Preview of a very unusual Fed week

HousingWire

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Transcript

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

00:11Week and what that looks like during a government shutdown. Before we get started, I want to

00:15thank our sponsor, Trust & Will, for making this episode possible. Logan, welcome back

00:20to the podcast.

00:22It is wonderful to be here. It is officially Fed Week on Halloween week. What else can

00:29you ask for?

00:31Yeah, that's true. Let's think about this. We have Halloween. We have a government shutdown,

00:36which does not look... So we're recording this on Friday before Fed Week starts, but no indication

00:42that something's going to happen between now and Monday that would get the government back

00:46working. So that means we're having Fed Week when most of the government shut down.

00:50Yes, but we did get CPI inflation today. So that was one report.

00:55Yeah, yeah. So we'll talk about that in just a minute, but let's talk about Fed Week.

00:59And what you think is going to happen.

01:02So the market is really priced in two rate cuts. Some crazy traders are trying to talk

01:09people into three. I was like, okay, that's not going to happen. But in any case,

01:14the whole year was labor over inflation because we're sitting here. The Federal Reserve had a 3%

01:24inflation target for 2025. I would say that they're probably focusing more on PCE inflation than CPI.

01:32But in any case, with the inflation report today, 3% CPI inflation, 1% above target.

01:39And everyone is all in on the rate cut this week. So much that even Nick Tamaris, who's basically the

01:49Federal Reserve's outlet for news to the media, for everyone, he kind of said, you know, there's going

01:55to be less resistance to a rate cut now because of the inflation report. And so it's thin. But again,

02:03it's already priced in. So much of the rate cuts is priced in. And again, it's very, very hard

02:09to get the 10-year yield below 380 if you believe in neutral policy and being modestly restrictive.

02:17This is why we've always stayed above there. Last year, we didn't because the market thought we were

02:21going into recession, which wasn't correct. But here, you know, 10-year yield fell down a few basis

02:28points below 4%, went up above 4%. Last time I checked, it's like 3.99%. But we're only here

02:36is because the Federal Reserve either really can't read labor data correctly, or they're purposely

02:42wanting, you know, the labor market to get softer, so it becomes apparent that they need to cut.

02:50And this is what we have this year. It's not inflation. The economy is growing at 3%. Stocks are

02:57like all-time highs. But the labor market is getting soft enough to where they can get to neutral policy

03:03and not have anyone kind of disagree with that. But they're doing it in a very slow, methodical

03:10fashion, which again, to me is on purpose, right? Because if I believe in my Fed model back in 2022,

03:17they really need to suppress wages. Americans making more money is their biggest nightmare. It's a

03:23Halloween horror flick for them. Job openings at 12 million. I mean, anything where Americans have

03:31that much power against employees, horrible, because apparently inflation could take off.

03:36In any case, look at this. Global pandemics, very inflationary, disinflationary. You look at the CPI

03:42report today, goods inflation is picking up. It's in all the data lines now, except service inflation

03:48is offsetting it. So we're here at 3%. We're nowhere close to, but the bond market says, hey,

03:55labor overinflation this year.

03:57So you expect this week that we'll get a rate cut. It won't move mortgage rates very,

04:02very much. And maybe the most interesting part of the whole meeting will be, again,

04:07Jerome Powell's remarks in the press conference.

04:10Yes. And to me, it's, you know, the civil war, the civil war was needed. Somebody needed to put

04:17Jerome Powell on his ass. And Christopher Waller and Michelle Bowman and all these people just needed

04:22to say, hey, listen, aggregate data is getting weaker. Are you purposefully choosing to ignore it?

04:30And it got to the point where even Jerome Powell in his last few months had to basically say, guess

04:35what? The labor market is deteriorating. So if you have the Fed chairman talk about deterioration

04:41and CPI inflation is running at 3%, which do you weigh more? The market has already said labor.

