1981: Housing Market Indicators, FHA Mortgage Insurance Premium Risks, Housing Shortage Proposed Solution, American Enterprise Institute, Tobias Peter

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Welcome to episode 1981,1981. Today we have a fantastic show for you. We have Tobias Peter, who who is a research fellow and assistant director at aei, otherwise known as the American Enterprise Institute. Fantastic interview coming right up. You're going to love this one. Be sure to stick around to the end. Be sure to comment below. Thank you for liking the video, if you're watching on video and if you're listening on the podcast. Thank you for your reviews. We really appreciate those and we got a few new ones last week. So always appreciate your reviews on whatever podcast platform you happen to be listening on. Before we go to our guest Tobias, though, I want to talk to you about how to lie with statistics. Well, you know, there's a famous book, old book from, I don't know, the 50s or something called how to Lie with Statistics. And it is so true, you know, it's just amazing how, how they can mislead us with a simple chart. And I'm going to show you an example. I hope you're watching this on video because it really hits home if you're seeing it, but if you're not, I'll explain it to you for the podcast listeners. So here it is. This is us existing home sales up until this year. Right? So we're estimating through the end of the year, what it looks like. And as you can see, 2021 was the biggest year for home sales. This chart goes back to 2012, so it's an 11 year chart. And you see 2012 was pretty slow in 2013. It got the mid teens. 2015, 16, 17, 18, you know, it was pretty good. This is home sales volume for existing homes, not new homes. Sales volume for existing homes. And you know, 2018, 2019, those were kind of even. 2020 was better. Of course, when the first lockdowns were released, well, I should say the people were released and they could roam about the country and as I predicted, they would go out, they would move out of cities, they would move to suburb, and they sure did. They did that in mass migration. You might remember if you've been listening to me for a long time, I compared that to the Grapes of Wrath.

The John Steinbeck novel. And he talked about the Great Migration with the Dust bowl and the Great Depression and all of that stuff. And as soon as people were free to move and leave urban areas, they left in droves, just as I predicted in February of 2020, before anybody was even thinking that yours truly predicted it. Hey, I gotta toot my own horn. I gotta say what I'm right about the predictions, because that's another one that came true. Okay, so we saw 2021, though, with the highest sales volume of all. And then 2022, you know, that was about even with 2013. So it was pretty leveled down a little bit because we, you know, we saw interest rates increase quite dramatically in 2023. Terrible. I mean, this is really bad.

Looks bad, doesn't it, for existing sales volume in 2023. But wait, there's more. Let's take a look at this chart. This chart shows exactly the same data. Nothing has changed in the data. The only thing that changed in this chart, which doesn't look bad at all, right, it looks like 2023 has pretty good sales volume, about four and a half million existing homes sold. The peak in 2021 was just over six million homes sold. But, you know, four and a half million, that's a solid year, 2023, right? Nothing wrong with four and a half million. But what changed? Well, what changed is the starting point of the chart. Remember, life's most important question, as I always say, is compared to what? So are you comparing it to zero and looking at the sales volume, or are you comparing it to a sales volume of 4 million as your start point? So if the chart starts at 4 million homes sold, then these statistics look really bad. It looks like terrible. The end of the world. You know, home sales are just falling off a cliff. But if you compare it to overall, and you compare it to the last 11 years, doesn't look bad at all. That's the starting point. See, here we start on this chart at 4 million homes sold, existing homes, not including new homes. And here we start with zero or really, you know, 1 million. Right? That's the first number showing on the chart. Okay, so you know, zero, but then, then the first volume number is 1 million. Right. It's the same exact data, but it's so misleading when you look at the chart one way or another way. And I know a lot of our listeners are super smart people. We have tons of tech people, tons of engineers, statisticians that listen to the show, mathematicians that listen to the show, quantitative analytics people, you know, quants. You're much smarter than me at this stuff. Right? I'm just a layperson observer. But it is just. I just gotta show this to you because it is so misleading how they do this. And they want you to think one thing they intentionally know, if that if they show you a compared to what, then the data looks really, really dismal rather than a more accurate comparison. When you're comparing to what the data, you know, sales volume is down, but it's not that much. I mean, it's a solid year. Four and a half million homes sold. Nothing wrong with that. And of course, remember, always, as I've been saying, sales volume and pricing are two completely different worlds. Those are completely different things. We're not talking about that here, but price and sales volume, totally different. This is simply looking at sales volume and the sales volume is down the most, generally speaking, in the most cyclical markets that we never recommend you invest in and wouldn't recommend you invest in because those are the markets for the gamblers and the speculators, whereas the linear and some hybrid markets are the markets for the actual investors. And because you're listening to this show, I know you, you are a real investor. Okay, let's get to our guests and let's hear from the American Enterprise Institute. Great interview, Tons of insights here. If you need us, reach out through Jason Hartman.com and by the way, thank you for all of you who attended our 100% financing nothing down for investment property. Special zoom meeting we had last week. We had hundreds and hundreds of you on and I know a zillion of you have asked for a replay of that. We have. We're working on it. So stay tuned for more on that, we may be able to get you a replay of that special zoom meeting that we had. Also, our Empowered Mentoring meeting is coming up on Wednesday. Can't wait to see all of you who are in the mentoring program. We're going to have another fantastic meeting and hopefully a new application that we're going to be able to tell you about then. And if not this week, it might be next week. So more to come up on that. We'll see you all Wednesday for our regular mentoring meeting. Looking forward to it. And let's go to our guest from the American Enterprise Institute.

