INSIDE ECONOMICS

Mark Zandi:                     Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I am joined by my two co-hosts, Cris deRitis and Marisa DiNatale. Hi guys. How's it going?

Marisa DiNatale:            Hey, Mark.

Cris deRitis:                      Doing well, Mark. Good to see you.

Mark Zandi:                     You always say that, Cris.

Cris deRitis:                      It's always good to see you.

Mark Zandi:                     Oh, no, I meant it's always going well.

Marisa DiNatale:            And he's always doing well.

Cris deRitis:                      Oh.

Mark Zandi:                     And he's always doing well. That's a good state of affairs though.

Edward Pinto:                 Yes.

Cris deRitis:                      Yeah, I think so.

Mark Zandi:                     But you wouldn't tell me otherwise.

Cris deRitis:                      I think so.

Mark Zandi:                     You wouldn't tell me.

Cris deRitis:                      Oh, I'd lay it out on the line.

Mark Zandi:                     Actually, he would. He would tell me.

Cris deRitis:                      You're talking about me personally, not the economy. So opinion may differ.

Mark Zandi:                     Indeed. But we could talk about the economy. We probably should talk about the economy. Marisa, you're doing okay?

Marisa DiNatale:            I'm good.

Mark Zandi:                     You're back up and running?

Marisa DiNatale:            Yeah.

Mark Zandi:                     Okay. You're fit as a fiddle? Okay, because-

Marisa DiNatale:            I'm great.

Mark Zandi:                     Okay. You're great. Perfect.

Marisa DiNatale:            Hundred percent.

Mark Zandi:                     Good. Good. And we have a guest, Mr. Pinto. Ed Pinto. Good to see you, Ed.

Edward Pinto:                 Likewise, Mark, Marisa, Cris.

Mark Zandi:                     And you're hailing from Bethesda, you say?

Edward Pinto:                 I am hailing from Bethesda today. Yes.

Mark Zandi:                     Yeah. I know because don't you have a home in Tampa? I believe.

Edward Pinto:                 Sarasota.

Mark Zandi:                     Oh, Sarasota. Oh, okay. [inaudible 00:01:31]

Edward Pinto:                 Gulf Coast. Not the right coast.

Mark Zandi:                     Right. Got right coast, right coast. Are you getting hit by that seaweed problem? Is that an issue there?

Edward Pinto:                 I just, I've been reading about it. No, we haven't been hit by that yet. I don't know if we, yeah,

Mark Zandi:                     Hopefully not.

Edward Pinto:                 Sorry. So seaweed pile. Yes, I've been reading about that

Marisa DiNatale:            In your way. My mom lives in Naples and I keep asking for the seaweed update.

Edward Pinto:                 Okay. Well, we're what, a hundred miles north of there? We'll see.

Mark Zandi:                     Is she getting it? Mesa?

Marisa DiNatale:            No, not yet.

Mark Zandi:                     Not yet. Okay.

Cris deRitis:                      But Vero Beach, eye of the storm, right?

Mark Zandi:                     Yeah. I have a home in Vero Ed and

Edward Pinto:                 Oh, that's on the other coast, the

Mark Zandi:                     Directly across from Sarasota, I think

Cris deRitis:                      On East

Edward Pinto:                 Coast and drive across directly, but easily. Yes.

Mark Zandi:                     Right, right. And there is some seaweed issues there. Some seaweed. It's not you can't walk on the beach kind of problem, but it's becoming more of an issue. Anyway, it's great to have you, Ed. We go back, I think, certainly back to the financial crisis.

Edward Pinto:                 Yes. Probably 2008 would be my guess. Somewhere around there.

Mark Zandi:                     Right. When you were doing all that work on Fannie and Freddie and

Edward Pinto:                 Absolutely.

Mark Zandi:                     And I can remember, I think the first time I met you was in New York City and my assistant set up a meeting in some dive somewhere in the middle of Midtown. Do you remember this? I thought you-

Edward Pinto:                 I also met your brother then.

Mark Zandi:                     Oh, is that right?

Edward Pinto:                 Yeah. And then I was down into your office in, outside of Philly. I remember that.

Mark Zandi:                     Oh, that's right. Well, I remember this. We were meeting Ed in this hole in the wall, in the middle of very close to Penn Station, New York. I'm thinking to myself, why did he pick this spot? Why this spot? And it turns out my assistant picked it because she didn't know where. Oh, and Sarah, this Sarah's on the line. My assistant's still, this is no criticism, but she picked this spot because she thought it was easy to go to and she didn't know you know where to go. And so we-

Edward Pinto:                 Good job, Sarah.

Mark Zandi:                     Good job, Sarah.

Edward Pinto:                 Not that that Mark remembered it.

Mark Zandi:                     That's right. Not that it didn't make an impression.

Edward Pinto:                 It was 15 years ago. But that's okay.

Mark Zandi:                     That's right. That's right. Oh boy. That is kind of bad, isn't it though? You say.

Edward Pinto:                 Well, we got off to a good start. And that was good. That's what counts, Sarah.

Mark Zandi:                     It was. It counts. Right, right. Good coffee, as I recall. Good coffee. Good coffee.

Cris deRitis:                      You're keeping the expenses down, right?

Mark Zandi:                     Keeping expenses down. That's right.

Edward Pinto:                 Yeah. We didn't blow the budget, that's for sure.

Cris deRitis:                      That's good.

Mark Zandi:                     And Ed, you are now at the American Enterprise Institute and you've been there for quite some time now.

Edward Pinto:                 Yes, since about 2008 also. Yes.

Mark Zandi:                     Oh, okay. Great. And you run, is it called The Housing Center? What is it called?

Edward Pinto:                 The Housing Center. DAI Housing Center. Yes.

Mark Zandi:                     Housing Center. You got some really good folks there. I know-

Edward Pinto:                 Thank you.

Mark Zandi:                     ... Steve Ulnar and-

Edward Pinto:                 Steve just retired.

Mark Zandi:                     Oh, did he? Okay.

Edward Pinto:                 Last month.

Mark Zandi:                     Oh, okay.

Edward Pinto:                 After helping co-found The Housing Center back in 2013, and he was with AEI since 2011. Before that he was at the Fed. But Steve's shoes are being filled quite ablely, they're hard to fill, by Joe Tracy.

Mark Zandi:                     Oh, Joe. Joe's there. Okay, cool. He's really good.

Edward Pinto:                 As a senior advisor, and I forget, non-resident senior fellow at AEI. And so Joe started literally the first workday after Steve's retirement. And that's been great. We really like Joe. He's got also-

Mark Zandi:                     Yeah, he's good.

Edward Pinto:                 ... Experience in the Fed. And then we have the rest of our staff, Tobias and Cici and Arthur and all the others.

Mark Zandi:                     It's a great group.

Edward Pinto:                 Thank you.

Mark Zandi:                     And you do really good work. And I want to get into that in some detail. And just to round out, because you're deep housing, mortgage, finance, and before AEI, I know you were with Sandy for a while, but-

Edward Pinto:                 I started out in law school and I've been in housing finance my entire career. So I started out as an attorney at the Michigan State of Housing Development Authority, became general counsel after a couple years, spent eight years there, spent a couple years at Mortgage Guarantee Insurance Corporation and Mortgage Insurer. Then spent-

Mark Zandi:                     Oh, I forgot that. You know I'm on the board.

Edward Pinto:                 Yes. Yes.

Mark Zandi:                     On the board. I just came back from a board meeting from MGIC.

