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Moody's Talks - Inside Economics

Episode 50
March 18, 2022

Higher Rates and House Price Angst

Mark and Cris welcome two guests from Zelman & Associates, Ivy Zelman, CEO and Dennis McGill, Director of Research to discuss the state of housing and mortgage markets.

Full episode transcript

Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight. 

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics and I'm joined by one of my co-hosts, Cris deRitis. Cris, how are you?

Cris deRitis:                       Doing well, thanks, Mark. How are you?

Mark Zandi:                      What's the deal? Ryan has bailed on us. Ryan Sweet's the other co-host, and he... I think a lot of stuff going on at home today. So we'll miss him.

Cris deRitis:                       I blame the yield curve.

Mark Zandi:                      You do? Why?

Cris deRitis:                       Yeah. It's narrowing. He's not a big believer in the yield curve. I think he's just avoiding [crosstalk 00:00:44] yeah, avoiding the issue.

Mark Zandi:                      That doesn't sound like Ryan stuff. Doesn't scare Ryan off. Yeah, I think, I think he's actually more scared about the bet we have on housing starts, which we're definitely going to come back to Cris. 

Cris deRitis:                       Oh yeah. You should be scared.

Mark Zandi:                      Well, we had a great number. Okay. We'll come back to that. 

Cris deRitis:                       We'll come back. Yeah.

Mark Zandi:                      And I should say Cris, obviously he's the deputy chief economist, but we've got two guests today, Ivy Zelman and Dennis McGill and we'll come back and introduce the two of them shortly. We go way back with both. I'm going to ask Ivy how many years back we go, but we go back a lot of years, so it's good to have them on. And they are the very best on housing, housing finance. And other than you, Cris, I should say you're, you're pretty good yourself, but [crosstalk 00:01:38].

Cris deRitis:                       I'm a big Ivy fan. We're aligned in our forecast, so right. 

Mark Zandi:                      Exactly.

Cris deRitis:                       Lot to talk about. Lot to talk about. Okay.

Mark Zandi:                      But before we go down the housing path, I think it's apropos, obviously they're related, the Fed this past week, the FOMC.

Cris deRitis:                       Yeah, they had a lot to say. So just to summarize, so the Federal Open Market Committee met on Wednesday and raised the target fed funds rate by 25 basis points to a range of 25 to 50 basis points, right? So this is the first rate hike in three years. So that is significant. And really, if I can summarize, we'll get into some of the details, but summary of the tone, they signaled essentially that they're all fighting inflation, that they're even willing to sacrifice growth to fight inflation. That is the number one most pressing issue at this time. So they signaled they're going to, not only do they hike now, but they're going to continue to hike according to the dot plot, which is a summary of all the members of the committee and their views on where the fed funds rate and inflation and GDP are going to end up over the next couple of years. They're signaling that the fed's funds rate would end at 1.9% by the end of this year, that's the median. So we're talking six more hikes, one at every meeting of a quarter point. 

                                             So again, fairly aggressive stance, large change from what we saw in December, right? So clearly they are concerned about inflation. They also indicated that they do expect to reduce their balance sheet coming months. They didn't specify when exactly that will be, but I would imagine it's going to be within the next one, three months would be my guess that they'll start to reduce some of the holdings they have in treasuries and mortgage backed securities. They just stopped purchasing what, a couple weeks ago. So now they're going to switch gears here. What else did they have to say? They did mention the invasion of Ukraine by Russia as being certainly human tragedy, economic concern as well, injecting a large degree of uncertainty into the US economic outlook. So clearly that's something that they're watching and it might be a reason why they're taking this certainly wait and see approach. They're not going to commit to anything just yet in terms of a very aggressive monetary policy, because there are these cross currents when it comes to inflation, growth, oil prices. So any number of factors here.

                                             One last thing I'll just summarize, the economic projections that they gave, because this, there was a fairly significant revision to their outlook here. They cut their GDP forecast for 2022 to 2.8% from 4%. So that's pretty significant. That is they had forecast at 4% at the last meeting back in December and there was no significant, no real significant change to the unemployment rate outlook though. So they still see a very strong labor market. It's really just this reduction in growth. And then perhaps the largest change or most obvious changes around their views were on inflation for 2022. They expect PC inflation to come in at around 4.3% versus forecast of 2.6% in December. So upgraded significantly the view there. And then even in 2023, they expect that inflation will still be relatively high at 2.7%. And so that's an indication of, again, their view that the inflation is pressing, it's going to take some real effort to get it back down.

Mark Zandi:                      Couple things. One, they kind of hit it right down the fairway, didn't they with regard to market expectations? So before the meeting, investors thought, hey, they're going to raise rates seven times this year, one at each FOMC meeting, there's seven to go and they're going to get seven and we'll get to 1.9% by the end of the year. And that they will give us some sense of balance sheet reduction sometime kind of midyear. And I think the market reaction was first negative. You saw stock prices sell off, bond yields rise. But then by the end of the day, stock prices had fully recovered and bond yields had come right back in. So it felt like they just nailed what the market was expecting. So nothing, it was hawkish, no doubt. 

Cris deRitis:                       Yeah.

Mark Zandi:                      You know, obviously very hawkish, but that was well anticipated by market participants. Would you agree with that observation?

Cris deRitis:                       Yeah, I would, I would say so. Yeah.

Mark Zandi:                      Yeah. Okay. Second, our forecast is a little bit less hawkish. So let me ask you this. Before the Fed met, we were forecasting four rate increases in 2022, not seven. We're going to do a forecast here pretty soon for the month of April coming up couple weeks from now. What's your thinking around what the fed's going to do now? And obviously this forecast is what the fed will do, not necessarily what you think they should do, but you know, what will they do, do you think? Is it three more rate hikes now or six more rate hikes for the remainder of the year? So that's a pretty big gap between our forecast and the market forecast and the fed forecast.

Cris deRitis:                       It is. My view at this point is five, right? I increase it. I think there's going to be another one, but I think you have so many cross currents, I'm not ready to commit to a very aggressive policy. And if you look at the history of the dot plots and how accurate they were in projecting how many rate hikes the fed actually conducted at least over the last five years or so, they've always come in stronger than what actually happens. Right? So dot plots indicate very aggressive policy. And then in reality, the fed is never quite able to get up to that. 

Mark Zandi:                      [crosstalk 00:07:43] you're saying their forecast is wrong, Cris, that's what you're saying.

Cris deRitis:                       Oh yeah. Their forecast is, but they said it in a nice, like roundabout way, but their forecast is wrong. Well, they use some language there to color it. [crosstalk 00:07:53].

Mark Zandi:                      Your thinking is, well-

Cris deRitis:                       ... data driven.

Mark Zandi:                      They're right about growth. They're right about inflation, but you think inflation will moderate sufficiently enough, growth will slow sufficiently that we need another four rate hikes this year, not another six rate hikes this year, which in the grand scheme of things, you know, I'm not sure I would debate it. 

Cris deRitis:                       And also on balance sheet, you said that they, and I think they indicated strongly that they would begin allowing the balance sheet to wind down. So they bought all these treasuries. They bought all these mortgage securities to bring down long term interest rates. They stopped buying not too long ago, but at the May meeting, the next meeting, it's likely they're going to announce that they're going to now allow the balance sheet to run off, meaning the securities on the balance sheet will mature, maybe there'll be some prepayment on the mortgage securities, they'll allow that to happen. And if you do the arithmetic, the balance sheet will run off by about a hundred billion a month. And that's kind of, sort of, I think they were pretty point blank about that they were going to do that. So it sounds like that's where we're headed.

                                             Yeah. I don't think they gave the specifics on the timing because they want to allow themselves some freedom there. But yeah, I think that's... Reading between the lines, I think that's what they...

Mark Zandi:                      Okay. Good. This is a good point to bring in our guests because the next logical thing to talk about is mortgage rates. And I'm very curious what Ivy and Dennis think about the path for mortgage rates going forward in the context of what the fed did. So Ivy. It's good to have you, Ivy Zelman. Good to see you.

Ivy Zelman:                       Hi. Thanks for having me.

Mark Zandi:                      Yeah. You know-

Ivy Zelman:                       Having us.

Mark Zandi:                      How long have we known each other? Or would you rather not say for both our sakes?

Ivy Zelman:                       I think that it's got to be at least 25 years.

Mark Zandi:                      I think it has. I was going to say that too, 25 years. Yeah.

Ivy Zelman:                       Yeah. We had the pleasure of being on the infamous Louis Rukeyser Wall Street Week show for those that are old enough to remember, kind of the Oprah of Wall Street back then.

Mark Zandi:                      I don't know about you Ivy, but I was like quaking in my boots. Were you nervous on that?

