\n<\/p>\n
The housing market has two big problems<\/strong>: home prices<\/strong> and a lack of supply<\/strong>. With so few homes on the market, buyers have barely anything to choose from, and sellers remain in control. But how did we get to this point? Back in 2008, there were too many homes on the market, and we all know what happened to home prices.<\/strong> So how did we go from being oversupplied to undersupplied <\/strong>by MILLIONS of housing units so quickly? The answer is pretty simple.<\/p>\n Mark Zandi<\/strong>, Chief Economist at Moody\u2019s Analytics, joins us again to give his take on the 2024 economy<\/strong>, the housing market<\/strong>, home prices<\/strong>, and our massive underbuilding problem<\/strong>. The last time Mark was on the show<\/a>, he explained the \u201cslowcession<\/strong>\u201d that could have taken place in 2023. Instead, a roaring economy took off with low unemployment, high consumer spending, and real wealth increases for many Americans.<\/p>\n But, as we head into 2024, there are still a couple of BIG problems<\/strong>: little-to-no housing supply <\/strong>and a polarizing <\/strong>presidential election<\/strong><\/a> of epic proportions<\/strong>. Both of these will have big impacts on the economy, and if you want to know what could be coming next, don\u2019t miss this episode!<\/p>\n Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: Mark: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey everyone, welcome to On The Market, I\u2019m your host, Dave Meyer. And listen everyone, after you hear today\u2019s episode, I don\u2019t ever want to hear again that data or economics or finance is not interesting because we have an amazing conversation and an amazing guest today, Mark Zandi, who is a very well-known American economist. He\u2019s the chief economist of Moody\u2019s Analytics, and I look forward to talking to Mark every time we have the great opportunity to have him on the show. He makes really complicated topics very easy to understand, and I really love just how humble he is about his remarkable success as an economist. But he also gives it to you straight. He tells you which data points are important, which ones are unreliable, which should be ignored altogether, and it really helps you cut through a lot of the clutter and make sense of what\u2019s going on in the complicated economy.
Today, we talk a lot about the labor market and I learned several things that I never knew from Mark. We also get into immigration, what happens in the economy in an election year, and we also talk about the housing shortage and some of Mark\u2019s ideas on how we could restore some affordability to the housing market. So we have a great show for you, and with no further ado, let\u2019s bring on Mark Zandi from Moody\u2019s Analytics.
Mark Zandi, welcome back to the podcast. Thanks for being here.<\/p>\n
Thanks, Dave. It\u2019s good to be with you.<\/p>\n
For those of our listeners who are new or didn\u2019t hear your last episode, can you just tell us a little bit about yourself and your career at Moody\u2019s?<\/p>\n
Sure, I\u2019m the chief economist of Moody\u2019s. I joined Moody\u2019s a while ago now, 15, 16 years ago. I sold a company that I had formed in 1990 to them, and I\u2019ve been with them ever since. So I\u2019ve been a professional economist for, hard to believe, but over 30 years. I\u2019ve seen a lot of ups and downs and all arounds.<\/p>\n
When you were here on the show last time, we ended with this term that you had coined, the slow session, that you had been using to describe the economy. Can you remind us what a slow session is and if your thoughts about it came to fruition?<\/p>\n
Yeah, slow session, and you can look it up in Google. You can Google it. There\u2019s a URL there that one of my colleagues purchased. Yeah, for nine bucks a year apparently so not bad. Slow session, not a recession. So the economy isn\u2019t contracting, going backwards, but an economy that\u2019s not going anywhere quickly, a slow session. I\u2019ll have to say, 2023, of course not over yet, but pretty darn close is going to turn out to be a lot better than a slow session. Not only did we avoid a recession like we thought, but it was a really good year in terms of growth.
GDP is what economists use to gauge the broader health of the economy, that\u2019s the value of all the things that we produce. That\u2019s going to grow 2.5% on a real after-inflation basis in the year, and that\u2019s a good year. I mean typically think of 2% as the benchmark. You get 2%, you\u2019re doing just fine, especially when unemployment\u2019s so low, when sub 4%. 2.5%\u2019s great. So it turned out to be a much, much better year than certainly most people feared and even better than I had expected.<\/p>\n
What do you attribute that resilience to?<\/p>\n
A bunch of stuff, but there\u2019s a list, but I put at the top of the list the supply side of the economy really surprised, meaning we got a lot more productivity growth during the year. We can peel that onion back too if you want, but productivity came back to life. One thing that might be going on is all those people who quit their jobs back a couple, three years ago, they\u2019ve now taken on jobs that they think better of, they\u2019re more suited to their talents and skills and they\u2019re better paid and they\u2019re happier. And we can see that in surveys and that probably translates through to higher productivity, but remote work might be playing a bit of a role. I think it\u2019s way too early for AI, but that may play a role down the road.
