Latest / Trumponomics / The U.S. Economy Is Doing Great. Why Isn't Housing?

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The U.S. Economy Is Doing Great. Why Isn't Housing? · Trumponomics

• 0:01
  Speaker 1: The U S economy is firing on just about all cylinders.
• 0:06
  Speaker 1: We say just about because one of the few sectors
• 0:09
  Speaker 1: that isn't doing so well is the housing market. Purchases
• 0:12
  Speaker 1: are slowing down, builders aren't building so much, and some
• 0:16
  Speaker 1: people are even reluctant to post their properties for sale.
• 0:19
  Speaker 1: Should we blame mediocre wage gains? Is it the Federal
• 0:23
  Speaker 1: Reserve's fault for raising interest rates? Or is something bigger
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  Speaker 1: going on? Welcome to Benchmark. I'm Scott Landman, economics editor
• 0:41
  Speaker 1: with Bloomberg News in Washington. Ten years after the global
• 0:44
  Speaker 1: financial crisis, America's housing market has come back somewhat, though
• 0:49
  Speaker 1: nothing like the gang buster's pace in the two thousands,
• 0:51
  Speaker 1: which was fueled by subprime lending and lax regulation, but
• 0:55
  Speaker 1: it seems to be stuck in slow gear compared with
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  Speaker 1: the rest of the economy. In fact, for four out
• 1:02
  Speaker 1: of five recent quarters, the residential real estate market has
• 1:05
  Speaker 1: actually dragged down the pace of GDP growth. Later on
• 1:10
  Speaker 1: the program, we'll talk about whether this cooling in the
• 1:12
  Speaker 1: housing market will spread and help trigger a recession like
• 1:16
  Speaker 1: it did in two thousand seven. But first, let's dig
• 1:19
  Speaker 1: into the details of why housing is slowing down. In
• 1:22
  Speaker 1: the US. Pressant Gopaul is a reporter in Bloomberg's Boston bureau.
• 1:27
  Speaker 1: He's been covering the national real estate market since two
• 1:30
  Speaker 1: thousand four. Pressant, thanks for being with us on Benchmark.
• 1:34
  Speaker 1: Great to be here. So Pressant, what's the number one
• 1:37
  Speaker 1: culprit behind this housing slowdown? Affordability? I'd say, but the
• 1:42
  Speaker 1: big change is mortgage rates. And how have those mortgage
• 1:46
  Speaker 1: rates changed? Okay, so you know a year ago rates
• 1:49
  Speaker 1: were probably if you think about your typical thirty year
• 1:53
  Speaker 1: fixed rate mortgage, it was about a percentage point cheaper
• 1:57
  Speaker 1: a year ago. So a lot of folks would say, hey,
• 2:00
  Speaker 1: mortgage rates are still affordable. Yes, that's true if you
• 2:04
  Speaker 1: look at it from a historic perspective. But think about
• 2:08
  Speaker 1: the fact that we have these home prices where they are,
• 2:11
  Speaker 1: and baked into those home prices are even lower mortgage rates.
• 2:14
  Speaker 1: So as rates rise, uh, you know, there's a potential
• 2:18
  Speaker 1: to maybe puncture the bubble a little bit. And why
• 2:21
  Speaker 1: has affordability become such an issue? Well, you know, if
• 2:26
  Speaker 1: you think about the kind of gains and home prices
• 2:30
  Speaker 1: we've had now for years, they have way of outpaced incomes.
• 2:34
  Speaker 1: So if you have sort of year upon year of um,
• 2:38
  Speaker 1: you know, in some areas skyrocketing home prices and wage
• 2:42
  Speaker 1: gains that are now are picking up a little bit,
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  Speaker 1: but still are nowhere near uh you know, seventy eight, nine, ten, eleven,
• 2:50
  Speaker 1: twelve percent year and your gains. And then you layer
• 2:55
  Speaker 1: on top of that jump in mortgage rates. Um, you
• 2:58
  Speaker 1: could see how affordability becomes an issue. But it's not
• 3:02
  Speaker 1: just the increases in you know, the prices that have
• 3:06
  Speaker 1: been an issue for home buyers. It's that there's just
• 3:10
  Speaker 1: so few homes on the market. Why is that right?