Ivy Zelman:                       Oh yeah.

Mark Zandi:                      Oh yeah. I was like, yeah. And you were so good. I remember you were, I remember Dennis, I don't know if I've ever told you, we ever talked about this, but it, Ivy was pumping Louis Rukeyser before the show, basically wanted to know what his first question was going to be. Do you remember this, Ivy? Do you remember this? You don't remember. [crosstalk 00:10:28].

Ivy Zelman:                       I remember I was very nervous.

Mark Zandi:                      And she was trying to figure it out and he would not tell her, he goes, "Nope. I'm not telling you. You got to be ready for any question that's coming." It was like the Pope. I hope I'm not making this up Ivy, but it was a studio somewhere in like the middle of Maryland, between DC and Baltimore. And he flew in on a helicopter. He landed, he came into his office in the studio and we all would sit around and if he got his monologue written in time, we'd go live. No, is that right? Yeah, we'd go live. And if he didn't get it written in time... No, no, it was the other way around. If he could write it in time, if we wrote it in time, we would tape it. And if he couldn't get it written in time, we would go live. Right? So we're all praying that he to done so that we could tape it. But no, no, it went live. We went live and it was it was fun. Right?

Ivy Zelman:                       Absolutely.

Mark Zandi:                      It was a lot of fun. I don't [crosstalk 00:11:27].

Ivy Zelman:                       I had the pleasure of being on more than once. And I can tell you, in my twenties, late twenties, it was such a frightening experience but also an incredible one.

Mark Zandi:                      Yeah. He was a good guy. Interesting fellow. So tell me about your path, Ivy. I mean, you have this wonderful company with all these great folks and you've made such an impact on the housing and housing finance industries. Everywhere I go, anyone I talk to, they talk about your work and Dennis's work and the company's work. So just an amazing success story. Can you just tell us a little bit about that?

Ivy Zelman:                       Sure. And thank you. Dennis and I have been together, kind of glued the hip for 22 years. And prior to Dennis joining me at Credit Suites as a summer intern, I'll steal his thunder a little but summer intern at Michigan. I started working at Salomon Brothers in 1990, and I did a two year investment banking, financial analyst role, and then moved into equity research. And I was fortunate because the lights were going to go out according to everyone, because Salomon Brothers was going through a treasury scandal, we were the middle of a recession and there was openings and the investment bankers were like, you don't want to go on equity research. They're just monkeys. They just write what the managements tell them what to write. But there was a job and I could pay my rent. So that was the beginning of my career. And I spent another eight years at Salomon Brothers as the housing analyst, running really home building and building product research for that silo and then went to Credit Suites for a decade. And that's when Dennis and I later hooked up. I was there in late '97. That was after Smith Barney acquired Salomon brothers. And I was let go, because they had the number one ranked analyst at the time. I did surpass him the following year, so that was a bad choice on their part.

Mark Zandi:                      [crosstalk 00:13:22 you surpassed Dennis, you said.

Ivy Zelman:                       Surpassed the number one ranked analyst at the time that Smith Barney chose. 

Mark Zandi:                      Oh, I see.

Ivy Zelman:                       Fired me. Yeah. But recognizing that after several years at Credit Suites and the market in 2000 it was just coming off of tech bubble-ish 2001, the housing market was benefiting at that time from the fed easing and the market started really becoming the darling after the tech wreck. And our research was again, really focused on builders and building product companies. But we sometimes stepped outside our lane. So that was early on when Dennis joined me as an intern and we started writing about the mortgage market and really continued to utilize what at the time was a Rolodex that I developed to not rely on publicly traded management teams to inform us. So I started talking to private home builders. 

                                             Unfortunately back in the early nineties, I did this at Salomon Brothers, the industry is so fragmented across really all of the pieces of the puzzle, the ecosystem, that you can call a private home builder or talk to a private mortgage company, a private real estate broker, every aspect of it and really learn what's going on. I call it boots on the ground. So we really continued to build that Rolodex to help inform our overall outlook. And we turned cautious, really more neutral call it, late '04, '05, over just concerns on affordability. But so really I'll just summarize and not go on and on about what happened in the past about the housing market. But you know, my team, Dennis and I leading sort of the charge, it's really deep dive thematic work and overlaying that work with proprietary surveys that allow us to say, are we still on track for our forecast, our longer term forecast? And each month when we're obtaining information from these C-suite executives that are partnering with us, we really could adjust and better confirm or moderate, adjust our forecast. So it's really a unique business model because we really are not dependent just on data and economic models, but just live human beings that are, I call it weeds in the trees and boots on the ground that we are really a beneficiary of that partnership.

Mark Zandi:                      So you guys started a company. What's the, I always pronounce this wrong, eponymous. Eponymous. It's Ivy Zelman and associates. Did you know that word, eponymous? You name something with your name, it's called eponymous. 

Ivy Zelman:                       Got it. New one for me.

Mark Zandi:                      [crosstalk 00:16:14].

Ivy Zelman:                       Yeah, we started Zelman in October of '07 in the beginnings of the true storm of the GFC and-

Mark Zandi:                      Oh wow. Good timing, guys. '07. Yeah. Right.

Ivy Zelman:                       And it's been quite a ride. We recently sold the majority stake of the company in July of 2021 to Walker Dunlop, which is a public company.

Mark Zandi:                      Great company.

Ivy Zelman:                       Commercial financial lender and investment sales broker. They're now at the helm and we are operating pretty much autonomous, but working with them to find synergies and strategize. on the future. So it's a pretty big inflection point after roughly 14 years of being independent.

Mark Zandi:                      Yeah. Excellent. Willie Walker. He's got his own podcast.

Ivy Zelman:                       Yeah.

Mark Zandi:                      You're going to have to tell me, you're going to have to let Willie know who's got the better podcast. I'm just saying, you know? Yeah. But he's got a wonder, he actually does a really, unlike me a lot of homework, he does a lot of homework. He gets [crosstalk 00:17:15].

Ivy Zelman:                       No, he's a great moderator.

Mark Zandi:                      He's a great moderator. That's a very, very good podcast. Something to really aspire to. So, Dennis, Ivy, don't take offense to this, but Dennis looks like he's still in his twenties, like what that heck is going on here? I know always say this every time I see Dennis, but it's true. Look at him.

Dennis McGill:                  I'd like to think I can still act like I'm in my twenties too sometimes, but [crosstalk 00:17:42] some trouble.

Mark Zandi:                      Great. Yeah.

Dennis McGill:                  I was going to say, I would take the over on the 25 year comment that you guys have known each other, because I've known Ivy for 22 or something like that. And I know your stuff was already in existence then. 

Mark Zandi:                      It's probably true.

Dennis McGill:                  And it was So I'm not sure what, I don't remember when that change happened, but it was still

Mark Zandi:                      That's when we sold the company. We had a company,, my brother and I and a fellow. We started it back 1990. We sold to Moody's, I don't know, 16 years ago now. So Dennis you're ahead of [crosstalk 00:18:17]. Pardon me?

Dennis McGill:                  Still have the domain? That must have been [crosstalk 00:18:19] domain at the time.

Mark Zandi:                      Indeed? Oh no, wait, hold on, hold it. I don't have the domain. No, I don't. Moody's owns the domain and we still use it actually. If you go, you'll come to one of our websites. So yeah, I held onto a few other, we bought a whole bunch of them, like every state code plus economy, I've got a few of those. Are you interested in buying those, Dennis, by any chance?

Dennis McGill:                  Everything's got a price mark.

Mark Zandi:                      I know that's worth about five cents on eBay probably. Yeah. Anyway, so you're director of research and you've been with, you were a founding member of Zelman Associates, correct?

Dennis McGill:                  Yeah. Yeah. It was our small team from Credits West.

Mark Zandi:                      Yeah. Great. How, big is your research team now? How many folks do you have working now at [crosstalk 00:19:09]?

Dennis McGill:                  Including Ivy and myself, we're at 12.

Mark Zandi:                      12. Fantastic. And where were you prior to credits... You guys met each other Credit Suites? Did you come right out of school? Were you doing something else?

Dennis McGill:                  So the internship that Ivy referenced, I was actually, I had already graduated from college, but was going back for a master's in accounting. So I knew that at summer period was really an internship type period. And the reason I was going back for a last year of accounting was somewhat to build a knowledge, but also cause I was totally unprepared to come into and get a good quality job. So it worked out well to be the naive graduate going to this hybrid internship between New York and Cleveland, which is where Ivy was. Was working from somehow still with a 212 phone number to kind of mask that.

Mark Zandi:                      Oh, I know. Yeah. [crosstalk 00:20:01]. 

