Why Jerome Powell is wrong about housing

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about remarks by Fed Chair Jerome Powell on mortgage rates and housing inventory.   Related to this episode:   Housing Market Tracker - HousingWire  https://www.housingwire.com/housing-market-tracker/  HousingWire Youtube  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q  More info about HousingWire  https://lnk.bio/housingwire   To learn more about Trust & Will visit trustandwill.com   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.

Transcript

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

00:12Chair Jerome Powell on mortgage rates and housing inventory. Before we dive in, I want to thank our

00:17sponsor, Trust & Will, for making this episode possible. Logan, welcome back to the podcast.

00:22It is wonderful to be here. I woke up and looked at the White House, tweeted my article about

00:31housing demand at a three-year high because mortgage rates fell. And it made me ponder

00:38to the thought that Jerome Powell, the head of the Federal Reserve, the esteemed Jerome Powell,

00:45went on TV when they asked about housing. And he said they have no tools to help the housing

00:53shortage. When was this? At the Fed? This is at the Fed. Okay. And I said to myself, you know,

01:00and I don't agree with the housing shortage. We could get into that a little bit later. But

01:05just remember, the institution that really manages mortgage rates, when rates went up,

01:15demand fell, housing permits fell. I encourage everyone to go look at housing permits and housing

01:20starts. It has been going down since the rate hike cycle started. There was a brief time where

01:27mortgage rates fell on their own, late 2022, early 2023. The Fed was still hiking rates during that

01:34period of time. And during that time, I just want to remind everyone, Neil Kashkari of the Federal

01:40Reserve came out on national TV and said, we don't want this. We don't want housing back to life. How

01:49are we supposed to balance an economy? Mortgage rates getting down to near 6%. Why? Demand goes up.

01:55So what happened late 2022, early 2023? Mortgage rates went down to 5.99%. The lowest mortgage rate print

02:03that we had post 2022. And housing permits, single family permits started to rise. And they started

02:11to establish the building of new homes. So the institution that really controls 65 to 75% of

02:18where mortgage rates can go, made a public statement that they have no tools. And we sit here, we don't

02:24have any of the housing starts data for a while now. But the last print in August, permits are at

02:29recessionary lows. This is what we're dealing with. So what do you make of that? When he says that,

02:33what do you think he means by that? I've always believed this about the Federal Reserve. They are

02:39not true housing people. They're also what I would consider third-party regurgitators. They take

02:46information from housing institutions and look at the data. But if you are the head of the Federal Reserve,

02:53and there was a time where somebody wrote about, well, if monetary policy is too restrictive or too long,

02:59it affects the future production of supply. He does this all the time. So it didn't make sense to a lot

03:08of people. And people are coming to me. He's asking. I said, this is just how the answer stuff.

03:15If mortgage rates were down at 5% and new home sales grows again, builders are moving down their

03:25total units of supply. Single family permits will grow. Housing starts could grow. So unfortunately,

03:34we're always stuck with this same comment that he always brings out about this, but it's just not

03:39true. And again, they do not make policy around the existing home sales mark or the new home sales

03:44market, but their tools affect the housing sector more than anyone else. So it's not a good look

03:52when he goes on national TV and says something like that. When clearly back in late 22, early 2023,

04:00rates came down low enough to show a little bit of life that one of the Fed presidents had to go on

04:05national TV and say, how are we supposed to balance an economy? Why? Because it goes back to what I've

04:10always said. If people start having sex, they start buying homes, they buy more stuff. And if you're

04:16trying to balance an economy, housing activity has a multiplier impact that they're just afraid of,

04:23right? It's better for him to say that than to say, we have no tools to help the production of

04:30housing when clearly, you know, and we go back to what we wrote in June of 2021, when we said,

04:37hey, guys, I'm just going to tell you, there's going to be no construction boom. As soon as rates go up

04:41from here, you know, housing demand will fall, new home sales will fall, the builders will, you know,

04:46permits will go that and here it is. Voila. Another by the end of 2025 reality of how the housing

04:53economic cycle really works from real analysts and not third party regurgitators. Well, I guess we

04:59will see if the Federal Reserve can do more to do that when we get a new Fed chair. Of course,

05:05you feel like even when they announce a new Fed chair, there's an effect there of that person.