04:49So, you know, does the Fed want to rock the boat? I mean, they have in the past. I don't remember in

04:562023 where, you know, 2023 was October and we were at a key technical level. And I remember going on

05:05CNBC that morning and saying, listen, the Fed needs the labor market to break. So get ready for a

05:11hawkish statement. You know, they need more pain in the economy. There was no reason the growth rate

05:16of inflation fell faster than what the Fed said. The labor market was like, Powell went very hawkish

05:2110-year yield, straight to 5%. And then they're like, what's going on? I don't understand why the

05:2910-year yield is at 5%. So, I mean, in theory, he could do something like that. But I think

05:34there's enough people in the Federal Reserve to challenge him. Very fitting toward the end of

05:40his career that this is happening. But I think they just cut maybe if they have another layup handed

05:47to them. The bond market did so much of the heavy lifting for them already that can they actually

05:52just take the layup and take the victory? This Federal Reserve has shown me from time to time that

05:58they don't want to take the easy victory. They're still probably going to talk about modestly

06:03restrictive, inflation prices, all these things. And we'll see how the bond market reacts. But again,

06:07so much is priced in already. And we don't have a lot of economic data to work off of currently.

06:14Okay. Well, let's talk about the CPI report, which you've said, you know, Trump was like, hey,

06:19I need you guys to go back to work to generate this report, if nothing else. Unfortunately,

06:24we don't have the jobs data. But tell me what the CPI inflation report did.

06:29Sarah, it was late 2022, I went on CNBC, joke heard in squat box. And I told them that

06:35the growth rate of inflation by rents cannot sustain itself. The global pandemics, very inflationary,

06:43especially rent, and then the disinflation happens. The way the CPI tracks rent inflation is terribly

06:50slow. So this report was the weakest rent inflation in four years. So you have to almost to a point

07:00question if that's correct or not on how the CPI calculates. The other indexes are well ahead of the

07:06CPI. So that offset the goods inflation. So the detective in me says that, you know, they've already

07:16said they're not going to do the next CPI report next month. All right. There's no talk about the

07:21PC inflation, which is more tilted toward goods. But if you want to highlight CPI inflation, if

07:28shelters disinflation is happening, it offsets the goods inflation. And here we are at 3%.

07:34But one of the theories, one of the things I've tried to explain to people on the Nerd Tour,

07:39the White House believes the immigration policies, if less people are coming to the country and more

07:45people are being kicked out, there is more rental supply. And that in itself is disinflation.

07:50Stephen Myron, who's now a Fed governor, this is what he's talking about. The disinflation in rents

07:55happened a long time ago. It's just terribly slow. So I could see why now they really wanted to get

08:01the CPI report out there before the Fed meeting. Because, you know, if the rent disinflation,

08:06rent is shelters over 40% of the index. You can't have breakaway inflation unless rents really take

08:12off unless oil prices escalate out of control. So here we are. I think there's no talk about

08:19the PC inflation where the Fed really tracks. It's just this report. I think they just wanted

08:23to stick this to Powell one more time and have Stephen Meyer and talk about, look at the rental

08:30disinflation. We have policies in place to create more rental supply out there with less people living

08:36in America and less people coming in. That was the read to me today. Ten-year yield really didn't do

08:42much. It fell a little bit, rose after the manufacturing data and just hovering around here.

08:47But I could see the game plan on why they did this because of shelter inflation. Because if shelter

08:54inflation was rising with goods inflation, you've got a problem. But wage growth going lower, more supply,

09:00it's really hard for rents to take off like it did. And again, the history of global pandemics,

09:04very inflationary, disinflation. If you look at rent inflation for the last three, four decades,

09:09you don't have these big spurts like we did during COVID.

09:13So without a lot of the government data, when you look at the CPI report, what do you think about

09:19the overall health of the economy? Where do you think we are?

09:22So let's look at this. Economy's still growing at 3%. Stocks are at an all-time high. Middle and wealthy

09:28people still have a lot of cash they're spending. Lower income people are showing a lot of

09:34stress. Fed doesn't care. We've always said this. Every institution needs pawns. That's them.

09:40Credit markets are breaking on the lower income side. Fed doesn't care because they have to have

09:45pawns. So in this context, the economy is still expanding, but the labor data is slowing down.

09:54And again, now that rates are lower, we're trying to see if this is good enough. Because with more rate

10:00cuts into the system, the arm loans start to become more and more attractive. Can we get housing permits

10:06to grow again? Which happened at the end of 2022 going into 2023, permits started to grow, starts

10:14started to grow. If you do that, you can keep the employment there on the residential construction

10:19side. And then as the short-term costs go lower, more projects can be done because the math starts

10:28to make sense. So we're in this tug of war between the economy is still expanding, but the trade war

10:34becomes the issue in terms of what is government policy? What plans are we supposed to do out here?

