Lead-Lag Live

Chris Porter on Housing Market Dynamics, Immigration Trends, and Affordability Challenges

• Michael A. Gayed, CFA

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Unlock the secrets behind the housing market's current state and its affordability crisis in our latest episode. Join us as we sit down with Chris Porter from John Burns Research and Consulting to dissect why, despite falling mortgage rates, places like Orange County, California, are still seeing price hikes that make housing 30% overpriced on a national scale. Through Porter's expert insights, we explore how demographics, including age, location preferences, and immigration trends, are shaping housing demands in diverse ways across local and regional markets.

Ever wondered how immigration truly impacts the housing landscape? We dive into the contrasting estimates of net immigration for 2023 and the lasting effects of the pandemic on rental demand. By examining the implications of global birth rate declines and tighter border policies, we uncover the complex interplay between immigration trends and the U.S. economy. Plus, we discuss how generational shifts in birth rates and economic factors have delayed major life milestones, influencing housing preferences and market demands.

From analyzing the pressures of high mortgage rates and limited supply to examining the impact of Federal Reserve rate cuts, we cover the myriad challenges facing today's housing market. Learn about policy proposals like Kamala Harris's $25,000 credit for first-time homebuyers and their potential to reshape the market. Finally, we highlight the trends steering suburban growth, the influence of remote work, and the ongoing migration to southern states. This episode is a must-listen for anyone looking to understand the forces driving the housing market today.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

Even with the drop in mortgage rates here more recently, the affordability situation has improved somewhat and in some markets across the country there's some markets like Orange County, california, where unbased, where actually prices have been going up fast enough that even the drop in mortgage rates recently hasn't really helped that housing cost to income ratio for somebody trying to get a mortgage today. So we've seen a bit of an improvement there, but we're still not back to normal. I mean where we're saying right now at a national level housing is 30% overpriced. If you look at just sort of the housing cost to income ratio today versus a more normal level, we think it was normal. That's improved from 35% a year ago, but we're still 30% overpriced.

Speaker 2:

This would be a good conversation. I had, chris Porter, on a space spaces, I think, a year, year and a half ago, and we were talking about demographics, which I'm pretty sure are destiny. So we're going to take a much longer term, look at where we are demographically and how that might impact on housing, on markets, so on and so forth. So, with all that said, my name is Michael Guyatt, publisher of the Lead Lag Report, joining me for the rough 15-minute time period. Here is Mr Chris Porter. Chris, introduce yourself to the audience. Who are you, what's your background, what have you done throughout your career and what are you doing currently?

Speaker 1:

Yeah, so I'm Chris Porter Cedar, vice President here at John Burns Research and Consulting. We're based out of Southern California but really we have a nationwide presence. We do published research and consulting for the residential real estate sector. You know really all over the country and you name it the different sectors of the industry, whether it's for sale, for rent we do single family rentals, build your, rent apartments, building products because a lot of the building product companies are interested in the same kind of information, just maybe packaged a little bit differently. But really our focus is on understanding what's happening at the local level from a housing perspective and ultimately, how does that roll up to what's happening at the regional level, what's happening at the national level and's happening at the national level, and just helping our clients be more informed as they make big investments in the housing space. And so really for the last 20 years I've been with the company, almost 20 years been with the company, done some work in the research side and the consulting side, and really for the last 10 years had been focused on really just understanding the demographic drivers of housing demand.

Speaker 1:

When you think about it, a house is the biggest purchase most people are going to make in their lives and if you're a renter, your entire life. It's probably the biggest line item in your budget every single month. It's also where we spend our nights, we sleep, we're there during the day. We raise our kids in these houses. It's a crucial part of our society and we think there's a lot you can understand just by studying demographics and translate that to the housing industry. It's often been said demographics don't change all that much, or it's. They're very slow moving but at the same time, very powerful forces that I think, if you understand some of those trends and where they're headed, this can help you to make a better long-term strategy for your business, whether you're in the housing industry or really any industry I think really relies heavily on demographics.

Speaker 2:

You know about local versus regional versus national. How much variability is there, just broadly speaking, in demographics when it comes to the local versus the national?

Speaker 1:

Yeah, I mean you can have some widely different, big differences at the local level. I mean you look at Florida as an example of you know it's been seen as a retirement destination and so it's got an older population, generally speaking. You look at, you know, cities versus suburbs. I mean there's a lot of different ways you can dissect this and understand. You know cities versus suburbs. I mean there's a lot of different ways you can dissect this and understand.

