Logan Mohtashami on home builders and new home sales

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about the home builders and what's going on in the new home sales market.   Related to this episode:   ⁠⁠Mortgage rates drop to another new low for 2025 | HousingWire⁠⁠  https://www.housingwire.com/articles/mortgage-rates-drop-to-another-new-low-for-2025/  ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠HousingWire | YouTube⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q   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 a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.

Transcript

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

00:11home builders and what's going on in the new home sales market. First, I want to thank our

00:15sponsor Optimal Blue for making this episode possible. Logan, welcome back to the podcast.

00:21It is wonderful to be here and we're going to talk about the home builders just by themselves.

00:27And the reason I bring this up is because as the 10-year yield has been going lower,

00:33mortgage rates have been going lower, the builder stocks are doing better. But with all these

00:38negative headlines about the builders, what's going on? Yeah, this is so fascinating because

00:45obviously over the last couple of years, they've been able to buy down rates. As you say, they've

00:50been living in a sub-6% mortgage environment, right? They've been able to do that. So they've

00:55been able to do really well during this time. But that started to change a couple of months ago

01:01and things were slowing down. They had a lot more inventory. So what do you see right now?

01:06So before 2025 started, we wrote that article December 23rd in 2024. We said the builders are

01:15going to have a supply and demand problem because their completed units for sale were picking up.

01:21And historically, that's the data line that really matters. Not a lot of people, again, know this

01:26about the builders. The builders have stages when they do their reports onto the census.

01:32They have homes that are completed for sale, homes that are in construction, and homes that they

01:36haven't started, right? So the builder model is, the business model is different than what people

01:42projected. And back in 2022, when we had over 10 months of supply and there was all these

01:48cancellations, you know, it looked very negative for the builders. But new home sales were at such

01:54a low level. Builders' profit margins were still healthy. If the 10-year yield goes down and rates

02:00improve, they could sell these homes. The demand is there. Well, back in 2022, November 9th, if anybody

02:06want to go back and look at the builder stocks in November 9th, that was a real noticeable bottom,

02:12and builder stocks just took off, right? As rates were heading down towards 6%, the big publicly traded

02:18builders did whatever they needed to do to sell homes. But also, the smaller builders felt better

02:23about business. New home sales grew, and then rates went up. And then we do this back-and-forth

02:29game with the builders, and you can see it in the builder's confidence. Whenever rates go down,

02:35their confidence picks up. They believe they could sell more products, traffic picks up,

02:41sales pickups. So all these things just move around the 10-year yield. Well, this year, just like

02:48the existing home sales market, mortgage spreads are better this year than they were in 2023 and in

02:542024. So now that we're heading toward, if we can just get towards 6%, the builders have also shown us

03:03their data gets better, whether it's big, medium, or small builders. And then, you know, they can get some

03:09sales done. They've got enough completed units for sale in homes that are under construction or

03:16homes that haven't even started construction yet. So they are in that category that they've got the

03:21supply there. They just need the demand to start winding that stuff down. Why is that important?

03:27Because the builders, when we look at economic cycles, residential construction workers, they

03:35typically fade. Residential construction workers are fading. But like in 2023, they faded for four

03:41months back then to four straight months. It was a bigger decline in the labor pool back then than it

03:46is now. But then rates went lower. So I know it's confusing because there's all these negative headlines.

03:53But if the 10-year yield had gone up to, let's say, the 10-year yield was at 5% and mortgage spreads

04:00were bad and rates are at 7.75%, we are not having this discussion. But because the builder stocks are

04:08so oversold and they were basically pricing in a very high mortgage rate market, they have the ability

04:16to flow back up when the 10-year yield goes low. Just kind of keep it simple like that. Ebbs and flows,

04:21waves and channels, money flow, how things work, how builders and traders operate. But it does make

04:28economic sense because we've seen it twice before. Now, last year, toward the end of the year,

04:33the builder's confidence was picking up when rates were going up higher. They were assuming,

04:38you know, mortgage rates would be lower, regulations would be lower. There's no tariff on anything out

04:44there. And then went into 2025 with a lot of enthusiasm. And rates stayed elevated. You have tariffs here.

04:52You know, so things change. You know, and even the builders, I think they were the first trade association

04:58that asked for, you know, let's not put tariffs on lumber. So now it's a little bit different. Again, when rates

05:04go down, things just feel a lot better. When you got really cranky old men at the Federal Reserve who were

05:11saying, oh my, you never, my, if people start buying homes again, what are we going to do?