It is my pleasure to welcome Tobias Peter. He is a research fellow and assistant director with the American Enterprise Institute Housing Center. And we are going to discuss the market in general today, but also as it relates to something I've been talking about a long time, the biggest impediment to to affordable housing, at least in my opinion, and that is the good old government. So we're going to go into that because Tobias deals a lot with government policy issues. So I think you'll find this interview to be very interesting. Tobias, welcome. And I guess you're coming from Washington, D.C. right?

Exactly. Yeah, I'm coming from Washington, D.C. thank you, Jason, for having me. And I'm just going to go ahead and share my presentation.

Great. Yeah, I look forward to it. There are some good visuals here if you're watching on video. If you're not, we are going to make sure that those come across in audio only format. So let's go ahead and dive in.

All right, great. So this is an update on what's going on in the housing market as of today and how we are seeing it developing over this over the end of this year and also next year. And we are at the housing center, at the air Housing center. We're all about data and we want to be tracking data. And it's close to real time. And we're using mostly census data or complete data sets or at least data sets that we've wedded against census data sets. So in this case here, we're monitoring what's happening in the in the rate lock market. Rate blocks generally occur between four to six weeks before loan gets originated and the sale happens. So they actually tell us a little bit what's going to happen in the future of the market. And this is rate lock data as of last week. And here on this chart I'm showing the rate lock activity for 2021, 2022 and also the start of 2023. And I'm also Showing what happens happening in the to to mortgage rates.

Remember 2021 was an incredibly strong year in the house. In the housing market, of course there was a lot interest rates were low. The Fed was still buying mortgage backed securities and generally people were, people were on the move after the initial shock with the pandemic. So the market was very strong and interest rates were low. Then in 2021 the market continued roaring until about.

Week 19. And then rates, once rates started climbing over five and a half percent, that's when we see the coming off the housing market. And quickly after rates touched 5 and a half percent and then even went to 6 and 7%, we can see that volume declined by 2030% compared to 2021. So the start of this year, obviously rates have come down a little bit. So they were down to 6% just three, four weeks ago. Now they're back up at 7% and hence we're seeing that volume is down 41% compared to 21 compared to the same week in 21. So in terms of home price appreciation that we're looking at it year over year and we're finding that for January, home price appreciation came in about four and a half percent which is down from 4.8% a month ago. But it's also a significant drop from where we were a year ago when we were up at 16, 17%. And we think that the market so far has been fairly resilient. There's been low unemployment, we have still a very constrained supplies, I'll show in a second. And we have strong demographic tailwinds where we have still this rising millennial generation that is now entering their prime home buying years which are probably going in pushing against these higher interest rates. And we're expecting a cumulative decline from the peak of about 10, 10% by the, by the end of next, by the end of this year as our base case. However, if you really taking inflation into account, which is now running at 6, 7%, we are finding that rates are in effect negative once you ad for these interest rates.

