors into a new homes

08:44back then. We had all this, we had all this drama back then. And then we couldn't finish homes. And

08:49we know, didn't matter. People were like, Oh, mortgage rates are lower. So the whole premise

08:53of that CMC interview six weeks ago was president Trump wants lower rates to fight tariffs because he

09:00saw it work. So yes, lumber prices were a lot higher, but rates were a lot. So in, in the,

09:06in the realistic world, we can't get to three, four or five anytime soon, unless the labor market

09:12breaks or something, but you can get towards six, 6%, 10 year yield goes down 6% mortgage rate spreads

09:17get better. Guess what happened in the last two years? The builder's confidence picks up and permits

09:22start to pick up a little. So we're in that, we're in that environment. You have to deal with the hand

09:28that you possibly could deal with in this game. And as I, as I pounded my fist down for the last two years

09:36on CMC, you just need 6% mortgage rates. You don't need three, four. If we needed three, four or fives, we're all

09:42having a different conversation right now. But monetary policy is not restrictive or was not restricted enough to

09:50keep the expansion from going into recession, but it is, and has had an impact in the housing market

09:56since 2022. So we are sitting here with two and a half years worth of data. It ain't happening, but you

10:04have a solution, right? So, you know, one of the, one of the things that we've talked about, you know,

10:10how do you go into a trade war? You know it probably would have been better, better for Trump to have had

10:16the tax cuts. Well, I, I, what we're talking on Friday morning. I don't even know if the thing

10:21passed or not. They were doing a vote. There are a few Republicans that weren't going to pass for

10:26Tom's tax cuts or the budget. But if he would have had this and then the, you know, they, they would

10:34have deregulated some of the rules on banks, holding a little bit more treasuries, the SLRs, you know,

10:41Bissette wanted to get that done. They haven't done that. They would have maybe had a little bit of

10:45better backdrop for housing, but we're still here with elevated rates near 7%. The 10-year yield is

10:52like 443 when I, when I left. So the 10-year yield looks right to me still, but again, I understand

11:00why Bissette and Trump and everyone who wanted a lower mortgage, could you imagine if rates were at

11:05like five and a half and six and a quarter and we're buying homes and housing permits are going and

11:10construction is going. And that's what a powerful country does in an expansion. People buy homes,

11:16they have sex, they have kids, household formations, we build homes, everything. You can run with that

11:22story in 2025. So we just, we just didn't get there. But for the existing home sales market,

11:28it was a, it was a benefit that the 10-year yield fell this year.

11:31Let's talk about mortgage spreads, right? Because, okay, in this environment where we need all the

11:37help we can get, what are we getting right now from mortgage spreads?

11:41Okay. So mortgage spreads, right? And one of the things I go, when I, when I do the nerd tour,

11:46I always, a hand of anybody who knows what mortgage spreads are, it's like three people,

11:51right? So, so how, how do we just talk about mortgage rates? Slow dance, 10-year yield,

11:5630-year mortgage rates, been slow dancing. But sometimes we want an intimate slow dance. We

12:01want the 1970s soul train intimate slow dance. That's mortgage spreads being compressed and being

12:07back to normal. 1.6 to 1.8. That's where it is. If we had normal mortgage spreads, mortgage rates are

12:13at 6%. But when rates go up, when there's market volatility, spreads get bad. After the Silicon Valley

12:21banking crisis, mortgage spreads got to 3.10%. So not a good, very bad slow dance. The guy looked

12:27at another girl, the lady doesn't want to dance with her. That's not good. But the spreads have

12:31been getting better. We're halfway back to normal. So that's a positive, right? Mortgage rates could

12:36be near 8% today if we had 2023 spreads. So if we did not have any market drama this year, the spreads

12:44would have behaved very well all year long. When the stock market was acting crazy and bad and the

12:48market was crazy. Spreads got bad again. It cost us about 20 to 25 basis points at the peak. But now,

12:54you know, spreads are getting a little bit better. So if the Fed, if the market's calm and the Fed

12:59continues its rate cut, the spread should improve. If the 10-year yield goes down, mortgage rates go

13:04lower, mortgage rates going lower with better spreads, there's your 6%, sub-6% mortgage market,

13:09right? We need about one more percent of rate cuts to get that low 6-level a little bit more

13:15attainable. And then if spreads get better, you get that sub-6%. Everyone's doing more business.

13:21We're buying more homes. My God, we could have housing permits rise again. Could you imagine

13:25that? We've always had housing permits rise in expansion. This isn't it. The Federal Reserve's

13:30policy is too restrictive for housing. So it was encouraging to see the spreads this year improve.

13:37Of course, the market drama took that away. But now we're looking at it and it's gotten better the

13:43last few days. So that's a positive. So we'll see what happens in the future. But again, I've always

13:48been a labor over inflation guy. If you want sub-6% mortgage rates, you need the labor market

13:52break. But there is a pathway to get there that doesn't need the labor market break. So it should

13:58be another interesting last eight months of the year to see how Trump deals with Jerome Powell.