Dennis McGill:                  It's confusing, but that was where we had met and then fortunate enough to get offered a job back at Credit Swiss. And then I remember Ivy calling me and letting me know that would be also on her team as well.

Mark Zandi:                      Well, fantastic. It's good to have you both. And you know, let's go back to the mortgage rate question. Obviously housing, housing finance, very sensitive to rates. So I assume you guys have a view on where mortgage rates are headed. And so let me ask, do you have a view on where mortgage rates are headed and what the fed did this past week affect your thinking about where mortgage rates are headed? If you have an explicit forecast,

Ivy Zelman:                       Well, we don't have an explicit forecast, but I think that with Cris' comments about the fed planning on selling MBS. really it's a function of the pressure on, or I should say the lack of demand that that would imply, you'd assume rates would move higher. And yet also we're seeing pressure on originations, significant pressure on refi’s. So it's kind of like, they'll be originating less. So there's less supply while there is less demand, but you know, directionally we're obviously seeing rates not only increase, but spreads are widening, with pressure on the mortgage originators that are trying to deal with competitive pressures, but offsetting the fact that primary, secondary spreads continue to be challenged. So we're seeing year over year for primary buyers. The monthly payment for an entry level buyer is up about probably 30% year over year.

                                             So certainly that is directionally not favorable for the consumer, for the primary buyer. Despite that though, there's been really surprising resiliency to that. And we think that has a lot to do with the non-primary buyer in the market that people don't really worry about, but we're paid worriers, Mark. You know, that's what we do for a living. We don't have any skin in the game. We don't have a book of business that we're tied to any view and we just try to be insightful, but we are concerned about rising rates, but we don't forecast them.

Mark Zandi:                      Okay. So let me unpack that for a second, because I have been a little confused about this. So the mortgage rate that people pay right now is a little over 4% last I looked. That's up about a percentage point where we were really not too long ago. I think kind of-

Cris deRitis:                       Part of the year.

Mark Zandi:                      Towards the end of last year early this, right Cris?

Cris deRitis:                       Yep.

Mark Zandi:                      Some of that is obviously all interest rates have risen. The so-called risk free rate, the tenure treasury yield rate, which the mortgage rate is often is based off of, that has moved up. But as you said, the spread, the difference between the mortgage rate and the 10 year treasury yield has also increased over this period. And so if you go back beginning of this year, the difference between the primary mortgage rate and the 10 year yield was about 150 basis points, one and a half percentage points. Now it feels like it's more like two percentage points. So it's increased by a half a point. So what's going on there? Why is that spread gapped out like that over the past couple of months, couple of three months. Do you have a sense of that?

Ivy Zelman:                       You know, Dennis can weigh in, but we used to use the 10 year versus the 30 year spread as a proxy to understand what mortgage rates directionally would look like and competitive pressures, but it's really kind of broken down that typical benchmark. And that has a lot to do with the pressure that we're seeing on MBS prices and originators that have to sell those mortgages into the secondary market so that they're requiring a higher return. So that's why the spreads are widening. And I think that with the fed obviously saying they're going to start not only not buying as Cris pointed out, but they're going to be selling, we're seeing that pressure result in that widening spread. And I think it was over 200, it was like a 206 basis points the last I looked.

Mark Zandi:                      Oh, is that right? Okay.

Ivy Zelman:                       I don't know Dennis, if you want to-

Dennis McGill:                  [crosstalk 00:24:09] it gets a little outside of our sort sweet spot mark, but I think it has a lot to do with the fed policy around. They were the incremental buyer for quite a long period of time and just not even being a buyer anymore, sort of the market was trying to get ahead of that as well. Anticipation of knowing that they would be exiting the market, demanding that price premium earlier. And then now to the degree they become a seller, I think that's got people expecting that spreads are going to at least stay elevated at these levels, if not potentially pressure it further.

Mark Zandi:                      Good point.

Ivy Zelman:                       One offset. If I may just add in one offset that may help a bit to the consumer is that during the post shutdown pandemic period, really the best credits were being underwritten and purchasing homes or re refining. And it wasn't because they weren't willing to lend to less credit worthy borrowers, but today they seeing more easing or willing to do a little bit more to bring in those lower credit borrowers today and not subprime type borrowers, but just on the margin that you're seeing. In our mortgage proprietary survey that we do monthly, we're seeing slight easing non QM as well as jumbo and lower FICO scores on conventional FHA/VA. So that's starting to happen as the market's more competitive.

Mark Zandi:                      Got it. So just to summarize for the listener. So what you're saying is, and it makes sense to me, is that okay, the fed was buying all these mortgage securities back in the pandemic, trying to get mortgage rates down. Now the economy's strong, they're going to start tightening policy, which means they're not only not buying mortgage securities or allowing them to prepay, they may even start to sell at some point. They don't think they've gone that far yet, but they may do that. That's one of the factors causing this difference between mortgage rates and treasury yields to kind of widen out. But I mean, what you're pointing out is, hey, look, we, because interest rates are up and we're going to come back to demand for housing in a bit. But because demand is now suffering primarily by first time buyers and primary buyers, given the competition in the origination market that, might cause the, at least at limit the increase in the spread or might even bring it in at some point> That's kind of, sort of what you're arguing.

Dennis McGill:                  Or the other way of thinking about that too, on the last point is remember the rate is more of the price dynamic, but what I think what Ivy was getting to and what will become incrementally more important is what are the terms? What are the other metrics that are going into that?

Mark Zandi:                      I see.

Dennis McGill:                  Where you could go to the consumer and A, you'll probably see a lot of buy downs, more so going forward, whether that's a bill or buy down or even a homeowner could potentially be doing it, but you could also see a different mix of product. Rate might be higher, but down payment flexibility, credit score flexibility. Those types of things are starting to see more of as the industry, like any other industry doesn't want to shrink volume. So they're going to do what they can to try to drive volume in as controlled way as possible, I guess.

Mark Zandi:                      Oh, okay. So Ivy, you weren't really talking about the interest rate, you were talking underwriting, the underwriting stand. 

Ivy Zelman:                       Yeah. I was talking about the underwriting stringency, which is what we measure. But I think as Cris would know, Fanny and Freddy actually went on the call it jumbo second home buyers actually tightened and increased the cost for those loans. So you've got that dynamic that it's moderately starting to impact second home demand that we're seeing showing up, but still elevated.

Mark Zandi:                      Got it. Got it. Okay. Before we move in deeper into the housing mortgage markets, let's play our statistics game. And just to remind everybody out there, the game is each of us, and you guys can play or not play, it's up to you know. Love to have you, but you don't need to. 

Dennis McGill:                  You just want us to sit here, Mark? We can't play the game?

Mark Zandi:                      No, I would much prefer if you played, but you know, it's okay. I'm giving you a way out if you want to get out of this. Because you should know, I always win. I just, I always win. No, no only kidding. Brian's actually the big winner here. So maybe I will win today.

Cris deRitis:                       You got a chance. You got a chance. 

Mark Zandi:                      So the game is we each announce a statistic. The rest of us try to figure out what that is. The best statistic is one that is not too easy so that we all know it right away. One that it's not so hard that it's like forget it, we're never going to get it. And it would be bonus is if it's somewhat related to what we're talking about, housing, housing finance, or recently what's going on in the world. It could be a statistic related to the fed or to anything in the economic statistics over the last week, something like that. So with that as a description, I'm going to turn, just because Cris knows this game well, I'm going to go to Cris first. Cris, what's your statistic of the week.

Cris deRitis:                       All right. Nice round number. 70.

Mark Zandi:                      70. Okay. Seven zero.

Ivy Zelman:                       I'll guess on that one.

Mark Zandi:                      Okay, go ahead. 

Ivy Zelman:                       70% of homeowners are locked in below four.

Mark Zandi:                      Ooh, geez.

Cris deRitis:                       Oh, that might be right. That's that might be right.

Mark Zandi:                      Yeah.

Cris deRitis:                       That's not the number I'm thinking of, but.

Mark Zandi:                      Is that right though? 70% of people with mortgages have a coupon, a rate that's below 4%?

Ivy Zelman:                       Right.

Cris deRitis:                       All right.

Mark Zandi:                      Whoa. Well, before-

Ivy Zelman:                       Damn, I thought I had one.

Cris deRitis:                       That's a good one.

Mark Zandi:                      That's a really good one. 

Cris deRitis:                       Yeah.

Mark Zandi:                      Before we go play though, that's a really good, interesting statistic. So Ivy, why is that? What's the import of that number? What's the significance of that? 