Edward Pinto:                 I'll get to my son in a minute.

Mark Zandi:                     Okay.

Edward Pinto:                 And then I went to Fannie Mae for five years. I was a senior vice president there for marketing and product management. And then I was their first chief credit officer and executive vice president for credit. And then I went into consulting from 1989 to 2008 doing lots of different things, mostly on the single family housing finance side, but a little bit of multi-family. And then started up with AEI in the housing policy. I had kind of migrated away from the legal work towards policy early on. But now as happens, I was talking to Lori Goodman the other day about the same thing. Her daughter who now works at, I think, Freddie Mac, but my son now works for Arch Mortgage Insurance.

Mark Zandi:                     Oh, okay.

Edward Pinto:                 And so, another mortgage insurer.

Mark Zandi:                     Great MI company, that's for sure.

Edward Pinto:                 Fabulous MI company. He started there about six months ago, so. Never imagined that he'd get into the mortgage business. He just ended up stumbling on this great job and got it six months ago. So as Tobias said, who's the assistant director at The Housing Center, my wife and I have been married, it'll be 50 years this year-

Mark Zandi:                     Congratulations.

Edward Pinto:                 ... Thank you. And I've been in housing for the entire time, and so Tobias said, "Oh great, now Joan will get housing in stereo."

Mark Zandi:                     Oh, yeah. That's all you're going to be talking about.

Edward Pinto:                 Just for two weeks. But Lori said that her daughter never paid much attention to what Lori did, and then goes to Freddie Mac and then says, "Mom, they know you there. You're actually-"

Mark Zandi:                     Oh, she's a legend at the-

Edward Pinto:                 Yeah. Her daughter had no idea.

Mark Zandi:                     That's hilarious. Of course Lori runs the Housing Finance Center at the Urban Institute, so you guys are great. And they do fabulous work as well. I do a lot of work with them also. Well, it's great to have you.

Edward Pinto:                 Thank you.

Mark Zandi:                     We're going to go deep into your work and housing, house prices and policy and all of the above. But before we do that, we had a week that was chock-full of economic data. And the data point at the top of the list was GDP for the first quarter. And I thought maybe Marisa, you can give us a rundown on what that GDP number had to tell us about the economy.

Marisa DiNatale:            It was weaker than we were expecting. So GDP grew at 1.1% quarter over quarter on an annualized basis. We were expecting it to be about a percentage point higher, and that was roughly what consensus was expecting also. So that's weak compared to the last couple of quarters. We got 2.6% growth in the fourth quarter and 3.2% growth in the third quarter of last year, so significantly weaker.

                                           Within the details, consumption was quite strong. So personal consumption expenditures added almost two percentage points to GDP growth. I'm sorry, I was looking at the wrong quarter. They added two and a half percentage points to GDP growth. Residential fixed investment, which I know we're going to talk about in the podcast, so this is investment in housing, that subtracted a bit from GDP growth. And if you look at the prior quarters, residential fixed investment has now declined for eight consecutive quarters as interest rates have risen quite fast over the past year. The other big component that moved the needle was the change in private sector inventories. That took away about 2.3 percentage points off of GDP growth, so it nearly offset the increase in GDP from consumption.

                                           Net exports added a little bit, but much weaker than we'd seen in the past couple quarters. And government spending was a bit of a support adding nearly a 10th of a percentage point of growth to overall GDP. What else? The non-res fixed investment sector added to growth. So within fixed investment, certainly housing is the weakness, but outside of housing, things look pretty good still. It was a pretty weak reading; weaker than we were expecting, for sure, and may be some indication of what's to come over the next couple of quarters.

Mark Zandi:                     Yeah, weak. So one percent-ish, that's about half the economy's potential rate of growth, which is the rate of growth necessary to generate enough jobs to maintain stable unemployment. So if you stay here for very long, unemployment's going to start to notch higher. Is that a good thing or a bad thing in the context of the current environment?

Marisa DiNatale:            Well, I mean-

Mark Zandi:                     It's a good thing.

Marisa DiNatale:            It's kind of in line with our slow session story. It's sort of what we've been talking about with, we have still have positive growth, but it's slow. It's below potential. We're starting to see slowing kind of across the board in everything. We got a lot of releases this week. We got a lot of economic data. The housing market is a little shaky-

Mark Zandi:                     Okay. Wait, go back.

Marisa DiNatale:            ... It's like it had been stabilizing, but-

Mark Zandi:                     Answer the question. Answer the question.

Marisa DiNatale:            ... I'm vacillating?

Mark Zandi:                     You're vacillating. Is it good or bad? I mean, in the context of we need to get inflation down, the Fed's on the war path raising interest rates, what do you think? I mean, Cris, what do you think?

Cris deRitis:                      Yeah, it's in that direct. It's supportive of getting inflation down. We do need the economy to slow, but calling it good is never easy in this environment. You want growth. I'm a little bit concerned with the the mix, consumption growing quickly, but investment pulling back; I don't see that as a positive. Consumption can be fickle and you want the investment to continue for our future here. So.

Mark Zandi:                     Maybe it's my rose colored glasses, I'm just saying that number was, let's say-

Marisa DiNatale:            Don't say in the strike zone.

Mark Zandi:                     Okay. Let's say on script. I mean, if the Fed were going to pick a number that it wanted, it'd say, "I want 1%."

Marisa DiNatale:            But I also think the Fed would want slower wage growth, which it didn't get. And-

Mark Zandi:                     Okay, we'll get to that. But in terms of the GDP, in terms of the growth rate of the economy, they got pretty much what they want. Because consumers are hanging tough, they're doing their thing. I mean, year-over-year real consumer spending growth is 2%. That's like exactly what you want. A fair amount of weakness was just inventories, just draw. I think you actually saw a decline in inventories, didn't you?

Cris deRitis:                      Yeah.

Marisa DiNatale:            Yeah.

Cris deRitis:                      [inaudible 00:13:42]

Mark Zandi:                     Which is pretty good, right? Because that lays the foundation for better kind of conditions going forward, particularly in the manufacturing base where the inventories were becoming more of an issue. I agree with you, Cris. The one thing that makes me a little nervous is the investment spending on the equipment side, but it was fine in terms of intellectual property and it was fine in terms of structures. That felt fine.

                                           And then government spending feels like it's starting to kick in a little bit. I don't know if that's the infrastructure spending kicking in yet. I might be a little earlier for that, but that's going to happen here going forward. So I mean, if you were going to pick a number... No? It doesn't come close?

Marisa DiNatale:            I agree. I agree in isolation, but I'm just worried about some of the other indicators that show that may be...

Mark Zandi:                     Okay. We can worry. We can worry.

Marisa DiNatale:            Inflation isn't coming down as quickly.

Cris deRitis:                      What's the tradeoff?

Marisa DiNatale:            We may get into a situation where we fall into a recession or we see negative GDP growth and core inflation is still up around three and a half percent.

Mark Zandi:                     All right. Let me ask you this. Let me ask it this way. What number would you have wanted to see? I mean precisely, what number would you have wanted to see? Pick a number.

Marisa DiNatale:            I would've liked our forecast to be correct at 2.1%.