• 3:15
  Speaker 1: So builders coming out of the downturn, we're a little
• 3:19
  Speaker 1: battle scarred, so they were reluctant to kind of uh
• 3:24
  Speaker 1: sort of go gangbusters and build the way they did
• 3:27
  Speaker 1: in the last cycle. So they've been sort of, you know,
• 3:31
  Speaker 1: building modestly, and they were building more on the higher
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  Speaker 1: end and really where the demand is is on the
• 3:38
  Speaker 1: lower end, and that they were just aren't enough starter
• 3:40
  Speaker 1: homes in this country. So folks trying to leave their
• 3:44
  Speaker 1: apartments and you know, get their first house are going
• 3:48
  Speaker 1: onto the market and they're finding you know, houses you know,
• 3:51
  Speaker 1: excuse my French, like crappy houses that are you know,
• 3:54
  Speaker 1: houses in terrible shape, you know, maybe in their price
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  Speaker 1: range or you know, just nothing. So that's really the issue.
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  Speaker 1: And it's not just builders not really building at the lower,
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  Speaker 1: more affordable end, but it's people that won't even leave
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  Speaker 1: their houses after they've been living in them for a
• 4:12
  Speaker 1: long time. You've written about this, right, yeah. I did
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  Speaker 1: a story about baby boomers and in the generation older
• 4:20
  Speaker 1: than that sort of hanging on, aging in place. So there,
• 4:24
  Speaker 1: you know, why why move and sort of enter this
• 4:27
  Speaker 1: crazy housing market? You know, why not just kind of
• 4:30
  Speaker 1: stay where you are and add onto your house, etcetera.
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  Speaker 1: And so that's what a lot of people are are doing,
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  Speaker 1: and as a result, there are fewer listings on the market,
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  Speaker 1: and you know, you know, I wrote actually about a
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  Speaker 1: guy who was in Philadelphia, a twenty something who was
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  Speaker 1: riding on his bike knocking on older people's doors trying
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  Speaker 1: to get them to sell their houses. I don't think
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  Speaker 1: it actually works, but that that shows how desperate things are.
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  Speaker 1: And you know, the other issue now you have is
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  Speaker 1: when when mortgage rates rise, there's a lock in effect,
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  Speaker 1: so people who uh, you know, people just don't want
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  Speaker 1: to give up their great rate. Maybe they refinanced and
• 5:06
  Speaker 1: they got below four, so why sell and then have
• 5:11
  Speaker 1: to take on a higher orgite rate. Another issue that
• 5:16
  Speaker 1: we've heard about is the new tax law which went
• 5:19
  Speaker 1: into effect in January. Of course, it's called the Tax
• 5:22
  Speaker 1: Cuts and Jobs Act. It did cut some taxes, but
• 5:25
  Speaker 1: it actually went in the other direction when it came
• 5:28
  Speaker 1: to the deductions that people could take for mortgage interest
• 5:32
  Speaker 1: and property taxes, and those have been pretty favorable to
• 5:35
  Speaker 1: people in high cost areas, high tax areas, such as
• 5:38
  Speaker 1: the New York City region. How has this played a
• 5:41
  Speaker 1: role in the housing market this year? Right, So there
• 5:44
  Speaker 1: are some benefits to people who are who are wealthier,
• 5:47
  Speaker 1: you know, people in businesses, but so so there that
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  Speaker 1: that's a positive. But if you look at the housing market,
• 5:53
  Speaker 1: what it's done, it seems to be doing is driving
• 5:57
  Speaker 1: people out of these areas with very high taxes. You know,
• 6:00
  Speaker 1: Westchester County is sort of it's probably the place with
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  Speaker 1: the highest property taxes in the entire country. That's you know,
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  Speaker 1: just north of New York City, so that people there
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  Speaker 1: don't don't want to live there. I'm hearing about people
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  Speaker 1: who are now buying in Connecticut, which is the market
• 6:15
  Speaker 1: that was really in terrible shape. Buying there because the
• 6:18
  Speaker 1: taxes in Westchester are too high. Other people are just
• 6:21
  Speaker 1: sort of looking to establish residents in in in Florida
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  Speaker 1: where there no there no income taxes, and you know,
• 6:30
  Speaker 1: the property taxes are a lot lower. So that's driving
• 6:33
  Speaker 1: some wealthier people to maybe buy their retirement house early.
• 6:38
  Speaker 1: Let's go back to some of the issues facing builders.
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  Speaker 1: You know, something that we often hear about. It tends
• 6:44
  Speaker 1: to be more of a local story, but you add
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  Speaker 1: it all up and it can really have a national impact.
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  Speaker 1: Our our zoning laws or zoning rules at the local level,
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  Speaker 1: how does that affect how builders built and how much
• 6:58
  Speaker 1: they can build and what kind of houses they can build. So,
• 7:03
  Speaker 1: you know, thinking about where a lot of the development happens.