Speaker 1:

You know young people are more likely to live in cities and they're in their youth, but they're moving out to the suburbs later in life as they start to form families and form their own households. And so you know, I think we can, we can glean a lot of insight at that local level because, it's been said over and over again, real estate is local and we think that understanding the different dynamics of what's happening at your local level really can impact your strategy as a business. You can't necessarily sell the same type of house in Phoenix that you can in Chicago. There's going to be some differences there and some of that is driven by demographics. So I think because of mainstream media.

Speaker 2:

When people hear demographics, they probably think mainly about immigration, migrants. You know that part of the population. Let's talk about how those trends have played out and if they've been as impactful as how certain media seems to make it out to be.

Speaker 1:

Yeah, no, it's been a. It's been a real hot topic, obviously, and then as we head into the election, you know, an even hotter topic. I think what's kind of interesting is you look at the Census Bureau numbers and they were estimating, you know, we had about 1.1 million net immigrants into the US in 2023. So measuring mid-2022 to mid-2023, that's kind of how they do their measurements and what we found was, gosh, all the signs were pointing to much higher numbers. And then the Congressional Budget Office came out with their estimates and they estimated a number that was three times that, so 3.3 million. And the more we dug into this, the more we realized, yeah, it actually does look a lot closer to that 3.3 million number than it does the 1.1 million.

Speaker 1:

And you think about it like we basically shot off our borders for a period of time during the pandemic. And you think about it like we basically shut off our borders for a period of time during the pandemic and you not only have a little bit of a catch up from from that period of time, you also have unrest in the world. You've got, you know, the US just seen as a very desirable place to live, and so what's been happening is, we've been seeing an increase in immigration in the US. You know, call it three million or so. What's been happening more recently is that we've seen actually a little bit more tightening at the borders, and so we're seeing a little bit more of a lower net number coming in in recent months and really this year to date, While we were estimating a much higher number for the forecast in the next few years. We're taming that down a little bit, just understanding that this is heavily influenced by government policy, and I think you've got all parties involved at this point saying we need to do something about immigration.

Speaker 1:

And so I think it also helps to explain some of the strength we've seen in the job market when you look at some of these job numbers that we're getting for such strong levels for so long. If you look at some of the data from the BLS and it basically shows that, hey, we had an increase in the number of foreign-born workers and most people who tend to move to the US sort of the high point of the bell curve is people in their 20s and their 30s and that's people in the working age population. So I do think it's been a boost to our job growth. It's probably been a boost to our economy as well, and now we're starting to see a bit more of a slowdown in that.

Speaker 1:

The other thing I think it's helped is a little bit is help fuel some of the strength in the rental market as well. We know that when new people tend to move to the US, oftentimes they are living with family or friends when they first move here, because that's one they're new in the country. But secondly, in many countries that's a more culturally appropriate way of living and then maybe they carry on that same tradition here when they move to the US. But we do think that it's been boosting some of the rental housing. As they do move out and form their own households, they tend to rent first and so we think that that's also been a benefit to rental.

Speaker 2:

Do you have a sense of how much of the rental price increases are due to the immigration side? I mean, can we quantify how much upward pressure has been as a result of those policies.

Speaker 1:

I haven't looked at the actual numbers in terms of rent growth, but certainly we can see from a demand perspective it's increased the demand. In fact, some of our team recently did some analysis on this and basically estimated that the net increase in renters we've seen over the last several years has really been as a result almost a purely result of the growth in the foreign-born population in the US. There's a strong tie between those two growth numbers.

Speaker 2:

There's a strong tie between those two growth numbers. I think that's interesting because that then explains why there's maybe a certain degree of high frustration around immigration impacting the ability of native-born Americans right, the first generation, second generation, from even before right In general.

Speaker 1:

Yeah, it's a hot topic and we don't get into the political side of this, but just kind of try to understand what are some of the reasons that we're seeing some of the things in the economy that we are, and we think that immigration is part of that for sure and that's mainly a urban versus suburban phenomenon.

Speaker 2:

I mean, what's, what's sort of where does it tend to go.

Speaker 1:

We're seeing, you know, the gateway cities are the sort of the usual places that people are going to, but you do see increased levels of immigration really in all parts of the country, whether it's the cities or it's in the suburbs. I think increasingly we're probably seeing more of that in the suburbs and that's the challenging thing is, it's not always easy to get real data behind the actual numbers of where they're headed. We can look at some of the you know for those who've claimed asylum. We can look at you know where is their court case that's eventually going to come claimed asylum. We can look at you know where is their court case that's eventually going to come. Where is that? What jurisdiction is that going to be in? But it is a little bit harder to wrap your head around some of the numbers in terms of where they're going by location.