Mark Zandi:                     No, that was just a tracking estimate. That was just a tracking estimate. Actually, that fell. Interestingly enough when you got the durable goods numbers the day before, that showed investment was going to be weak, and that pushed the tracking estimate down to, I think, one and a half. So I think the actual consensus on the day, and then the Atlanta Fed wage GDP tracker was 1.1 on the nose. So the consensus had come in because of those and trade data that we'd gotten the day before. But Okay, all right, fair enough. Did you want to bring up any? Marisa, you mentioned ECI, maybe you should talk about that for the employment cost index, because that was more disappointing in the context of the current environment.

Marisa DiNatale:            A lot of data came out. So we got the employment cost index for the first quarter, and this is the Fed's preferred measure of wages because it controls for the mix of jobs created. And that actually accelerated compared to the fourth quarter. So it was up 1.2% from the fourth quarter. It was 1.1% in the fourth quarter. That's for total compensation. Wage growth overall was stable. It was 1.2%, which is exactly what it was in the fourth quarter as well. So that uptick was mainly a reflection of an increase in benefit costs rather than compensation. So year-over-year now we're looking at wage growth of 5%, which is about what it's been for the past six months. It was 5.1% in Q4 and 5.1% in Q3. So that was a little disappointing to not see more of a slowdown in wages especially. That's the one the Fed is keyed in on when they're looking at pressures coming from service sector industries and employers keeping wages high in those industries where the main input cost is labor.

Mark Zandi:                     Cris, is that consistent with your take on it too?

Cris deRitis:                      Yes. I'd say much more focused on the ECI than the GDP number, to your previous question. GDP, you got to keep an eye on it, but it's probably not going to sway the Fed's decision. This ECI is certainly much more important, and the PCE, which I think we'll get to next.

Mark Zandi:                     Well, much more important in what sense? In terms of setting monetary policy?

Cris deRitis:                      Yeah, if that's the-

Mark Zandi:                     Oh, I see.

Cris deRitis:                      ... If we're focusing on trying to understand what the Fed is going to do next and what implications that could have for the economy longer term. I think those are numbers to watch.

Mark Zandi:                     I don't know, it feels like the job market's weakening to me, so feels like it's just a matter of time before that wage growth comes in a more fulsome way. That five percent's too high. We need three and a half percent, I think, to be more consistent with this target. So it's got to come in more. The PCE, that felt like that was okay, no? The core. That's the consumer expenditure deflator, the measure-

Marisa DiNatale:            That actually decelerated in March. It was 0.1% February to March, and that's...

Mark Zandi:                     Core, I think, was 0.3 excluding food and-

Marisa DiNatale:            Core was 0.3. and that was unchanged from the previous month, so that didn't really budge. It was the headline that budged.

Mark Zandi:                     Cris, anything on that?

Cris deRitis:                      No. Bernard Yaros wrote up the summary for this one for us on our website, and he indeed said that it stuck to script in March.

Mark Zandi:                     Oh, did he? He's using my language, is he? Okay.

Cris deRitis:                      I think that that's the case, but obviously still concerning in terms of the level.

Mark Zandi:                     Okay. I think it's a good time to turn to housing, because in the GDP number in growth broadly, certainly housing is a drag on growth. It is in recession, home sales, construction and house prices. Ed, how would you just broadly characterize housing market conditions at this point? I mean, there's some optimism out there that it might be bottoming out. I mean, are you of that view?

Edward Pinto:                 So you've got two different pieces of it. One is home sales, which existing and new, and then you have home prices. Home prices have been much more resilient than I was expecting given interest rates at six and a half percent, give or take mortgage rates up from two and three quarters, 3% not too long ago. And that's largely due to continued supply constraints, which are severe in most of the country, particularly at the lower end of the market. And we'll be talking a lot about that over the course of this podcast. But the inventory, months remaining inventory, are all very low. Near historic lows. The historic lows are set during the pandemic, but if you go back 40 years, we are lower than 38 of those 40 years. And so that is keeping house price appreciation stronger than it otherwise would be. It's definitely slowed down.

                                           On the home sales side, particularly existing sales, that's way down 30, 40% on the measure we use. And I think the home sales numbers are somewhat similar and that's just due in measure to a lack of supply. You can't sell what you don't have. There has been a bigger slowdown at the higher end of the market that was really the run up and the high end of the market was unprecedented during the pandemic. And so that has definitely slowed down the activity. But again, it has had much less effect on home prices.

Mark Zandi:                     You, at The Housing Center at AEI, produce your own house price index; and very timely because you're out with March data. March 2023.

Edward Pinto:                 So you might say, "Well, why does the industry... Why do you need another house price index? There's already lots of them." And the answer was three or fourfold. One is we didn't like the latency of the other indices. Case-Schiller has got a tremendous amount of latency because while they will come out in April, they have come out in April, and they'll call it February. It's actually an average of December, January and February, meaning it's actually February. And so it has quite a bit of lag to it. Excuse me. It's actually January, so it has quite a bit of lag to it.

                                           We come out with our March numbers. We came out with them I think Monday or Tuesday of this week. And so that was one reason. Another reason is that we wanted an index that just didn't break the market up into one third, one third, one third or one quarter, one quarter, one quarter.

                                           We wanted to define price bins by the amount of leverage that was present market to market to market, driving house prices, because what we knew from the run up to the financial crisis, the low end of the market went up quite a bit faster and came down quite a bit more during the high end of the market. And the way we describe it is the high end of the market is left to their own devices more or less. If they want more leverage, they have to self create it, take higher debt income ratios, put less money down to leave them to buy a more expensive house potentially. And people that are not getting government assistance tend not to do that. They tend to be more circumspect when it comes to leverage. On the other hand, if you're at the bottom end of the market, the low end of the market, which is largely defined by FHA, those buyers tend to use much of the leverage that's made available to them by the federal government and these agencies.

                                           And so we consistently see low prices going up faster in general than high prices. That was turned upside down during the pandemic. I'll get back to that. And so we wanted an index that actually would track that. So we created one with four price bins, low, low medium, medium high and high. And we actually define low as metro by metro, quarter by quarter, what is the 40th percentile of an FHA homes transaction that was insured by FHA; And that sets a dollar point; And then we take all of the sales below that dollar point and call that low. We take the 40th to 80th percentile and call that low medium.

                                           We know that basically largely represents first time buyers entry level because we also look at what percentage of that low and low medium are first time buyers and entry level as we call them, and it's about 75, 80%. On the other hand, the medium high and the high is everything; the medium high is everything above 80%. So it includes a little bit of FHA, but it's mostly Fannie and Freddie. And the top of the medium high is the Fannie Freddie loan limit divided by 1.25 to account for a 20% down, which is about the average down payment at the high end of the Fannie Freddie loan limit. Again, that's done at a metro level, but there it's adjusted every year as those limits adjust. And then the high is everything above that. And so the high ends up being largely private portfolio lending with a smattering of Fannie and Freddie because that 20% calculation for down payment is imprecise.

Mark Zandi:                     Can I?

Edward Pinto:                 Sure.

Mark Zandi:                     Just to summarize, because many of the listeners are not as deep into the weeds as obviously you are or we are. So what you've done is you've taken to construct your house price indices by price tier, you've broken the market into where the mortgage financing is coming from. So.

Edward Pinto:                 The leverage associated with that word, financing.

Mark Zandi:                     The low end is FHA, that's bottom of the heap.

Edward Pinto:                 FHA, Fannie and Freddie.

Mark Zandi:                     And then the middle is kind of Fannie Freddie and the top is more the banks, other so-called portfolio lenders that don't sell the loans to Fannie Freddie or the FHA. Hold them on their balance sheet.

Edward Pinto:                 Exactly.