14:05Does he start to implement the shadow Fed presidency where hypothetical Warsh comes in and says,

14:10we're cutting rates. Don't listen to Powell. America has been too restrictive on policy. We

14:15need housing back. We'll see if that ever occurs. But at least now the spreads have gotten a little

14:20bit better. So we're still not back to normal, but we're happy. That's good. That's good. Okay.

14:26Let's talk about inventory a little bit. We're going to be doing, you're going to be doing the tracker

14:30here tonight. That's what you do on Friday nights because that's when you get the data. Tell us a little

14:34bit about inventory. I'm going to wear this outfit and do the tracker tonight because I feel like I'm

14:39doing so. In any case, positive story for 2024 and 2025 for the existing home sales market. Inventory

14:48is growing, right? The whole mortgage rate lockdown inventory can't grow with rates high. They didn't

14:54happen. Positive. Price growth slowing down positive. Now, why is it bad for the builders? Builders are here

15:02to make money, right? So they have certain margins they have to keep going. So the active completed

15:08units for sale is 120,000, around 120,000. Historically, going back to the 1960s, that's kind

15:15of the peak, right? In 2008. It's funny. We always joke about these people who say, oh my God, there's

15:20more homes that are being built, millions of homes. Homie, it never even got to 200,000 during the housing

15:25bubble crash in 2008. Why? None of y'all read because you would never say such a stupid statement.

15:31And by the way, if anybody's listening to the birth date rate, I'm getting birth death rate models on

15:37inventory skyrocketing. But listen, these are professional grifters, people. These are the

15:42anti-central bank. These are your loser friends with loser YouTube channels and loser X accounts

15:48and Instagrams. Do not listen to them. We just had supposedly the 10-year period where the silver

15:54tsunami was about to take off from 2015 to 2025 because the first baby boomer hit 62 in 2008. So they

16:00we're going to downsize. So we went 10 years waiting for the 26 to 32 million active inventory

16:05that was supposed to hit the market. We literally got to 240,000 in March of 2022. 26 to 32 million

16:13to 240,000. These people are trash. They're garbage. Not even the Russians and the Chinese

16:18and Iranians do this, but they still do it, right? We had a period where we had more elderly people die

16:23during COVID and inventory broke to all-time lows, right? So no, it's not a coherent model.

16:30New listings data is getting back to normal, positive. Inventory is trying to get back to

16:34normal, positive. But the builder's completed units of sale is basically at a level to where

16:41housing is basically peaked before. Again, profit margins. They're here to make money. So they're

16:48sitting on one of the highest levels of homes that haven't even started construction. It's not a lot

16:54of homes, about 100,000 homes, but they're sitting back and going, we're not going to be issuing

16:59permits here. So inventory growing positive for the existing home sales market, another existing home

17:04sales positive outcome. But for the builders, they're like, oh man, on top of elevated rates,

17:10we have tariffs. I don't know what's going on. So builders, the existing home sales market for the

17:16first time this year on the inventory side has a better storyline than the new home sales market

17:21because they sell homes as a commodity. And of course, inventory is so specifically local. So

17:27you and I talked to somebody at the KW, the Keller Williams event that was, he was telling us he's in

17:35New Jersey and sort of a bedroom community to New York. And literally it's like they're in 2021.

17:41They cannot, you know, there's very few houses to sell. They go for hundreds of thousands over

17:47asking. They can be in terrible shape. It doesn't matter. People buy anything. And I was just like,

17:52wow, this, those, those markets are, you know, simultaneous to something maybe in Florida where

17:58it's really hard to sell a condo. The Northeast inventory story is still savagely unhealthy.

18:06The West is picking up a little bit more, which is getting better for them. Oddly enough,

18:13the healthier inventory markets are the South, right? Because, you know, you, prices, again,

18:18prices escalating out of control. It's not good for anyone, right? It's not good for anyone's future

18:24business or current, right? You just kill affordability. So the South to me is more of a

18:29healthy, Florida has specific issues with, with insurance and the condo markets, but in general,

18:34the West and the South is much healthier than the North Northeast is just, no, there's still,

18:43still some of these areas are still like 40, 60, 70, 80% below pre COVID levels. Not a very good

18:49housing market in that sense, because why price inflation is allowed to still stay at very unhealthy

18:54levels on a year of year basis. You don't want that. You want price growth cooling down out there.

19:00Cause remember we can't look at housing as okay. By the end of December, that's it. Housing is going

19:04to be here for decades, decades, decades, and decades. And whenever prices escalated out of

19:09control, you need a period of time where price growth cools down. We saw that, you know, the 1940s

19:14prices escalated. It was the hottest home price growth period. Then they cooled down in the seventies.

19:18Price growth was very hot in the late seventies. They cooled down. Housing bubble crash was very unique.