Speaker 2:

I want to share another post that you put out looking at birth rates, and I think this is interesting. It's from the Wall Street Journal. Birth rates are falling fast across countries, with economic, social and geopolitical consequences. Us births are down. You've got fertility rates from US, mexico, india, china, south Korea, hungary, japan. Ain't nobody having babies like they used to. I think it's kind of the point. This is true.

Speaker 1:

And you know people having kids later in life, you're probably going to have fewer kids on average, despite the fact, you know we've got technology that allows people to to have kids later in life more easily. We're just seeing a real slowdown, and so one of the things we've done is we've tracked this by generation, and so I thought this was kind of fascinating to look at my mom's generation born in the 40s, leading edge of the boomers, and they, on average, had about 2.1 kids by the time they were 44 years old. It's kind of the end of the fertility years for most women. My generation born in the 70s was slower to have our first and our second kid, but really by the age of 35, caught up to my mom's generation, had two kids by the age of 35 and actually surpassed them a bit, got to about 2.2 kids. And then we saw that same, a very similar trend for the group born the decade after me, in the 80s. Now what we, though, is the group born in the 90s a lot of those who came of age you know, adult age during the great financial crisis, and we saw all those adulting milestones delayed for that generation. They're having fewer kids at the same age than previous generations did. And it gets even lower when you look at the group who's born in the 2000s still very, very young at this point, the oldest of them is only 24 years old but just having kids at a slower pace and probably having fewer kids and that's contributing to some of this lower birth rate overall.

Speaker 1:

But yeah, you look at the rates, the decline in these rates in some of these other countries, in Mexico and India really sharp. We've seen a drop in the US, but not as substantially as you see in some of those other countries and I think this has this has impact on housing, right. So, you know, maybe that impacts the, the type of home you choose or even where you decide to live. So if both parents are working and they, you know, don't want to be an hour's commute from where the kids are going to school, you know, maybe they live a little bit closer to the job centers and maybe they need a smaller house. They don't need, you know, four bedrooms, they need two bedrooms or three bedrooms, and so I think that does impact people's housing choices as well. On the flip side, I think you've also seen some people just say well, it's the cost of living. That's maybe preventing us from having more kids. We would choose not to add a third kid because we just we can't afford to do so.

Speaker 2:

Clearly the homebuilder stocks are saying there still needs to be much more building of housing independent of the birth rates. But I wonder, at some point, where does the intersection happen? In terms of the birth rates dropping, immigration may be also dropping and then supply being large enough to deal with all the demand. I mean, I would think at some point it gets to be. There's a glut. That happens in the housing market, even if we're far away from now.

Speaker 1:

I mean that's, that's long term. I think if we look at you know, everybody made such a big deal about the group that was born in the 80s is, you know, we're coming out of this baby bus during the 70s and then you have this rise in births in the 80s. Quite frankly, we had births rising I mean a little bit of flattening in the 1990s. But you look at the 2000s and that's the group that's. The oldest of them is 24 today. We had births peak in the US about 4.3 million in 2007. So those are 17-year-olds today and if they are forming households at a slower pace than previous generations, I think this is a supply of housing demand or pipeline of housing demand for a long period of time. We're looking at the next 15, 20 years. That's a group that's going to be supplying demand for housing, whether that's rental housing or for sale housing. But you're right, you start to get past then that, that 2007 group, the people, the kids that are 16 and younger. Today there's just fewer of them born in the U? S and then it remains to be seen, you know, how much of of that gets filled in by immigration.

Speaker 1:

So this is a graphic from one of our reports that you've shown right now, where we look at the population by age and we've got the solid bars down there at the bottom that represent the population born in the US. We're accounting for the fact that some people have moved away or some people have passed away. But then we layer on top of that the foreign born population, which I think it gets undercounted or discounted completely in the conventional generation definitions. When you talk about the boomers or you talk about Gen X, those generation definitions were largely just based on people born in the US and it didn't account for the foreign born. So you look at my group born in the 70s. There we had low births and immigration has helped to fill in some of the dip there in the population, to the point where one in four people who are living in the US today were born in the 1970s was actually born in another country.

Speaker 1:

And then you look off to the far right and you can say, ok, well, the foreign born population is is a much smaller percentage of the overall, but that will grow over time. Like I said, most people tend to move to the US in their 20s and their 30s. Like I said, most people tend to move to the US in their 20s and their 30s, and so we do expect those populations are going to get bigger over time, just as that cohort ages into the appropriate years to see more immigration. I could literally spend two hours talking about this one graph. I think there's some real big takeaways.