Mark Zandi:                     And they tend to be jumbo loans, big loans to higher income households. That's kind of how you've done it.

Edward Pinto:                 That's it. And we actually can measure the mortgage risk. We have a mortgage risk index that measures the mortgage risk versus the 2006, 2007 stress event that comes from layering risk layering. And so we then can look at what the loan mortgage default risk built in from just the risk characteristics into each price bin and it orders itself, as you'd expect.

Mark Zandi:                     Got it.

Edward Pinto:                 The low price bin has the highest risk, the high price bin has the least. So the third reason we do it is the methodology we use. And I won't get into exactly how we do; it's not that it's a secret, but it gets in really into the weeds. But we have a methodology that allows us to do it more quickly and do it across a much larger count of transactions. And-

Mark Zandi:                     This is repeat sales, right? Your index is repeat sales?

Edward Pinto:                 Well, it is repeat sales, but we call it a quasi repeat sale.

Mark Zandi:                     Okay.

Edward Pinto:                 We're using an AVM for one sale to create one sale point, and we're using the actual sale to create the other.

Mark Zandi:                     AVM being the Automated Evaluation Modeling.

Edward Pinto:                 Yes.

Mark Zandi:                     So a model determined the house price.

Edward Pinto:                 Exactly.

Mark Zandi:                     Not a actual transaction.

Edward Pinto:                 And so normally when you do a repeat sales, you have to throw out most of the sales because you can't connect the two.

Mark Zandi:                     I see. Interesting.

Edward Pinto:                 And so we are able to connect a very high percentage each month, whereas Case-Schiller publishes, I think 18 or 20 metros, again with a lag. We publish 60.

Mark Zandi:                     Got it.

Edward Pinto:                 And we can publish on an annual basis. We can do it down to the census track level. So it just gives us a lot more data to slice and dice, and so we'd like that.

Mark Zandi:                     That's cool. That's cool. We actually construct a repeat sales index as well, and we have March data. Cris, do you want to describe the March data? I'll have Cris, describe the results of our March house pricing. I'm curious how it lines up with yours. Do you recall if you look at it carefully, Cris?

Cris deRitis:                      Yeah. So we showed a half a percentage point a decline in March. So that is quite substantial.

Edward Pinto:                 Year-over-year constant quality?

Cris deRitis:                      Year-over-year. We're at 1.4%. Let me see if I can-

Mark Zandi:                     That's month to month down.

Edward Pinto:                 Oh. Month to month-

Mark Zandi:                     March is down half a point in March.

Cris deRitis:                      That's right. And year-over-year, 1.3% growth still.

Mark Zandi:                     Up.

Cris deRitis:                      But certainly decelerating from the double-digit pace. Peak to trough our index suggests prices nationally are down 2.2%.

Edward Pinto:                 So what was your number year-over-year, Cris?

Cris deRitis:                      1.3.

Edward Pinto:                 We're at 2.3 for March year-over-year and month to month we are at... Hold on a second. Month-over-month we're at 1.4%.

Mark Zandi:                     Is that-

Marisa DiNatale:            Up positive, Ed?

Mark Zandi:                     Up?

Edward Pinto:                 And that was up. Well, that was about flat with February, which was month-over-month, 1.5%.

Mark Zandi:                     Oh, okay.

Edward Pinto:                 So these are month-over-month numbers.

Mark Zandi:                     Oh.

Edward Pinto:                 One other thing that we do that is pretty unique is we utilize the optimal blue rate lock data to track in real time, because we get the data daily, but we aggregate it up weekly. And so on Monday we have last week's rate lock. And so a rate lock is somebody buys a house and then they're getting a purchase loan and they do a rate lock. A few days later they apply, do a rate lock, and we get that information, which includes a lot of information about the transaction at an anonymized level.

                                           And so we're to do two things with those data: One is we can track volume and slice and dice that quite a bit. And so we publish rate lock volume data for cash out, rate and term, by agency, purchase and all of that. And I've been doing that for, I think we go back about four years, because that's how far the data go back. But secondly, we're able to take the individual transactions, aggregate them up to a national level, and then we create a proxy. It's not a proxy for what turns out to be our constant quality year-over-year, month-over-month HPA that we use from the public records data. We're actually able to create a proxy of that. So this past Monday, for example, here we are in April, we have an April number, we have a May number, and we have an early June number because loans that-

Mark Zandi:                     I see.

Edward Pinto:                 ... Had rate locks last week, many of them will be closing in early June.

Mark Zandi:                     Good. And what's it saying, do you know?

Edward Pinto:                 I think for early June, we're down to about zero year-over-year.

Mark Zandi:                     Okay, year-over-year. So, still weakness.

Edward Pinto:                 And so we actually think that we've already passed the worst in terms of the correction. We had about a 5% correction that happened pretty quickly in the latter part of last year. Nationally, I think it peaked in July. Some regions of the country, particularly out west, it peaked in May and June. But we now see on a month-over-month basis, that is reversed. So that 5% decline that we sort of built up over July, August, September, October, November, and probably December, we've now had some month-over-month positive numbers. Well, starting in July, we think we're going to start seeing some modestly positive numbers in terms of HPA month-over-month, but they're going to be offsetting last July, which are negative numbers. So that's going to start bringing-

Mark Zandi:                     Oh, okay. So you're saying-

Edward Pinto:                 ... Back up.

Mark Zandi:                     ... You're sensing some stabilization of pricing and you actually think the price declines, do you think they're over? Do you think-

Edward Pinto:                 Unless something happens where interest rates-

Mark Zandi:                     Interesting.

Edward Pinto:                 ... Break out of this six and a half range or there's something else that happens with the economy. We also think that unemployment will have minimal impact on increasing the supply of homes, which comes when people either pull out of the market or go into distress. We think it would take unemployment of five and a half percent for that to have an impact. So we're still two points away from that. Seem to be a long way from having unemployment impact it. So we're back to this supply issue. There's nothing on the immediate horizon that says there's going to be more supply.

Mark Zandi:                     Okay. So I want to come back to that. I want to say one thing about our house price data that I observed, just pointing this out. There's 400 plus metropolitan areas in the country, so we create HPI house price indices for all of them. Four fifths of them, 80% have experienced declines, 20% of the markets have not. Philly house prices have not declined. Just pointing that out. And Vero Beach, Florida, no price declines in Vero Beach, Florida.

Edward Pinto:                 Who lives in Vero Beach? Has a place in Vero Beach?

Mark Zandi:                     Guilty. Guilty.

Edward Pinto:                 [inaudible 00:33:24]

Cris deRitis:                      Its 'cause the seaweed hasn't affected the price yet.

Mark Zandi:                     Exactly. And so I was very, very-

Cris deRitis:                      It's coming.

Mark Zandi:                     ... Happy to see that. Of course, there's a lot of volatility in the data month to month because of trend, and Vero doesn't have as many transactions as some of these other bigger Florida markets does. So that may be part of it. Just pointing to that. Cris, you heard Ed, he doesn't think that there's going to be any more price declines or any significant more price declines. And obviously-

Edward Pinto:                 Nationally. On a national basis.

Mark Zandi:                     On a national basis. National basis.

Edward Pinto:                 We track the top 60. We look at more, but we track the top 60 month by month. On a month-over-month basis, we've seen a pretty consistent shift to increases.

Mark Zandi:                     What do you think? You want to describe our forecast to Ed, and how do you feel about the forecast in the context of what Ed's saying and everything else you're observing?