• 7:07
  Speaker 1: It's actually you can build in cities does tend to
• 7:11
  Speaker 1: be very dense developments, and but there's a limitation often
• 7:16
  Speaker 1: on how much you can build in the city. And
• 7:17
  Speaker 1: it's it's usually quite expensive to build in the city,
• 7:20
  Speaker 1: but further out in the suburbs and beyond that, and
• 7:24
  Speaker 1: the excerpts, residents don't like dense development. So they they
• 7:30
  Speaker 1: don't like it because they think it brings it adds
• 7:32
  Speaker 1: more you know, kids to the schools and traffic and
• 7:37
  Speaker 1: and just headaches, and so they just don't want it.
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  Speaker 1: So there's been I think, sort of a resistance to
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  Speaker 1: to do what probably would make some sense, um, just
• 7:47
  Speaker 1: just to bring in more affordable housing. Is this why
• 7:50
  Speaker 1: builders have to build large houses in the suburbs and
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  Speaker 1: excerbs and not, you know, they can't split up the
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  Speaker 1: lots into smaller lots and maybe build at you know,
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  Speaker 1: the four fifty thousand dollar houses instead of the one
• 8:05
  Speaker 1: one million dollar house. Yeah, I was just talking to
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  Speaker 1: the builder, was saying exactly that. So they're saying that,
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  Speaker 1: you know, they'd like to do a townhouse development, you know,
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  Speaker 1: just more dense development. But in some towns they actually
• 8:20
  Speaker 1: craft zoning laws in such a way that it sort
• 8:24
  Speaker 1: of directs development to larger houses and things like that.
• 8:28
  Speaker 1: The ways you can write it so it just only
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  Speaker 1: a large houseworks. So that that's kind of what they're
• 8:34
  Speaker 1: up against in some places. And what about the labor
• 8:37
  Speaker 1: situation with home builders? Is the tight job market and
• 8:43
  Speaker 1: the Trump Administration's cracked down on undocumented immigrants having an
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  Speaker 1: impact on developers ability to you know, to keep building,
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  Speaker 1: to build the houses that even that they're they're already
• 8:56
  Speaker 1: planning to build. I can't tell you for sure what
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  Speaker 1: I just hear builders talk about how the labor crisis
• 9:04
  Speaker 1: keeps getting worse, and you know, there was you know
• 9:09
  Speaker 1: that you can imagine that a lot of people are
• 9:11
  Speaker 1: in this environment from from Mexico in particular, UM may
• 9:16
  Speaker 1: not be eager to kind of come into the country
• 9:19
  Speaker 1: and take the risks of getting deported. So yeah, I
• 9:25
  Speaker 1: mean that only exacerbates the problem. You know, you have
• 9:29
  Speaker 1: this real desperate need for labor right now, and builders
• 9:34
  Speaker 1: are saying they would build more if they if they
• 9:36
  Speaker 1: had it. So person we we've talked about a whole
• 9:40
  Speaker 1: range of issues affecting the housing market here. You've covered
• 9:44
  Speaker 1: this industry, as we said, for more than a decade.
• 9:48
  Speaker 1: How does it look to you now compared with say,
• 9:51
  Speaker 1: in in the you know, the boom times in the
• 9:54
  Speaker 1: mid two thousands, Is it going to pick up from here?
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  Speaker 1: I know you can't make predictions, uh or these constraints
• 10:01
  Speaker 1: kind of really here to stay for for quite a while.
• 10:05
  Speaker 1: It's a little hard to say. I mean I covered
• 10:09
  Speaker 1: actually I was covering the housing market during the boom
• 10:13
  Speaker 1: last time around, and then I covered the crash and
• 10:17
  Speaker 1: I remember during the boom that you know, I wrote
• 10:19
  Speaker 1: actually a series of stories for this paper in New
• 10:21
  Speaker 1: Jersey about how this could be a bubble, and I
• 10:25
  Speaker 1: got so much pushback from the industry. They just didn't
• 10:28
  Speaker 1: believe that this could happen. And then you know, lo
• 10:30
  Speaker 1: and behold, maybe six months after my series, home prices
• 10:34
  Speaker 1: started to soften. Um. Now we're in a situation where, um,
• 10:40
  Speaker 1: I think there's a general kind of understanding that the
• 10:45
  Speaker 1: market is changing. I think I think maybe we learned
• 10:47
  Speaker 1: something from the crash, But in some ways, so much
• 10:51
  Speaker 1: of real estate is psychological. So if people start believing
• 10:56
  Speaker 1: that we're heading for, you know, a downturn, it could
• 11:02
  Speaker 1: it could bring on some of that. So so, you know,
• 11:04
  Speaker 1: it's hard to really know where things are heading. It's
• 11:08
  Speaker 1: hard to know. But for the latest news on the
• 11:11
  Speaker 1: housing market, Prashant, they should definitely follow your stories closely. Prashanco, Paul,
• 11:15
  Speaker 1: thank you so much for joining us on Benchmark. Thanks Scott.
• 11:50
  Speaker 1: Now for a broader perspective, we're joined by Elena Satyava.
• 11:54
  Speaker 1: She's a senior economist Bloomberg Economics in New York. Lena,
• 11:58
  Speaker 1: welcome back to Benchmark. Thank you. Jelia we just heard
• 12:03
  Speaker 1: from Prussian Kopal all sorts of reasons why the housing
• 12:06
  Speaker 1: market is not doing so well right now. How would
• 12:09
  Speaker 1: you sum up the reasons for this underperformance in housing.
• 12:13
  Speaker 1: I would say it's a case with many things in
• 12:17
  Speaker 1: the economy, there is no one single explanation. I think
• 12:21
  Speaker 1: the housing sector sluggishness stems from both supply and demand,
• 12:26
  Speaker 1: and I think that the most recent underperformance is likely
• 12:30
  Speaker 1: a result of a back up in rates and mortgage rates.
• 12:33
  Speaker 1: They went up by about a full percentage points points
• 12:38
  Speaker 1: since the beginning of the year, similar to what happened
• 12:41
  Speaker 1: back into douzen thir team when we had the tape
• 12:44
  Speaker 1: at Tantrum, So rates arose quite rapidly after Chairman Bernanke
• 12:51
  Speaker 1: spoke and spoke the market, so that the long the
• 12:54
  Speaker 1: long term yields went up and with them went up
• 12:57
  Speaker 1: the mortgage rates, and we saw or a consistent decline
• 13:02
  Speaker 1: in home sales following that episode. I think after this
• 13:07
  Speaker 1: time the increase in mortgage rates this time around, we're
• 13:11
  Speaker 1: gonna see a streak of weak economic data this year
• 13:16
  Speaker 1: in terms of sales and starts, and that will filter
• 13:21
  Speaker 1: into residential investment in GDP. However, despite all this short
• 13:27
  Speaker 1: term reasons. I think there are some structural changes in
• 13:32
  Speaker 1: the housing market, and there is significant shortage of labor,
• 13:37
  Speaker 1: for sure, and it's been a problem, and that has
• 13:41
  Speaker 1: been holding down the pace of housing starts in this cycle.
• 13:46
  Speaker 1: I think that is definitely into the the issues. But
• 13:49
  Speaker 1: I would also like to mention low productivity growth in
• 13:53
  Speaker 1: the residential construction sector, particularly in the single family housing,
• 13:58
  Speaker 1: So that's been an issue for white some time, and
• 14:01
  Speaker 1: I think that is also holding down the pace of
• 14:04
  Speaker 1: residential investment in this cycle. And there's been a structural
• 14:09
  Speaker 1: change in terms of how households organized, so people cohabiting
• 14:16
  Speaker 1: much more in this cycle, and it's actually not the
• 14:22
  Speaker 1: very cyclical thing. It's more of a structural change. And
• 14:26
  Speaker 1: I think there is some data from the Pure Research
• 14:30
  Speaker 1: Center and that shows that about the third of all
• 14:35
  Speaker 1: twenty to twenty nine year olds lived with their parents
• 14:39
  Speaker 1: or grandparents into thousand and sixteen. That is almost three
• 14:43
  Speaker 1: times as many as back in So So so millennials
• 14:48
  Speaker 1: living in their parents basement. That still hasn't changed a
• 14:51
  Speaker 1: whole lot. Absolutely, that hasn't changed, and I think it's
• 14:55
  Speaker 1: not going to change that much. People always talk about
• 14:58
  Speaker 1: pentamp demand from this, I think that is changing very
• 15:03
  Speaker 1: slowly and it's still a big issue. And I do
• 15:06
  Speaker 1: see this in my neighborhood as well, just anecdotally, so
• 15:10
  Speaker 1: I think we're still going to see that happening and
• 15:14
  Speaker 1: holding down the pace of housing demand. When when you
• 15:17
  Speaker 1: talk about higher mortket rates, is there any sector of
• 15:20
  Speaker 1: the economy that's so sensitive to rising interest rates as
• 15:24
  Speaker 1: the housing market. The good example is always auto sales,
• 15:29
  Speaker 1: so they also fluctuate with changes in rates, but I
• 15:33
  Speaker 1: think housing is probably the best example of the most
• 15:37
  Speaker 1: interest rate sensitive sector. And it's pretty clear that the
• 15:40
  Speaker 1: Federal Reserve is likely to continue raising interest rates over
• 15:44
  Speaker 1: the next year or so. Correct. Look, they're not gonna
• 15:47
  Speaker 1: stop to safe housing, that's for sure, so they have
• 15:51
  Speaker 1: the dual mandate, they have their financial stability issues. So housing,
• 15:57
  Speaker 1: after all, is only four percent of the economy, so
• 16:02
  Speaker 1: I don't think that they will stop doing what they
• 16:05
  Speaker 1: are supposed to do just to save the housing sector. So,
• 16:09
  Speaker 1: in other words, you don't think that the slowdown in
• 16:13
  Speaker 1: the housing market is likely to trigger any major disruption
• 16:19
  Speaker 1: in the broader economy the way that it did in
• 16:22
  Speaker 1: the mid two thousands that led to the housing crisis,
• 16:25
  Speaker 1: Is that right? Not really, So housing did not play
• 16:29
  Speaker 1: significantrol on the way up this time around, and it's
• 16:34
  Speaker 1: probably not gonna miss things up on the way down.
• 16:37
  Speaker 1: The thing that I really like to look at is
• 16:40
  Speaker 1: something called household debt to income ratio that plunged after
• 16:44
  Speaker 1: the Great Recession, and it has not shown any signs
• 16:48
  Speaker 1: of a pick up in this cycle. So basically, households
• 16:52
  Speaker 1: are not over leveraging, and that what really cost the
• 16:57
  Speaker 1: last housing crisis to large degree, and this is not
• 17:01
  Speaker 1: going to be a factor this time around. But it
• 17:04
  Speaker 1: wasn't just households over leveraging. It was also that all
• 17:07
  Speaker 1: kinds of crazy financial products that Wall Street created and
• 17:12
  Speaker 1: lending standards had gotten pretty low, that there was these
• 17:15
  Speaker 1: kind of hidden weaknesses in the financial system. Do you
• 17:18
  Speaker 1: feel that regulators and the FED have gotten more control
• 17:22
  Speaker 1: over these issues and that that Wall Street hasn't gotten
• 17:26
  Speaker 1: quite as out there in in the products this time sure? Well,
• 17:31
  Speaker 1: obviously it's a much broader issue, and there are always
• 17:36
  Speaker 1: some unknown unknowns right that can cause the next crisis.
• 17:40
  Speaker 1: So nobody is going to guarantee this time is not
• 17:44
  Speaker 1: going to be an issue. But I think in terms
• 17:46
  Speaker 1: of how to compare the situation right now to what
• 17:51
  Speaker 1: we saw back in thousand five and leading to the
• 17:55
  Speaker 1: housing barts. It's definitely much better this time around than
• 17:59
  Speaker 1: The FED is really watching very closely the situation and
• 18:04
  Speaker 1: all the financial stability metrics, and the regulation, as you mentioned,
• 18:09
  Speaker 1: has definitely taken care of a lot of things that
• 18:12
  Speaker 1: went wrong back in douzen five six and going into
• 18:16
  Speaker 1: the recession. So you're saying, you, Lena, that it's a slowdown,
• 18:20
  Speaker 1: but it's going to be a boring slowdown this time right. Well,
• 18:25
  Speaker 1: the way to look at it is that residential investment
• 18:28
  Speaker 1: has added a few tenths of a percent to economic
• 18:30
  Speaker 1: growth each year since two thousand twelve, and residential investment
• 18:36
  Speaker 1: is projected to subtract this year from economic growth. And
• 18:41
  Speaker 1: this this will be the first year of residential investments
• 18:46
  Speaker 1: subtracting from growth since two thousand and ten. But again,
• 18:50
  Speaker 1: this will be a very small subtraction. It's not gonna
• 18:55
  Speaker 1: really change things, which is basically economic growth is wrong.
• 19:00
  Speaker 1: The economy remains a robust and consumers are leading growth
• 19:05
  Speaker 1: in the economy. All right, on that optimistic note, let's
• 19:08
  Speaker 1: end it there. Yelena Slativa, Senior US economist at Bloomberg
• 19:12
  Speaker 1: Economics in New York. Thanks so much for joining us
• 19:15
  Speaker 1: on Benchmark. Thank you, it's been a pleasure. Benchmark will
• 19:22
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