Speaker 2:

I think it's fascinating because you often don't hear about this when it comes to sort of discussion around. You know, is housing overvalued or undervalued in terms of that demographic sweet spot hitting?

Speaker 1:

Yeah, so 35-year-olds that's kind of the headline on this graphic here. Everybody made a big deal about 10,000 people turning 65 every single day of the year. Right, we've got 12,000 people turning 35 every day of the year. And when you consider that right now 35-year-olds 35-year-old is the median first-time homebuyer in the US We've got a pipeline of potential homebuyers just waiting to buy, so you know we're going to have 4 million well, close to 5 million people turning 35 for really the next decade or so. It's just again, more demand in the pipeline for the housing industry.

Speaker 2:

It's an interesting comment off of X I'll show here Wildcard is advent of radical life extension tech which would reverse the collapse. That's an interesting point about sort of longevity. I mean, you know, who knows with AI, if you and I are going to live until the age of 130. I don't know if I want to, honestly, but that's not the interesting thing, right?

Speaker 1:

Well, we're getting to the point now where I think the Census Bureau estimates, at least in their most recent projections, that by 2038, we're actually going to see more deaths than births in the US, simply because of the aging of our boomer population, the fact that we're having fewer babies.

Speaker 1:

So we're getting to the point where you're going to see those numbers start to converge. Deaths are going to keep rising and I think that's just a given given the aging of our population. You know, what happens with births, I think, kind of remains to be seen, and I actually think that number is a little bit further out. I think we'll probably see it's probably in the 2040s where we start to see those lines converge. Really, at that point immigration becomes the sole contributor to net population growth in the US. But this person raises a great point that if you look at what's happening with this idea of life expectancy increasing, maybe that puts a damper on those death numbers. I think long-term they're still going to be increasing. Yeah, I think for the housing industry it's interesting, you know, interesting to understand how many hundred-year-olds there are, but really there's no hundred-year-olds buying homes out there right now.

Speaker 2:

Right now, I get it. Right now, it's true, let's talk about mortgage rates and maybe elasticity or inelastic demand when it comes to housing, because if you've got this big cohort that's constantly wanting to buy homes, it seems like no matter what mortgage rates are. Life will go on, people will spend and they don't care what the rate is. They just need to get that property. Do the demographics overwhelm the effectiveness of monetary policy in terms of trying to slow down housing?

Speaker 1:

No, I mean, I think the challenge right now is just the lack of supply. You know people not wanting to give up their sub 3% mortgage and put their house on the market. So we've got. You know we look at. I was just looking at the numbers this morning 76% of outstanding mortgages out there are below 5% and I didn't check to see what the new Freddie Mac number came in it today, but I know in the last couple of weeks it's been close to 6%. Nobody wants to trade up from 3% to 6% mortgage if they don't have to. And there's some people that are going to be willing to make that trade off if they have to, for job reasons, or maybe for family reasons, or maybe they don't need to take on a mortgage and they can just pay in cash and interest rate doesn't matter. But I do think it's been the supply of housing that's been a limiting factor there, and especially in young people trying to get into the market. Also just the fact that it's super expensive and when you have a less supply, well, it means that prices continue to go up and so we've still continuing to see rising prices out there.

Speaker 1:

Even with the drop in mortgage rates here more recently, the affordability situation has improved somewhat and in some markets across the country. There's some markets, like Orange County, california, where I'm based, where actually prices have been going up fast enough that even the drop in mortgage rates recently hasn't really helped that housing cost to income ratio for somebody out trying to get a mortgage today. So we've seen a bit of an improvement there, but we're still not back to normal. I mean where we're saying right now at a national level housing is 30% overpriced. If you look at just sort of the housing cost to income ratio today versus a more normal level, we think it was normal, that's improved from 35% a year ago, but we're still 30% overpriced.

Speaker 1:

And so you know, as you kind of look at the math, the affordability equation, there there are three factors really it's your income, it's your home price and it's your mortgage rate. And to get back to a normal level, if you just take any one of those pieces individually, you'd either have to see a massive uptick in income, you'd have to see a massive decline in prices or you'd have to see mortgage rates come down into the 1% 2% range to get back to that normal level. Maybe it's 2% to 3%, I just don't know that any of those are a likely scenario right now, and I don't believe they are, and so I think we're going to be in the affordability challenge here for a while. It's just the components incomes are growing, we are seeing home prices still rising maybe rising at a slower pace and mortgages are coming down, but I think it takes more than that to get us back to normal affordability. So it remains a challenge, and that's the case in almost every housing market across the country 30% overpriced is a pretty big number.