05:11You know, it is, they're starting to become more of a discussion that

05:15the market really doesn't like, has it? And the two-year yield is going lower, but the 10-year

05:22yield is drifting higher. And it's a very short term, you know, trade that's going the opposite

05:28way. I would just say, listen, the 10-year yield has been in range really for three, four months now

05:33down here. The two-year yield going lower, three months going lower, you know,

05:38they're anticipating more rate cuts than what the Fed is talked about. Again, if we're supposed to

05:46be a neutral policy, we have maybe two rate cuts left. Beth Hammock, our favorite Cleveland Fed

05:53president who, like whatever, seven weeks ago said the labor market was robust. And then Jerome Powell

05:59says it looks like the data was negative. She came out today and said, you know, I wish policy was a

06:05little bit more restrictive, you know? Oh yeah. Oh yeah. Oh yeah. We love Beth. Beth is just,

06:11she's just, she says that as it is. There needs to be more pain. There's not enough pain for her to,

06:19so she stuck to her guns on that one. But it goes into another discussion about housing shortages and

06:27inventory and how does it really work? And do we really have a shortage anymore? And, you know,

06:32we always talk about building more homes. We never really do base, you know, because I think that the

06:37housing discussion has to always go with the supply and demand equilibrium on how things have operated

06:42for decades. And people just want to talk about supply without the demand effect. Well, let's talk

06:47about the inventory because you feel like Jerome Powell is wrong on inventory. You even, when people ask

06:53you about, you know, the fact that the home builders, you know, that were low on inventory or the

06:59home builders should have built more, you wouldn't even say no to that. I know I'm on an island on

07:03this and I've always been on an island. I will die on this island and I will challenge any person on

07:08planet earth on, uh, to debate me on this, but I do not believe the builders underbuilt in the last

07:14decade. Um, for those that don't know me for the, in the last decade, when I first started writing

07:19about housing economics, I said, kind of like from 2008 to 2019 will be the weakest housing recovery

07:24ever. And that, you know, now that I look back at it, I could see what other people were thinking.

07:29Housing was a lot more affordable back then. And there was a lot of inventory. So in their minds,

07:34their models actually told them that home sales would be much higher and housing starts would be,

07:39I was like, no, homie, my, I don't usually like to do long-term tail calls, but I said,

07:45we are not going to get 1.5 million housing starts until years 2020 to 2024. That was like,

07:50looked at as a ludicrous statement, you know, but I said, no, it's never going to happen because

07:54the builders are going to have their weakest new home sales cycle because they have a more

07:58expensive product. There's a lot more cheaper homes out there. The credit markets and demographics

08:03weren't really that great in the last decade. So here we are. We never got to 1.5 million housing

08:09starts until years 2020 to 2024. Another call purchase application, the mortgage MBA will never hit 300

08:14until years 2020 to 2020, hit 300, like the second week of January, 2020. The builders only build on

08:22their demand curve. They could care less of what everyone else thinks. They sell homes as a commodity.

08:29So what happened in the last decade is that not only was it the weakest new home sales

08:33recovery ever in history, it was the weakest housing starts and permits ever in history because

08:40the builders kept on missing sales estimates 2013, 2014, 2015, 2018. And they just don't sit there and

08:49just build, build, build, build, build, and then pile up on inventory. They're completed units of sale.

08:54And I love the fact that I'm able to show people these multi-decade trends, but when the total completed

09:01units of sales get to about 120,000, they don't push, right? And we have five to six decades of this

09:08information sitting there for people to read and they choose to simply ignore it always and always.

09:13And that's why we wrote that article in 2021. We said, oh, you people are so cute. You're like little

09:19cute kids. You think there's going to be a construction boom. As soon as rates go up, because

09:23the builders were really pushing pricing on everyone, their profit margins, juicy, fat profit margins they

09:28had, you know, as soon as that happens. And here we are, December, 2025, the last housing permit start.