Because I'm so glad you said that. So even if you consider the cpi, the most widely used measure of inflation, to be accurate, which hardly anybody does, because they have an incentive to make the CPI lower than real inflation. But that's another discussion. But even if you consider the CPI to be accurate, we have negative interest rates where people are literally getting paid to borrow money on mortgages, even if they have properties that don't generate income. So, so move into a house, live there for free, get paid to live there because you've got negative interest rates.

That's absolutely true. And I mean especially rents were still rising very, very rapidly, especially last year where we had double digit rent increases. So if you were buying and if you had locked in these low interest rates, I mean you were, you know, kind of, you were, you were really gaining, getting a lot of the benefits from, from this amortization, but then also insulating yourself from these rate increases that we've seen. And yeah, so in particular, if you have been buying a home before the pandemic, you're still about 16% above the pre pandemic trend, even though home price appreciation has been slowing. And we're expecting it for the next two months to further decline to about 0% home price appreciation. What does it look like across the country? So here, this slide here, we're looking at the year over year home price appreciation again for January. And you can see that it varied quite dramatically across the largest 60 metros. And just to walk your readers through your listeners through this, this chart here showing a map of the country out west in the western part of the country. So this is everything from California, Idaho, Washington, Oregon, Arizona, Nevada, Utah, Colorado. There we have seen fairly significant reductions in home prices and we're finding that home prices on a year over year basis are down 10% or more. And then of course, if you factor in your inflation, it's much more so. On the other hand, in parts of the country, particularly Florida, and also some midwestern cities like Indianapolis or Kansas, home price appreciation was actually fairly robust still. And home prices in some of markets like Indianapolis, Miami, Kansas City, they were going up, are still going up at double digits. So we have a wide dispersion in the rate of home price appreciation across the country. And to us that makes sense because especially if you can work from home, you can take advantage of these lower home prices in some of these, some of these more inland markets. You can sell your house in San Francisco, San Jose, move to a, to a Phoenix, to a Boise, to an Austin and you can sell your house for, you know, if you have the median house in San Francisco, you can sell it for a million three and buy a house in Austin for 40 cents on the dollar. So that, that makes perfect sense. And also if you're a retiree or just in general looking for warmer climates, you know, kind of these, Florida met particularly very attractive.

And so what we're experiencing here when we look at this home price appreciation and just the major differences is we're really seeing for the most Part the classic difference between cyclical markets and linear markets. And those linear markets performing very well. Many cities in Florida, I would not even consider them linear anymore. But Florida is benefiting from its, you know, good government and just the fact that everybody's moving to Florida for a variety of reasons, you know, and fear of more freedom, restrictions in the future, etc. So very interesting. You know, one of the things I've been saying on the show for about, I guess it's 11 years now maybe is that geography is less meaningful than it's ever been in human history. And of course it's still meaningful. I mean it, geography still matters. But it used to matter. It used to be everything. I mean, look, you know the old saying, what are the three rules of real estate? Location, location, location. Right. But remote work, among other things, has really made geography just less and less meaningful. And so what this is doing, and you know, I Talked about this 10, 11 years ago, is it's starting to equalize prices where they're not equal, but you're seeing the values being taken away from expensive cyclical markets and given to the lower priced linear markets and to an extent the hybrid markets as well. So it's quite interesting and I think that trend is going to continue for a long, long time.

That's absolutely true. I mean we've been tracking work from home and before the pandemic, work from home, 5% of all employees were working from home. Then it spiked to 50, 60% but now it's. And it's come down. That's true, but it's still at about 30% and it's been flat for the last couple months. So you're not really seeing much movement in the decline in work from home. It's really, it looks to be here to stay with us for the foreseeable future. And as you say, as more people are mobile and are moving to particularly lower priced metros, we're going to see the air slowly going out of these high priced markets as in California, and the balloons starting to increase in more attractive localities where home prices are still relatively affordable.

Absolutely. Okay, let's go on.