Cris deRitis:                      So our forecast is a bit more negative. We have a 5 to 10% peak to trough decline, making the forecast 5 to 10 because it does depend on which specific house price index we're looking at. But across the majors, the FHFA, RMHPI and the Case-Schiller, that's about the range. I mentioned we're down about 2% so far based on the MHPI, so still more to go. I agree that the supply is limited, but the affordability remains a real issue. Our model is a fundamentals based approach and it's looking at that price to income ratio, looking at other factors, the interest rates in making this determination.

                                           So by our measures, the market is substantially overvalued still because of the 40% run up in prices over the last couple of years. It would take time for those prices to re-equilibrate with incomes, especially with incomes projected to slow in terms of their growth. We're expecting prices to remain negative for the better part of this-

Mark Zandi:                     Let me say, a lot of assumptions obviously, but two key ones: One that fixed mortgage rates stay around six and a half percent, 30 are fixed. Through the end of the year, they start to come back down next year to five and a half by the end of the 2024. And the other is no recession, a weak economy, virtually no growth in jobs, unemployment starts to notch higher, but no recession. With that, we get peak to trough declines in the entire market from A to Z of almost 10. In the Fannie Freddie part of the market probably what, 6, 7, 8? Something like that.

Cris deRitis:                      Less.

Mark Zandi:                     Less.

Cris deRitis:                      Definitely we do price tiers that are equal segments, so one third, one third, one third. And clearly the price declines are really conservated in the higher end of the market. We see virtually no price decline in the bottom end of the segment. My view is that's really driven by that affordability. You have people who may be trading down, can't buy the higher priced home. I still want a home, so I'll compete for that lower end of the market. So that's holding very strong and the supply is very limited at that end. So I do agree with that.

Edward Pinto:                 I mean, we see for the peak to trough, I said 5%, which is at the lower end of your 5 to 10, we see zero year-over-year for December 2023. And we see, I think it's 3% positive for 2024 year-over-year. But on the supply or on the low, using our price bins, the high end, this is year-over-year for March, the high was minus 0.4%.

Cris deRitis:                      Okay.

Edward Pinto:                 So call it year-over-year. Medium high was a 0.6, low medium was 3.1, and low was 6.1. And again, our low and all of these are based market by market by market based on the leverage component that I described earlier. And so that 6% on the low end back in 2019, that would've been viewed forget inflation, which is in these are nominal prices. But back in 2019, 6% would've been considered a very healthy increase in house prices, even at the low end. We saw it slow down and now it's starting to speed up.

                                           We think what you said, Cris, is right. People can move down market, they can't move up market. And so that's a factor there. You have the work from home. We think of the tailwinds where we view work from home as a huge tailwind, which allows people that normally would not have driven the drive to you qualify mantra. Well, now they're driving because they don't need to be in the office as much, and now they're competing with people who would've been driving to qualify. And so you have a lot of pressures on the lower end of the market, and maybe we'll have some time to talk about this, but we've done a tremendous amount of work to connect the displacement pressure that comes from house prices being out of sync with incomes at a metro level.

                                           And the displacement rate in terms of homelessness as measured by the point in time, homelessness rate across 360 categories, geographic categories that HUD tracks. And we have found in looking at 30 plus different metrics, this single most important predictive metric to predict the rate of homelessness by these 360 areas is the median house price to median income in that area. And it swamps all the others.

Marisa DiNatale:            Wow.

Mark Zandi:                     That's interesting.

Edward Pinto:                 R squared is 78%. And so we've built that into what we call our good neighbor index, but maybe we can get into that a little bit later.

Mark Zandi:                     Well, that's an very important point, and one of the questions is whether the price pressures in the lower end of the market are related more to demand or to supply? So my sort of narrative or thinking has been that since the financial crisis, home building has been relatively constrained, except up until recently in the pandemic, before the run up in mortgage rates. But for most of the period, financial crisis, home building has been relatively muted, constrained for lots of different reasons.

                                           Particularly at the low end of the market the builders, particularly publicly traded builders, focus on the high end because that's where they could make the most money; return on equity is a lot higher. The low end, very difficult also during the financial crisis because of the hit that local state government took. They raised their fees on permitting and the fixed cost of actually putting up a home rose quite significantly. So it made it much more difficult for builders to build those homes at the lower end of the market. My kind of thought process has been we really need to focus on the supply side of this market, try to figure out how to create more supply, particularly at the lower end of the market. Does that resonate with you, Ed, or do you have a different take on that?

Edward Pinto:                 Exactly. Most of our work now is on the supply side of the market, and I'll talk about that in a minute, but I would push back on two things. One is back in 1970, California was normal in house prices to income. San Francisco was just about normal. And the problems that have emanated, largely from the west coast, also up in New York and some of the northeast, have really took hold there and then started spreading, other parts of the country. And when you're at a median home price to median income at a metro level of about three or less, you have virtually no homelessness. But once you start moving up from that, we can actually track how that works.

                                           California has been above that level for a very long time. They started getting above that level in the seventies and then the eighties and the nineties. And now they're at, in San Francisco, 10 times area median, and their area median's the highest in the country, San Jose, San Francisco. So that's number one. This has been building for a long time. We have a lot of information on why it's been building, but it has been building. The second thing is, you talked about the builders, there was a perception that the builders rape and pillage, which is how I would describe a little bit of what you just said. They're going to go-

Mark Zandi:                     I didn't say that. I didn't say that.

Edward Pinto:                 No, you said-

Cris deRitis:                      For the record.

Mark Zandi:                     I don't even mean to imply that-

Marisa DiNatale:            He's paraphrasing.

Mark Zandi:                     ... Basic economics. You build where you're going to make the money.

Edward Pinto:                 Again, let's push back against that. So we took 540 counties around the country in 200 metros, and we mapped out in a scatter plot what the gross living area was, a single family detached. We also did it for single family attached, but detached what the gross living area was of the unit was the Y-axis. And the X-axis was the as-built development based on the square footage lot, how many lots do you get per acre? And that became the as-built development. And we found uniformly it was an 85, 88% correlation that there was a gradient that was very strong as the gross living area declined. The gross living area declined as the as-built density increased. And so what's really driving this is zoning, if you don't allow higher density, which is a controlled thing by the government entities, not generally the builder, it's the government entity.

                                           If you allow higher density, even in single family detached, we call that greenfield development. We looked at 20 years worth of development, brought everything current to the present value with the automated valuation, and did that. We also then said, okay, now we're going to have the Y axis be the value of the house today. And the X axis is going to be the same as build density. We got the same gradient. And so we can see, one of the things that we say as we talk to local and state governments around the country is if you allow higher density, even for single family detached, if you go from four to six units, if you go from five to seven units an acre, six to eight, whatever, you get a massive increase in the number of units; You get a reduction in the size, but still being very ample given the household sizes today; And you get a reduction in price, and it's all driven by you, the local official. It's not driven by the builder.

Mark Zandi:                     You're absolutely right. I should have said also, obviously the permitting is a big factor here in what's going on. And that also changed. It's been building over a long period of time.

Edward Pinto:                 Yes.

Mark Zandi:                     I think it got much more serious significant around the financial crisis, but I totally agree with you-

Edward Pinto:                 We went back 20 years with this. We went back 20 years so that all the houses that we were looking at had no depreciation issue because they were all 20 years or less. So what our answer is, is light touch density, which is a small lot development. We call that small lot greenfield development under 5,000 square foot lots, more than eight per acre, preferably 10 or 12 on single family; 30 units an acre on townhouse, preferably. We also include two unit, three unit, four unit, up to eight units. Basically up to about 20, 22 units an acre if you do it in density. It includes accessory dwelling units and everything in between, cottage housing, you name it.