05:17You know, the worst are these de-growther people that sit there and go, home sales have to crash.

05:23We have to destroy the economy to bring inflation down. There's, there literally are some people

05:29that are just born into some crazy bondage that they can't get out of. And the de-growthers are

05:34always these major deflationary people that are just lost, lost it as a child and did it all the way

05:40until they're dying days. But think about this. 6% mortgage rates is not loose policy compared to

05:49what we saw in the previous decade. Previous decade, oddly enough, previous decade, mortgage

05:54rates were three and a quarter to 5%. The builders had the weakest new home sales cycle ever recorded

05:58in history. That was my big macro call last year. But now household formation, wages, incomes,

06:03these things are a little bit different now. The builders aren't really operating from very high

06:07levels of sales. And if you look at their home sales data from 2018 up to 2025, if you take the COVID

06:14burst in sales for, for that, for that one shot, and then the low level in 2022, the sales have

06:21remarkably stayed in a range for a very, very long time. So when sales are low, you know, and a 10 year

06:29yield drops, you know, you can, you can understand why some of the builder stocks are performing better.

06:34Now we're going to have a builder's confidence coming out in the, in the week. Now next week,

06:41I think it's on Monday. That might be a little bit too early to capture this last move in rates,

06:47but with rates go towards 6% and stay there, the builder confidence should pick up. Their traffic

06:53should pick up. Their sales should pick up. That's what's happened before. And that, that survey is

06:58tilted towards smaller builders. The big publicly traded builders can pull some more levels.

07:02Why Sarah? Because the builders are efficient sellers because they are not the March of Dimes.

07:09They are not the March of Dimes. They're not a charity. They're here to make money. And we still

07:15have this crazy concept that, you know, the builders, I remember, I think it was a New York

07:19Times reporter that said, you know, even though sales are down, the builders should still buy homes.

07:23They're like, homie, you've never ran a business in your life. Oh yeah. No, that's not how it works.

07:28You know, so another interesting nugget into this second half of 2025 for housing.

07:37You know, so I think they've shown remarkable resiliency when you consider the tariffs,

07:43which have been, you know, hard to track, hard to know what's coming, hard to know how to plan for

07:48that, like what's going to be actually assessed, what's going to be pushed out for another three

07:53months. There's that. And then there's also a pretty significant amount of people being,

07:58you know, arrested, like for, for immigration purposes at places like Home Depot or at,

08:04or at construction sites. So, I mean, I know locally here, I was reading a story about a builder

08:10who was like, you know, his, his crews don't show up because they don't want to get arrested.

08:13Um, or it, you know, I'm not sure that builders always pick up people from Home Depot. They usually

08:18have very skilled people who are, who, you know, work for them on different things. But, um, I think

08:23that the resiliency of the builders is pretty amazing. Well, one thing that, um, they talked

08:29about this year, about 7% of what goes into a new homes is, is broadened from overseas or another

08:36country. So it, it isn't a significant amount. And from all the earnings calls and what people are

08:44talking about, they haven't had much tariff cost pushover yet. Um, and also because home sales

08:53aren't booming, they have plenty of labor to do what they need to do. Uh, um, so it's one of these

09:01things. If new home sales were running at 1.3 million and housing starts were at 2.5 million,

09:09that might be a different subject, but that's not the case this year. So resilience, part of it is,

09:15you know, they haven't had the cost push, uh, inflation yet. Uh, uh, they've been able to manage

09:21that. And also, uh, because new home sales are, uh, you know, they're not booming in any sense or

09:27manner. Uh, they, they haven't had quite the labor issues that many people thought in, in scale terms

09:34out there. So if rates go down and they could sell product, you know, you know, it'll be interesting

09:40to see when do you actually finally see single family permits start to pick up again. We saw that

09:46toward the end of, uh, end of 2022 when rates got down to 6%, then we saw single family permits take

09:52off. And that hasn't been the case for some time now. So there's going to have to be a supply and

09:56demand equilibrium. And it's a lot more difficult now for the builders because the completed units

10:01of sale are at historical levels that typically usually is at the end of the cycle. But if we

10:07can get down to 6% again, see, it's just such a shame that we're holding things back for just

10:12for 1% of rates. That's what, that's what it's like. The kicker here. It's not, it's not like the

10:17market is saying three, four or 5% rates, but just getting down towards six could alleviate some,

10:23some of the concerns, not just by the general public that want to sell or buy homes, uh, but

10:28also on the economic side, uh, that you're not going to need the builders to, to start, uh, uh, um,

10:35laying off people. Now, especially trade, uh, construction labor has already been rolling

10:40over for some time. Uh, but even Home Depot and Lowe's are, are acting better. Again, rates go lower.