So then here we're looking at our home price projection for the end of this year and next year. And these are projections taken from the June 2022 peak in the housing market Base case prediction is that home prices are going to be down between 10% or flat over that period. And the two crucial inputs for that are what's going to happen to mortgage rates and what's going to happen with Unemployment. If the mortgage rates stay, you know, kind of between a 5 and a half to 7% range, we should be in our base case. And just a couple weeks ago we were at the lower, at the lower end of our base case in terms of interest rates. Now that inflation fears have, have returned to the market, now we are actually at the top, up or even slightly above our base case on mortgage rates. Unemployment remains incredibly, incredibly low. So that should insulate the market from rapid home price decelerations. But who knows what's going to happen? And you already alluded to the Fed. The Fed is in an incredibly tight spot, especially if the inflation numbers don't continue to come down. And while the market is certainly expecting the Fed to layoff sooner than later, I'm not so sure on that. And so we'll see if the Fed can engineer a soft landing. But, you know, if they can't, all bets are off on the, on the market, on the mortgage market and housing market. In an optimistic base and optimistic case, we're expecting that home prices would be about flat or 10% up. Again, if rates are lower, that would, that would be a case for, for our optimistic prediction. And of course, unemployment would stay below five and a half percent. But in the pessimistic case, unemployment were to increase above 5 and a half percent and mortgage rates were to exceed 7 more than 7.57 or even go higher, we would expect prices to decline by 10 or 20% over this year, next year.

And so of course, that's a nationwide projection and it likely weights heavy on the cyclical markets just like Case Shiller does. That's one of the things I hate about whenever I hear Case Shiller quoted. It just drives me crazy because 75% of those markets, markets in their composite index are cyclical markets. Of course they're going to depreciate the most. And, and you know, the weighting is so uneven that, that, you know, makes it look like the whole country is depreciating when it's, it's not, you know, it's, it's just too large of a country and it's too diverse to, you know, paint with a broad brush. But do you have any comments on that pessimistic Case scenario? I'd love to, to, you know, get your comment on that and how you interpret, you know, national home prices.

Yeah, yeah. I mean, it's, it's, since you brought up Case Shiller, I mean, we've been, as I showed earlier, we're tracking 60 markets on a month to Month, month basis. And our, our projections are ready for January. If you were to look at Case Shiller, you would get the average because Case Shiller, I mean Case Shiller would tell you our project, our, our home price appreciation is for October, but it really is an average between August, September and October. So it's a three months average. So you're really getting only the September number. And we are already in January in our projections here. So that really tells you that there are more timely data out there to tell you a little bit more about the market. And we're also tracking 60 metros and on a quarterly basis we're tracking 100 metros. So kind of going back to the point, we really cover more of the country. But yeah, you're absolutely right. I mean, we're expecting to see large divergence in home price appreciation if this pessimistic case were to, were to come to fruition.

We have fairly large divergence by market.

By market. Yes. In terms of home prices, I mean, out in California particularly, we would expect home prices to come down quite significantly from their peaks in San Francisco's NL, say 25, 30% potentially, versus other markets in Florida, in the myrtle beaches of the world, where you have attractive climates, low taxes, a steady inflow of people, still a very tight supply and low home prices there. We would expect home prices to be about flat, potentially.

Yeah. And that's the worst case scenario.

And that would be the worst case scenario in the optimistic case. I mean, we are still thinking that these differences that we're seeing across markets, they're going to be persisting for quite some time for these more secular shifts that we're seeing in the market.

Okay, all right.

And then, but at the same time, and I think that's an important point to make and most people have come around to this, we're not going to see a repeat of the great financial crisis. And there are a couple reasons for that, but the main one is probably that housing inventory and month supply remains very, very tight. And we have seen that inventory has as of recently been increasing, but it continues to run way below pre pandemic levels and is way below a market. In January, we find that overall inventory was up 14% from a year ago, but it's only still out only two thirds the level that we had between 2017 and 2019. So we had about 950,000 active listings or total listings versus those three years that I quoted. We had about 1.3, 1.4 million listings on average. So we are a long way off from where we should be. And at the same time, while demand has also come down, this whole relationship between demand and supply, it also remains very tight. We are now at 4.7 months supply. This is up from 4.1 months that we had before the pandemic. And we would expect to see continued home price declines. We would have to be at six months or seven months supply before prices were to come down. So we have still a long way to go until we reach that point.