Speaker 2:

Is the simplest answer the right one? It's like the only way that really that really corrects is a recession Like you just need to have unemployment exploding to break that I?

Speaker 1:

you know, like I said, it would have to be because it's a supply issue.

Speaker 2:

Seems like everyone says supply, but it seems like that's been a narrative for like two years now Right, and we are starting to see the resale supply take up a little bit.

Speaker 1:

I mean, I noticed a few more houses in my neighborhood this last week with for sale signs on. You know, we did a survey of consumers out there and asked them what sort of the magic mortgage rate that would convince you to to get off the fence, and we found that five and a half percent resonated with a lot of with the majority of consumers. So I don't think there is any expectations that we're going back to a 3% mortgage rate and that's certainly not in our forecast right now, at least in the short term here. This will be the lookout through maybe 2027. But I think people are going to be more accepting of a 5.5% rate if we get there. I think people don't want to be tied to their house in the way that they've sort of been handcuffed to it here. They want some freedom, some some ability to to move around if they want to, and they're they're maybe willing to accept a higher rate. Five and a half percent is the number that we've. We've surveyed and that's that's what people are telling us.

Speaker 2:

How have shifts in in labor force participation between men and women impact some of these trends in labor force participation between men and women impact some of these trends so I'll share from another postage put up which I think is interesting. Looking at women's labor force participation, basically arguing that women's shares has increased more than men's in every working age group and a lot of that's because of the more flexibility from working from home. More women are entering the workforce because they can work from home more than before. Does that have any marginal impact on housing growth, housing demand or valuation?

Speaker 1:

Yeah, I think it does. I mean so we've seen. It was interesting going back and looking at the great financial crisis and the job losses that occurred during that recession. We lost a lot more jobs in the male dominated sectors. We lost a lot of construction jobs, you know, and so women. Actually, we saw women gaining jobs in like education and health services. I mean, it is just interesting to see some of the gender dynamics there, and we actually reached a point there where 50 percent of the payroll jobs in the US were held by women, and we got back to that. It came down a little bit in the subsequent years, but we got back to that point just before the pandemic hit in the subsequent years, but we got back to that point just before the pandemic hit.

Speaker 1:

You know, I think we've seen and this is a little bit outdated here the 2021 numbers, but we've seen women's labor force participation. Despite the fact that, you know, a lot many women took on more family responsibilities during the pandemic, maybe dropped out of the labor force in a greater pace than men did. I also think this has opened up some opportunities for women to reenter the labor force, and so, when we look at the work from home component of this. You know, for a working mom, if she's able to work from home, that allows her to be in the labor force, maybe at a higher rate than previously. It was the case of my family, my wife, you know, being able to work from home. She could do a 30 an hour week job from home while the kids are in school and still be able to drop them off and pick them up, and so she was able to enter the labor force. You know, and so I think we see that a lot of women in their 30s as where we've seen some of that pickup amongst women's labor force participation.

Speaker 1:

How does this impact housing? Well, now you get two incomes, so maybe you can afford a nicer house, maybe you can. You know, if you get the work from home component going on, whether it's both spouses or just one of them, you need to account for that in your housing design or your housing layout. So, whether it's a formal home office or it's just a flex space that you've converted into a home office, or even just finding a little nook somewhere that you can, you can work from home, I think it does have some impacts on on people's housing choices. And then also, if, if you're able to work from home or maybe you have to do a commute two days a week instead of five days a week, maybe you can live a little bit further out and commute in just a few days as opposed to doing that every single day of the week, and you're willing to make that drive less frequently than than every day.

Speaker 2:

Is the immigration side tilted more towards males than than females? I mean, I'm trying to think through what sort of the interaction of that women labor force participation versus maybe more men that are immigrating than women.

Speaker 1:

You know I haven't dug into that. That's something I should, I should look into and see.

Speaker 2:

Yeah, I'm just curious if there's any sort of overlap there. As far as that, okay, and what about? So let's talk about some specific markets. You mentioned 30% nationwide. I'm sure there's some that are far overpriced and some that are starting to correct on the outside. What areas are showing the most overvaluation, undervaluation on the housing end?

Speaker 1:

Yeah, let me just pull up our list. So we do this every single market or every single major market in the country, every single month. It's in some of these markets, like let's look at Charlotte. So, charlotte, if we look at the median housing costs on a monthly basis I'm looking at mortgage payments, I'm looking at interest, I'm looking at taxes, insurance, some maintenance in here, about 37% of the household income is going towards housing costs. And we look at 125% of the median income, knowing that homeowners typically have higher incomes than renters. So about 37%, but that 37% is 42% higher than what we think is normal for Charlotte, so nearly one and a half times what it should be.

Speaker 1:

And so to the locals there in Charlotte, housing feels really, really overpriced and maybe for somebody moving into the area and they're coming from California, they're bringing that California salary with them. You know housing doesn't seem that quite as expensive on a relative basis, but for a local it's. It's a real challenge. We're seeing the same thing in Las Vegas and Nashville, atlanta, you know, all 35 percent or more overpriced relative to what a more normal level is, and we're constantly reevaluating what that normal level is. We can look at the long term historical average what that normal level is. We can look at the long-term historical average. But in some of these markets we think that that normal is actually higher than the long-term average because some of the supply constraints housing just gets more expensive, it's going to consume a bigger part of consumers' wallets and so maybe that new normal is higher than it has been historically.

Speaker 1:

Most of the major markets that we look at we look at 33 huge markets across the country in one of our reports. I mean every single one of those, with one exception, is 20 percent or more overpriced in terms of trying to get a mortgage today. The San Francisco metro area is the one that's has not seen that same level of overpricing as we've got right now, marked at about 11 percent overpriced. Not seen that same level of overpricing as we've got right now, marked at about 11% overpriced. And that's, you know, I think due to some stronger income growth there as well as, just, you know, the flattening prices in that market.

Speaker 1:

But you hear all these stories about, you know, people moving out of, maybe the central metro area, and I'll use Orlando as an example. Or you can look at Denver, you could look at Salt Lake, where the main metro area has become more expensive for the locals and they're moving a little bit further out. So maybe they're moving to the next metro over that has a little bit more affordability. Those are also the metro areas that have more land availability and so you can build in some of those surrounding areas. But we're definitely seeing evidence of that in markets all over the country where it's just the next market out becomes a little bit more affordable or maybe more desirable, especially if work from home applies.

Speaker 2:

Do state finances matter at all when it comes to local markets, meaning states that are better managed in terms of their debts, their municipal liabilities, versus other states, and I'm thinking there in terms of sort of the anticipation of higher taxes on a state level?

Speaker 1:

Yeah, I think people are having to take into account the state level taxes. Also increasingly becoming more of a concern is insurance. You know, you look at the natural disasters that are occurring all over the country and insurance rates are rising. You've got certain insurers pulling out of certain areas or certain states, and so rising insurance costs are also adding to the affordability challenge for many consumers out there today as well.

Speaker 2:

What else is happening on the housing side? That's not really getting much attention or traction. I think everybody's waiting for the to your point, the overvaluation to correct and it's taking a lot longer. And now that the Fed's entering a cutting cycle, I think the expectation is that's going to further keep the demand and overvaluation going. What are some sort of sleeper dynamics that are taking place?

Speaker 1:

One thing I'll just say is that the Fed rate cut last week it's probably not going to impact housing as much this year as it might next year and the reason for that is it's just there's a lag effect and certainly we've already seen mortgage rates coming down. We're talking about low sixes right now are just above 6%, but we really haven't seen existing home sales pick up. So we think there's a bit of lag effect there. We're also just entering this period of time where home sales slow seasonally. So you've got, as we head into the later months of the year there's a typical slowing down. And then also the fact that I think there's a little bit of a confusion still about with all the changes in the way that real estate agents are compensated as a result of the National Association of Realtors settlement and the way that I think there's some added confusion to the picture for consumers about how actually the transaction occurs and who gets paid and who gets paid how much. We're probably depressing transactions a little bit there as well. So I don't expect to see the Fed rate cut have a major impact this year in housing, but I do think it's going to see you'll start to see that rate cut cycle impact housing in 2025 and beyond.

Speaker 1:

Also, just, I think the expectation that rates are going down to 3% is. It's not there. I think we're our estimates call for really, over the next several years, probably closer to 5.5%, and that's just based on what the market is saying about the 10-year treasury and we looked at what the bond markets are saying there about the treasury futures. And then we have to layer on top the mortgage premium, which has historically been about 170 basis points. We think it's probably a little bit higher right now on a go forward basis, probably 190 basis points or so. So we're probably looking at, you know, five and a half percent mortgage rates on average for the next three years or so, and that's as far out as we're forecasting in our published reports. So there's not an expectation, or there should be an expectation, that rates or mortgage rates are going back down to three percent anytime soon.

Speaker 2:

Let's talk about getting a little bit further as far as that overvaluation side of things. Are we talking more overvalued for the upper echelon on the housing side, the housing which is more paid by cash versus the lower end? Where is it most bubblicious, I guess.

Speaker 1:

I mean, the pain is really felt on the lower end of the market, right, it's those, not even just the young households, it's the young adults who haven't yet formed households and can't move out of their parents' home or they can't move out of a roommate situation, simply because the entry level payment is just astronomical and compared to what they're earning. And, yes, maybe they're seeing some better income or growing incomes, but the cost of housing is just so painful at that, that entry level point, and that's, you know, one of the reasons we're seeing that. We talked about the median age of the first time buyer early on. It's now 35. It used to be, you know, prior to the pandemic, it was 32. It's risen from 29 back in in the early eighties, sos, so it's been gradually going up.

Speaker 1:

I think that is where the biggest hurt is felt right now is really on that, the entry level price points. If we could build houses and sell them at $150,000 to $200,000 a pop, I think we could induce demand all day long. But the challenge is just, with the costs of of land, with the cost of regulation, it's just it's hard to to make that pencil and and so I think that continues to be a struggle for the, the young adults, that entry level buyer they're. They're feeling the pain right now.

Speaker 2:

Without taking a political stance, let's maybe talk through some of the policy suggestions that are out there. I mean, Harris made a whole bunch of news for saying calling for a twenty five thousand dollar credit, right for whatever, for first time homebuyers, and everybody on X slash Twitter said you do that and the sellers are just going to jack up prices by twenty five thousand dollars. How does the federal policy side interact with current valuations?

Speaker 1:

Yeah, I think there is certainly some credit. You know, some truth in some of that. We probably would see some some price increases as a result of that. But I also think I mean for me that was what helped me get into my first home was it was a tax credit for first time buyers. So, you know, I think it probably would be some benefit to the market.

Speaker 1:

But yeah, I don't necessarily want to get into too much of the political side of it, but I think if there's a way that we can induce supply, I think another part of her proposal and again, let's keep in mind that these are just proposals, whether they actually get completed in an administration's term remains to be seen but it was to induce more, more construction. Quite frankly, we we think, as we look at what's happening with with land availability, right now I don't think there's enough land, entitled land available to increase our, our new home sales activity you know, more than single digit, low single digits or mid single digits over the next several years, simply because of a lack of land. So it does come back to a big. You know, a big part of this is the supply component of as well. Is there a supply out there to meet the needs, even if there is this pent up and growing demand for especially that a tree level buyer.

Speaker 2:

Where is that less of an issue? What states have more land? What states are maybe doing it in quotes right?

Speaker 1:

You know, if I look at where the biggest construction markets are today, um, in terms of of permit activity, it's it's Houston. Uh, let's look at single family Houston, dallas, phoenix, atlanta, charlotte Um, you know, you see some of these markets sprawling a bit I mentioned earlier kind of the spreading out and whether it's, you know, even within the same metro area maybe going to a little bit more of the outlying counties. So that's really where we're seeing a lot of the growth. It still continues to be in the southeast today and in the south, but then, you know, you look at, you know, behind Charlotte we've got Austin, orlando, Tampa, raleigh-durham, I mean, if you look at this list, and it's really the biggest single family permit markets are all in that. You know, texas, or I guess you can say even Arizona, all the way through to the Carolinas. So a lot, of, a lot of growth still happening in those areas, a lot of building. And that's something we've seen, you know, as you look at this, the history of construction over the decades, we've seen more and more construction shift to the southern states and that's that's where the migration patterns are as well. We're seeing jobs move further south. So I think those still continue to be the path of growth.

Speaker 1:

Not that they don't have some hiccups right now. I mean we're seeing more oversupply in some of these markets. We're certainly seeing a big surge in multifamily here. The last couple of years the multifamily permits spiked and we're starting to see a slowdown in multifamily permits now because of that huge spike and some of these areas are still dealing with some of the massive increase in supply. We're starting to see some vacancy rates take up, but I do think the demand continues to shift to the southern states and we'll continue to see growth in that part of the country. Not that there can't be growth in other parts. We can still grow the Midwest, we can still grow the Northeast, but I think the lion's share is going south.

Speaker 2:

One of the big narratives around COVID was you'd have more and more people moving out of the cities and going to other far off places and states and suburban areas. I haven't heard much of that as of late. Is that still an ongoing trend or are we back to everybody's going back to the city?