The other big thing is labor force growth. A number of people out there working and looking for work. That has been very strong surprisingly, and part of that\u2019s just more participation, more people are coming back into the workforce. Participation rates aren\u2019t quite back to pre-pandemic, but they\u2019re higher than I would\u2019ve thought they would\u2019ve been if there had been no pandemic, just because the retiring baby boom generation and then immigration has been boom-like, and of course that poses a whole slew of questions and challenges. But one of the benefits of that is you\u2019ve got more folks out there working and looking for work, and that adds to growth. So because the supply side of the economy grew more quickly, surprisingly so, that allowed the GDP the amount of stuff that we produce to grow more quickly without any inflation, with inflation coming back in. So I can wax on, but that\u2019s I think a high level the most important factor resulting in the surprisingly good economy.<\/p>\n
Great. Let\u2019s dig into that a little bit more because you mentioned a couple things I think that are going to be really interesting for our audience. One of them was about labor force growth. During the pandemic, we saw a lot of people leave the workforce, and as you said, it\u2019s starting to come back. You also mentioned that immigration is fueling a lot of the labor force growth. Is that legal migration, illegal migration, a combination of both?<\/p>\n
It\u2019s got to be a combination of both. Certainly the former, legal immigration is up. I mean, that got crushed during the pandemic for lots of obvious reasons and that\u2019s made its way back. That\u2019s certainly adding to a number of folks out there working. But I do think we\u2019ve seen, it\u2019s clear we\u2019ve seen a surge in undocumented workers now and I\u2019m sure that\u2019s adding to jobs and payroll and labor force. But here\u2019s a technical point. These estimates, these numbers are based on surveys and if the Bureau of Labor Statistics, the keeper of the survey goes to someone who\u2019s undocumented and say, \u201cAre you working?\u201d I\u2019m pretty sure that undocumented worker may not want to respond to the survey. So I\u2019m sure undocumented workers are finding their way into the workforce and adding to labor force, but I\u2019m not so sure how much of that is behind these really good numbers that we\u2019re observing.<\/p>\n
Got it. So in the numbers and the data that you provide in your report, which comes from the Bureau of Labor Statistics, that is mostly reflecting legal migration, but there might be even more labor force growth it sounds like that is not measured by traditional methods.<\/p>\n
Got it, exactly. The data is imprecise representation of reality and all data is an imprecise representation of reality. In this case, it\u2019s quite imprecise. And my guess is my sense is that we\u2019ve seen very strong labor force growth of strong immigration, but it\u2019s probably been even stronger than we think it is in the data that we\u2019re observing.<\/p>\n
That\u2019s super interesting. I mean, one of the questions I\u2019m constantly wondering about is when you look at the total number of job openings in the United States right now, it\u2019s come down a little bit over the last couple of months, but it\u2019s still I think eight and a half million, somewhere around there, pretty high. And even if, from my understanding, correct me if I\u2019m wrong, even if we got back to pre-pandemic levels of labor force participation, it still wouldn\u2019t fill the need or fill all of those jobs. Is that correct?<\/p>\n
Yeah, that\u2019s the arithmetic, but I\u2019m not sure that\u2019s reality. I\u2019m not sure I believe in those unfilled positions. Okay, now I\u2019m going to speak to you as an employer. I hire lots of people, I employ lots of people.<\/p>\n
Yeah.<\/p>\n
I\u2019ve got a couple hundred economists around the world in my world reporting up to me. And what\u2019s happened is it\u2019s costless to open up a position and you just leave it there, it doesn\u2019t mean you\u2019re going to hire anybody. You could slow walk that forever, and that\u2019s what I think is going on here. I think it\u2019s not like you\u2019re getting dinged for having that open position. And here\u2019s the other thing, if you work in a big company, a multinational like I do, the human resource function is a machine. It\u2019s a very complex machine and apparatus. You really don\u2019t want to shut that thing down, because once you shut it down, to get it back up and running is going to be incredibly painful. So you keep it running, but less than full force and that\u2019s what\u2019s going on here I think in a lot of companies.
So those open positions don\u2019t mean what I think people think they mean, which is interesting because the economics profession, if you go back a couple, three years ago, there was this whole, even sooner, more recently than that, smart folks were saying, \u201cOh, we\u2019ve got to have a recession. We\u2019ve got all these open positions. That means the labor market was really tight. The only way we\u2019re going to get cool the labor market off and get inflation back down is by jacking up interest rates and pushing the economy into recession.\u201d So they pinned a lot of that view on all these open positions, but without actually, I think understanding. And I guess you wouldn\u2019t really understand unless you\u2019re actually a business person doing this, doing it actually that there isn\u2019t as many open positions out there as people think there are.<\/p>\n
That is a great take and one I haven\u2019t heard before, but makes total sense because you hear a lot right now about the concept of labor hoarding where people basically businesses don\u2019t want to lay off employees or more hesitant to lay off employees than they were in the past because how the labor market was especially two years ago or whatever. And this seems like an extension of that almost where people might be opportunistic. You post a job and if someone fantastic comes along that you would love to have a couple years from now, you would take advantage of that, but you\u2019re not necessarily eager to fill any of these positions with any sort of urgency.<\/p>\n
You nailed it, that\u2019s exactly right. And you just want to keep those resumes coming in, you want to take a look, you might have a conversation or two, but it doesn\u2019t mean you\u2019re actually going to hire that person sign on the dotted line and I think that\u2019s a lot of what\u2019s going on here. And in times past that was less the case. Before online job matching and searching companies, if they had an open position, they had to go to the newspaper and put a help wanted ad, and now it\u2019s expensive. Probably people don\u2019t realize this, but if you go back in the day, probably 25 years ago, New York Times was a big client of mine, and they made a fortune on help wanted advertising. It was like, I don\u2019t know, crack cocaine margins. I mean, it was incredible business.
The newspapers were the single most profitable industry on the planet. The pharmaceuticals were a close second, but the newspapers were number one, and that\u2019s because the cost of doing that. But for the business person, that was costly. So if you weren\u2019t actually going to hire somebody in any reasonable timeframe, you wouldn\u2019t keep posting online. I mean, excuse me, you wouldn\u2019t keep posting help wanted, right? You wouldn\u2019t put it in the newspaper, but online costs are, if there is any costs, there\u2019s some if you go LinkedIn I guess, or some other job searching sites, but it\u2019s relatively modest in the grand scheme of things.<\/p>\n
So given that, and we talk about this on the show quite a lot, there\u2019s a lot of different labor market data, none of it perfect as you pointed out, but when you look at the big picture, the aggregate of all the information you look at, Mark, what are your feelings about the strength of the labor market right now?<\/p>\n
I feel great about the labor market. I mean, it\u2019s rip-roaring. It\u2019s sub 4% unemployment for two straight years. Last time that happened was in the 1960s, and that\u2019s the only other time in history I think that that\u2019s been the case. Lots of jobs, job growth is moderating, but that\u2019s by design because the Fed\u2019s trying to cool things off and get inflation back in the bottle. Wage growth is good. There\u2019s lots of different measures, but if you look at the plethora of the data, it says 4% wage growth and that now is higher than the rate of inflation. If you look at wage growth across all wage tiers across the wage distribution, low wage workers, high wage workers, everyone is getting wages that are increasing at a rate that\u2019s faster than the rate of inflation. That\u2019s been the case now for all of 2023, so that\u2019s all really good.
Probably the best thing, quit rates have come in, which is I think consistent with the moderation and wage growth and that\u2019s probably good because that was things were getting heated. Hiring has come in, it\u2019s more consistent with pre-pandemic, but really, and you mentioned this in the context of labor hoarding, really important thing is layoffs remain very, very low. I mean, we\u2019re talking today on a Thursday in December, we get the unemployment insurance claims data, which is a read on the number of people that lost their job and say, \u201cHey, can you help me out?\u201d And get a check. That remains extraordinarily low, close to 200,000 per week, which that\u2019s consistent with a rip-roaring labor market. So if you wanted to pick one part of the economy to highlight how well things are going, it is the job market. It is very good. And it\u2019s across industry, it\u2019s coast to coast. It\u2019s not like one part of the country\u2019s doing great, another part\u2019s not. It\u2019s uniformly the case across the country.<\/p>\n
I think that\u2019s really important because there are a lot of high profile or when a big tech company lays people off that makes the news and I think that distorts a lot of the underlying data about what\u2019s going on with the labor market that although some of the big companies were laying off maybe six months or a year ago, that overall that is not really the case. Initial claims, as you said, Mark, are extremely low. Continuing claims I think are going up a little bit but are still low in historical context, so it shows a lot of strength. Mark, given what you said about the labor market, can you tell us a little bit more about your outlook for this year, 2024?<\/p>\n
I\u2019m positive, I\u2019m upbeat. We may not get the same kind of growth in \u201924 that we got in \u201923, but that\u2019s okay. Get GDP growth around two, that\u2019s very consistent with a good solid year, help create a lot of jobs and at least certainly enough jobs to keep unemployment at or around 4%. So it should be a good year. I mean the key to the economy obviously is you and I is consumers, Dave, if we keep spending, particularly if you keep spending, it\u2019s key that you keep spending.<\/p>\n
Me personally, I\u2019m doing a very good job of it.<\/p>\n
Although you\u2019re in Amsterdam, you\u2019re not going to help out the US economy from Amsterdam.<\/p>\n
Oh, I come in hot every time I come visit though. I\u2019m going skiing, I\u2019m doing fun stuff, don\u2019t worry about it.<\/p>\n
We need those dollars. But as long as the consumer hangs tough and does their thing and spend, not with abandon but just enough, we\u2019re good. We\u2019re golden because they drive the economy, and all the forces that influence consumer spending look pretty good. We talked about jobs, we talked about wage growth higher than the rate of inflation. We talked about unemployment. The stock market\u2019s at a near record high. Housing values, they\u2019ve gone flattish, but they\u2019re way up from where they were just a few years ago. Lower income households are under more financial pressure and they have taken a bigger hit from the previously higher inflation, and so they have borrowed against their credit cards and taken on consumer finance loans and are now paying a lot more in interest because of the higher rates.
But middle income and high income households, they have not borrowed, and they have done a really good job of locking in the previously low record interest rates through various refinancing waves. The average rate on an existing mortgage is 3.5% so that gives you a sense of, it\u2019s amazing. So people are really insulated from the higher rates, and then there\u2019s still a fair amount of excess saving that got built up during the pandemic. Again, high income, high middle income households have most of that, and households are sitting in their deposit account as cash and they call on it when they need it and have used it to supplement their income.
So if you add up all the things that drive consumers and their spending behavior, it all looks pretty good. Certainly consistent with the idea that they\u2019ll hang tough, stay in the game and allow the economy to move forward without suffering a recession. Now, obviously a lot of risk, a lot of things to worry about. There always is. The thing that makes \u201924 unique is because we have an election coming, and we could talk about that if you want, but that does pose some potential threat given just how fractured our politics are. But abstracting from the things that are low probability, the most likely scenario is that we have another reasonably good year.<\/p>\n
I do want to get into the political question, but before we do it, I just would love your opinion, given your belief that there is remaining strength in the US economy, how do you feel about the Fed\u2019s recent, I don\u2019t know if you really call it a pivot, but their more dovish approach in the last couple of weeks?<\/p>\n
I\u2019m all for it, I think it makes a lot of sense. I was perplexed back previously when they still thought they\u2019d raise rates in 2023. I thought that made a lot less sense to me in the context of fading inflation, everything suggested that they could pause, and now they\u2019re forecasting three-quarter point rate cuts in 2024. That makes sense in the context of inflation moderating and all the trend lines there look really good. It feels like by this time next year we\u2019ll be within spitting distance of the Fed\u2019s target without any rate hikes and some rate cuts. The only thing that\u2019s keeping inflation from its 2% target, the Federal Reserve has a target of 2% on one measure of inflation, is the growth in the cost of housing services.
