Mortgage rates, inflation and those homeowner vacancy numbers

Speaker A: You know, you hear Logan Modishami break down the housing market on this podcast every single day. But did you know you can follow the same charts he uses? Every Housing Wire membership includes Logan's Housing Market Tracker charts, his daily market analysis, Housing Wire news, and access to this podcast with Housing Wire intelligence. You can take those charts a step further, customizing them to see what's happening in your own market. Get the data behind the conversation@housingwire.com

Speaker B: welcome, everyone. I'm joined today by lead analyst Logan Motashami. And if you are watching this on YouTube, you might be like, what is going on? Of course. This is our annual Halloween dress up edition. And today's theme is Elizabeth Holmes, who Wore it Better. So, you know, you might think, I'm a woman, I have an advantage here. But if you're looking right now at Logan, he's got the blue eyes. He figured that out. The facial hair kind of makes it rough, but otherwise I think he might win. So, uh, Logan, welcome to this very unusual podcast.

Speaker C: It is wonderful to be here, Sarah. I don't know why you're saying my facial hair would make me look weird.

Speaker B: Okay, first of all, what does this have to do with housing finance? Nothing. We just like to. Nothing.

Speaker C: We both saw that movie with Elizabeth Holmes and we thought there

Speaker B: was. We had to. We had to. Yes. No, I love this. I love it. The big blue eyes really do a big number for you, I think.

Speaker C: This is not easy to make, by the way. So the chart daddy does not have the greatest skills, but I tried.

Speaker B: Oh my gosh. Okay, well, thank you for being in the spirit of Halloween. I mean, you've been saying all month, you're like, ooh, this could be a scary month for housing. So let's dive into it. Are you going to keep, uh, that on for a while? You're going to take that off?

Speaker C: Uh, just for a little bit. We're going to talk about, uh, today's, uh, economic data, which was really, really interesting today. Jobless claims is under 200,000. Oil prices are, uh, above 100. Both WTI and crude GDP was at 3.4%. So which means nominal growth is near, uh, 6%. The AI capex boom just really showed itself in quarter. Close to 13% of the GDP was just from that and inflation core and headline CPI are above 3%. No, uh, ending to the conflict. Nothing. And the 10 year yield was down a few basis points today. So I just look at it as we won because it could have been a lot worse this month. And six to eight. I think it was eight weeks ago. We talked about, you know, things are escalating and that 10 year yield has to hold that line at 5.35%. It eventually got there and it held a few times and now uh, the 10 year yield is under 5%. So there's a lot of things that this morning could have gone very bad for rates, but they haven't. And I think the mindset is starting to look into 2027 and uh, unless something crazy happens or some escalation or something, something really bad happens with the trade war and the conflict, maybe we've seen the worst with the 10 year yield and rates for now.

Speaker B: That would be incredible news. And actually yesterday you wrote an article after the Fed speeches, after the comments and the Q and A that, you know, it was actually, we finally got a positive Fed day for housing. Oh, you are

Speaker C: creeping me out

Speaker B: with those, with those,

Speaker C: I know those, those eyes. You know, I

Speaker B: actually think I look like Tippi Hedren more than I look like, uh, you know, maybe I'm an older version anyway. Okay. We're not going to get distracted by this sort of. Okay. Uh, but no, it was a positive Fed day for housing.

Speaker C: Okay, I'll, I'll do you a favor, I'll just take it off.

Speaker B: Okay.

Speaker C: It's the first time I tried lipstick on, I think I overdid it. But um, so the worst case scenario we were able to take off and now we have to start looking out in the future. So I think if I was to make a case, you know, because older and economies don't have a lot of domestic investment because so much has already been built out that when you have a new industry like AI, like if you took the AI CapEx, uh, hardware, data centers altogether, it's actually more than the housing bubble boom in terms of its components to gdp. So that's much is here. But you could also make a case is that this can't last forever. Right. And eventually growth is going to slow down to a consumption based economy. When you become a wealthier country and you age, you basically become a service sector consumption economy in that sense. So I think when we look back at this week and this month of October, kind of the worst case scenario. So the ball's in our court to kind of move it to the next step and maybe alleviate some of the inflationary pressures that the country is dealing with. Uh, and so far it's Thursday. Nothing crazy has happened. We only got one more day left in October and then we deal with the Midterms and everything after that. But for now, as good as you could hope for with all the variables in play.

Speaker B: Talk about the inflation a little bit more because, um, that's one of the things that Kevin Warsh said yesterday, and he was very clear. He's like 2%. There's no compromise on 2%. He's going forward with that. We came out today. Tell us what that looks like.