                                           And so we've done a tremendous amount of research on that. We have quantified how many more housing units. We know what the conversion rate is, we know what the economics are. We've calculated the economics area by block, property by property. So we've got a model that tells us is this economically feasible to convert as an infill to higher density if it were legal? And then what the optimum number of units would be. And so, how many units you get. Why is this important? Well, California's doing a lot here. They have a lot more to do, that they need to do. Washington State just passed a law just a week ago, it's on the governor's desk, that would allow light touch density in virtually throughout Washington state and residential areas. There are some exceptions, but it's a few and far between.

                                           And significantly, Charlotte, North Carolina, passed an ordinance late last year, takes effect June 1st, that would legalize buy right two and three units throughout the city in all residential areas. And they already have a history of doing some higher density in about 3 or 4% of the residential areas. And we just finished a project that we can actually visualize where those units have been built in the last 20, 30, 40 years under this zoning. Because we think once this zoning ordinance takes effect, the real driver is making it legal. The financing isn't the issue. The labor isn't the issue. The lumber isn't the issue. It's making it legal to build higher density. Once you do that, the private market, if allowed to do it by right, will figure out a way to do it.

Mark Zandi:                     Let me ask you a question around that. I mean, you've got some good examples of communities moving in that direction, but pretty universally, it's very difficult to get local governments to do the kinds of things that you're describing. What can be done here to help facilitate this effort, this transition? I mean, if it left to its own devices, it doesn't feel like that's going to go anywhere, at least not very quickly. Is there something that can be done?

Edward Pinto:                 Well, maybe hinting at what can the federal government do? Is that-

Mark Zandi:                     Yeah. I mean, what-

Edward Pinto:                 The short answer on the federal government in my book is nothing.

Mark Zandi:                     Nothing. Okay.

Edward Pinto:                 Because the federal government was the cause of this problem. The federal government created the current zoning system that is called exclusionary zoning. They created it in 1922. It was created for nefarious purposes to keep Blacks and other quote undesirables out of neighborhoods that were being built in the twenties. And we were living with that decision from a hundred years ago by the federal government, the Department of Commerce.

                                           I think it's an education process. It's a grassroots effort. We work with groups all over, Yenbi groups, other think tanks and different organizations: The Home Builders, the realtors, the Chamber of Commerce, et cetera. There are lots of groups interested in this. It is trench warfare, but the way I describe it, Mark, is we have the wind at our back. We know we're having victories. Arlington, Virginia just passed an ordinance. It is trench warfare, but this is the United States of America and we have a republic and it's the laboratory of the states and then under the states. That's the way we operate it. It may not operate as fast, but when the federal government does something, you get these results that you live to regret. And I could list 20 others other than the zoning, but I regret them all.

Mark Zandi:                     Okay, got it. I hear you loud and clear. It feels unsatisfying somehow, but I hear you.

Edward Pinto:                 We're making progress, so you have to look as the glass is half full, not half empty.

Mark Zandi:                     Got it. Got it. Let's do this. Let's play the game, the statistics game, and we'll come back to housing. But in the game, obviously, I think we're all going to pick statistics that hopefully are related to housing, mortgage, finance. Not necessarily, but just saying. And the game, of course, is we each put out a statistic, the rest of us try to figure out what that is through clues, deductive reasoning. And the best statistic is one that's not so easy that we all get it quickly, not so hard that we never get it. And if it's apropos to housing, mortgage, finance, all the better. Okay. With that as introduction, I think we always begin with Marisa. Marisa, you want to go first?

Marisa DiNatale:            Sure.

Mark Zandi:                     Go ahead. Fire away.

Marisa DiNatale:            Okay. Minus 0.4% in March.

Mark Zandi:                     Okay. Is it one of the economic releases that came out?

Marisa DiNatale:            It is.

Mark Zandi:                     This week? Okay. Today?

Marisa DiNatale:            No.

Mark Zandi:                     Okay. Housing related?

Marisa DiNatale:            No, it's not.

Mark Zandi:                     Ah.

Cris deRitis:                      Oh.

Mark Zandi:                     Okay.

Cris deRitis:                      Throw us off. All right.

Mark Zandi:                     Did it come from the GDP report?

Marisa DiNatale:            But we did dance around it at the beginning of the discussion, so we did refer to this.

Mark Zandi:                     It's not in the GDP numbers?

Marisa DiNatale:            It's not, no.

Mark Zandi:                     Okay. Hmm. Okay. It's a government statistic that came out this week.

Marisa DiNatale:            Correct.

Cris deRitis:                      Is it from the PCE?

Marisa DiNatale:            No.

Cris deRitis:                      No.

Mark Zandi:                     No. Minus 0.4.

Cris deRitis:                      PCI?

Mark Zandi:                     Can you give us a hint that doesn't give it away?

Marisa DiNatale:            Well, we were talking about it in the context of GDP. We mentioned it. You mentioned it when we were talking about the GDP numbers.

Mark Zandi:                     Wage related?

Marisa DiNatale:            No.

Mark Zandi:                     No. What? Geez, Louise. What were we talking about, Cris, you recall?

Cris deRitis:                      Talking about the components, the investment consumption.

Mark Zandi:                     No, but she's saying it's not GDP. It's not in the GP release, but we were talking about-

Cris deRitis:                      It's related.

Marisa DiNatale:            No, it's not in the GDP-

Mark Zandi:                     Inventories? Related inventories? No?

Marisa DiNatale:            No.

Mark Zandi:                     No. Goodness gracious. Thanks a lot. This is a tough one.

Cris deRitis:                      ECI. It has a-

Mark Zandi:                     No, she said not wages.

Marisa DiNatale:            It's not wages. It's not wages.

Cris deRitis:                      Wages [inaudible 00:52:13]. I want it to be wages.

Mark Zandi:                     Can you give us what's part of the economy we should be thinking about or would that be-

Marisa DiNatale:            So we were discussing it when we talked about marking down our estimate of Q1 GDP

Mark Zandi:                     Oh, investment, durable goods. It's-

Marisa DiNatale:            There you go. Okay.

Mark Zandi:                     Okay. Durable goods. Okay, it's in the durable goods numbers.

Marisa DiNatale:            It is, yeah.

Mark Zandi:                     Okay. Fair enough. So minus 0.4, was that the core X, defense X transportation?

Marisa DiNatale:            Yeah.

Mark Zandi:                     Okay.

Marisa DiNatale:            It's durable goods. It's core durable goods orders for the month of March. So this is stripping out non-defense capital goods, stripping out aircraft orders, civilian and government. So it was down 0.4%. This was the second consecutive month of decline, but this is actually declined four out of the five last month. So that suggests going back to this weakness in investment spending, in private investment spending even outside of housing. Not a good sign.

                                           And year-over-year core durable goods orders are down 2%. I'm sorry, they're up 2%, but that's the weakest positive reading that we've had since the worst of the pandemic, since March or April of 2020. And if you strip out the pandemic, you have to go back to about 2011 to get a weaker year-on-year reading in core goods.

Mark Zandi:                     This is making you nervous that businesses are starting to pull back on-

Marisa DiNatale:            Yeah.

Mark Zandi:                     Okay.