Speaker 1:

Yeah, so this was a really early on during the pandemic. There was a paper put out by the Cleveland Fed that I thought was really interesting, where they looked at the churn of, and particularly focused on, young adults and the way they described it is, you know, these big cities, they often have young people in their 20s moving to the cities. It is, you know, these big cities, they often have young people in their 20s moving to the cities and then at the same time you've got people in their 30s maybe moving out of the cities and going to the suburbs, and so there's a constant churn. And what happened was not so much a mass exodus of people from the big cities I mean, with a couple of exceptions like New York and San Francisco but it was just that the churn was disrupted. You had people moving out and maybe even more people moving out to the suburban locations, but you didn't have the same number of people moving in. Those 20 somethings were maybe going out of college and living with their parents in suburbia, because the world was just updated at that point in time. We have seen now that churn, I think, kind of get back to more normalized levels where we do see, you know, continued growth into the city. So I think it's come back.

Speaker 1:

Look, we were already calling for more of the growth over this next decade to go to the suburbs anyway. Not that cities were dead, but we just thought, looking at the aging of the population, we had this group that was in their 30s, the millennials, you know, in their 30s and 40s. They're moving out to the suburbs and it was, you know. It's really played out. I think it got accelerated a bit by the pandemic, but it's played out as we expected it would, with just more of a lion's share of growth going to the suburbs. Well, I think what we weren't necessarily expecting because nobody was expecting a pandemic was that we would see even a little bit more growth in sort of some of those outlying or even rustic areas of the country. It's not capturing the same share of growth that it once did, but those outlying areas have picked up a little bit more, as we've seen more work from home or more remote work.

Speaker 1:

I do think you know we've seen, obviously the last couple of weeks, a few different stories about more of this idea of return to office, about more of this idea of return to office, the forecast that somebody said the survey of CEOs said that you know, the next few years we'll see 74% of workers back in the office on a very consistent basis. So that remains to be seen. I think a lot of people did move a little bit further out simply because they wanted a little more space and they had that freedom to do so. Or we have saw people relocate as a result of work from home or remote work possibilities. You know, it'd be interesting to see what happens with the employment dynamics there. Do people stay at their jobs if, all of a sudden, their employer mandates they've got to come back into the office? Or do they, you know, have to put up a longer commute, now five days a week as opposed to just two days a week?

Speaker 2:

Of all the data points that you guys track, I mean demographics are very long term, right, but of all the data points you track, what are most relevant to shorter term price dynamics when it comes to housing? Is it employment? Is it something else and we looks at?

Speaker 1:

Yeah, I think job growth is good for all types of housing, right, if you, if you can have a job, you can maintain or form a household, you know that's that's good for housing, whether it's rental housing, whether it's for sale housing, if it's built to rent single family rental apartments, I think job growth is good across the board.

Speaker 1:

But we're also we're spending a lot of time looking at what's happening with supply and you know, right now, a lot of these markets that were, you know, pretty healthy markets, you know, just even a couple of years ago or even in the last year, but have now seen more of an influx of supply, whether it's an uptick in resale listings, a surge in apartment construction those are the markets that are maybe struggling a little bit more now.

Speaker 1:

I look at what's happening in Texas. We've added a bunch of supply in Texas and we're seeing prices slowing and even falling a little bit year over year in some of the major Texas markets and we're seeing that in, I think, some of these areas that have previously been really strong Texas and Florida we're now seeing more of a normalizing and maybe giving away a little bit of all those massive gains that they had over the last several years. But when you look at just the sheer amount of price increases or home value increases over the last several years I mean we look at Florida we're talking 50 to 60% increase in prices since February of 2020. Nationally we're in the 40s. We've got a few markets that are, or a few regions of the country that are a little bit lower than that. Maybe we're giving back a little bit of some of that, but they're still much more expensive markets than they were five years ago.

Speaker 2:

Chris, for those who want to track more of your thoughts, more of your work, where would you point them to?

Speaker 1:

Yeah, so our website is jbraccom J-B-R-E-Ccom that stands for John Burns Research and Consulting. You can also reach out to me on Twitter I'm Demograph Chris and you can also look me up on LinkedIn. So just Chris Porter at John Burns Research and Consulting.

Speaker 2:

But I'm in all those locations. Super interesting discussion. I hope everybody enjoyed it and thank you, chris. Really really interesting stuff here. Yeah, my pleasure. Thanks, michael. Thank you everybody. Cheers.

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Michael A. Gayed, CFA

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