Speaker C: So let's assume Kevin Warsh is 15 years ago and it wasn't President Trump that was the president. Kevin Warsh would have said, hey, listen, tariffs are bad. Look at the core goods in inflation data. We were heading toward negative on this, and all of a sudden we put tariffs on and all of a sudden the core goods inflation starts taking off. So you could see that outside of that, there isn't anything too drastic. It's not like wages are creating inflation in a big way. My concern going out in and not so much on PCE as we're going to go into rental vacancies and homeowner vacancies a little bit later. But we got a big lift from rent disinflation happening. But it looks like rent inflation is stabilizing. That's more of a CPI thing. So we really have to get the tariff situation in check and then get the conflict in check because, you know, you don't want another variable added on to 2027 and have these two things laying around for the whole year. Uh, there's a pathway. And of course, think about everything that's happened. A, um, major domestic spending on a deficit, spending, conflict, war, everything. And still we're basically 1 1% away from being close to 2% on the PCE data. So we thrown everything we can. And this is much different than the 1970s, right? The 1970s had major labor force growth, right? And then we had an oil shock on top of that. And oil would have to be $426 today to adjust to those prices. So we don't have that kind of breakaway inflation. And we're throwing everything you possibly can at this. And we're not that far from getting back to 2%. So if growth slows down, AI story slows down, uh, you get the conflict over with, right? And you don't make trade. You got things, you got things that can make this work. So, uh, I think Kevin Warsh is just buying some time to at least maybe get two of those variables fixed up a little bit.

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Speaker B: I think this is going to be one weekend where we can be like, we should not expect anything crazy, at least from our side, like maybe Iran's going to do something. But it feels like right before the midterms, like days before, before the midterms. Maybe just things are going to be quiet for a minute. What do you think?

Speaker C: I mean, I know J.D. vance sent a letter to Iran, you know, and stuff. And just remember, Iran can't take this forever, right? You know, their economy is getting hit harder than it has in the past. And again, when you start to have military people complain, you know, uh, wages and inflation over there, their inflation and uh, their stories a thousand times worse than what we're dealing with here. So eventually something has to settle itself out. You know, this can't be a story going into 2027.

Speaker B: Okay, let's talk about some data we on homeownership rates, vacancy rates. You have very strong feelings about this. Would love to know what you make of that.

Speaker C: All right, so homeownership, um, for those of you who didn't follow my work in the last decade, boy, I had some really like, almost dark takes after when I started writing my housing, uh, economics. And one of them were, if you take the adjusted to demographics of, uh, post 2007 where prime age population growth peaked and it was declining, which is a really, really big thing for my work. And then you take all the credit, uh, deterioration, all the people that were going to foreclose on their house sellers that weren' to be buyers, my work, and this goes back to what I wrote in 2012 or 2013, that homeownership rates should bottom out by 62.2 to 62.7. That's where I think the homeownership and the homeownership rates was not at that level. Uh, so people were thinking that's a very dark tick. But if you adjusted to the credit loss and everything, I think after all the adjustments they've made on census data, we ended up at 63.1. That was the low point after the housing bubble crash. But as households are form and demographics are better and everything, you know, by years 2020 to 2024 a change. Number one, the MBA purchase application data should hit 300 first. Two weeks of uh, 2020 we got there. We should eventually have 1.5 million housing starts during that period. We got that check. But the homeownership rate in the article I wrote, 2016 or 17, uh, we should get to 66.21% if you adjust it to demographics. And the credit data getting, uh, so, uh, much better now from post qualified mortgage Dodd Frank and the 2005 bankruptcy reformulates. And the high, I think, and this was, this was a call for years, 2022 to the high was 62.10. So we close to getting to that level. And then of course housing inflation took off, prices took off, taxes, insurance and everything. So the homeownership rate is 65.4. It looks relatively normal to me considering the whole scope of housing right now. And that's perfectly fine. Right? You know, that's, that's. I always look at the 2002-2005 data as just, that's not real. Everyone could just exclude that, uh, we're never going to have a credit boom like that. We're never going to have homeownership rates like that. We had the COVID burst in home ownership rates that you discount Oath. That was a tracking uh, error. And the homeownership looks perfectly normal to me when you, when you make all the adjustments. So I thought that was fine. But the vacancy data, that's where things get very interesting.

Speaker B: Okay, well, let's talk about that. Also. I do think it's interesting when you think about 65% homeownership rate is about normal. Right? I think in. Because we talk about homeownership so much because we're like, this is the wealth building. I think most people think it's much higher than that, but anytime we've gone higher than that is not gone. Well, we've extended the credit to your point. Like it's just, that's about where we are as a country.