19:24You, you had home prices escalate out of control, but she didn't have inflation. That was a credit boom,

19:28credit bus, credit bus, foreclosure, short sales, not a good thing. That was an unhealthy housing market

19:33on that sense. But here you just had too many people chasing too few homes. So the Northeast is not a good

19:39healthy housing market with inventory that low. Very, very, very, very hard. Cause considering that this

19:45is the fourth calendar year of the lowest home sales there rates of stay out of it. We can't get much

19:49traction going. We built a lot of homes in the South over the last few years. We did not build that same

19:55amount in North and there's consequences for that. So this is unfortunately the, one of the unhealthy

20:01stories has been the Northeast. I look at housing differently than other people. Cause people go,

20:06Oh, look at inventory is not great. That's not a good thing. It's not a good thing. Supply is a

20:10function of demand. Supply is a function of keeping prices stable. You want supply rising. 2023 was bad.

20:17Like 2023 new listings data went to all time lows. Home sales didn't go anywhere. He didn't really

20:21have any mortgage growth year over year. Home prices were way too strong for what the demand curve

20:26was. But 2024 and 25, it's a process. It's a healing process. But again, separate existing and new

20:34home sales, two different marketplaces, existing home sales in general, constant terms for the nation,

20:39positive data lines for the new home sales market. Profits matter. So more troubling in that market.

20:46And it makes sense for the builder's confidence index. Remember when we talk about the builder's

20:49confidence index, it's smaller, uh, builders. It's not the publicly traded builders that have

20:54so much cash on their balance sheets and have the ability to pay down rates when they need to sell

21:00homes. So nature is healing. Housing is healing. We just need a little bit lower rates. We need some

21:06of these headline things to get, get resolved, maybe get some trade deals resolved so that we have less

21:12volatility. I, it is. And to, to, to think about that with all the crazy confidence data,

21:18that's terrible out there and all these headlines and everything. And stock market was in a bear

21:23market. Purchase application data had positive year over year growth the entire time.

21:29The resilient yield went lower. Ten year yield went lower this year at the start of the year.

21:34Didn't do that last year. Ten year yield rules all. That's what I did on the CNBC. Everyone's like,

21:40Carl continues. What about labor? What about control? I'm told me, I'm telling you, man,

21:4310 year yield goes down. It's amazing. The builders sell new homes and they build homes.

21:49The labor shortage just isn't talked about, you know, in that sense. Go back to 2013. They've

21:54kind of said the same thing, but in this context, it's really demand, right? Somehow in America,

21:59when demand is there, we get stuff going, we build stuff, we need stuff. It gets there in that light.

22:05Logan, thank you so much for being on today in your, in, in the suit jacket that matches a couch

22:13that we had in our, in the lobby of our last office. Do you remember that?

22:18Oh yeah. Yeah. Everybody said that, look, that's like Logan's outfit. So I was like,

22:21if I had it on, I would have taken photos. It would have been, you know, one of those catalog photos

22:28that used to, Oh, thank God. None of my old modeling photos are ever going to go public.

22:34That was a terrible time. I used to have blonde hair, sideburns. I was always tan.

22:40I had to do that. If someone wants to go and find those, that would be very, very,

22:44they're locked away. There are a few out there, but the other, I had to do a, a Levi's commercial

22:50audition for a Levi's commercial. Mind me with my shirt off and my, uh, uh, uh, my, uh, um,

22:58shorts showing, but the, the, the director said, Oh, let's do it. Austin power style.

23:06And it's like right on the spot because that's just when Austin powers movie came out and there

23:11was no prep or anything. So I had to do these lame, it's these lame, like commercials back

23:16then in the nineties where, you know, these people look like they're starving to death.

23:19I would pay so much money. It's never going to be found. It's never going to be found. But

23:25literally I had to do the presentation or president. I had to do the, uh, commercial

23:29in Austin power store. Yeah, baby. Yeah. And that I was like, what am I doing? This is not

23:35for me. Right. This is the Lord did not put me on this. The Lord put me to do housing economics

23:42and take on American bears. That's what they've done. That was the moment that cattle, you know,

23:47it, it became clear to you. You're like, no, no, you know, you know what, well, you know what

23:50it did. This is even a worse story. Um, they were trying to teach me to do the catwalk.

23:56God, I'm so embarrassed to even say this. And I didn't, I wasn't doing it right. And I had

24:01this 10 year old girl just yelling at me about how terrible I am to do the cat. And that was

24:06it. After that, I said, man, I'm an athlete. You know, I play ball. I'm not getting yelled

24:11at by some girl, but not do this count. I walked out. That was it for me. I said that that

24:16was it. I had a, I had a Tilly's contract for one year doing all four seasons. And of

24:21course I break my nose in a lifting accident. The people, the universal powers were telling

24:26me, no, get away from this. This is not your thing. Your future is dealing with the American

24:31bears and the Russians and the Chinese and Iranians who put disinformation. And this is

24:35where I am today. I am exactly where I should be. Uh, uh, and I'm blessed beyond belief.

24:41Their loss, our gain. Happy to have you, uh, covering the economic beat for us as opposed

24:47to doing that catwalk. But, uh, we appreciate it, Logan. Thank you so much.

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