We're not even at a normal market, much less a declining market. So yeah, just one more comment on this. Of course my listeners hear me say this all the time, but you know, the problem is there is no light at the end of the tunnel here in terms of getting more inventory. Now granted, if you own a bunch of real estate, you're glad that you've got, you're already at the light at the end of the tunnel, so good for you. But you know, there just isn't any sign that anything would put a lot of inventory into the market considering that you've got this lockup situation with people with 28 to 29 years left on these ultra cheap mortgages. I like it. To rent control, it's like having a super long rent controlled lease that's below market rate. Nobody's gonna move. That's exactly what happens in these rent controlled areas. They just stay forever. And you know, maybe there's a gray market that develops where they sublease the property to their friends. You know, you just have this market with just no inventory, it's just constant shortage. And the concern I have is that this is almost three decades left on this. It's not like it's going to change in five years, you know.

No, I mean when we've, when we've looked at supply, we think that yeah, you need to give it at least 10 years, 10 years to see a meaningful response. And the one positive sign I would point to is that California, out of all places, California. Right. You wouldn't expect any possible.

I know they allowed the ADUs. Is that what you're going to say?

Sorry, they allowed ADUs, but then they also, as of, as of this year, as of last year, January 1, 2022, they allowed what we would call light touch density. And so they, they allow you to split your lot into two halves and then they allow you to build a duplex instead of just a single family home. So in effect on the same lot you can now build four units instead of just one. And of course you know that for this to take effect or to hold, it's going to take about 10 to 20 years till you see a meaningful increase in supply in California particularly.

Yeah. So the way you'll get the increase in supply in California is with mass migration out of the state, which is happening at a rapid rate because everybody's just fleeing the socialist republic of California. But what's interesting is that seems like progress, and it's sort of a little surprising that California would do that in a way. Right. But it's kind of like progress. Right. So I want to believe that's a positive thing. But remember, we still have California to deal with, you know, really restrictive building codes other than the zoning. Right. They loosen up the zoning, but, you know, still, the house has to have this, that and the other thing. It's got to be mega energy efficient. You know, you've probably got to do 39 environmental impact reports before you, you know, break ground. So, yeah, you know, you're still dealing with that kind of stuff. Right.

I mean, the beauty of this is that the legislature actually did away with some of these CEQA requirements, the environmental studies. And so they, they did away with, with that, with this, with this new law, which is why we are somewhat optimistic that it's gonna. It's gonna go somewhere. But of course, the irony is that California literally tried everything to increase hous. What did they end up settling? Is they settled on the. On the free market to come up with a solution.

Yeah, that's. That is ironic. It is ironic.

But now the critical thing is that we give the market enough time to respond. I mean, the market is not going to solve this shortage over overnight. It's going to take a decade or two.

Right, Right. Yeah. Good. You know, I'm kind of curious. The infamous Coastal Commission in California, I have not kept track of them lately. I remember when I lived there, I lost a big deal where I was selling this really expensive property in Malibu when I was back in the brokerage business, in the conventional, traditional business side of it, you know, it was due to the Coastal Commission. Right. Do they loosen up on the Coastal Commission stuff at all? That's a good question.

I mean, I don't know the answer. I don't know the answer to that. But with this new Senate Bill 9 and 10 that they passed, they've. They've cut back some of the environmental requirements, but yeah, I mean, they have a long way to go.

Yeah, interesting. It'll be interesting to see how that plays out in the next 10, 20 years. Okay, let's move on. Yeah.

So coming back to why it's not going to be as bad as doing the great financial crisis, I mean, if we also track mortgage risk, and every month we are stress testing every mortgage as it gets originated, and we have now over 40 million such mortgages in our database. There's also this academic paper that our colleague undertook where he stress, stress tested over 200 million mortgages. And what he found was that mortgage levels today are much lower than they were in 0607. 0607 distressed mortgage default rates were 35%, 36%. So we were expecting under severe stress event like the financial crisis, 35 or 36% of all mortgages originated to default in a given year. And today that level is about 14%, so about a third what it was. So that, that's positive. But then the other thing that I'd like to point out is from this work that our colleague did is it's oftentimes, you oftentimes hear the saying that the early 2000s were normal lending standard. We're a time of normal lending standards. What he found was that it's nowhere near the case. I mean, the mortgage risk started building starting as early in the early 1990s, which was ironically when Congress passed the Safety and Soundness act, when they came up with the affordable housing goals that pushed Fannie and Fred further and further into the subprime territory. And that over the, over the next 10, 15 years ended up increasing the level of mortgage risk to the level that we've seen. This massive foreclosure wave.