Speaker C: You know, some people make some a, uh, case that if you adjust it to households, the homeownership rate is really like 53 to 55% because you have more people living in a, in a house, you know, but just, just how the census counts it, you know, it looks about normal to me. Getting above 66.21% in years 2022 to 2026 would seem off to me. Uh, and I think we got to 66.10. So we got close to that forecast. But then it goes into the vacancy data, homeowners, homeowner vacancies, and rental vacancies. And one that you hardly ever see in America is the homeowner vacancy data, because you can't really doom porn that thing. And the homeowner vacancy rate is 1.2%.

Speaker B: Let's talk about that homeownership vacancy rate. First of all. What is that? What are we measuring there and what does it look like right now?

Speaker C: Okay, so the homeowner vacancy rate are the homes available for sale. Right. And that's compared to the, you know, census population out there. So, uh, naturally it always stays very low. It rarely goes above 2%. Why? Because most home sellers are buyers. But if you sell, sell your house and you're not buying another house, you have to go rent. Because most people don't sell their homes to be homeless. So the vacancy rate, if you look at the NAR data, there's 1.6 million active listings in America. There's 340 million plus Americans out there. So, uh, uh, normal active inventory is two to two and a half million. NAR has pending contracts into that equation. So naturally, this data line is very low. Even during the housing bubble crash years, where you had inventory went from two and a half million to four million. We had 15 million loans in distress where those people were going to sell to be renters, you know, or sell to be homeless. Right. They weren't going to sell to buy a house. It never even got to 3%. So the homeowner vacancy rate is very low. That's why I always like to teach people that in the active inventory, the only things that matter in America, active inventory and homeowner vacancy rates, you put them two together, it squashes so much of the doom porn. That's why you don't see the doom porn. People use this site or this data line. They like to do the vacant inventory or, uh, vacant units for sale. We've had like 15 to 19 million homes that are vacant around America. They always go, oh, at any second now, 13 million homes can hit the market marketplace, and it never occurs. So new listings data, active inventory vacancy rates are low. That explains what's happened in the last few years. Affordability is very stretched. So the supply demand equilibrium got hit on that. Homes are taking longer to sell as rates are staying elevated. But we're still kind of in this construct where we're not back to like normal levels of NAR inventory. We're getting close, we're close. We're at levels where I don't talk about a housing shortage anymore because I'm over 1.52 million and I have four months of supply. But the vacancy rate is basically the units available for sale. You know, and most, most people remember we have so many people in America, but only a small portion of people sell and buy their homes every single year. And that's why that data line is very low historically, going back decades and decades and decades,

Speaker B: it's actually a shockingly low amount of, um, transactions when you look at the total.

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Speaker B: So, you know, I love a road trip and I'm always driving, right? I live in Texas. I cannot tell you how many times I'm driving through a small town or like a really small town. There's all these vacant homes and I'm like, no one's buying that home. That home's not even, you know, you and I heard these people before talk about like, oh, there's all these, you know, millions of vacant homes. Most of the homes that are vacant, vacant like that and haven't been lived in for years. No one's ever going to live there. They're in the middle of nowhere, they're falling down. Like that's not what we're talking about here,

Speaker C: you know. You know, unless it's available for sale, it does not matter, you know, so I've dealt with that vacant unit thing for God knows forever. I mean, that was a 19 million. It's like a little bit above 15 million. And every time people go over any second now, and I go, guys, if this was going to occur, you'll see it in the new listings data and then you'll see the active listings. So that's why you have that, uh, vacancy rate very low. Uh, you'll never see that chart. I do it on the Nurturer sometimes. I'll post it on Instagram too. But, uh, uh, that explains why that percentage is historically very low. But then the interesting thing is the rental vacancies. Now the rental vacancies had been stabilized around a little bit above 7% for some time, but it perked up to about 7.6. So I think the interesting aspect going out next year is housing construction has fallen down a lot the last few years, but we're still like kind of 2019 levels down there. You know, one concern is that because rates are still elevated and you know, we're not building a lot of apartments or rental units that eventually rent inflation will take off again. We're seeing stabilization in the rent data. But also now you could see that, you know, rental vacancies by the census is elevated to, uh, post recovery highs and wage growth is running at 3%. So uh, for me to counter rental inflation, I would say that vacancy rates are still elevated and wage growth is at cycle lows. Right. If you add wage growth running at 5, 6% and rental vacancy, he's down. That's a bad. Oh, that's a really, really bad story. And that's what happened during COVID Right. All global pandemics are very inflationary, including rent. If you go back to 1918 and look at, you know, rent inflation back then, uh, you saw it really took off and then the disinflation happened. As I think one of my interviews on squat box four or five years ago, I said, uh, rent, uh, inflation will pick up, but then the disinflation will happen. And that's where we are. That's what it's been for the last few years. But it's something to keep an eye on for 2027 if it just stabilizes and just stops going down or does it pick up a little bit?