Ivy Zelman:                       Well, I think that the fed policy of pumping liquidity in the market and buying MBS, the backlash of a refi boom is going to be an impediment to mobility. Consumers will be incentivized to move unless they have the arbitrage, which is what most people are focused on is those that are leaving high cost states to moving to low cost states, whether you're leaving the state of California and you go to Arizona, mountain states, Texas, but we're watching that very closely. And just to give you some perspective, that number at the end of 18 was 39%.

Mark Zandi:                      Oh my goodness. And so now with mortgage rates above four and 70% of mortgages have rates below four, you're saying that's going to really interest rate lock. It's going to make it difficult or make it less likely people are going to move, because they'll get a mortgage.

Ivy Zelman:                       Right. Because mortgage rate, mortgages aren't transferable with, with the exception of FHA/VA, which we don't really see a lot of that, but that's at least on the conventional jumbo side they're not transferable.

Mark Zandi:                      And I guess that's also why refi activity is completely dead now. Right?

Ivy Zelman:                       Well, we see cash out refi.

Mark Zandi:                      Cash out. 

Ivy Zelman:                       There's so much equity, but I don't know Dennis, any guess on the 70 or Mark?

Mark Zandi:                      Okay. Yeah. Yeah. Is it related to housing, Cris? 

Cris deRitis:                       It is. It is.

Mark Zandi:                      We can ask questions, guys. We can ask questions. [crosstalk 00:31:03]. No?

Cris deRitis:                       It is related to housing. So it's consistent with your rules.

Mark Zandi:                      Well, why are you saying it that way? You're just kind of being a little sly when you answer that question. Is it related to housing or not? 

Cris deRitis:                       It is related to housing. Yes. 

Mark Zandi:                      Okay. Okay.

Ivy Zelman:                       Your projection for home ownership rate?

Mark Zandi:                      Oh geez. That would be pretty aggressive. That'd be optimistic.

Cris deRitis:                       No. It's a number that came out the week. [crosstalk 00:31:28]. What's that?

Mark Zandi:                      NAHB survey. Yes. [crosstalk 00:31:32].

Cris deRitis:                       NHB survey. Which one? Which?

Mark Zandi:                      The builder sentiment survey. The buyer sentiment survey. That one

Cris deRitis:                       Expected sales.

Mark Zandi:                      Expected sales, that's it.

Cris deRitis:                       That's it. You got it. You got it.

Mark Zandi:                      Yeah. Oh, okay. That was pretty good. 

Cris deRitis:                       That was pretty good.

Mark Zandi:                      Tell us about that. Tell us about that survey because I don't think we've ever talked about it and what's it said say?

Cris deRitis:                       It's a survey conducted by the National Association of Home Builders and Wells Fargo jointly. They sent out a survey to home builders and asked them various questions about the state of the housing market, about how builders feel about the market. One of the questions is around expected sales activity, whether you think, how are sales going to be in the within the next six months? 70 was the number for March. That's down 10 points from February, which was at 80. And it's now, this level, at 70 it's the lowest since June of 2020. Right? So, and it's below what we had prior to the pandemic as well. So that's consistent with higher rates, people being more cautious here. So it does suggest that sales are going to be slowing going forward.

Mark Zandi:                      So that sounds pretty ominous then. Down 10 points? That's future sales, right? They're saying future sales are going to be-

Dennis McGill:                  Well, you know the interesting part about that for me, Cris is a lot of times the builder survey, when it comes out, there'll be some attached commentary. And I think there's only three general questions they could ask.

Mark Zandi:                      That's right.

Dennis McGill:                  How do you feel about current sales, future sales and traffic? And it's a literally a good, fair, poor multiple choice answer. And then they create the diffusion index out of that. You'll see a lot of times when that goes down, sales activity goes down, they'll say, "Well why?" And say, "Well, we're worried about supply chain. We're worried about lumber costs. Worried about these other things." Usually the reason is doesn't have anything to do with sales, which is kind of the comical part. And with this decline, what a lot of builders are doing today is holding product off market because they don't know what their future costs are going to be. They're worried about the supply chain and they're still starting the homes. They're accumulating more spec, and under the premise that eventually the supply chain will open up, as we get closer to those homes being completed, we'll know better how to price them. And then we'll release them to the consumer.

                                             And a lot of the industry is doing this. The majority of the industry is doing this. So in some respects, if you asked any builder about, well, what's your outlook for future sales, you sure as hell would hope that it's really good because there's a lot of spec homes coming. But yet the answer is to head in the other direction, which is a bit ironic based on their activity around specs.

Mark Zandi:                      You know, Cris, I think he knows a lot about these statistics. We got to be careful.

Cris deRitis:                       Yeah. Yeah.

Mark Zandi:                      It feels like he knows a lot more than we do, which is I guess a good thing. A good thing. So Dennis, so what's your sense of that? And I know this is what makes looking at the housing market now feel like Alice in Wonderland, is it demand or supply or is it both that's really now starting to weigh on sale? We saw existing home sales today. I hope that was nobody's statistic, but that was kind of on the soft side, at least relative to expectations. I think we all thought they were going to be lower, but felt a little lower than I thought. So it feels like demand. Well, in a traditional time you say that's demand, demand is weak and mortgage rates are up. Demand is weakening, but it kind of feels like you're saying, well, yeah, that may be true, but there's also these supply side issues as well. Is that kind of what you're saying? 

Dennis McGill:                  And there's no doubt that the supply side issue is real. The conversion rate out of backlog, how quickly builders are completing homes. We're seeing that under a lot of pressure and probably starting to maybe stabilize a little bit, not getting incrementally worse, but it's at an extended cycle time. But what you're seeing is it complicates the read on the market because if you're a builder that's holding product off market, what you're doing to essentially accomplish that is race price. And there aren't enough buyers, whether they be primary or investors, to accept that price. And one of the dynamics you saw last cycle, which you worry a little bit about right now is if you're signing a contract for X price on that new home, and they're telling you it's not going to get built for eight, nine, 10 months and and your deposit's only 2%, 3%, whatever it might be, and it's refundable some states, it's not a lot of risk at the signing period. It's almost an option contract that's pretty at attractively priced. So no one's going to back away from these contracts. Nah, we'll just sit and wait because there's been so much appreciation. It's not until you get to some type of inflection point that could create some risk. 

                                             But I think it challenges the notion that anyone really knows deep the demand is right now because it's not being tested in many ways. And the hope and the, and the premise that most of the industry is operating under is that it'll be there when we're ready for it. End of this year, next year when these homes come to market, the demand is so deep. And as you mentioned, we'll get into some of these bigger picture themes, but the idea is we're so underbuilt, the demand is so deep, when we release it, the buyer will be there.

Mark Zandi:                      Oh, this is interesting.

Ivy Zelman:                       Yeah. The cycle times, just to put in perspective are about two months longer than historically, and there we had Lennar report earnings and sequentially they did see an uptick in that cycle time, but running year over year, about two months longer. So it takes some a hundred days, 120 days. It sits at another 60 days and the cap, so we do a proprietary home building survey, that equates to about 15% percent of new home sales and the publics represent 45% of the new home market and combined, they're probably limiting sales in more than half of their communities. And in some builders cases, they're not even selling right now. So there's really, we'll call it a supply chain, not only on the materials and getting the labor, but it's also getting the land developed and it's at the municipality level and it's a lack of staffing. It's problematic across the board. So it's resulting in a lack of growth. So on the insatiable demand, it's great, but it's not great if you can't deliver people their homes and can't open new communities. So the industry's very, very challenged right now.

Mark Zandi:                      Well, it sounds also like you're saying that if you look down the road here six, 12 months, and let's just say mortgage rates do push up to say 4.5% closer to five, affordability becomes a really, a big, much bigger deal for the primary buyer, the first time buyer. It felt like what you were saying is that you've got all these properties that are essentially contingent sales that could fall off pretty quickly here. And so you could be left six, 12 months from now with kind of a hole in the market, which might mean lower house prices, for example. Am I reading too much into what you said or is that [crosstalk 00:38:33]?

Ivy Zelman:                       No, I think that is a concern. I think that at the same time I hosted a round table in Phoenix week and a half ago and probably 30 executives and the mortgage commentary was like, "We have to underwrite people, re underwrite them every day that are in backlog." And we're in this frenzy of concern that will they be able to continue to qualify? So as you think about that backlog and assuming their primary buyers, they're not that worried right now to Dennis's point because there's been so much home price appreciation. So they're kind of in the money. The question is will they be able to meet the terms of the loan on the new basis? And so there may be some fall out there, but the builders are somewhat complacent about it.

                                             And we were talking about interest rate locks, about can you lock in? And one lender is offering a 360 day lock, which is sort of an innovative product. Typically you can lock in 45, 60 days prior to close. And there's a product now, 180 day lock. And that costs about a point and a half. And so when you think upfront what the consumer is willing to do with a lock that could mitigate the risk, that if rates were to your point, go to four and a half, they could right now lock if they want to, but it's at price.

Mark Zandi:                      Got it.

Dennis McGill:                  I think Mark, for a lot of when we, when we started talking about mortgage rates and how we look at it, we certainly, we don't forecast. So we think more about the spread dynamic and how does that compound what the forward yield curve is implying and so forth? But we always come back to the idea that the relative move in mortgage rates is a massive factor for the market. And whether you talk about it as a spread for what people have to what's outstanding and when that's in their favor, it triggers refi activity, movement activity, or you think about it from an affordability standpoint, you get a hundred base point drop in rates. That's like getting a 12% cut in price on the house. So the idea that that was hugely beneficial over the last couple of years. To argue otherwise would be a little insane. And to think then it reverses and won't have some negative consequences is a bit comical.

                                             And you can look at it many different ways, but the correlations are very, very strong when you look at it versus sales base, whether it's existing homes or new homes. What's bridged that gap in some periods in an unhealthy way is, well, you have to start stepping in with other things, different mortgage products, which is what we saw last time is people chase the market, or you have the investor buyer steps in because they're not as price sensitive as the affordable, as the entry level primary buyer is. But how can we sit here and say that home price, the cost of a monthly payment, right? That's the cost almost every level homeowner is going to be thinking about they're purchasing. If that's up 30% and has risk of going up more, we know incomes aren't up that much. We know people weren't sitting on a huge war chest of savings prior to the pandemic. So how does it not worry people?

Mark Zandi:                      I'm with you. I mean, I'm totally, I'm totally with you. My sense is that rates have come down, they came down during the pandemic, you had these supply constraints. So the increase in demand from the lower rates bumped up against no supply and you get prices going north, skyward. In a sense, the lower rates got capitalized in the higher house price. 

Dennis McGill:                  Exactly.

Mark Zandi:                      But now if demand goes away because more rates are up and they're up, they could be up a lot, then that's got to come out of house price. Right? You know, that's kind of what you're arguing. 

Dennis McGill:                  Yes.

Mark Zandi:                      Yeah. Right. 

Ivy Zelman:                       I was just going to add-

Mark Zandi:                      So let me ask you this though, Ivy. Okay. So our forecast and I think your forecast, because on a careful consumer of what you guys say, is not too dissimilar. You're saying house price growth has been sizzling. You know, right now I think it's 20%, 15, 20% year over year, depending on which house price you measure, you use. But we're all saying like a year from now, two years from now, it slows kind of gracefully. Maybe we get no house price growth for a while, but nobody's saying house price decline. Did I mischaracterize your expectation? Is that roughly your forecast, that house prices are going to be, they're going to go flattish maybe, but they're not going to decline, at least not nationwide? Is that roughly right?

Ivy Zelman:                       Well, right now we're in the middle of updating our forecasts.

Mark Zandi:                      Okay.

Ivy Zelman:                       We've got a lot of moving parts, but we had been, our last quarterly update was for 2022 to be up 4% for existing home prices.

Mark Zandi:                      2022.

Ivy Zelman:                       2023, 2022 and 2023 are kind of flat.

Mark Zandi:                      Oh, okay. Okay.

Ivy Zelman:                       But I think, countering, I was just with a lot of institutional investors, meeting with industry executives. And I think that what we hear from them and that complacency slash maybe a more optimistic view that you can sort of counter the rising rates as a risk is the biggest one, which I'll let my in-house demographer speak to, Mr. McGill, who has incredible brainiac genius work that he did in a piece he published, we at Zelman published.

Mark Zandi:                      Fantastic piece by the way. 

Ivy Zelman:                       Right, cradle to grave on the demographics, which are quite sobering. But a lot of what I hear to counter the concern is the fact that we have so much wealth creation by senior boomer, Xers that are really supporting and supplementing their adult children's down payment. You know, the amount of gains from the stock market, cryptocurrency gains, Redfin came out and said to 25% of buyers in 2021 used their stimulus checks for down payment. 

Mark Zandi:                      I saw that.

Ivy Zelman:                       And obviously that's going away, but there was also cryptocurrency gains. And so that's one counter argument that there's wealth, transfer of wealth. And then you have the migration. So in Scottsdale, when we had this round table, builders that are move up, high end, said 40 to 50% of our buyers are from out of state. And given it was Arizona, they were saying from California, Washington, predominantly, whether you're in Texas and A, the Texas MSAs, they're coming from California, they're coming from Washington as well. 

                                             But that number had been prior to COVID, they estimate 20%. And there's so much of the market dynamic that incrementally, that you see from non-primary where you're seeing cash buyers accelerating while those getting a mortgage are declining. So I think that the market, and I go and I look at markets like in Toronto or markets where there's been, investors have been really the predominant incremental growth that's supporting robust pricing. This could go on longer. The one thing different in the US and Dennis can speak to this more is that we are adding supply. The amount of supply that we have, it's just not there yet. It kind of feels like The Boy Who Cried Wolf. We keep saying we've got record multifamily backlog. We've got single family backlog at the highest level it's been since '06 and well the guys around the builders around the room in Scottsdale were like, "Well, we can can't get any homes completed. So I don't know how that's going to change because we don't have plumbers. We don't have roofers. We don't have HVAC. They're all aging out. And we're so constrained."

                                             So I think the dynamics of the market are really giving people a false sense of security that this is going to be sustainable. And in the near term there may be continued price appreciation for longer, even with rates rising. You know, if you could sell a home in, let's say Pasadena for a thousand dollars a square foot and then you move to let's say Phoenix and it's 600 a square foot, do you really care if mortgage rates are up 100, 150 basis points? And by the way, don't worry about gas prices. Because you know, if you're moving to the desert or inland empire, Palm Springs, you're working remote. So you don't have to worry about gas prices because people drive to qualify.

                                             So I hear every counter to my headwind of concern that people are just shrugging off as an issue. And I said, yeah, but they still have to buy groceries and they still have to pay for higher shelter. We have double digit rent inflation on new leases and high renewal, high single digit renewal. So it's coming at every aspect from inflation. And so I think it's really difficult to just assume it's going continue to rage, but institutional investors, they are looking to add more capital and looking for opportunities because the fed has pumped so much liquidity into the market that residential real estate is the darling. And we could talk about that for hours, the amount of capital coming into the market.

Mark Zandi:                      So there's a lot of cross currents and we're talking about house prices and growth and where they're headed and there's negatives and positives obviously, very complex. It feels, again, feels like Alice in Wonderland to me, but before we go on to the investor part of the equation, because I'm a little confused by that as well, what's going on there, what is your view then? I mean, I will house prices grow? Do you still think it's 4% per annum over the next couple, three years, which by the way, would be kind of the average house price growth since the beginning of time? So that's not really consistent with the idea that the market's going to run into some trouble. That seems like kind of down the middle of the fairway. Is that your view or is it price growth goes flat or you know, what is your thinking here?

Ivy Zelman:                       Well, I'll let [crosstalk 00:48:22] Dennis.

Dennis McGill:                  I was going to say, I'm going to make this an easy one for you. And I'll introduce my stat, my number for you because it feeds into this. 

Mark Zandi:                      Okay. Go ahead. Yeah, we were going to go back to the game. 

Dennis McGill:                  Okay. So it's 294,000.

Mark Zandi:                      294,000. Sounds like a price of a home, but that is not, the median price is 350 I think. Is it a price of a home? 

Ivy Zelman:                       I don't think I should guess because I feel like I have a [crosstalk 00:48:48].

Dennis McGill:                  It's a unit number, not a price. I'll give you that. 

Mark Zandi:                      Say that again?

Dennis McGill:                  It's a unit number, not a price.

Mark Zandi:                      294,000.

Cris deRitis:                       Is that units authorized but not started?

Dennis McGill:                  No, but you're on the right track, Cris.

Cris deRitis:                       Okay.

Mark Zandi:                      Units that were authorized but not... Well, I know there's 1.6 million homes under construction, half of which are single half, roughly half are multi. So that's not it.

Dennis McGill:                  Yeah. But you're on the right track too, Mark. You guys are getting there.

Mark Zandi:                      I don't know, what is 294? Is that spec building? The number of kind of-

Dennis McGill:                  It's the increase in what's under construction over the last year. 

Mark Zandi:                      Oh, okay. Oh okay. Now that borders on a little too hard. I'm just saying, Dennis.

Dennis McGill:                  Well, I realized after the 70, that number was a little hard. But the reason I brought it up and why I'm focused on it is because that's how much was added to backlog in the last year. That's equivalent to what was added to backlog of what's under construction the last five years combined, and mind you the last five years were not bad housing years. Right? So what Ivy's kind of speaking to, and I think what it's one of those data points where it almost feels like in three years, four years-time, people will look back and say, oh yeah, it was obvious. I mean, look at how many homes people started under [crosstalk 00:50:06].

Mark Zandi:                      That's right.

Dennis McGill:                  And it's a number and it's not just in the last five years. That's like the second highest number, you got to go back to the early '80s to find anything close. So you have all this, you mentioned earlier, the demand response is immediate, right? The pandemic brought about an immediate demand response alongside mortgage rates. The supply response hasn't happened yet. It takes too much time, especially when the builders literally stopped starting homes in March and April of 2020. And it took some time to get back to any type of [inaudible 00:50:36] inventory and you could argue they still haven't gotten back there. And that's not the peak of it because the capital flowing in from every angle, multifamily, developers, builder lad investments, single family for rent, that number's only going to go higher. And I think when we're sort of triangulating that with demand and thinking about price, we know that that's the cyclical component of the market, right?

                                             You guys know as well as we do that the demographics don't move that fast. You want to be on top of them. You want to understand the story of, but year to year, the growth in the population, even in a good year, right, is 1%. The number of bodies in our country, that's not swinging around all that much and how people behave doesn't swing around as dramatically as people want to imply. So this is all about supply. And if the supply mountain that's coming over the next 18 months is more than we can demographically support, then what do you think home builders are going to do to clear that inventory? 

Mark Zandi:                      Okay, Dennis, I'm going to pin you down, baby. Everything you're saying to me says price declines is what you're saying to me. But are you saying price declines?

Dennis McGill:                  [crosstalk 00:51:40] price declines, I think you see price declines. I think it's going to take some time because of right now, builders are pushing price to cost. You know, they're not pushing price to affordability. They're not matching it up with incomes. They're looking at it and saying, "My demand is infinite, so I'll raise price to cover my costs." Even though they've always told us that's not how you price a home, but that's what's happening. So I think in the near term, you see prices go up. But I think you got this compounding effect where you're going to have to see prices go negative. And again, in hindsight, in a couple of years, we'll sit there and say, home prices went up 30% and two year period mortgage rates were higher and you had a bunch of supply coming. Why is it a supply?

Mark Zandi:                      I am totally with you. I am totally with you. I'm totally with you. And our forecast has it coming right down to zero, but not actually going negative because I'll give you, this is the reason why.

Dennis McGill:                  The minute you say negative, Mark, that's the headline. Mark Zandi says that home prices are going negative.

Mark Zandi:                      Well, yeah. Then I'll get vilified [crosstalk 00:52:32].

Ivy Zelman:                       But you guys, what you need to remember is that the supply is highly concentrated. And therefore we could have corrections that are more pronounced where the supply is the greatest. And I think that's what we need to focus on because nationally, it may not go negative because in Ohio and your state, great state of Pennsylvania, we don't have the same magnitude of supply. When we look at the one thing we haven't talked about yet, at least within the inflationary component is land prices. So we do a quarterly land development survey and land prices at the end of the fourth quarter, finished lot prices were up 35% year over year and that's national. And that looks like a hockey stick from where it had been over the prior period, five plus years. So when we look at lot prices and the land grab, it's very disconcerting to assume that the builder is going to be able to sustain profitability, unless they can just continue to pass it on to the consumer.

                                             And they have been. And that's one of Dennis's point. They're not pricing to affordability, they're pricing to cover those costs, land being the biggest. And so recognizing a finished lot as a percent of the cost of goods sold is half of the cost. So you can spend a lot even on lumber, which is the thing you hear mostly from builders, whining and complaining, but land, if you buy the land wrong, that's going to be what ultimately determines what they do on pricing. And then they have to blow out these homes that they're speccing. And I don't think that's going to happen in Ohio. I was speaking at the University of Wisconsin this past summer, talked to some private builders there, and land prices are up maybe 10, 15%. And there's no real public builders there. I think Lennar was just entering the market at that time.

                                             So I think we have to think about the concentration and no surprise, smile states, sand states. I heard a new term, banana states from a building product distributor. So however we want to formulate our thoughts, is it a surprise that Austin's strong? That's where all the builders are going or is it a surprise that Boise now is a new hot market and the builders are entering those markets? Why the private builders that have been there for decades are saying, "I would never pay for that land," or is it surprising that the build to rent capital is going to Arizona and to Texas or Florida and following where they believe the growth is the strongest. So I think it's not national numbers I think about, I think it's about understanding where the supply is going. Not only to be significantly higher, but also where within the market, because they have to go further out to the tertiary markets in order to even come close to penciling a return that they're promising their, not their own capital, their investors that they've raised money with. And you hear from the land developers that it's a lot of dumb money [crosstalk 00:55:27] and there's new people into the market, new players on the chess board that are driving a lot of the growth.

Mark Zandi:                      And I am going to come back to house price. And I'm just, two things, we're going to come back to the game and Ivy, you're going to go, I'm going to give you a chance to play the game. And then at the end, I'm going to ask for an explicit house price forecast for next couple, three years. And I'm curious.

Ivy Zelman:                       We have to do it after our macro forecast because we're [crosstalk 00:55:53].

Mark Zandi:                      Ah, no, no, no. This is a preview of that, a preview of that. So, and I'm going to tell you what our forecast is and you can say, this is our forecast, but you know, I think it's going to be less than that or more than that, where the risks are. But let's go back to investors for a second. This is confusing to me because if you... So we have all these institutional, well, we've got all kinds of investors coming in. The latest data, we get transaction level data. We calculate the number of investors based on the deed, who has a corporate kind of a name. A roughly a quarter of the sales now are to investors and that's up a lot, maybe 10 percentage points over the past year.

                                             Some of that has, the increase in flipping hasn't really, it's not flipping per se. That remains about five, 10% of the market nationwide. It's up in some markets like the Boise and the Phoenix, but not many markets. Most of it's institutional. And you can correct me if I'm wrong, but it's mostly I'm going to buy to rent. But the question is at these prices, I've done some performance too, because I'm a kind a mom and pop investor. And my son does this. He goes in Philadelphia, buys old housing stock, rehabs and renovates, and then rents. And he's been doing this for a number of years. So I look at a lot of the spreadsheets and I can see what the returns, the cash returns on based on expected rents. And they're pretty good. 

                                             It's hard to pencil it out, at least on a cash on cash basis, you can't pencil it out. So then you're thinking they got to be relying on capital gain, but does that make any sense at these kind of high prices and what we were just saying about? So my question to you is what are they doing? I mean, just because they have the cash or deploying it? So it really is dumb money. I mean, what's going on? I can't figure that out or is my arithmetic wrong?

Ivy Zelman:                       Well, in the markets where they're building as opposed to renovating, I think that you can make assumptions about future values that can be arguably wrong and therefore you can make the numbers work. You also can assume you're going to get strong leasing once the level of lease rates that you're underwriting with the HPA you'll benefit from, but I don't necessarily think it's all dumb money. I think there's been probably some pretty significant returns already realized. You guys have been doing it for a number of years. And I don't believe that the institutional investors are really the lion share of the, at least on the existing stock. I think it's much more still individual investors and short term rentals. 

                                             You know, I was out to dinner last night with an industry executive and him and his wife own several homes in inland desert area, California, Palm Springs. They have a condo in Mammoth. You know, you think about co-primary, second home, few investment properties, using short term rentals to cash supplement your income. There's such a significant amount of private investors. I was at dinner with a builder in DC in December. And he said, "Yeah, we probably sell about 20% of our homes to private investors." And these private investors are not flippers, so he's not worried. They're just buying to rent out. And what we always come back to is that at some point, do we have a people problem? But Dennis can weigh in more as our thoughts are aligned. You know, we are always challenging ourselves because this can last a lot longer when you think about what, tell me where rates, Cris, will be two years from now and are we going to go into recession because the fed it's been so behind the curve and they're going to tighten as, and a result of their tightening we roll over into recession and rates actually go back down and that the only place that people can hide is in real estate?

                                             You know, there's so many variables that we can't tell you what it's going to be like in three years, but the dynamics of supply and demand intersecting, to Dennis's point, if supply does come to fruition and these builders in Scottsdale is just an example of the rest of the country, where supply is so constrained, they just don't see any way it's going to change. They're not going to, all of a sudden, miraculously have more trades, more bodies at these various trades and they don't understand how the municipalities are going to hire a staff that's normally two or sorry, six, and now it's only two. Kids straight out of college that have worked there for one day are, are working at these municipalities. And you know, there just feels like there's impediments and that's their pushback. But Dennis [crosstalk 01:00:39].