09:35We got COVID-19 recession levels, housing starts COVID-19 recession levels. That's why we wrote

09:40that article almost one year ago today that the builders have a supply and demand problem. So

09:46don't look for any kind of rebound in here. The only way we've ever seen them get a little bit more

09:52proactive is Jerome Powell. If you're listening, drums up, mortgage rates get down to 6% and stay there

10:01for a little bit. And oh my God, it's, it's a remarkable, the builders confidence are up small

10:05builders to the, the, uh, estimated sales growth are rising, you know, traffic picks up. So there

10:11are tools that have made this work all the way back to the Peloponnesian war, Sarah, but all the way

10:18back. So I think the, the point that I want to dig in here is it's not just that you think that,

10:24um, well, the builders missed it, you know, they, they shouldn't, you think the builders were correct

10:28because you're like, they sell to the demand and the demand at unless, you know, less affordability,

10:34which includes mortgage rates gets to a certain level. They're, they're not wrong for what they're

10:39doing either. There's not a demand for home, new homes at that point.

10:43This is the private sector, Sarah Wheeler. People demand results, shareholders. Are you kidding me?

10:50Do you think this is like the government where you could take unlimited losses all the time? And

10:54actually it doesn't matter. No, how you build your business is if you can make money, if you cannot

11:01make money, you do not have a business. Right. And this is why, well, I think it was a New York times,

11:06um, uh, writer. I think it was back in 2021 or 2022 when rates, I actually, I think it was 2022

11:14when rates went up and he's like, oh my God, the builders aren't building homes. They need to,

11:18they need to build homes. Now, even if there's no demand for them, I go, you have never ran a

11:24business in your life. Right. And that's the problem in your world. Money is free. It's

11:30abundance and all this stuff. And this is what, I mean, I disagree with the, the Yimby. Yes. In my

11:34backyard people, unless you could get financing, unless you could get demand, the supply and demand

11:38equilibrium for economics and housing has been very efficient. And we are at levels to where the

11:45builders are like. So all this talk about a major construction boom and all this and new,

11:51no, I mean, it's better now that mortgage rates are now at 6%, but imagine if we were at seven and a

11:56half percent mortgage rates and Jerome Powell came on TV and said, we don't have the tools to help

12:02build homes. This is what I got to deal with. It's bad enough that the YouTube people are trash

12:08always. And God, we heard a bunch of new grifty ones this week, but for the head fair chair,

12:14for the president of the fed chairman to go out and national TV and say that, and it just sounds

12:19weird, you know, like you really control kind of mortgage rates and, you know, 65 to 75% is fed

12:24policy. And I say this because Neil Kashkari recently came out, I think it was a year ago. He said,

12:30you know, if we really wanted mortgage rates lower, we can do it. We just cut interest rates. We can do it.

12:34And he's right. 65 to 75% is, I just don't want to do it. So at least make it a something coherent

12:40statement. So people could kind of look at you and go, I'm not sure that's right. Because I don't

12:45agree with Powell's statement now that there's a housing shortage, right? I have, I have set numbers

12:50that I put for myself. And once we got them, I said, I'm out. I can't talk about it anymore,

12:56right? On the national side. And look at the builders, right? If there was a housing shortage,

13:00builders would be booming with demand and all that stuff. And always remember, if you're talking

13:05about supply, if you do not have the demand equilibrium in there, you're working with an

13:10outdated dinosaur model that doesn't exist. And you're going to sound like that New York Times

13:15reporter who's never ran a business in his life and goes, the builders should just keep on building

13:19and just do that. That never works out.

13:22That never works out. So the one time, the period of time when you were like, yes,

13:28we actually have too low inventory was 2022, right? We had 240,000 units for sale across the entire

13:38United States. So I, I have a rule of thumb with my inventory. If we are above 1.52 million on the

13:47national data and monthly supplies over four months. So that's the NAR data, not ours. We have enough

13:54active inventory to keep days on markets going. And then, you know, housing is a functioning marketplace.

14:01What happened during COVID was housing broke out before COVID even hit us, right? And your prices were

14:09already accelerating higher, faster. Housing starts broke out, new home sales broke out, and then COVID

14:14happened. And then the worst thing ever, we had no seasonal increase in inventory in 2020. So we are

14:22already broken to all time lows. And then we just went straight down. I'm like, oh God,

14:28this is a problem, right? And it's funny because I sit here thinking about all the people,

14:33the most educated, I mean, Harvard at MIT and Wall Street and NASA, all these housing doomers

14:38in 2020 and 2020, we're talking about big national nominal home price increases. Clearly Harvard missed

14:44out on these intellects. We had active inventory near, at all time lows, we had 3% mortgage rates and we had a

14:51rising demand curve. And that was the backdrop for the biggest home price crash post-World War II.

14:56Not the most educated people. Entertainers, but not the most educated. So of course, we're like,

15:00oh my, we need higher rates, everyone. This is not a good thing, right? This is what an inventory

15:06shortage looks like. Now, on the national side, do we really, does anybody really say there's a major

15:13inventory shortage? Demand is booming, right? There's multiple bids everywhere out there, right? So

15:20for now, monthly supply over four months, right? It's four and a half months. The housing bubble

15:26crash years, I think it was running at over 10, but it's a functioning marketplace. That was the

15:32whole concept of team higher rates. Because unlike Jerome Powell, I know the consequences of this,

15:37right? But for the first time in my life, it looked like a shortage and now we're back here. So

15:43not only do I disagree with them on the, they can't do anything about it. It's the whole,

15:49the inventory shortage thing is just not there anymore, right? We're not seeing these, oh my

15:54God, there's just two, there's not enough homes out there in the market. The demand right now,

15:58because housing affordability got really bad, the product now that's out there is much different

16:04than the product that we saw in the previous decade when it was more affordable and inventory

16:08is higher. So you have to put all these tangible variables in there. I don't think he has the

16:13ability to do it. I don't think a lot of people take the time to kind of look at the whole enchilada

16:18of housing economics there. So of course, our data, you know, our data is a little bit different than

16:23everyone else because we just show the raw single family homes available for sale, not in contracts.

16:28So it got really bad, right? I mean, February of 2022, I just threw up the flag and said,

16:34I don't care. This thing has to absolutely destroy. We need higher rates because we would

16:38have had another 18 to 19% home price growth year. And all that does is kill future demand

16:42and prices were rising actually 17 and 18% until the data filter itself out. But we only had 240,000

16:50single family homes available for sale in March of 2022. We had too many people chasing too few homes.

16:57That was, we had the unhealthy housing market in 2020 through the very unhealthy housing market in

17:022020 to the savagely unhealthy housing market. But now we're good. Choices, buyers and sellers, good.

17:10When you look at the national data, and then the problem is you've got these two giant states,

17:15Florida and Texas, that really influenced that national data in a way that, you know,

17:20if you're not in Florida and Texas, you can feel like that's not my reality, right? Because whatever,

17:25when they were, when we had all that migration coming in, we were low on inventory. Now that that

17:31slowed down, you know, there's more inventory in, in Texas and Florida. How do you account for that

17:36when you think about those national numbers? I disagree with that assessment because every,

17:41every state pretty much has inventory growth. Now there are some states that are not back to 2019

17:45levels, of course, but we don't see these, there's no homes to buy stories anymore, right? Because

17:52monthly supply, and this is why monthly supply is a very good, this is why days on market is very,

17:57you know, we were, we were a days on market people, right? I mean, that's, that's just,

18:00that's just my, the days on market when it's a teenager level is never a good thing, right? It's,

18:07there's, there's no good news you have in the housing market when the days on market are a

18:11teenager level. So there's the days on market are so sporadic by everyone that it confuses everyone

18:17out there. Cause some people have like 45 to 90 days or something. The NARs, a days on market,

18:23normal, normal would be 30 to 45 days, right? That would be normal. We had like 14 days in 2022.

18:32That is never a good thing. There are homes in Montana that were going out for hours.