Speaker B: You know, I mean, all things considered, I feel like we're, we're coming into a, like you said, I mean it's more positive than it could be. Do we wish rates were lower? Yes. Do we wish we had more origination? Yes. But it could be so much worse.

Speaker C: Yeah. Again, my, my concern was that because after the MOU deal broke off, you see this very, very violent reaction with the 10 year yield in oil and getting back up to 5.35%. If for some reason we closed AB, the conflict got worse and nominal growth is here and everything, the bond market could sell off even more until the Federal Reserve tries to calm things down. Thankfully the 5.35 level held. And even with all this economic data that we had today that was very solid, we're starting to look past some of the craziness. So you get the conflict over with, you don't make trade. War 2.0 and you know, the AI uh, boom can't last forever. Those are three things. For an older country that does not really have a lot of major demographic, domestic investment things. Because we built out so many homes and commercial buildings and everything for so long. You can make a case that maybe the worst is over. But again, there are a lot of ifs and variables that you have to take over. But the last week of October, man, with the fed meeting and everything that happened, boy, that thing held. And the last time we checked, we're under 4.98% on the 10 year yield. And uh, whenever that happens, we survive the 5% 10 year yield. So of course we all want rates to be, uh, just a little bit lower where demand can grow and everything. And, you know, inventory is up to a level where it's healthy. You don't have to worry about prices taking off. Right. You know what Covid was, was the first time where it was supply driven. And then rates were very low. So late 2019 to early 2020 was the lowest active inventory in the history of America. This is why we were very, very cautious. I remember one of my tweets in May during COVID I said, guys, we have to start worrying about home prices taking off. The whole, hey guys, we need team higher rates, we need to get inventory back up. And we, we're just working this stuff out. And the history of housing economics for decades and decades, you have periods like this, uh, as long as wages could outpace home price growth, you know, affordability gets better, you in check. Those are positives.

Speaker B: We went from savagely unhealthy housing market, which I still think is one of your best, uh, phrases that you've come up with, to now. It's, you know, it's pretty, oh,

Speaker C: it's, it's healthy. I love this, I love that. I hated the housing market, you know, uh, when we went from unhealthy to very unhealthy, Just savagely unhealthy. In February, February of 2022, when I saw 287 people sitting outside a house in L. A that did not deserve like two people. But, uh, that's when you needed to blow this thing up to get any kind of normalcy because things could get out of hand. Shortages are the worst. There's nothing good that happens with shortages because whatever inflation you get is not deserved or earned. And all it does is impact future demand. And you see some of that in what's happening in San Francisco. It's a very unhealthy housing market there. But that's not so much of shortages. It's a lot of money, right? You got a lot of wealthy people out there and you Know, everyone, wealthy people like to have a nice house and they're paying up and you never want to see that. But the dynamics of housing. I think there was a. There's a New York economist, he was, you know, the Professor Galloway show, and they're showing the New York times. And since 1856, every decade there's always. There's a housing crisis, There's a housing crisis, there's a housing. Everyone's been complaining about housing since 1856. You and I have talked about this with, oh, uh, this technology is going to take all the jobs. History keeps rhyming itself. But one, the one thing that always have wages rise, right? Wages have risen a lot since 1856. So, you know, part of the housing problem is people make money, right? Especially dual household incomes make money. And that's enough to keep housing. Total home sales near 5 million, which in the last decade, as I've always liked to show, even with affordability ever, and mortgage rates super low and lots of inventory, the highest levels of sales from 2010 to 2019 was around 6 million. So you're with all this said, uh, the construct of housing demand is there, uh, uh, if you get 700,000 more sales, you're back to somewhat kind of normal. And then to get to the peak of the last decade, not 2020 or 2021, but the peak of last decade when rates were lower and affordability was just a million more home buyers. Slow and steady wins the race here. And, uh, just like they said in Contact, small moves, Ellie Small.

Speaker B: It's always a movie reference. I love it. Um, Logan, thank you. As always, thanks for dressing up because. Yeah, yeah, I think now you look like Jeff Goldblum as a vampire.

Speaker C: Oh,

Speaker B: that's.

Speaker C: That's what it looks

Speaker B: like now.

Speaker C: You remember that, uh, where there was a teenager in Orlando that said you look like the guy in Wicked, the Wizard. You're the wizard and Wicked. And I'm like.

Speaker B: And, and to be clear, you were not wearing any.

Speaker C: I was not worried, but you were just, you know, the hair. I'm getting older, so I look more like Jeff Gropoli. Yeah.

Speaker B: Well, thank you so much. We'll talk again soon.

Speaker C: Pleasure.

Speaker B: Thanks for listening to Housing Wire Daily. If you haven't already, we'd love for you to take a minute to rate the show or leave a comment. We'll see you back here on Monday for more news and insight.

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