And that goes back to rents. And as you know, Dave, rents have gone flat to down for the past year, and so that\u2019s going to translate through in the slower growth and the cost of housing services over the next year. And as that happens, overall inflation is going to get back in the bottle so to speak. So I forecast lots of stuff, some things I\u2019m confident in, some not so much. Inflation coming back to target by this time next year, if we have this conversation next year, and I\u2019m on the record here now, I feel confident in that. I think that\u2019s very likely to happen. Stuff could occur, but that\u2019s very likely to happen. And if so, that would be consistent with rate cuts so I\u2019m all on board with that.<\/p>\n
I certainly hope you\u2019re right. And I do just want to take a minute to explain something that Mark just said, which is rents have been one of the main things that have been keeping one of the main headline inflation indicators that you hear about, the Consumer Price Index, up over the last couple of year or so. But the way that it\u2019s collected for the CPI lags quite a bit. And so that is why we see inflation numbers reflecting higher rent. Whereas if we look at some of the data I look at or a lot of the private sector data into rents, you see as Mark said, they have been flat or even fallen in some markets. And so the Fed, even though the CPI uses this older historical data, they can see from private and other data sources that the rent pushing up inflation is likely to end. So that is, I believe, Mark a big basis of your hypothesis about inflation coming down.<\/p>\n
Yeah, you explained that very well, Dave. That\u2019s exactly right. Yep, exactly right.<\/p>\n
Thank you. You mentioned.<\/p>\n
A, A+.<\/p>\n
I appreciate that, I\u2019ll take it.<\/p>\n
I\u2019ll put my professor hat on.<\/p>\n
You mentioned that an election year could influence the economy. Can you tell us a little more about your thinking on that subject?<\/p>\n
Well, I do worry about our fractured politics, they are a mess. I think it\u2019s likely that the election is going to be close. Feels like it\u2019s going to be former President Trump against current President Biden again. Obviously, a lot of script to be written over the course of the next few months and the year, but that feels like the most likely scenario and that argues that it\u2019s going to be a very close election. And if it\u2019s a close election, when I say close, it\u2019s going to boil down to 5, 6, 7 states. It probably boils down to one county, two counties in each of those states because at the end of the day, it\u2019s really about, I live in Pennsylvania. That\u2019s a swing state, and the swing county is Chester County, the county I live in because it\u2019s a suburban county, it\u2019s a purplish county.
In fact, I joke my wife is going to determine who\u2019s going to be the next president because we live on a circle. The circle is a mile in length in Chester County, and it\u2019s some legacy farmers and folks you think are Republican. And then you\u2019ve got a bunch of newbies, Vanguard employees because we live very close to Vanguard and got less Vanguard executives coming in and they are more progressive Democrat. In fact, I could go on and on about my neighborhood. It\u2019s a story in and of itself.<\/p>\n
But the way the elections have gone recently, it really could come down probably not to one vote, but you do see these hugely impactful counties or states coming down to fractions of a percent of the total population. So I agree that, obviously we\u2019re a long way away. We\u2019re still 11 months away, but it does seem like it will be a close election.<\/p>\n
The point is it\u2019s going to be close, and if it\u2019s close, it\u2019s going to be for sure going to be contested. If it\u2019s contested, well, that could be messy, and I think that\u2019s a threat to sentiment which is already pretty fragile. And at the end of the day, a recession is a loss of faith with sentiment. As fragile as it is, if it takes another knock, people could pack it in. The consumer doesn\u2019t do what I expect and we don\u2019t have the year I expect.<\/p>\n
I got it, okay. So it\u2019s not necessarily that there\u2019s historical precedent that during an election year.<\/p>\n
No.<\/p>\n
The economy behaves one way or another. It\u2019s more just given the political realities right now there\u2019s just more chance for, yeah. There\u2019s just more chance for a surprise I guess, or a loss of faith like you said.<\/p>\n
Maybe it won\u2019t be a surprise because we\u2019re all talking about it already.<\/p>\n
Fair.<\/p>\n
But one of the fundamental strengths of the American economy is the stability of government, the political process, the rule of law. And if that\u2019s shaken, challenged, then that goes to the core of what makes the US economy exceptional, and it is exceptional. And so that poses a threat to economic growth in the coming year. And of course even after that longer run.<\/p>\n
I\u2019d love to turn a little bit towards our focus here of the show on the housing market. In your report, you detail some interesting information about the housing shortage. We\u2019ve talked about this, but probably not for a while on the show. Can you just tell us a little bit about the nature of the housing shortage in the United States?<\/p>\n
Yeah, we don\u2019t have enough homes. Particularly affordable homes, both for rent and for homeownership, and this happened in the wake of the financial crisis, the bust. I mean, housing seems to be always at the center of our economic problems, I don\u2019t know why. But before, the financial crisis 15 years ago, the problem was overbuilding. Builders put up too many homes, vacancy rates soared, and that was the basis for the collapse in the housing market that occurred in the crisis, 2008, 2009 into 2010, house prices fell 2020 5% peak to trough depending on the index. The bottom really wasn\u2019t until 2011.