10:45What's the sector that gets impacted the most housing? Keep it simple like that,

10:48you know, but it does explain the builders confidence data and how the cycle is a very

10:54unique cycle. Sarah, I cannot express to you how unique this economic cycle has been, uh, uh,

11:00for housing just, you know, the COVID-19 recovery, you know, the savagely unhealthy housing markets,

11:06the, you know, everybody who's in that, you know, the, the builder cycles over, but you know,

11:10the corporate profits are so, there's so many different variables. You've got to be able to capture it.

11:15Uh, but there is, there was kind of like a shock at all. I know even Mike Simonson and Dustin,

11:21who's a lover economist, all these people that, Hey, what's going on? Let's ask Logan. And you know

11:25me, I'll go, I'm going to get a video out right away. I am not afraid of being on the camera and

11:31give it a shot, explain the 10 year yield. I show charts of 10 year yields and toll brothers and

11:37you know how, what's going on here. But, uh, uh, with housing, you kind of keep it simple.

11:4210 year yield goes down, mortgage rates go down. That's the slow dance that we've been talking

11:47about since 1971. And then, you know, the spreads are getting better. So the slow dance, Sarah,

11:52the slow dance is more intimate. So you don't, you like it more intimate slow dance where people,

11:57you know, slow dancing, uh, uh, that way instead of the, you know, Napoleon dynamite slow dance where

12:04they're like 10 feet apart from each other. That's where bad spreads. That was 2023, terrible spreads,

12:11slow dances fall apart, you know, not, not, not the way we want to slow dance here in America.

12:17Listen, it all depends on who your partner is. So if it's Napoleon dynamite, you want it to be,

12:21you know, arms length. So you got to pick a good partner.

12:25Did you, did you just throw shade on Napoleon dynamite after his dance moves he had on that,

12:31on that movie?

12:33That's such a great movie. Okay. So I had a question for you because we've talked about,

12:37um, especially when it comes to inventory, when you're looking at the housing market,

12:41at the existing home sales, you know, you're like, you know, this looks about right to me. It's not,

12:45uh, you know, we, we are down, but, but the housing market has, has become more healthy in 2025.

12:52When you look at the new home sales market, what level do you look at for like, uh, months of supply

12:58and stuff like that, that to you means like we are at a good, a good spot for new, new home sales.

13:04So I had a rule of thumb always in the previous decade. Um, I say the builders get in trouble when

13:11monthly supply is above six and a half months, but what happened in this cycle, which was very unique

13:18monthly supply spiked to 10 months, but the total completed units or sale were still very low.

13:23Cause we had, we had so many homes that were under construction or hasn't started yet. It,

13:28it, it pushed out the monthly supply data much larger than you would normally see now for the

13:34builders, just on the business model side, uh, their supply is too much, right? Where the existing

13:41home sales market, you know, the, the way you get a housing recovery going is that, you know,

13:46affordability has to get better. So let me give you guys all a really good example of this.

13:50Moody's came out, uh, with a home price index valuation. And like, I think, I think it was

13:562022 when things were very crazy, home prices were 29% overvalued nationally. Well, that is now down

14:05to 8%. You know why? Higher rates. Who is team higher rates February of 2021? Boy, the tomatoes being

14:14thrown at me at that time. Oh my God. What are you doing? You're just like, like, no, it's about to get

14:20really bad right now. Prices are going to escalate. Well, part of the concept of team higher rates was

14:25not only do you get inventory to grow and you get price growth to cool down, but you also put the

14:31home builders on their ass part of my language and they make deals, right? Because monthly supply

14:36was high and their total units were, were, you know, they didn't want that to build up. So they

14:41were making deals, giving people low rates, moving products. Well, that worked for a few years,

14:47but now they're total completed units of sale are back to levels historically that usually are peak

14:53of housing cycles. And, uh, I, it's one of the charts that not a lot of people know about this

14:59completed units of sale, but going back to the 1960s. And then we see it that way. You're like,

15:03okay, now you, now, now you can kind of understand why the builder builders pulled back. Cause they are

15:08not going to put their heads down and start building in this environment or issuing permits.