Marisa DiNatale:            And this is forward-looking because these are orders. So we could also look at shipments, which were also down for two consecutive months. And this is kind of current receivables, but the orders can go out 6, 9, 12 months. So this suggests potential weakness coming in the quarters ahead as well.

Mark Zandi:                     And I guess also in the context of the banking crisis in the fallout that's going to have on credit, and particularly your small business, I guess this would be the place to really... Let me quickly, one thought was generally recessions, I think I'm getting this right, recessions are led by the consumer. The consumer packs it in, stop spending, and we go into recession. Could it be the case? And certainly that doesn't feel like that's what's happening now. I mean, consumers are cautious, but they're spending like they typically do for the most part. Could it be that this recession is different, like everything else about this current environment, and it's businesses that kind of lead us into recession? Is that a possibility? Is that what you're thinking?

Marisa DiNatale:            No. Is it a possibility? Sure. But I still think that there's... You're right, we got data on consumer spending and income this week too. I won't go into it in case that's somebody's statistic, but that shows resilience among consumers. But we've also gotten data on credit markets and consumer borrowing, and that is turned, for sure. So balances are now falling compared to where they were a year ago when you look at a variety of lending products. So to the extent that consumers may be drawing down any savings they have, it also looks like they're pulling back on debt. That could be supply and demand. It could also be banks making it more difficult for consumers to take on more debt. Interest rates are higher. Lending standards appear to be tightening across a variety of products. So I mean, I think eventually this is going to come down to the consumer. We noted the labor market seems to be weakening too.

Edward Pinto:                 I would just add, Marisa, lending standards in one area are weakening reasonably fair amount. And that's mortgages, government mortgages, Fannie Freddie, FHA. FHA lowered their premium. That's going to be increased demand against tight supply. Fannie Freddie just changed their LLPAs, their loan level pricing adjusters, tilting more towards high risk borrowers.

Marisa DiNatale:            Exactly.

Edward Pinto:                 That's going to increase demand there. All of this is going to feed into that low end of the market where there's no supply and house prices are already going up 6% year over year.

Mark Zandi:                     That's an interesting point. So Ed, did you want to take a crack at this game?

Edward Pinto:                 Sure. I'm going to throw out, let me get the number in front of me here. It's obviously from something we publish because I don't follow the other-

Cris deRitis:                      Wow.

Mark Zandi:                     Fair enough. Oh no, this is a problem.

Marisa DiNatale:            So we're not going to get it, Ed.

Cris deRitis:                      It's problematic.

Edward Pinto:                 No.

Marisa DiNatale:            Is what you're saying.

Edward Pinto:                 We talked about it quite a bit, so let's-

Cris deRitis:                      Okay.

Edward Pinto:                 ... Give you one and we'll see. But the number is, hold on a second. I just picked up the wrong thing. Okay. The number is 2.1 and it has something to do with housing, obviously.

Mark Zandi:                     Is it a related to your house price estimates?

Edward Pinto:                 It is not related to the house price estimate.

Cris deRitis:                      Is it the risk index you referred to?

Edward Pinto:                 No.

Cris deRitis:                      No?

Marisa DiNatale:            Is it like month supply on the market?

Edward Pinto:                 Yes.

Mark Zandi:                     Ah. [inaudible 00:58:00].

Edward Pinto:                 Which month's supply?

Mark Zandi:                     Oh jeeze.

Edward Pinto:                 Well wait, it's 2.1 months. Think about it.

Cris deRitis:                      Existing.

Edward Pinto:                 No, it's all yes, existing, but what portion of the market?

Marisa DiNatale:            Oh, is it the low end of the market?

Edward Pinto:                 Yeah, it's the low end of the market. So again, the-

Mark Zandi:                     By the way, Marisa, that was pretty good.

Cris deRitis:                      That was impressive.

Mark Zandi:                     That's pretty impressive. I wouldn't have gotten that.

Edward Pinto:                 The reason I brought it up is-

Cris deRitis:                      We did poorly, but...

Edward Pinto:                 ... You have buyer's market, sellers market, you have equilibrium point. The equilibrium point at the low end, we estimate to be around five months, give or take. So three 2.1 months is a rip-roaring sellers market for the low end. And again, that is not as low as it got down to 1.1 month, believe it or not, during the pandemic in 2000, I think, 21, maybe early '22, but 2.1 months is probably the lowest it had ever been. We started tracking in 2012 through sometime in 2020. It is a rip roaring low end of the market sellers market. And again, you add more leverage or demand through the government loosening up credit, reducing the cost of credit as FHA did, and you will end up adding fuel to the fire.

Mark Zandi:                     Can I ask you-

Marisa DiNatale:            And I'm curious, when you say the low end of the market on a national average basis, what cutoff are we talking about in terms of the-

Edward Pinto:                 Well, we don't have a national cutoff because it's-

Marisa DiNatale:            It's metro by metro.

Edward Pinto:                 Metro by metro.

Marisa DiNatale:            Okay.

Edward Pinto:                 The 40th percentile of FHA seller buyers, spread across the entire market, all homes below that point. But it's probably 300,000. Probably less than that, 250, something like that. Again, we don't have a national number, per se. It's market by market.

Mark Zandi:                     Hey Ed, just to push back a little bit on your point about FHA premium cut, and this is a stating what the argument here is for cutting the premium. It was 30 basis points, 0.3 percentage points. One argument was, look, the FHA had built up a significant reserve based on the premiums that they were charging. Typically, the kind of rule of thumb is you want at least 2% of reserve.

Edward Pinto:                 2% is the minimum, Mark.

Mark Zandi:                     Minimum. But they were at 11%. They were at 11%, which is-

Edward Pinto:                 But what's the right numbers a good question. But 2% was the statutory minimum.

Mark Zandi:                     But 11% is extraordinary by any measure. That's the reserves that they have built up. So they're saying, "Hey, look at the premiums I'm charging. I'm building up this massive reserve and that doesn't feel appropriate to me and I'm just going to cut it 30 base points." And the second thing is the demand. Demand's gotten crushed because the 30-year fix for the typical borrower, not the FHA borrower, the typical borrower is six and a half. That's just completely knocked everyone out of the market. So lowering the mortgage rate by 30 basis points, 0.3 percentage points, I mean, I'm not juicing demand. I'm just trying to cushion the blow from the surge and interest rates that have occurred.

Edward Pinto:                 Well, you are juicing demand, and we did a very in-depth published paper on this back when FHA lowered their premium 50 basis points back in 2013, I think it was, '13 or '14. And we had a strong, not as strong as today by any stretch, but a strong seller's market back then. FHA announced that it was going to bring in all these buyers. Excuse me, new buyers, FHA, yada yada. It was going to be so affordable. And we said, "No, no, that's not going to happen. It's going to drive house prices up and they're going to poach customers from the other agencies." And so we did an in-depth study and we found two things: One is I think 70% of the 50 basis points was translated within months into higher prices. And we could demonstrate that empirically around the country.

                                           And secondly, I believe something like 80% of the increase in borrowers that FHA experienced came from Fannie Freddie Rural Housing and VA. To less extent, VA. And rural housing lost 40% market share in three months. So what is the purpose of one government agency cutting prices in order to basically pick up share from another government agency? And the result in a seller's market like we have is going to be to drive prices up. Not 6%, but maybe seven and a half percent, all things equal.