18:36They're not even waiting for the days, you know? So more supply, less price growth, more choices,

18:43all inventory is up everywhere. I know Connecticut and New Jersey and Illinois there, but in general,

18:48we're in a much better stance. So on a national basis, monthly supplies over four months,

18:54inventory is above five, 1.52 mils. We're going to get the NAR seasonal decline in inventory. So

18:59it's going to be, it's on the lower end of the, but as long as I have 1.52 to 1.93

19:04in over four months of supply, I do not want to get into this low inventory. There's not enough homes,

19:10demand is booming, whatever. Demand was never really booming in the, in during COVID,

19:15like it was during the housing bubble years, which was a great conversation during the housing bubble

19:21years. Inventory was rising, right? I, some poor unfortunate guy put me on his podcast and he kept

19:27on telling me that whenever inventory rises, prices falls. I goes, you've never read a book

19:31and you've never studied housing economics because inventory used to rise in the eighties,

19:37nineties, and 2000. No, it didn't. Yes, it did. You have never looked at a chart either.

19:41Person never talked to me ever again after that, because once he looked at it, once he,

19:45decided not to burn books, but read them. There he goes, looks at it. He's like, oh my God,

19:50it is right. Yeah. Total active inventory was rising from 2000 to 2005, 2 million to two and

19:55a half millions. Monthly supply was below five months. Rising demand curve, much different

20:01marketplace. Sales were booming back then. Now here it's a, it's completely opposite. Why do we do

20:08those crayon charts or those economics? What's going on here, right? Qualified mortgage changed

20:13everything. So authentically we had a shortage that is very bad. It's very unhealthy. It's

20:19undeserved price growth. It happened, but you know, we're back here and I just, I can't with a straight

20:25face, do what Jerome Powell did. We have no ability to help the production of housing. There's still a

20:30shortage of hopes, right? So it's just, it goes back to decades and decades of information, active

20:35inventory, usually two to two and a half million. We can do this with 1.52 to 1.93 monthly supply over four

20:42months. It's fine. But the builders, Oh, homie, you get to 120,000 completed units. And that's why

20:49we wrote that article a year ago. No, it's not going to work. And here we are there. Whatever the

20:54next housing starts and new home sales prints, if rates have stayed elevated, the thing gets worse.

21:00So that's how, that's how adults work in the private sector, right? They're not some, you know,

21:06unicorn care bear, strawberry shortcake, you know, la la la. Let's all have a picnic and build

21:12homes and, you know, out here. Come on. You might, you might as well throw cabbage patch

21:16kids in there. If you're, if you're going down. Oh my God. I, I used to, when I used to score my

21:22touchdowns back in the eighties, I used to do the cabbage patch. Oh, bringing back the old memories

21:26out there. Oh yeah. Not that cabbage patch. I know, but you, I just thought of, I thought of

21:32cabbage patch and dance. I used to do what I used to score the touchdowns, but you're not back.

21:36I thought you were a basketball player. What are you talking about touchdown?

21:41Sarah, I think you're talking about garbage mail kids.

21:44No, I'm talking about cabbage patch. Maybe that was before your time.

21:48No, no, I'm, I'm, I'm, I'm a mid-gen expert. No, when I think of cabbage patch, I think of the

21:53dance. No, I was actually a better football player than I was basketball. Oddly enough,

21:57I stopped growing, you know, like seventh, eighth grade. So I figured I'm not going to be a center at

22:03five, 10, you know, so I got to learn to be a point guard, but I love football, man. That's

22:07why I always tell people, like, if you, if, if you really want to know the essence of me,

22:11think of me as a strong safety that sees an overrated trash talking tight end, that's going

22:16to come down the middle. I know it's going to soft every single day. I woke up and I go bleep the

22:20doomers. And that's me knocking him on and bleep, you know? And so everybody could see, and you know,

22:26he ain't talking anymore out there. So that's just kind of the mindset I have out there. But yeah,

22:31I mean, I played basketball, I coached high school basketball, but in my heart, I'm a strong safety

22:37baby. In your heart. Well, thank you for joining us going over all of this. We'll talk to you again

22:43soon. Pleasure.

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