Dennis McGill:                  And the view is not so much even that it's supply, depends how you wanted define supply. Ivy's talking about the ability to get homes completed and on the ground. But the underlying premise that's supporting the thesis for anyone who on the institutional level, and I think this is the narrative in the media, supporting the individual investors that you have a housing shortage across the country. That supply is forget what's in backlog, that there's three, four, five, six, I've seen 8 million type shortages of number of houses that the country needs that it doesn't have. So the perception is that you've got this big tailwind from the millennials, which is misfounded, and you've got a shortage of housing.

Mark Zandi:                      Yeah, but-

Dennis McGill:                  So why not be the best place to invest? And the way you get there on higher prices is to model more aggressive rent growth, Mark, you got to change your Excel model and model a little bit more rent growth from these historic peaks.

Mark Zandi:                      That's what it is. I mean, it's got to be because if I put in strong rent growth in the Excel sheet, I mean, I'm talking the strongest rent growth ever seen, I'm getting kind of maybe 5% cash on cash returns, which it's okay. But you know, for the risk you're taking, it just feels like this is... And obviously supply is picking up and then I would argue if you like a total new supply now, we're at 1.8 million, 1.9 million, including manufactured housing, that is no less than, maybe now more than underlying demand for new housing. So vacancy rates are about ready to turn. They're going to bottom out here and they're going to start to turn and move in the other direction. So you look at all that and you go, this doesn't make sense what's happening now in terms of... At least increasingly makes less sense from an investor perspective. 

Dennis McGill:                  That's right.

Mark Zandi:                      It sounds like you like what you're saying too. 

Dennis McGill:                  Yeah. Absolutely. And I think what you're really talking about and we're talking about in [inaudible 01:02:34] with a lot of these things is just where are we on the risk tolerance spectrum right now? And I think there's a lot of investors, private individuals and institutions that believe that the risk is low for those reasons we mentioned. I think what we're looking at from more of an unbiased perspective, it sounds like you share that view is that the implied risk seems quite high. 

Mark Zandi:                      Yeah. I'm with you.

Dennis McGill:                  And you might very well be right, we might very well be wrong, but I think there's a lot of underlying data and a lot of yellow flags that we've been talking about that leave us much more cautious. And as Ivy said, we're skeptics at heart. I think we'd be bad analysts if we weren't, but we tend to lean pretty heavily on what the data's saying and I think the data's leading us to a lot of these conclusions and some of the things that were very evident with hindsight cycle, I think people are looking for that same mortgage driven excess. It's not going to be there. It's something else. And those something elses are starting to add up quite a bit. And to Ivy's point, it can last longer than it should, but it feels like you're at the point in the cycle where every step higher that it's going just kind of means the other side's going to fall a little harder.

Mark Zandi:                      I like that metaphor. So Ivy, Ivy, you got to play the game. Are you ready? You ready with your statistic?

Ivy Zelman:                       I was going to provide you a statistic. I was just going to also say to Dennis's point, just talking to a C-suite executive that runs about 10,000 unit portfolio of multi-family assets. He said, "I used to do cartwheels if we were getting four to 5% rent growth. So now I'm doing back flip and triple cartwheels because I'm getting 16% on new leases and 12% on renewals." And if you are underwriting a new development for multifamily, and that's the input that you're utilizing, that return is going to look a lot better than if you go back in pre COVID. The cartwheel at two to four was a good annualized rate for rent growth. And by the way, the fed doesn't incorporate what current in their PCE and thinking about shelter. That's not showing up today in CPI and Dennis can speak more to that. So I think that there's a lot of assumptions that rent rolls are going to be sustainable because Dennis's earlier point, we have a shortage. There's no shelter and there's a huge deficit. All right. So my number for you, it's an easy one I think. We'll see. Five trillion.

Mark Zandi:                      Five trillion. That's the amount of fiscal stimulus provided to the economy during the pandemic. No. Okay.

Ivy Zelman:                       That's not the one-

Mark Zandi:                      That is 5 trillion though.

Ivy Zelman:                       No, I know, not the 5 trillion I'm thinking about.

Cris deRitis:                       This is the increase in housing wealth. 

Mark Zandi:                      Increase in housing wealth?

Ivy Zelman:                       Correct.

Mark Zandi:                      Over the past year?

Cris deRitis:                       Over the pandemic.

Ivy Zelman:                       Two years, two years with inclusive of those that don't have a mortgage, which is about 35% of homeowners.

Mark Zandi:                      Oh, that's a good statistic. 

Ivy Zelman:                       I think it's 3.2 trillion for those who just have a mortgage.

Mark Zandi:                      Right. Right. Someone was telling me, and I haven't been able to confirm this and we mentioned it in a different context earlier that people are cashing out now to finance future additional purchases that a lot of the investors are now using the built up equity in their previous purchases to buy new homes, new additional homes. Have you run across that? Have you seen anything? That feels sort of untoward to me, like a sign of froth when people start doing that kind of thing. Has that run across your radar screen at all?

Dennis McGill:                  I haven't heard that specifically, [crosstalk 01:06:18] but not surprised by it at all.

Cris deRitis:                       That feels like 2006.

Mark Zandi:                      It does feel a little weird.

Ivy Zelman:                       Well, I think people have more than doubled their... The couple I had dinner last night with, they basically bought two years ago in Palm Springs and they've more than doubled their investment. And today it feels pretty good owning it. So unless you have challenges on the carry costs, and you start to say my overall expenses are rising and it takes a lot more cash to pay the property taxes that are rising and just the overall utilities in every aspect of carrying more than one home and it's your day job, like your son is doing fix and flip or running rentals, I think people might start to say, I should take some chips off the table, but we haven't really seen or heard of that much. Although inventories did sequentially in the NAR report today, we did see inventories tick modestly higher, but inventories are at least, as a percent of households are at predominantly all-time record lows.

                                             And I just revert back to what did it look like before the pandemic? And it was also at all-time record lows and people would say to me, "Why is housing so lackluster? Why are home prices not rising more even though inventories are so tight?" And we can go through all the reasons, but at that point that was more me providing people like aging in place. You know, people are locked in at a low rate. Landlords like their cash on cash returns. So try to explain why housing wasn't stronger, but now it's all about, well, inventories are so tight, there's no high housing, so that's why home prices are up massively, but home prices are up massively because the velocity, historically velocity defined as those homes available for sale at the end of a month, and then sold in the subsequent 30 days, historically, call it roughly 20% of the 30 days. Those homes would sell.

                                             The last data point, I'm not sure with the NAR today, but it was approaching 60%. And so they're turning so much faster. And how much of that is to your point investors that are selling and taking profits, but we're watching that velocity very closely but I think if we want to nail down our home price forecast, I would say that it's so contingent on when the supply comes to market and what the economic backdrop would be. But I would guess that right now, this is going to go longer and there'll be an upward bias in the near term to our pricing forecast, just because the momentum is so strong. And I think it's like an ocean freight, you can't turn the tide that quickly. I think the consumer is sort of brushing off the war and the tightening, it's just beginning.

                                             So Main Street versus Wall Street, Wall Street investors, the capital, they're not even taking a breath. There's no stopping them and they want to give more capital and they want to buy more and there's land banking going on. And there's just a tremendous amount of optimism. That's not deterred at all by what's happening from fed policy or from the war, at least in my little anecdotes and being out in Southern California marketing and visiting with investors that are very large investors and very active, not only with institutional capital, but also on the land banking side. So I think it probably goes longer, but Dennis, you might want to weigh in. It's just, it's fascinating. 

Mark Zandi:                      Most of this-

Ivy Zelman:                       [crosstalk 01:09:57] where we are in the analysis part of the game.

Mark Zandi:                      Let's do this, two things. One, Cris and I have a bet and I want to get your take on the bet. And then second, maybe just to make it concrete. 2022 is hard to talk about house price growth, because you're right. I mean, you're coming into the year at 20% year rear. So no matter how you do the calculation, based on the arithmetic, it's going to be a strong year. I mean, even if it slows dramatically by year's end, you're still going to get a potentially a double digit game for 2022. So let's look into 2023 and I'm going to go to Cris first. Cris, what do you think 2023 HPI growth, house price growth is going to be, in let's say the core logic HPI series, the controls for mix and it's the entire market, not just the conforming market or nonconforming, it's the entire market. What do you think house price growth will be? [crosstalk 01:10:52] and give a range too. However you want to characterize it. 

Dennis McGill:                  Can I also add onto that? When you ask the question, are you thinking what the average to the year or point to point, like end of [crosstalk 01:11:02]?