                                           What we suggested to FHA and they ignored it, was rather than keeping with the very high-risk lending, which FHA does day in and day out, it's extraordinarily high risk, they are the subprime lender for the country, the federal government is a guarantor; Rather than doing that, you could have created a premium structure that had 30-year rates over here that either stayed the same and you used the excess that you thought you had on 20 year term loans that would've built wealth for these hapless borrowers that get FHA loans and have a very hard time over time building wealth because of the high defaults and everything else. And you would've lowered the risk profile at the same time and you wouldn't have created the upward price pressure because you would've been soaking up that benefit with the cost of doing the 20-year loan, the added monthly payment. And so we suggested that and it was ignored.

                                           We suggested the exact same thing to Sandra Thompson at FHFA before they did the LLPAs and it was also ignored. The problem is the government's go-to policy is how do we do something that leads to more risky loans? And so if you look at what Fannie and Freddie did with FHFA, it will increase the number of risky loans and decrease the number of lower risk loans. FHA will do the same thing. They will be increasing in the marketplace because they will absorb customers from the other agencies. They will be. And we found also that as they absorb them, those borrowers take out riskier loans because they're available. And so we don't think that's a sound policy.

Mark Zandi:                     Okay. So a lot to unpack there. We need repodcast for that, so we're definitely going to have you back, but we're running out of time, 'cause I know you have to catch a plane. But I do want to go to Cris and do one more stat, only because I've performed very poorly so far and I got to redeem myself, so.

Cris deRitis:                      Okay. Okay. I'll give you the-

Mark Zandi:                     Yeah, go ahead.

Cris deRitis:                      We call it the overhanded softball here. The minus 5.2%.

Mark Zandi:                     To me. Go ahead. What is it?

Cris deRitis:                      Minus 5.2%.

Marisa DiNatale:            Pending home sales.

Cris deRitis:                      Pending home. You got it. Marisa's on fire-

Edward Pinto:                 Oh, you're on a roll, Marisa. You get the-

Marisa DiNatale:            Sorry, Mark.

Mark Zandi:                     Wait a second, wait a second.

Marisa DiNatale:            Next week.

Mark Zandi:                     You're not using Chat GPT are you over there?

Marisa DiNatale:            Thanks.

Cris deRitis:                      Maybe she is Chat GPT.

Mark Zandi:                     Could be Chat GPT.

Marisa DiNatale:            We're in the matrix.

Mark Zandi:                     Man. She's raising the bar here. I'm going to have to get on.

Cris deRitis:                      Yes.

Mark Zandi:                     I didn't even have a chance to digest the minus 5.2.

Edward Pinto:                 You didn't hear the question and she was giving the answer.

Mark Zandi:                     Yeah, she was giving the answer. What the hell?

Edward Pinto:                 Boy-

Mark Zandi:                     Definitely deserves a cow bell.

Edward Pinto:                 Yeah. Get the cow bell out.

Cris deRitis:                      Okay.

Mark Zandi:                     That's so funny. Okay, I guess we have time for one. Should I do mine?

Cris deRitis:                      Go ahead.

Edward Pinto:                 Well, you're not going to be able to answer it, so you-

Mark Zandi:                     I know. Why do it? Why do it? It's a little hard, but I'll just throw it out there and then we are running out of time, but here there's two numbers, 5.9 and 4.9 and it is related to a statistic that came out today.

Marisa DiNatale:            Are these percent changes or?

Mark Zandi:                     Oh yeah. I'm sorry.

Marisa DiNatale:            Okay.

Mark Zandi:                     5.9% and 4.9%.

Marisa DiNatale:            Oh, is it the ECI? Is it in the ECI?

Mark Zandi:                     It's in the ECI.

Marisa DiNatale:            Is it wages and benefits?

Mark Zandi:                     It is total compensation-

Marisa DiNatale:            For total compensation and wages year-over-year?

Mark Zandi:                     For a certain sector, apropos.

Edward Pinto:                 Low end?

Mark Zandi:                     No, no.

Cris deRitis:                      Construction.

Mark Zandi:                     Construction.

Marisa DiNatale:            Civilian, private workers-

Mark Zandi:                     Construction.

Marisa DiNatale:            Oh, construction. Okay.

Mark Zandi:                     It's construction. So it's the employment cost index, total compensation. So wages, salaries, and benefits for the construction sector, year-over-year it's up 4.9%. And in the quarter Q1 2023, it's up 5.9% annually.

Marisa DiNatale:            Accelerating.

Mark Zandi:                     Yeah. I looked across most sectors, Certainly the large sectors, none of them are accelerating at all. Either the growth rates are stable or they're coming in. The one exception that I found was construction. So that goes to the still very tight labor market there. Only last month did we see any job loss in construction. Perhaps goes to single family is down, but multi-family is booming. And also we've got a lot of public infrastructure that's now kicking into gear because of the infrastructure plan. And we still have labor market issues related to the pandemic, going back to the difficulty of getting immigrants here into the construction trade. So, a lot going on there. And it also just highlights another broader point is that construction, the industry has shown very poor productivity growth over the years; Very difficult, at least as measured to increase productivity. And so that makes very difficult to keep labor costs down. So I thought that was a-

Edward Pinto:                 Mark, you said we'd have a moment to talk about maybe the supply issue.

Mark Zandi:                     Yeah, sure. Fire away.

Edward Pinto:                 We've come up with what we call light touch sensing, and what we have found is that as you move from McMansions... So the exclusionary zoning that we have basically promotes McMansions because that's the highest and best use. And by definition, they have to. And it's based on if you tear down a house, you have to have a lot that's worth a lot to justify tearing down the lower priced value that's on it. And you have to replace it with an expensive house, and that's why you get McMansions. Builders don't pick McMansions to put on those lots. The economics drive it based on the zoning. And if you allow two units, you would get a duplex instead. If you allow 3, 4, 5, you'd get whatever. In general, it marches up.

                                           And what we found looking at Seattle is as it marches up, the total amount built increases, the total value built increases, but the per unit value declines. And eventually once you get above three or four units on a parcel, it actually gets less expensive than a unit that you're replacing, which means you're getting rid of one unit and replacing with three or four, three additional or maybe four additional at lower price points. And that's what you need in order to get this market healthy and have an abundant supply of housing, you need to be building in that middle point and below. And that then gets the filtering going and that then reduces the displacement pressure that leads to homelessness.

Mark Zandi:                     I'm with you. I'm with you. I guess the only place where I might diverge a bit is in terms of policy. Maybe there's a way to facilitate more of that more quickly because that is definitely a big, big problem. Big problem. Hey Ed, I want to be respectful. I know you have to catch a plane. I do want to say the one thing that I find so endearing about you is how so excited and interested you are and what you do. It's infectious. I mean, how can you not housing after listening to you because you love it so much.

Edward Pinto:                 [inaudible 01:10:35] my wife. If you have it for 50 years, then it becomes a little different.

Mark Zandi:                     Oh, okay.

Edward Pinto:                 The reason is literally every day I'm getting stuff out of what I call our laboratory. And this morning I got these maps that Arthur put together. And every day we call it, we start with data, we turn data into information, but the key is to turn information into knowledge. And so every day I'm getting knowledge coming up from the laboratory and then you turn that knowledge into policy and action. And that's what I find exciting.

Mark Zandi:                     You certainly are exciting and you make everyone around you more excited, which is-

Edward Pinto:                 Thank you.

Mark Zandi:                     ... That's a rare quality. So, [inaudible 01:11:20] thank you. And with that, dear listener, we're going to call this a podcast. Talk to you next week. Take care now.