15:11So they got to wind that total complete units, wind that monthly supply. You get monthly supply

15:18back down below six and a half months and you get the total completed units going lower. Builders

15:25will get more confident. They'll start issuing permits. They'll finish up those projects.

15:30I'll sell new homes. It's not like we have like very high cancellation rates in the last year.

15:35And the crazy thing is the crazy thing, Sarah, is that the builders purchased application data

15:41earlier in the year, how to post a COVID high. And, you know, we, one of the prints were one of

15:46the monthly prints were kind of in the upper end range. So it's a funky sector, but if you're asking

15:52me when I think six and a half months of monthly supply, uh, when he goes under that, uh, uh, the,

15:58the builders feel confident they can smooth. So when he goes above that and the completed units go up

16:02with it, the builders go, Whoa, shut the permits down. Shut the permits. Housing starts down. No,

16:09no, no, no, no. We, we don't want to destroy our margins. So that's kind of how they operate. And

16:13that's how we came up with the, they are not the March of Dimes, uh, uh, uh, talking point.

16:19It's the one, you know, when you talk to someone who's not in housing, it's the first thing they say,

16:23well, we just need to build more homes. It's always, you know, it seems like an easy solution.

16:27Sarah, it's never going to happen.

16:28I know it's never, I'm, I'm, let me tell everybody, everyone is blowing smoke. Y'all are

16:34crazy. When do we ever oversupply marketplace in this country? The only oversupplied period we had

16:42was because of a housing, uh, credit boom and credit boss and distress sellers and anything out

16:48there. The, the system is not designed for deflation. This deflation is bad. Deflation profits go down.

16:57You can't sell stuff. You have less people working. That's why deflation is worse than

17:01inflation. So people keep on saying this. I mean, I'm going to die with people keep on saying,

17:07oh, we just need to build more homes. We're just going to sit down and say, no, you're not.

17:11There's good. There's a certain equilibrium, unless you want the government to finance this

17:15stuff and lose money on it. There you go. And we wrote that article, June, 2021. We said,

17:21everyone's like, you're going to build a lot of homes. Like, no, you're not. Wait till rates rise.

17:25It's all going to go. And then, you know, we're going to come back and read this article. I'm

17:28going to write in June of 2021. And I'm saying, I told you so because they need to make money on

17:34this stuff. Like, can you, can you in theory build enough apartments? Like really you could,

17:40you could buy it. You could build massive. You could buy three to 4 million more apartments,

17:45you know, and get rent deflation, but who's going to do it? You know, you've got to be able to make

17:50money on this stuff. So find a way for everybody to work together where you could loosen the

17:56regulations, get the financing going because financing is a really big deal, especially for

18:01builders, especially for apartment builders. A lot of regulations changed in the eighties,

18:06you know, where it's less incentives. Find a way to everybody work together on this and build. But

18:12if they can't make money on it, it's very difficult to ask people to start building. But

18:18a flooding of supply or people wanting deflation, right, in that regard, it's not. And you can see

18:27what happened. We had a really good run in the five unit construction when single family permits

18:32were falling in 2022. Five units were going up positive and then rates went up too much. And then

18:39that thing has collapsed to recession levels out there. So I'm just, I'm just, I've heard people

18:45say, we're just going to build more homes. And I just smile. I go, you're all cute, just adorable

18:49little kids. I love you all, you know, but there's just that supply and demand equal. Unless you get the

18:55government who says, okay, guys, put your head down and build as much as you can. We want deflation.

19:00We want rents to go down in a significant way. And don't worry, we'll take the loss on you guys.

19:08Just build and make. So it's, it's one of those things. There has to be that equilibrium. And

19:13this is why, if you look at housing starts and new home sales and all these things, they all move

19:17together, right? Because they don't oversupply a marketplace and it just get you, it has to make

19:23sense for them. It does. Well, we are out of time. Thank you so much, Logan, for weighing in on these

19:29very important things, especially the builders. Great episode. Pleasure's all mine.

19:38Bye.

19:43Bye.

19:46Bye.

19:47Bye.

19:52Bye.

19:54Bye.

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