Mark Zandi:                      I was going to say that, then I thought it was too much, but precision is good. I was going to say Q4 to Q4, Q4 2022 to Q4 2023. Not calendar year because you can have that that effect that Ivy's talking about. You see what I'm trying to do? I'm trying to get to your underlying sense of where house price growth is headed. So Cris, what is Q4 2022 to Q4 2023 house price growth? And characterize it any way you like. Ranged, upside, downside. I want to get a sense of what you really think the world's going to look like in 2023.

Cris deRitis:                       Yeah. So I think two to 4%. My guess for this year, I think we have to update our forecast, make it a little bit stronger. I think there's going to be a last gasp as people see the higher rates, but then I do expect to see rates really biting towards the end of this year and into 2023.

Mark Zandi:                      Two to 4%. Okay. Yeah. Downside or upside risk?

Cris deRitis:                       Downside. [crosstalk 01:12:04].

Mark Zandi:                      Downside risk. Okay. Ivy, Dennis, who wants to go next? And you don't have to go if you don't want to. I'm just-

Dennis McGill:                  No. I'll frame it in a way that obviously we are we're in the middle of ours as well, so we can't front run it, but where we were before was modestly negative for existing in '23 and that's point to point.

Mark Zandi:                      Interesting.

Dennis McGill:                  And we were a couple points negative for new where the builders would, they're more likely to incentivize clear price and that's an inclusive of incentives and so forth. I think to Ivy's point, the momentum in the near term is stronger than where we were before. And not sure that necessarily means that we would look at '23 with more optimism. I think we're also going to introduce '24, so there's kind of that element to it. But I would say I'd be more likely to see a minus two than a plus two.

Mark Zandi:                      Got it, got it. Ivy, what would you say?

Ivy Zelman:                       Yeah, I was going to say with it accelerating more than we modeled for '22, the stronger the climb up, the more likely the decline down. So the more we keep pushing on the gas. So I'd probably be in the low single digits from that 2% that Dennis pointed to. It seems reasonable. I think that the risk would be that it's not as quickly materializing for various reasons, but I do think that there's going to be more like a, even amid single three to four plus and at least maybe more in areas where the supply is just massive. So I think nationally 2% down sounds pretty reasonable.

Dennis McGill:                  The funny part to me, Mark is when you have this conversation with clients or people in general, they're like, "You actually think house price could go down?" You know, almost like a negative number. 

Mark Zandi:                      It's never happened.

Dennis McGill:                  Tail risk, a tail risk event. And you kind of look at, and you say, let's go back to our fourth quarter, '19 outlook, look at where the trend line is. Where is it now? And we're kind of haircutting here, 2%, 3%. You'd still be up what, 25, 30% from where you were. Pretty sizeable gains to begin with. So I think everyone's always a little cautious to throw that negative number out there, but where you're left is not that bearish of a scenario from where you would've thought '23 would be in '19.

Mark Zandi:                      I'm with you guys. I think it's going to be negative, no doubt about it. And in fact, the only reason why it might not be is because one's going to sell their home. They all think everyone's going to think, oh, my home is worth 1.3 million, because that's what Zillow says it is today. And I'm not selling for less than 1.3 million. So the actual price, the shadow price, if you had to transact as an economist, it would be firmly negative, but the actual measure price may not because you'll get 4.5 million existing home sales because no one's going to transact. That may be what happens.

Ivy Zelman:                       Well, you also have people that are actually going to get foreclosed and we see delinquencies rising in subprime mortgage. So you start to [crosstalk 01:15:05].

Mark Zandi:                      Well, that's a different scenario though, that would be real big time price declines, right? Because that-

Ivy Zelman:                       Well, the amount today is fairly negligible. I mean, the people that in forbearance have been steadily declining as the mortgage services are working hard to keep them in their homes. There's so much startup capital that VC back that have been in the market, sort of facilitating a lot of the purchases for SFR, like the iBuyers, they don't want to say how much they're selling even in escrow to SFR. But you know, when you think about the magnitude of the co-primary, you mentioned like people aren't going to want to sell their home because they've made so much money and they'll just think it's going to go up because Zillow says it's X value. But if you're carrying multiple homes or you're assuming your short term rentals are going to keep generating incremental income for you and all of a sudden they don't, I think that we're going to see that this non-primary piece of the market might even be bigger than your 25% of what transactions and you know, it's just...

                                             It feels like I asked an audience, "Raise your hand" in Southern California. I presented to a group probably about a hundred people. "Raise your hand if you have another home besides the one you live in." And very few raised their hand. I was surprised because I think that cocktail chatter, it feels like everybody that I talk to, maybe it's just the Wall Street crowd, but there's a lot of people that have more than one unit and do they start to get nervous because the ocean freight changes direction on the ocean, you start to get some waves and they said, "Oh, you know what? I better lock in those gains" and that tide can change very quickly. And you know, certainly our job is to provide you insights. But the nice part about what we do that's so differentiated is that we're able to get real time perspective from people that are in the field operating daily.

                                             And you know, I sent around to our team, one of our industry executives that's in Austin and pretty much the Southwest, but he's based in Austin and he was showing us that a builder was offering incentives in San Antonio to close homes. And we didn't understand it, the mortgage rate buy downs and wait a minute, I thought the market was off the charts robust? Why would a builder have to give you buy downs or pay closing costs? I think it was actually, so we're just not sure how much of that non-primary starts to diminish resulting in inventories lifting and everybody, why are inventories rising? What's going on? 

Mark Zandi:                      Yeah. Yeah. I hear you. Hey, I know we're running out of time and I know Ivy, you have another appointment to go to, and there's like a gazillion things I wanted to ask you. Maybe we can have you back if you're game for it. But I do have a question. Your background, that's the Empire State Building. Is that the sun setting or the sun rising? It feels like it should be the sun setting given this conversation. But I think it's the sun rising. Isn't it? If I'm looking, I'm looking east aren't I? Or have you guys even thought about this with the background?

Dennis McGill:                  Definitely not thought about that.

Ivy Zelman:                       That's a good thing. You can ask Dennis.

Mark Zandi:                      Somebody I'm sure-

Dennis McGill:                  [inaudible 01:18:30] talk to somebody in marketing, are we sure the sun even comes from that direction? It might just make it look nice.

Mark Zandi:                      Yeah. Well, anyway.

Cris deRitis:                       [crosstalk 01:18:36] rising.

Mark Zandi:                      I think it's sun rising. That would be apropos I think.

Ivy Zelman:                       Apropos.

Mark Zandi:                      Certainly on you guys. You guys are fantastic. And I really want to thank you for taking this time with us and Cris is going to be wrong, guys, I can feel it. This house price forecast of his, I'm going to have to work on him. So anyway.

Cris deRitis:                       You're coming around, Mark. That's-

Ivy Zelman:                       Better to be an optimist.

Mark Zandi:                      That is true. 

Ivy Zelman:                       You have more fans I think. I've been called permabear, Jihad, number of names.

Mark Zandi:                      Wow.

Ivy Zelman:                       Poison Ivy.

Mark Zandi:                      That's a good one. Sorry.

Ivy Zelman:                       And then [inaudible 01:19:10], laughing.

Mark Zandi:                      I shouldn't laugh at that.

Ivy Zelman:                       No, it's okay. I've got thick skin, but fortunately, we have a very good team that we collaborate and we're always questioning ourselves. And I recognize that we just are providing people a perspective that's admittedly contrarian, sobering, and they really don't want to hear it. I always go back to the days of 2005 and think about so many people that would say, "Thank you for making for us stop and think about some of the things that were concerning back then. Had you not, I wouldn't be here today." And, and that's the most rewarding thing that we can really ever look back on and that we were able to help others. And so I think that we just want to continue to provide those insights and always being thoughtful and challenging ourselves. Every day we challenge ourselves and we talk amongst ourselves and we have a very strong team. And so we'd be honored to come back and share with you what the latest and greatest is, but the paid worriers either do us well or will be wrong. But you know, certainly the information we're providing does make people stop and think. I always get questions after I present. "Can I see your slides? Can I dig in deeper?" So people do, those that are thinking about putting capital work, they want to know, but they don't want to know. It's kind of-

Mark Zandi:                      Yeah, yeah, yeah. I hear you. But you guys, you do it in such a nice way, it's easily digestible, very readable, fun to listen to, and I'll have to say often right. And I'm on board with you guys, I'm with you. I think there's a day of reckoning coming. Probably not this year, that freight train as you talk about, or that freighter has got to turn, but 2023, 2024 feels like, I don't know. It feels like we're setting us up for a correction. But anyway, with that, we're going to call it a podcast and thanks everyone for listening in. Talk to you next week.