10:42Corporate profits are still doing good. Just always remember, less wage growth and more pricing

10:47power, profits can rise, right? So, you know, our company's really terrified that the labor market

10:56got softer because they have to pay their employers a little bit less in terms of wage growth. So we're

11:03there. And this is a tug of war right now to get to the next stage. And I think a lot of the heavy

11:09lifting has already been done by the marketplace, getting the 10-year yield lower, right? And again,

11:14energy prices getting lower. So the whole Trinity complex we've always talked about since November

11:20of 2022, for this to work, you need lower energy prices, you need a lower dollar, and you need lower

11:26rates. They got all three now, right? And you could push this forward with a trade war as long as those

11:31things are there because people have a little bit more spare capacity to consume. So, and we're waiting

11:38for more data. That's the thing. We need to see more data out there. So we'll take it. But

11:43mortgage rates getting down here has helped in the past. The country feels a little bit better.

11:50People could buy and sell homes and move and do what they need to do. So it'll be an interesting last,

11:56I would say, two months of the year in regards to what the Federal Reserve thinks, what the economy

12:02thinks, because I'm pretty sure we're going to punt the November deadline again on tariffs. And

12:08eventually that has to solve itself one way or another. But we're still expanding, we're still

12:16growing, but the labor market has terribly gotten softer out here. And the sectors that are showing

12:23job losses are more related to interest rate policy. Interesting. I think Daryl, who is the

12:34economist for Redfin, when she went to the NAB event, which is all the economists in America,

12:41basically, and the Federal Reserve people, the poll was taken there. Do they think AI is creating

12:47the softer labor market or interest rate policy? Majority of the people said it's interest rate policy.

12:52And if you look at those charts, especially those of the Nerd Tour, you get to see the labor,

12:57the things that are getting softer are rate related to a degree. So we'll see. It's very

13:04exciting in this. It's always more exciting when you have a little tug of war action out there,

13:09but jobless claims is the key to everything. And I'm glad more and more people are realizing like

13:15literally one and a half and two million people lose their jobs every month is when growth slows down

13:20and less consumption and you don't need as much labor to protect margins. That's when you get

13:26a job loss recession. Okay. So one note on tariffs, of course, Donald Trump, President Trump said that

13:33he's not going to negotiate at all with Canada going forward on the tariffs. So we're going to be

13:38watching that because that could have something to do with home building, right? It just adds some more

13:44uncertainty into the home building when you think about where we get a lot of the lumber,

13:47the timber, some of the building materials. I always like to add, we were building more homes

13:55and selling more homes with lumber prices at $1,700. Why? Because mortgage rates are lower.

14:01Trump knows this. The White House knows this. The input costs are roughly 7% of all new homes. But if

14:10rates go lower, consumers have more buying power. The builders just came off of that. I don't think the

14:16number is legit. I think it gets revised lower, but it was a three-year high in sales. Existing home

14:21sales, we're going to talk about that next. But demand curve pricked up a little bit. This is why

14:28the Trinity had to be there for him because they couldn't do this if mortgage rates are at 7.5 and

14:33oil prices at 100. You can't do this out here. But as much as we talk about tariffs, for housing,

14:40rates matter more. And the builders have shown us this for the last five years, even with lumber

14:45prices where they were early in COVID, rates were lower. Affordability was a little bit better before

14:51all hell broke loose. And housing starts and permits were rising. Let's talk about existing

14:58home sales. So we saw that existing home sales beat year over year and also that the home prices

15:05have confirmed that. You know, 2025 is just flawless violin. It's Logan playing a violin

15:11flawlessly in the old castles in the old days. What have we always said about people who do not

15:21have models and do not track anything? You don't know when the market is turning, right? And I guess

15:28we flagged this mid-June that something was happening. The growth rate of inventory, how we

15:34calculate it, was running at 33%. Now it's down to 16%. I still think I have a slight chance of

15:40getting my yearly high in inventory again for another reason. But then all of a sudden, rates started to

15:46creep a little bit lower. And then the supply and demand equilibrium changed. So pricing firmed up a

15:52little bit now. That's the back-to-back months now. Pricing is firmed up. We're having much harder

15:59comps on a year-over-year level as well. So it's not like, and the whole thing about 2025, the greatest

16:06seller buyer inventory gap in the history of America. And every worthless doomer in America,

16:13every worthless Russian, Chinese, Iranian disinformation campaigns ran with that.