Yeah, well, the best laid plans of mice and men.

Right, Exactly.

It's the story of government is the story of unintended consequences.

Yes, yes, yes.

But I do agree with you. I think these mortgages are very sound. Anybody who's applied for a mortgage in the last 14 years or so, they know it's like pulling teeth to get a mortgage. It's, you know, give them a DNA sample and everything else.

Yeah, I mean, there's one exception, Jason, and those are FHA loans. And FHA loans tend to be as risky as they were in 06 and 07.

Okay, tell us about that. Now, those are insured by the Federal Housing Administration. So. So, you know, that's a different kind of situation because Fannie, Freddie, you know that during the Great Recession they talked about that implicit guarantee. Right, but there never was a guarantee. It was just that they backstopped the banks, you know, for. We don't need to go into that again. But, but yeah, tell. Go, go into fha. You've got another chart on that? I think so.

FHA is the, you know, we would label it the government subprime lender.

Can you go to your visual aid on that?

Yeah, yeah, sure. So I mean fha, FHA tends to be, FHA guarantees all the mortgages, as you said this backed by the government. And FHA also tends to be targeting or tends to be focused on lower income. First time home buyers, many of them are obviously minorities and it's equipping them with very, very risky loans. Oftentimes the down payment is just three and a half percent. If you factor in down payment assistance and seller concess, the down payment is in fact oftentimes zero. And the credit scores on these mortgages are very low. The debt to income ratios, they go as high as 57%. Wow. Yeah, yeah. So those are really high risk mortgages. And the problem is that a lot of these FHA loans are concentrated in certain neighborhoods and here on this, on this, these visual aids here.

It's not like they're low end anymore though. You can get an FHA loan, you know, for a million dollars.

Now you can, I mean, if you are willing. I mean generally with the GSEs, Fannie and Freddie, you get a better execution in terms of the rate, although that has been now changing to some extent as I'll show on the next slide. But just to finish this point here about FHA's concentration, I mean in Washington D.C. a lot of these FHA mortgages account for about 40% in a census tract. And they are mostly kind of in PG county or Princeville and County. Those were the areas that were most heavily affected in 0607 by the decline in prices and the foreclosure wave that followed. Because we are again repeating the same, the same practices that we, you know, that we did in 06 before the, before the great financial crisis. So we really haven't learned much from, from this experience.

Well, at least it's not on the Fannie Freddie products.

It's not on the Fannie Freddie products. But there's going to be a lot of, I mean these FHA FHA mortgage shares about 20%. So there's a lot of BO going to be exposed to this. And generally what happens is that FHA borrowers buy late in the housing cycle so they buy near the top of the market and then the market turns and then they're underwater almost immediately. The unemployment comes into play and they lose their home, you know, relatively quickly thereafter they wreck their credit scores and Put.

And because their credit score is wrecked, they have to recycle into the rental market. They have to. And they stay as renters for the next seven years.

Exactly. And then sell out on the landlord one way.

Wait, wait, wait. So landlords, that's a good opportunity for you to serve that group because that's exactly what happened after the Great Recession. There were all kinds of people with beat up credit, had a foreclosure, couldn't buy a house. And then that, you know, that ultimately put upward pressure on rents. So it's quite interesting. And you know that article, I had Matt Taibbi on the show a few times and you know, he wrote that article about the great bubble machine. And it's hard to think that this is not intentional. Right. To just keep the poor people down. You know, like you said, Tobias, they buy late in the housing cycle. They always come to the game late. Right. They're never in early. So they didn't get the benefit of all that appreciation. Yeah. Go ahead with what you're saying.

Yeah, no, I mean, we're putting them into, you know, we're setting them up for failure. And that's coming from the federal government.

And we'll be back with a lot more on this topic with this guest on our next episode. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own, and if you require special specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes.