Latest / Real Investor Radio Podcast / Episode 14 | Latest Housing Stats with Logan Mohtashami
Transcript
- Craig You're listening to Real Investor Radio with Craig Fuhr and Jack BeVier where we cover advanced real estate investing topics to help you stay ahead of the curve in your real estate investing business. Hey, welcome everyone to Real Investor Radio. It's Craig Fure and Jack Bevere. Jack, welcome. Good morning. And we're excited this week because we're joined by Logan Mohtashami of HousingWire. He is the lead analyst for housing wire writes the weekly housing wire tracker and is often, um, uh, frequented on YouTube. You can see all their podcasts, amazing content, uh, coming out almost daily by, I would think daily by, uh, Logan. We, it is mandatory reading for Jack and I, uh, Logan is also a frequent guest on CNBC, the New York times and the Washington post Logan. Thank you so much for doing the show. It's great to have you. Logan Pleasure to be here with fellow nerds. Yes, we are a podcast for nerds by nerds. Jack and I, when we sat down to do this, I have to be honest, I was a bit reluctant, but when Jack said, look, I wanna do advanced topics, deep dives for real estate investors who really care. I love that because my heart, Logan, has always been with sort of the Main Street guys. Craig Jack and Fred have obviously built a much larger company than just the average Main Street investor. So welcome to the show. It's great to have you we're going to talk we're going to talk today about I believe all of the issues that are affecting guys down at the Main Street level. So if you're listening along with this podcast, welcome, welcome. Let's go ahead and jump in. Jack, how are you? Doing good, doing good. I'm super excited to have Logan on today. So Logan, I recently saw you on a podcast, a housing wire podcast. It was fantastic content with you and Greg Crennan. It was a debate, essentially a debate that you all were doing on the market, where it's going, um, and you're feeling sort of on the fundamentals. Um, and I think that's a great jumping off point. Uh, if you're cool with that. Um, absolutely. I'm, um, Logan My work, I would say this, I've been doing this for over 13 years now. And I'm strictly based on like real economic models, things that actually matter with housing. And what I've seen, I would say for the last 12 years, is that a lot of people that talk about housing actually aren't housing people. They're, they have a lot of what I call speculative theory. And you can actually tell this by two very key points. Number one, if people aren't forecasting housing every single year, I'll be dead honest. You should not listen to them. We have a lot of people in this country who actually never forecast housing, or they just make up stuff. And number two, they have to provide some kind of model for their work. So much that you would actually easily understand it, and then this way the data can speak for itself, not the person. We have a, we have a lot of people in this country where the people, the person itself is actually the talking point, not the data. Uh, and this is, you know, uh, a great example of this is last year, everyone went into the home price crash stage, uh, just because they saw pricing getting weakened in the second app. They didn't talk about inventory levels or the 10 year yield or purchase application, nothing, they just assume everything was 2008, uh, for us at housing wire, I. We're very blessed and fortunate. Altos Research and HousingWire emerged. I have access to all the data in America up to the week. It's not fair. And I think that new listings data is very key and is something very few people have access to. And new listings data has been trending at the lowest levels ever recorded in history for over 12 months now. So I think. You wanna follow people that actually have access to the data and can explain it as well. Yeah. So when, when I talk about, you know, following housing people that, you know, there's, there's very few people in the country that I even would remotely just listen to just because you could see that, you know, people that track data and people who don't actually track data, there's a big divergence in what they talk about and what data they show. And unfortunately, housing is like the industry outside of the stock market, maybe where a lot of people just make up stuff or they have speculative theory. So. I think what the work that we did in housing wire, especially toward the end of last year, where we're trying to like convey to people that the market was changing, but you're not going to see it until a few months. That's the benefit of I think our work because we're so forward looking. And you know, with Altos Research, Mike Simonson and myself, I think, you know, we've got the two best housing analysts working in their one shop. And our job is just to relay the data as real time as possible with. a kind of an economic model specifically tied just to the housing market. Craig Fuhr (01:07.542) You know, I love your I love your data driven approach. I think Jack is very similar in that sense, and I feel like I've been listening to a lot of sort of disparate opinions lately, and it feels to me you could create a story for any theory that you have at this point, you know, like if you. logan (01:30.077) you could get rewarded also for, you know, for making stuff up. Oddly enough, I think just for me, generally, I always say that the housing bubble boys are kind of like the same group of people for 12 years, and they've been wrong for so long that, you know, the broken clock theory is in now, you know, a broken clock has more economic gain than these people. But, you know, for me, it's, I try to get as much live debating as possible. Because if you don't know what you're talking about in a live debate, the person's going to like scare you in front of everyone. So that's kind of my tactic just to because I feel like in that way, people can actually get real time information. And again, for us, it's very simple new listings data, active listings data, mortgage rates, 10 year yield purchase application data, where the economic cycles, all the variables that kind of would work with every housing cycle. Craig Fuhr (02:04.151) Yeah. logan (02:25.061) Uh, especially post world war two and, uh, things were so crazy during COVID that if you really don't have access to the data or track it, it's you're going to get lost anyway. And then kind of doom porn, you get, you know, points for that or viewership for that, and, uh, we're here today. Prices are at all time highs again. And my job is to explain why I care about the Y more than the final answer. So that's relatively what my work is always about. Craig Fuhr (02:55.694) Jack, if you don't mind, maybe we could just maybe put some brackets around today's conversation. You know, bigger, bigger issues here, the recession, maybe looming recession, supply, where's it gonna be coming from? And I love how you talk about sort of the new inventory channels, Logan. You know, credit, how are we going to fund our deals? And then sort of maybe the changing demographics that we're seeing in terms of buyers. That might be a good jumping off point of just some of the bigger issues. So yeah, go ahead, Jack. Jack BeVier (03:31.111) Yeah, just generally speaking, Logan, like our audience is really, you know, active real estate investors who are operating a real estate investment business. They're either investing for their own portfolios. So they're interested in what's going to happen in terms of inventory levels and credit markets, or they're flipping into the owner rock market. And, you know, and they're bar, but they're also borrowers for that as well. So, I mean, to your, to your, to your point, so what, so what do you think is going to happen? And, and, you know, 24 months from now, it doesn't, No, no one can plan their business frankly that well 24 months from now. People are, you know, we're interested in like what's going to happen in the next three, six and 12 month timeframes. So what's your crystal ball saying? logan (04:12.777) So what do we know now for a fact is that new listings data for three years in a row has been trending at the lowest levels ever recorded in history. So that only changes by two variables. Either you get a job loss recession that forces people to list their homes and sell, or mortgage demand stays high enough, long enough to kill demand that... we can, you know, get active listings to go, but you're still dealing with a very small crop of homes that are out there. So until new listings data starts to take off, we're stuck in this low inventory environment. And for me myself, my whole thing is that credit channels run inventory channels after 2010. This has been my big work for over a decade. And what I mean by that is, if people go back to the year 2000 to 2005, we had booming home sales off of credit. But we also had active inventory growing for five years. Not a lot of people know this, but inventory, if we want to use the NAR data to keep it simple, inventory was at 2 million active listings in 2000. It got to 2.5 million in 2005, but we had booming sales and rising inventory. And then the credit markets collapsed, home sales collapsed. And in 2005 to 2007, we saw this massive increase in inventory from 2.5 million to 4 million. We sit here today. After the biggest home sale crash ever recorded history for one year, an active inventory NAR is 1.1 million. We're like 50% below what a normal year would be going back four decades. So why did this happen? It's because after 2010, majority of the homes bought by owner occupied people are 30 year fixes. And also that means that they can't freely list their homes. unless they qualify for the house. So my talking point is majority of sellers are buyers, 75 to 82% of them. Of course, investors are selling for a different reason. So people just are living in their homes longer and longer. From 1985 to 2007, it was five to seven years, housing tenure. From 2008 to 2023, depending on who you listen to, it's 11 to 13 years. In some parts of the country, 15 to 18 years. For myself, I'm gonna live in my home 20 years next year. logan (06:37.817) So the turnover of housing is not as much as people think. So then you have the fixed debt cost rising wages premise. Why homeowners are doing so good now is they buy a 30 year fix every year their wages rise. And then all of a sudden inflation is here. It's been so long that we've had to deal with inflation that I think people forgot. Your best hedge on planet earth in America was an American 30 year fixed mortgage. Other countries don't have this. You know, so your wages rise more during an inflationary period, but your total payment is the same. So all these homeowners have been living in their homes for years. Their wages have been rising. And then all of a sudden, their wages rise more. They've already had low payments anyway. They're sitting very good. So that makes that home even more valuable on the cash flow side of things for them. So when mortgage rates spiked up from three to seven percent after home prices went up. My premise is that inventory is not going to grow like people think it could only grow through weakness and demand. And then last year came. And then for us, the best way for us to explain last year is we have single family active listings. And every conference I speak to, I go, does anybody know how low we were on active listings in March of 2022? And nobody knows the answer to that. I said, we only have 240,000 single family homes in a country of 335 million people. with 156 million people working. You wanna know why price has escalated out of control is because we have too many people chasing too few homes. And then mortgage rates spiked up, we had the biggest crash in sale. And all that did was bring us still to near active listings being all time lows. I think. You know for the Altos research in 2015. I always highlighted in the tracker We had 1.2 million single-family list that was 2015. That wasn't a big inventory year either We're a little bit above 500,000 so the same principle is 335 million 156 million people working. We have 508 single-family 508 thousand single-family homes out there. So we still are starved for active listings and that explains why logan (08:53.009) The United States of America, the only country where home prices have already gone past all-time highs from last year. Too many people chasing too few homes. The credit profiles of American homeowners have never looked better. And I say this as somebody whose family's been in banking since the late 1950s. You're never going to see more prettier charts than the American homeowners credit profiles. Jack BeVier (09:17.451) So we had this interesting situation though that I don't think we'd seen before, where by the third quarter though, we had still those very low levels of active listings. And yet because of the increase in cost of capital and the affordability headwinds that created, it used to be this benchmark that we're not going to have decreasing housing prices until we have six months of inventory. In the third quarter of last year, we found ourselves in an environment where we still had two months of inventory and yet housing prices had stalled and in many markets, in many higher end per square foot markets, started to actually decline in certain markets. That heuristic of the six months of inventory just got blown out of the water and I think it just made everybody's head spin because they were like, wait a second, I thought I had six months or at least four months, right? to prepare my business for the idea of stalled or even decreasing housing prices. And this heuristic just got tossed out of the window. logan (10:26.097) I'm not a big fan of the six month theory. I think four months on a national supply basis is where I would focus the national data on. But my whole thing is the savagely unhealthy housing market was this premise that if home prices escalate out of control, and I have my own model specifically tied for years 2020 to 2024, if home prices only grew 23% in five years, we'd be okay. But this five year period of time is going to be so different than other decades. If home prices escalate out of control, affordability overrides supply. If demand is falling. And that's the key. Uh, last year we started the year at 18 to 20% year over year growth before rates went up, uh, and then we had this unbelievable event where mortgage rates. We were living off a cycle where rates were raging between three and a quarter and 5%. So the stock of homes all of a sudden had to deal with three to 6%, six to 5%, 5% to 7.5%. And it caused so much chaos that the homes that were on the market were still basing off of a housing market living off of a sub 4% world, not a 7% world. And that... me is where pricing got very weak. Even if active inventory was low, and even supplies were, the stock of homes that were out there that needed to sell could not have taken a shock on a payment like that. But if mortgage rates fall, and then we've crashed sales so much that we're dealing with what I call is the 4 million base level in America, it's really rare after 1996 to go below these home buyers are different than the ones that were at six and a half million. So last year was so chaotic. That was the craziest period ever. And that's how I explain why home prices got weaker in a very short amount of time, even with active listings, because even if you had a very small amount of homes in any kind of market, when you have a payment shock like that, it's the biggest payment shock in history. You cannot price your home based on a sub 4% Jack BeVier (12:15.03) Mm-hmm. logan (12:40.329) uh, housing market, compare it to a 7% housing market, the total cost of, of acquiring that shelter, the buyer pool comes down less and less and, uh, home sales in an odd way. It crashed so much so fast that we're stuck here at this very low level. We haven't even broken under 4 million home sales all year. That was the low point that we had. Uh, the home buyers now are a little bit better suited than the ones that 6.5 million. So that's why I always said once March came, the housing market dynamic shifted because rates went up and prices went up so much so fast that even in a low inventory environment, affordability trumps supply. But that was the biggest total payment shock we've ever seen in history. So at a highly abnormal event, but in retrospect, everyone has to have their own kind of affordability model. Mine's actually broke right in March of 2022. But home sales crashed so much. that we got to a level where demand on a national basis just stabilized. And in a stabilized housing market with inventory low, the dynamics of pricing change. And that happened in a very, very short amount of time. One way to explain this, we had like a four-year housing cycle happen in four months. And that's not normal. But that's the speed of what happened really through everyone for a loop. And this is why inventory levels... are protecting the national data, but in certain parts of the country, affordability trumps all of that. You know, Austin is a really good example of that. Austin is back to 2019 inventory levels. It's different than the nation. There's 108,000 cities in America right now. So there's a few cities that don't fit that model, but other places, there's hardly any inventory and whatever comes onto the market, there's enough buyers there to still have bidding wars. But somewhere like Austin inventory level, like 2019 inventory levels to me changed the ball game on a national level, except we're nowhere close to there yet. Craig Fuhr (14:47.266) Jack, I want to speak about a real quick about a data point that I saw earlier this week where the NAR reported that only 23% of available homes are actually affordable right now for average buyers. That's actually down from 50% last year. So it now takes an average salary of about $100,000, $104,000 to buy a house, much less maintain it was the report there. And so yeah, affordability appears to be the guiding topic. right now. logan (15:19.161) Yeah, my afforded my affordability models just broke just completely shattered. I lost the price index of my affordability model at the end of 2021. So all I was waiting for was the 10 year yield to break above 1.94%. And then the structural dynamics of housing and we're still here at 4 million. And it's just there's a certain group of home buyers. It is in this country. What I call them the dice double college educated dual household income. Jack BeVier (15:19.339) The, good. Craig Fuhr (15:23.714) Thank you. logan (15:48.041) They easily can still buy homes. Dual household incomes changes every variable. Assuming you know you need $108,000 to buy those two household incomes, median incomes, there you go. So that's why we still have, I mean we're gonna have near 5 million total home sales this year. Jack BeVier (16:07.223) So like to that point, like I feel like the, for me, the, the way I've been thinking about it is that the housing market shrunk considerably, right? Like everybody who's got all the, all the existing home sales are down tremendously and everybody who's got a 3% mortgage is basically on the sidelines. So like all that inventory, all the liquidity that used to come and all the transaction volume that used to come from existing home sales is largely off the market. And now new inventory is going to be death and divorce. and new construction and the homebuyer side of things is just the first time homebuyer. And so you've got a much smaller market and so it's a lot, it's frankly, it's like a weaker market because there's less liquidity because it's just death, divorce and new construction versus new home buyers from the supply and the demand side. And as a result, one of the things that the concerns mean, I'd love to get your thoughts on this is that in a, with that much smaller. level of transaction volume and much lower supply and lower nominal levels of demand. I feel like you've got like from an elasticity point of view, it's a potentially and probably much more volatile market than we're used to experiencing. And one of the things that I'm concerned about or curious about what's going to happen is that, and that I think this dovetails to an issue that the Fed has. is that if we do see a decrease in mortgage rates, is there so much pent up demand from home buyers, for those first time home buyers, because they've been driven primarily by affordability issues that all of a sudden housing prices pop. And then the Fed says, oh crap, you know, inflation's back up because of housing prices. And so the Fed's got this like vested interest where they're stuck. They can't keep inflation down without keeping. affordability poor. logan (18:06.081) Here's one thing with the Fed. Home prices actually aren't part of the inflation indexes for them. It's rent and shelter inflation. The history of global pandemics, literally when COVID happened, I had to go back and start getting my pandemic economic mindset in play. Rent inflation always there's always a disinflation period. Rent is the only thing that goes into the components of CPI or PCE. Home prices don't. And a good example that I try to explain to people, during the housing bubble years, we had massive credit growth, massive home price growth. Inflation was tame there. I mean, we rarely even got core inflation above 2%. That's because rents were tame. So the home prices... Let's assume that rates fell back down to 5% and home prices were escalating. The Fed can't mandate their policies around home prices because that goes against their dual mandate actually. Price stability on the inflationary data that doesn't account for home prices and employment. So the growth rate of inflation falling, a lot of that is supplying a lot of sectors are coming back to normal. but they don't and not only our Fed, but the Feds around the world's try to stay away from home prices because it doesn't actually fit into any of their dual mandates. And that's part of the problem as well, is that if the inflation growth rate falls down, the Fed is already talking about rate cuts next year. The only reason they're doing this is because they believe where rates are right now and where inflation is, they're very restrictive. Well, so they wouldn't talk about this for the last year, but now they're finally saying, well, if the growth rate of inflation falls, we could start cutting rates a little bit, nothing big, but just to keep the economy going. And if jobs are being, well, in their eyes, they look at real yields. That's where, let's say the Fed funds or the 10-year yield is, where the growth rate of inflation. So if inflation's at eight, 9%, they still have a problem, inflation too high. Jack BeVier (20:15.967) because they're concerned about employment, because... logan (20:30.685) But inflation is falling where yields are right now. If you go look at the history, the Fed is very restrictive right now. So assuming that inflation falls even more, they don't wanna be too restrictive under their own model. So they said, listen, even if we don't have a job loss recession, we're gonna cut rates to get back down to restrictive policy, not super restrictive. Because if the jobless claims start to break, the 10-year yield goes lower, rates go lower. They can't do anything about it. And then it goes into their dual mandate and then employment is what people care about the most. And then mortgage rates go down on their own on that side. We saw that happen last year where we got mortgage rates under 6% again, banking crisis, everybody thought, okay, the recession is here, here we go again, we're having a credit movement. Mortgage rates fell even though the Fed was hiking rates, but jobless claims didn't break. So to me, the whole economic cycle. is based on where jobless claims data today, we got it again, it was good. The labor market is still very strong in that sense. So the labor market will front load mortgage rates and will override what the Fed does. And if the labor market breaks, it goes back to their dual mandate. If the growth rate of inflation is falling and then the labor market breaks the history of inflation, it doesn't hold up well, especially now with the supply increasing in a lot of areas that the Fed has. focus their attention on. Craig Fuhr (21:56.546) How do you, how do you square? Jack BeVier (21:59.364) Let me press you on something. Given the dual mandate of keeping inflation in control and maintaining healthy unemployment levels, if the American consumer is strong enough and the jobs market stays strong, why do we think that the Fed's going to decrease rates? I feel like there's this narrative in the media of next year, where it's just a matter of time, as if the Fed wanted to decrease rates. And my thought is that if jobs are strong, and inflation has gotten under control, and they don't cause a recession with these current interest rate levels, as the Fed decreases rates, that's just them taking bullets out of the chamber for their ability to keep us out of a recession in the future. Right? There was an issue. seven, eight years ago where they were like, hey, we're at super low interest rates here. If we have a shock and adverse thing to this system, the Fed can't do anything about it because they're already really close to zero. For me, the higher the Fed sets rates, it's giving them more tools in the bag, more bullets in the chamber to be able to do their job on a going forward basis. Why do we think they're going to give up ground on that? jobs stay strong. logan (23:25.481) Well, they're starting to talk about that right now. The reason they jacked up interest rates so fast so soon is that they gave everybody a model on real yields. And they said that we finally believe where inflation is at, we are actually in restrictive policy. So if the growth rate of inflation falls, they don't want to create a recession by being more restrictive. So they're laying, yeah, on their historical models, if that occurred, they're being super restrictive if the growth rate of inflation falls more. So if the growth rate of inflation is not falling, they could stay here. But when I talk about rate cuts, I'm talking maybe half a percent or 75, nothing big, but they're laying the groundworks because for the first time they said, okay, we are finally restrictive on our rates. And the only reason they're saying that now is because Jack BeVier (23:54.903) because they think that they're gonna create a recession. logan (24:23.333) when headline inflation was at 9%, that's not a topic. When headline inflation is under 4%, that's different. And they don't want if the labor market breaks, they the bond market will cut rates for them. You know, so in that case, they've even talked about this that they say that, well, if long year long term yields fall, a lot of our work will be done because housing will rebound. But eventually, if people are losing jobs, they're cutting rates because the forward looking inflationary data gets lower because less people are working, the labor supply grows, the growth rate of inflation traditionally falls in that environment. So right now they're trying to thread the needle. But for the first time, they've never talked about cutting rates before. But if the models that they show us, they are said, okay, we are very restrictive because we shot rates up faster than any time in history. And we did that just for keeping rates here, and then we're going to try to manage it. So when I talk about cutting rates, it's not much. But the growth rate of inflation is no longer at 8%, 9%. It's sub 4%. Core inflation itself is going to be in the 3% level. They're just going off of their own historical models. That's why this conversation is happening now. It couldn't happen last year because inflation was too high. jacking up interest rates so much so fast and one of the things like one of the things I've always told people why I don't believe in the 1970s inflation is that the bond market would have already been at 10% already. The 10-year yield would have been north of if they if everyone believed the 1970s inflation was here oil would have to be like $350 if you do inflation adjusted. Wages would have to compensate for all the inflation put in. It's a global pandemic. The history of global pandemics are very similar, you have this major inflationary period, and then the disinflation because all the things that were pressed due to supply constraints of a global pandemic start to come back to normal. And then everyone is back to same now. War makes things a little bit more complicated. Of course. Yes. Yeah. Yeah, yeah. So, yeah, the Craig Fuhr (26:35.05) Yes, there you go. There's always one other piece of a pandemic that we're not talking about here. Always. logan (26:43.961) What we saw as soon as the Russian invasion happened, oil prices took off and wheat prices took off. The history of war is very inflationary, especially World War II when you have to rationalize how much food could go where. But wheat prices have come down a lot. As long as the Russian situation doesn't get out of hand and supplies of everything to grow up, the growth rate of inflation can stabilize. Jack BeVier (27:07.915) Thanks. logan (27:12.029) So when the Fed is talking about, okay, we can cut rates next year, it's more or less than they're just tracking where the Fed funds rate, where the 10-year yield is rate, and where inflation is at. And there's this little sliver of room that they can cut, but they're not cutting rates back to zero or anything like that. The only way that happens if you have like jobless claims break and the job loss recession, and that goes into a whole different other category of conversation with housing, because one of the things I try to talk to people, people go, well, Well, if people are losing jobs, who would buy homes? So during COVID, I was the crazy person on April 7th, 2020 that wrote a COVID-19 recovery model. And I just started working for HousingWire. And they actually said, should we even publish this? I mean, you're saying that we're going to recover this year. I said, oh yeah, we're going to recover. These things are all going to happen on these certain dates. And even my economic friends kept on telling me, why do you think housing demand is going to come back? 20 to 30 million people were unemployed. I said, yes. And you have 5 million in forbearance. So 35 million Americans were off the grid, couldn't buy homes. And then I said, but look at the army behind me. I have 133 million. My army is bigger than yours. If rates fall, the history of housing demand after 2010, rates fall, demand picks up. We were at 4 million. housing demand recovered in seven weeks, right? So when we see the next recession, if the traditional cycle goes where bond yields fall and mortgage rates fall, can we keep that 4 million housing demand stable? My argument is that we've seen nothing in history that says that shouldn't occur, but that means mortgage rates have to fall because now we have 156 million people working. So assume you lose the 2 million that the Fed is willing to... you know, have sacrificial lambs for, to beat inflation, that's still 154 million people working. So that'll override any job loss recession, but it really matters if the 10 year yield falls. And that's, that's how I try to explain the COVID-19 recovery model. And how I'm going to talk about the next recession is that you have to account for the people that are off the grid, and then the people that are still working. And the, this is where the demographic story really kicks in for housing. logan (29:34.821) years 2020 to 2024 is a once in a lifetime event for the US. We have the best housing demographic patch ever in history. It's never going to be like this ever again ages 28 to 35 are the biggest in America. I call them replacement buyers. So they're in the system. So you look at move up buyers, move down buyers, cash buyers, investors, first time home buyers, you put it all together, you still could get that 4 million base buyer in there every year. And this has always been the case after 1996, as the civilian labor force has grown and the total workforce has grown. But the affordability issue is the problem. And that's why the whole savagely unhealthy housing market theme was created. Prices escalated out of control, not because we had record breaking demand or anything like that. We just had too many people chasing too few homes. It's a very difficult problem to solve unless people lose their jobs. Craig Fuhr (30:29.196) So Jack, I just want to jump in real quick here because I, you know, that are you working on the re the recession recovery model right now? So I always look at like, I think what I have a problem with sometimes is that there's, there's a couple of different scenarios that we're working with right now. There's financial panics and there's recessions. And I think they're two totally different things. And I feel that there is a global liquidity price, a crisis happening in credit right now. And I think it's only coming. So in 1998, we saw a financial panic. In 1990, we saw a recession, but no financial panic. In 2008, we happened to get them both. What are your feelings on sort of where we're going globally in terms of monetary policy, credit, things like that, and how that's going to affect the market, not just the recession, but sort of the, the credit, the looming credit crisis. logan (31:28.029) So I have a recession, six recession red flag model. The conference board, which is the institution America that created the IMF, the World Bank, they actually asked me to present my model to them last year. And one of the things that I've told them is that my six recession red flag model is gonna finally get hit on August 5th, 2022. So when that happens, the next stage is What gets us to the situation to where jobless claims breaks? Because you can't have a recession until jobless claims break. So what do we know right now? Household credit still looks great. The majority of homeowners, their credit profiles look awesome. 42% of homes don't even have a mortgage. So they're okay. What we see is renters though, uh, don't have the inflation hedge nor the, uh, base pay wage. What they do have is on the lower end, their wage growth really kicked up. Craig Fuhr (32:00.968) So, I'm going to go ahead and start the presentation. logan (32:23.657) for the first time in a long time. So wage growth really helped the lower end income start to consume goods a little bit better than the previous expansion. But eventually over time, what happens is higher rates, credit getting tighter. I would argue that we've already seen credit get tighter in the regional banks, and that's impacted the jumbo housing market. And the spreads in the mortgage industry actually got worse after the Silicon Valley So we're already seeing glimpses of this. What isn't gonna happen because the Fed could control this, the Fed believes it could burn out any fire they want after what they did in COVID. They feel like they can go into any marketplace, buy up any amount of debt, they could save any bank because they did that during the most craziest time in the US economy prevailed. This is why they talk about we can have a soft landing, but the unemployment rate can't get above 4.75% Craig Fuhr (33:07.979) Thank you. Jack BeVier (33:12.087) Thanks for watching. logan (33:21.565) They believe any marketplace with credit, they can step in if they wanted to. Now the question is, will they at that point, especially if inflation is still an issue, that's a question we'll have to see get answered when the jobless claims data break. But it's a different marketplace because the 2004 leverage laws that allowed firms to leverage up 40 to one and get credit in trouble, That's back to 10 to one and the banks that are getting in trouble just didn't have proper hedges and there's a lot of banks that are sitting on losses but they're unrealized losses. They believe they can manage that. Other countries around the world are dealing with issues like Europe is still dealing with inflation because food, energy, they're not as energy reliant as us. We have a lot of domestic production at home, natural gas, stuff like this. Europe is in a different problem because their demographics aren't as good as us. China is in a different problem because their demographics is not as good as us. Japan has a different issue because their demographics is not as good as us. The US has this unbelievable advantage where our population growth is, even though it's slowing, it's still rising. But we have a lot of young people. The millennials and Gen Z combined are bigger than the total population of Japan. We have what we call replacement consumers. The The credit side is the Fed is ready to step in and just fix any bank that goes under. And I think what happened earlier this year is that when people saw Silicon Valley Bank and all these banks go under that were in business for 100 years, whatever, just go out like that, they assumed they would spread. The counterparty risks right now are small compared to, let's say, 2008. So the Fed just feels like any emergency that can happen, they can go in. just like they did in COVID and that'll minimize. And this is why they think we'll keep rates as high as possible. And then if people are losing jobs, we could do some things to alleviate that pain. But again, a lot of that is depending where rates and inflation are at that point. And that was part of their, that was their mindset to raise rates so much so fast, to keep it there for long enough to get the growth rate of inflation to fall. And so much of inflation is rent. logan (35:48.317) 44% of core CPI is shelter inflation, 25% of that is residential rent. And the growth rate of that is slowing just like it does in every pandemic. And then of course, in the apartment sector, we've got a million apartments coming online. I don't know, I don't believe that's all those things are gonna get finished at this stage. So they're kind of, they feel okay with the situation, but as long as jobless claims doesn't break. Craig Fuhr (36:06.162) So, I'm going to go ahead and start the presentation. So, I'm going to start with the presentation. logan (36:16.125) the US doesn't go into recession, the Fed could keep rates as high as possible for longer to get their growth rate of inflation down. Jack BeVier (36:23.739) I get the point about the, the fed thinks that they can fix whatever bank failures or, you know, whatever perversions might happen there. But if you're the banks though, you don't want to be that guy. Right. So I feel like, you know, how do you feel about the banking industry, how they're going to fair in this, you know, cause the fed doesn't, you know, you know, to your point, like, Hey, if someone mismanaged their balance sheet and they bought a bunch of MBS in 2021, The feds basically like screw you. Like we don't, you know, and you go down because of that or you can't make enough money in the meantime. Like go do a capital call, go raise equity or we'll put a gun to your head. We got, you know, the plenty of big banks who are ready here to take your deposits and make it a safer overall system, though probably more concentrated. But those regional, those main street banks and regional banks as a result, I feel like, yeah, the system's not at risk, but they may be. Right? Like those individual players, though, I would hate, you know, it's not a fun time to be a bank stock owner. You know. logan (37:22.145) and they would say that is the function of capitalism. And if you take the risk is don't properly hedge and your banks go out, welcome to America. That's how the capital system works. And I think hedging the risk, a lot of people just didn't believe the Fed would actually raise rates that fast to that point. Yeah, nobody, the people just assume that, okay, Jack BeVier (37:45.335) Mm-hmm. Everyone got caught with their pants down. Yeah. logan (37:52.109) As rates got to two to 3%, they're like, there'll be done soon. 4% they're like, Oh my God, I'm not hedged for this. And, uh, that's, that's what happens. So they're the regional banks are in a different, uh, structure than I would say the, uh, the big commercial banks, but the unrealized losses are there. The fed knows this, but then we have to talk about the commercial side of everything, which it's like a slow moving death ball coming at everyone. We all know there. And. Craig Fuhr (38:17.117) and I'm going to be talking about the things that we need to do to get the best out of the world. So, I'm going to be talking about the things that we need to do to get the best out of the world. So, I'm going to be talking about the things that we need to do to get the best out of the world. So, I'm going to be talking about the things that we need to do to get the best out of the world. logan (38:22.213) It looks like to me, you know, things will be extended out. Uh, things are going to be sold at 15 to 21 cents to the dollar to get off the books. And those banks, the credit availability of lending gets less and less. Jack BeVier (38:38.503) So let me ask you about that specifically. Do you think though, like that things will be sold for 15 to 21 cents before the Fed actually is the one with the gun at your head? Because my thought is that there is such a super strong incentive to just kick the can and kick the can and kick the can that why would you, though yes, there are embedded losses. And if the Fed just lets you exist, then why would you ever recognize them? logan (39:05.421) Some of the long-term debts that are tied to commercial or corporates or even consumer, they don't mature anytime soon. But eventually the bill comes due. So it's really, I mean, we've had banks already take losses on those loans. It's just that it's, we're like years away before a lot of these things actually mature. So everything is just slowly moving until that final date. And you're already actually seeing like... Craig Fuhr (39:07.565) Thank you. Craig Fuhr (39:14.432) So, I'm going to go ahead and start the presentation. So, I'm going to start with the presentation. logan (39:34.241) lenders extend out some maturity on some of these on some of these loads to figure something out. So I think that's the difference between we saw the credit markets actually break in 2005, six, seven and eight before the job loss recession, you know, the consumer side, and then the leverage side was already there. Here, we're all waiting for the commercial because the consumers find on that sense, the auto loans are delinquencies arising, but you know, the commercial banks are capitalized against that. But here's this commercial thing, and it's just so slow. And you can push things out until that final due date is there. And then they'll push it out even more. Yeah, they'll push it out. Yeah, they're gonna push it out more and more and more until there's a job loss recession, then the Fed could cut rates. And then that's it. I mean, this is this is one of the difficult things to Jack BeVier (40:14.295) But she can extend. Yeah, but they'll keep, I just think they're just gonna push it out even more. Like... Jack BeVier (40:26.004) Right. logan (40:28.545) explain to people because people go, all these commercial loans are coming. I said, they're not due yet. When they're due, that's a different story. But there are things in place. There's discussions in the background about trying to keep everything as solvent as possible until that day comes. And it's just such a slow moving story that it's different than the massive credit hit that we saw. credit freezing itself. I always like to do the MBAs credit availability index. In 2004, it shot up from 400 to 900 in the peak of 2006, and then it had a waterfall collapse in one year. And we've gone nowhere for 13 years. And a lot of those banks went out of business. Here, the commercial side, it's like that ice rinks Austin Powers thing, the guy screaming. It's just such a slow moving thing that... You know, it just doesn't have the kind of velocity that people think with credit cycles getting bad. But the commercial banks are already feeling the pinch and the tightening and lending is already occurring. That doesn't get better until things change on that side. So Jack BeVier (41:40.491) And I think that may be like, but I think it may be like years and years before these like work their way through the system. You know, we built a whole loan modification, you know, set of systems that didn't exist previously in the mortgage sector as loss mitigation and also just like the ethics of keeping people in their homes. And he rather than just rip the bandaid off on everybody. And I feel like the banking sector is about to do the same thing for office. That the idea that, that they are just going to like, you know, take everybody out, line them up and shoot them in the back of the head and then flood the market with office. Like that's the way to maximize losses for everybody to maximize volatility and like chaos in the banking sector, to see the most number of banks destroyed. No one really wants that to happen. We all just wish. logan (42:40.273) Well, yeah, the lender, the lender doesn't want that to happen either. So that's, that's the thing that that's why it's, it's not a very fast moving, uh, um, project in a sense. And you're, we're already seeing discussions in the background, uh, of trying to extend this out and to, to mitigate this. And, uh, again, the commercial side on the lending side for small business on the consumer side is much, it's, it's just a much different background. I think some people think that. Jack BeVier (42:44.235) yet. Craig Fuhr (42:45.74) Okay. All right. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. So, we're going to go ahead and get started. Okay. logan (43:09.297) The commercial side will impact the consumer side not as much, just because we're talking about two different lending facilities. I think small business gets hit if you're tied to regional banks. But outside of that, the banking system is still just moving along. And I think that's the confusion with the commercial bank. People are just saying, well, why hasn't the recession happened? Why were commercial loans? Well, it hasn't actually occurred yet. And they can push this along longer and longer than people think. a different marketplace because if you're a consumer, you lose your car, you lose your house. You see that right away. If you're a commercial loan boy, you can extend that out, create even bigger loss provisions. But you know, it's the velocity or is, you know, Bugs Bunny versus the tortoise, right? And it's just the speed just isn't there yet. But we do see credit getting tighter for some of the regional banks, especially for housing at the jumbo market has gotten. tighter big time. And that's tied to the commercial and banking sector. But everything else to credit's flowing. I think one big difference is Freddie and Fannie are in conservatorship. If Freddie and Fannie weren't in conservatorship, I'd have a much different mindset right now. But because Freddie and Fannie are in conservatorship, the general flow of credit and housing has not been interrupted, wasn't interrupted during COVID. It's not going to be interrupted now They don't have stock prices going down to four or three, or the market forcing them to raise capital or anything like that. This is why I've always said the unsung hero of COVID was actually Freddie and Fannie staying in conservatorship. If they were publicly traded companies without that, I'm having a whole different conversation today on housing credit, but they are, and that keeps the housing credit flowing on that stuff. Craig Fuhr (45:04.534) So Logan, we do about one of these a week. Thank you again for your time. We try to keep him around 45 minutes. Jack, why don't you go ahead and see if we can tie all this up with a bow and anything else that we haven't touched on yet. Anything that you, I know you will. Jack BeVier (45:23.767) I'll keep going. I'll keep going all day. I guess. Yeah, there's a question I want to ask you. So in terms of In terms of bright spots from a recovery point of view, we've heard very recently in the past weeks, the past 30 days maybe, that securitization credit spreads are starting to tighten up a little bit. That's been helpful for some mortgage products. I mean, it's a very open ended question, but you know, where do you think mortgage rates are going to go over the next, you know, three, six months? Should people hold out? logan (46:07.721) So I'm a 10-year yield guy. And my forecast for this year was that the 10-year yield will be in a range between 3.21 to 4 and 1 quarter. Mortgage rates between 5.75 and 7 and 1 quarter. That was before the banking crisis. The mortgage spreads were actually getting better toward the end of last year and early this year. And then when the Silicon Valley bank situation happened, the spreads got worse. their spreads are starting to get a little bit better again. So for me, my entire mortgage rate premise is based on jobless claims. If jobless claims start to rise and get above 323,000, then you can have the 10-year yield get low enough to where mortgage rates can be 6% or below. But it's all based on that. I mean, Craig Fuhr (46:36.839) Thank you. logan (46:58.337) I believed in that so much this year, early on the year, I had to bring like Gandalf from Lord of the Rings out and say, we're not breaking this level, rates aren't going lower. A lot of people thought because inflation growth rate was falling, that we were gonna break this key level. And I'm just like sitting here, nope, we're not breaking this level. But I'm literally all my charts have, you shall not pass in that line in there. I'm still sticking to that, that the labor data is not as tight as it used to be, but jobless claims is still holding up. When jobless claims start to break, the bond market will go with that. Uh, they've shown us that the banking crisis almost brought us to a point to where the key technical levels were break. But once that changed upon 10 year yields have been slowly rising as it should have with the growth rate of inflation. But once, once the labor market breaks, the yields should go down. So we are. Craig Fuhr (47:31.624) I'm going to go ahead and turn it on. And I'm going to turn it on. Jack BeVier (47:48.861) But don't credit spreads go up to offset it? Craig Fuhr (47:50.019) Okay. logan (47:50.929) Well, here's the interesting factor. We always see mortgage spreads get worse during a recession, not before. And right now, if the Fed cries uncle, this could be one of those times in history where the spreads actually start to get better faster just because the duration of the spreads were worse for like 18 months before that. So the only other time that this occurred, 1985, we didn't have a recession, but the spreads got worse back then. The worst, the only two times in history that we had were spreads were 1980 and 82 recessions, right? Spreads get bad in the great financial crisis, recessionary data spreads get worse. But here, the spreads already got bad before the recession even started. So we'll have to see how they act, but we're starting to see the spreads get a little bit better, just a little bit better than what they were. And if the Fed cries uncle and they said, we're done hiking, the nexus cut. For the first time we could see actually, because the spreads are already historically bad, them get a little bit better. But again, I always say the 10-year yield and 30-year mortgage. Since 1971, these two have had a slow dance together. They've always stayed on trend together for many decades. The 10-year yield matters more in terms of direction than the spreads. The spreads can mean mortgage rates can get much better faster, but wherever the 10-year yield goes, mortgage rates have followed. That's why... I always do bond market channels with my forecasts. And so far we're exactly right at the peak right now. We're at four and a quarter this morning. So I don't see it getting any higher in any meaningful way unless the US economy starts to outperform even more. But right now the Fed has even told us, okay, we are very comfortable with where rates are because we believe for the first time we're restrictive. So that's why I always tell people now you're starting to see a different take. Because what the Fed doesn't want. is a job loss recession, the 10 year yield goes down and then they're forced to cut. They want to keep rates high enough, long enough and not be forced to cut rates. This is why they're starting to talk the market down because they don't want to push the economy into recession and then they're forced to cut because the 10 year yield will go down in that regard. So this is why we're having a different conversation now with the Fed than let's say 12 months ago where they're like, well, we're going to hike rates even if there is a recession, you know, so. Craig Fuhr (50:00.811) Thank you. logan (50:15.937) The Fed tries to talk to the market in their own way. And this is why we've seen a shift in the last four weeks. That's different than the last 12 months. Jack BeVier (50:26.451) I'm concerned that new mortgage originations might not track with the 10-year. This may be a meaningful divergence from the past because so many first-time home buyers are buying houses now, frankly, expecting to refi when rates come down, whether that's a year or two or three down the road. I don't think bond buyers are stupid to that idea. I guess I'm concerned that... Craig Fuhr (50:42.568) So, I'm going to go ahead and start the presentation. So, I'm going to start with the presentation. Jack BeVier (50:51.839) that mortgage bonds may start to price off of the three or the five, the new originations may start to price off of the three, you know, the three or the five for that because of that dynamic. logan (50:57.137) the new Originations. logan (51:02.737) Well, the one thing that we can work with this year is that when the bond market started to whiff economic weakness, we saw mortgage rates fall 1 and 1 half percent from the peak. And then when things started to calm down, they went right back up. So I always just tie it off of what the economic data is, what the 10-year yield. I think there's a bunch of people who just think the Fed's going to go back to zero again and do key. Again. economy has to be really bad in that situation for that to occur. So we deal with what we have right now. So far, everything is holding up. As long as everything's holding up, we're just going to be in this little range between 6% and 7.5%. The spreads, if they get a little bit better, you don't get that much divergence unless the spreads get noticeably better than, you know, we're like 3% right now, it's usually 1.6 to 1.8. So you could work with a 1% spread getting better, but it's really where As long as the economy is firm, there's not much that's going to happen there. And I know a lot of people just thought, well, the growth rate of inflation is falling this year, the 10-year yield will fall, mortgage rates will be back under 6% this year, but the economy held up. And that's how I try to explain my bond yield and mortgage rate forecast with what the economic data is. It's just this giant enchilada that we get every single week, and then we show charts on it. So it's not shocking to me right now that... We're going to have a 5%, 6% GDP jobless claims are low and the 10 year yields at four and a quarter. If you look at the history of where inflation and growth is, the 10 year yields should be a lot higher than what it is. The bond market doesn't believe in the longer term growth story. They're kind of thinking, okay, when things get back to normal, we'll be a slow growth economy with population growth slowing down and productivity, which is productivity is the giant X variable into anything. I mean, if that, I remember when I saw. Jack BeVier (52:52.011) X Factor. logan (52:56.209) productivity take off early on, I go, that's not real. That's not a real thing. We're not we're we don't have that kind of productivity growth. So that's ignore that. So let's see if the productivity is a real thing. I know the data has gotten better. The Fed is probably hope to God that productivity picks up. But I'm just not going to believe it until I really see it. But that's the X variable into everything. If productivity gets better, then the Fed job is so much easier. But we're not there yet. I'm just very hesitant to believe productivity data, because the whole world productivity has gotten lower and lower. The great innovations of technology that we've had in the past just don't have that kind of velocity anymore. I know a lot of people are thinking AI is gonna change everything, but I'm a little bit hesitant on their productivity saving everyone storyline. Jack BeVier (53:46.027) That's what I was gonna say, AI is gonna save us all and make the Fed, Fed strength. logan (53:50.277) Listen, we saw that movie, we all grew up with that movie, okay? It doesn't end well for any of us, okay? Skynet wins at the end all the time, so... Jack BeVier (53:59.903) But in a phenomenal economy, the economy is going to be fantastic. And then we die and then everyone just everyone just blows up. Yeah. Yep, yeah, exactly. Cool. Logan really appreciate you. You taking the time this morning. It's always a very high level, you know, high level best data out there that we can expect from you and how's the wire and so really, really appreciate you taking the time really enjoyed you letting us logan (54:04.721) Yeah. Craig Fuhr (54:06.47) It would be fantastic for the robots. Craig Fuhr (54:11.359) Oh. Jack BeVier (54:29.471) pepper you with questions and get your take on where things are going. We'll, we'll, we'll certainly stay closely tuned because, you know, as you said, there's, there's still a lot of variables that are yet to uncover over the next six months and it's still kind of any anybody's ball game. So thanks again. logan (54:45.533) Thank you so much. And I always have two sayings. Number one, if economics is done, right, it should be very boring. It's like not designed to be like this sexy fun thing that people are trying to make it out to be. But always be the detective, not the troll, right? And then let the data talk to you and ignore crazy people on YouTube. They're crazy for a reason. Craig Fuhr (55:03.466) I'm sorry. Economics would be much easier if it wasn't run by economists. So that's the problem. Hey, Logan, will you tell people where they can find you? And I understand you guys have your annual housing wire convention coming up. So any plug you want to give for that? logan (55:07.406) Yeah. logan (55:19.225) Yes. Austin October 10 to the 13th housing wire annual. A lot of great speakers myself and Mike Simonson will present our housing economic data models there. For me, it's very easy. My name, Logan Moschami on Twitter, on Instagram. We have a YouTube top 10 Apple podcast twice a week. Sarah Wheeler and I just try to talk about all the weekly information. There's a YouTube page for I'm telling you, I'm the biggest nerd ever. I just talk about economic data day to day at my stories or that. So I'm here to teach. That's what I kind of want to do. So if you want to find me, just type in my name, Twitter and Instagram is where a lot of my action is at. And Instagram has a lot of stories daily to go over all the economic data. Craig Fuhr (56:09.07) Well if you don't mind I- we might be reaching out to you again maybe not a forty five minute hit but maybe just a five or ten minute hit to give us some updates Jack I think we did find a bigger nerd than you. And we just can't thank you enough for the time and for all the great data for our listeners. So thanks once again, Logan. logan (56:27.622) Leisure is all mine. Jack BeVier (56:28.94) Thank you, sir. Craig Fuhr (56:30.04) All right, thank you very much. Thanks, guys. That's it for the episode. We'll see you on the next one.