16:17And they absolutely got obliterated. Because the slope of the curve, we've always said,

16:22our slope of the curve economics, how we track housing is more prolific than a lot of the stuff

16:28out there. So, and going back, was it five months ago, we said, the forward-looking data early in the

16:34year is acting better than it did last year. And last year was not that great. So from the reports

16:40from June to October, that will come out in July and November, even if sales stays flat, which the

16:49data is showing us it should, at a four million mark, we're going to have positive year-over-year

16:53growth all the way until November. So that last, or the last report for October, we have one more

17:00low comp. Be careful, don't read too much into it, because our forward-looking data is only showing

17:05slight year-over-year growth. But that was enough to firm up pricing to a degree. But it's nothing

17:12like early part of COVID, right? Nothing like this. All the median sales price for the NAR did went

17:21all the way down to about 1%. And now, then the second month was 2%. And this last report was 2.1%.

17:28So it isn't anything like booming or anything like that. Wages are outpacing a home price growth

17:34positive in that front. But it showed it again, just like it did late 2022, where we said people

17:40are going to be six months behind this. Last year as well, when purchase application data was negative

17:46year-over-year still for many, many months. But the forward-looking data got better because the weekly

17:50data got better. And here we are again. The symphony is complete in 2025. Unless you really track this

17:57stuff, you didn't know. So good report on that stuff. It's not like home sales are booming or

18:02anything. But now rates are near 6%. And they're staying here. Last year wasn't the case. Rates,

18:10bond yields shot up, rates went up, right? We've got all the way back to 7.25. That doesn't work.

18:17But if we could just stay here. And again, arm lending is starting to pick up now. And I never thought I

18:23would see this in a day where you have a declining rate environment, but the arm loans are picking up.

18:29But that would happen in this situation because the sub-6% mortgage market works here. So it is going

18:37to be a very fascinating setup for the 2026 because now the arm loans are going to give every American

18:43home buyer the capacity to buy a house under 6% rates. And we've never tested that at all for a few

18:52years. So I could not have asked for a better 2025. Inventory is up, price goes slow down.

18:59You know, Americans weren't like, you know, not trying to sell their house to buy another one.

19:03We're going to have near 5 million total home sales. Again, considering everything we've gone to,

19:08this is, for me personally, this is as good as you could hope for. And now we get ready for 2026,

19:13which is going to be a lot of fun. Yeah, a lot of fun. I'm so excited about that.

19:19Logan, thank you so much for being on. And we will talk again soon. Who knows what will happen

19:24between now and then, but thanks for guiding us through.

19:26Yes. And one thing, I still think I have an outside shot to get our inventory back to yearly

19:31highs. I know I've been talking about this all along. I only need a couple thousand more. You

19:36know, the growth rate of inventory really peaked in August, but I didn't believe, I thought we could

19:41get it up there. And oddly enough, the government shutdown is slowing some closing times. So maybe that

19:47gap, I mean, if I get it is for the wrong reason, but maybe that gap gets it a little bit higher

19:52before it comes out. And when we look at the NAR's total inventory, 1.55 looks like to be the peak

19:59around here. You know, soon they're going to have their seasonal declines. They're much higher than

20:04ours because they take pending contracts into their inventory data. But the monthly supply for everyone

20:10to just remember this monthly supply was 4.6 months. It's the third calendar year of the

20:15lowest home sales ever recorded history back in 2007 to 11, 8.3 to 10.9 months for all that period

20:23of time here, never really broke over five. And now the inventory seasonal declines of everything

20:29start to happen. We went through the full three years on this, why homeowners are in better shape

20:34than they were back then. And if you look at delinquencies and everything going back to the 1970s,

20:39there's a reason why that acted that way. And now toward the end of 2020, in a chef's kiss,

20:46violin, piano playing, oh my God, a symphony of beauty. It held its ground through that time.

20:52There you go. I mean, 2025, much better than the last anything since COVID. So,

20:57all right, Logan, thanks. We'll talk to you again soon.

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