That wiped out a lot of builders. It was such a wipe out crash, it wiped out builders, it wiped out a lot of infrastructure for building. It also raised the cost of building because a lot of local governments that rely on property tax revenue got nailed by the fall in housing values and so then they jacked up fees on permits in construction. And so the fixed cost for building rose very sharply in that period. And so that\u2019s really made it difficult to ramp up homebuilding, particularly for lower priced homes that have lower margins, again, the builder has to cover those higher fixed costs. And it really wasn\u2019t until right before the Fed started raising interest rates that homebuilding seemed to have gotten back to where it needs to be, not to solve the shortage, just simply to ensure that it wasn\u2019t going to get any worse, that we were putting on enough homes to meet the underlying demand.
And by the way, going back to the point about immigration, underlying demand may even be stronger than we anticipate because we\u2019ve got all these immigrants coming into the country, and we probably much more than we think, and it\u2019s adding to the problems at the affordable part of the market and then adding to our homelessness issues and that kind of thing. But if you do the arithmetic, and so right now we have a vast shortage. The vacancy rates are low, the homeowner vacancy rate is at a record low, and we\u2019ve got data back until just after World War II. By my calculation, we\u2019re short by about 1.7 million homes both for rent and for homeownership. Increasingly, it\u2019s less of an issue on the rental side, more of an issue on the homeownership side.
So this just exacerbates the problems potential first-time home buyers have getting into the market. They have this shortage of homes, lots of other things going on, high mortgage rates, high house prices, soft income growth and that just adds up to a world of I can\u2019t afford anything, I\u2019m just locked out of this market. I think it\u2019s one of the key reasons why even though the economy\u2019s good, people don\u2019t think it is, many people don\u2019t because they\u2019re paying more for lots of stuff and one thing that younger people in their thirties and forties know is it\u2019s going to be, unless something changes here, unless mortgage rates come in and the house prices weaken a bit, they\u2019re not going to be able to afford to become a first-time home buyer anytime soon.<\/p>\n
Yeah, it definitely impacts sentiment for sure. And like you said, it doesn\u2019t seem like there\u2019s an immediate fix. I did have a couple of questions for you to follow up. One of the things I look at quite a lot is that there\u2019s been a lot of multifamily housing for rent, rental units being built in the US over the last couple years. And there\u2019s some evidence that in certain markets there is an oversupply. If you look at absorption rates, they\u2019re turning negative. So how do you square those two things? On one hand, we don\u2019t have enough housing. On the other hand, we\u2019re a little bit oversupplied. Can you help make sense of that?<\/p>\n
Yeah, the oversupply you talk about is entirely at the high end of the multifamily market. It\u2019s these big apartment complexes that are going up in big urban centers. I live in Philly. If you go down to downtown Philly, massive projects, luxury apartments that are going in. That part of the market is oversupplied. Vacancy rates are rising and rents are flattening out there coming down in many. I say Philly, but that\u2019s symptomatic of what\u2019s going on in DC, New York, Boston, Chicago, Seattle, San Francisco, LA, lots of markets around the country.<\/p>\n
Oh, yeah.<\/p>\n
So they\u2019re no problem. It\u2019s really in the affordable rental for people that have lower income. It\u2019s not lifestyle rental. Some people want to rent, it\u2019s a lifestyle. I want to live in an urban center and I have that lifestyle and therefore I\u2019m going to rent. This is rental because of necessity. I have no choice. I can\u2019t afford to own a home, I have to rent. And it\u2019s that part of the market where the shortages are more severe. And by the way, if I exclude the high-end rental, the shortage is even greater than 1.7 million units obviously. That 1.7 million is for the entire market. If I exclude that, the shortage is probably two and a half million, something along those lines, even much worse.<\/p>\n
So it\u2019s similar to something we see with the purchase market, which there\u2019s just seems to be a mismatch between the product available and what demand is. We don\u2019t build a lot of small homes or first-time home buyers anymore that are affordable and seems like a similar thing happens in the rental market as well.<\/p>\n
Yeah, exactly. Exactly, it\u2019s the same dynamic playing out. The entry level, builders focus on high-priced homes because that\u2019s where the margins are. They can make a lot more money. They\u2019re not as focused. That was changing right up until when the feds started raising interest rates. You could feel like D. H. Horton for example, the biggest home builder in the country really was increasingly focused on entry-level housing. So that was changing, and I assume that\u2019s going to be the case on the other side of all this mess. But that was very recent. You\u2019re right, builders had been focused on the high end of the market.<\/p>\n
Mark, do you know what level of construction we need to get to start making a dent in this deficit?<\/p>\n
Well, I think the underlying level of construction, single-family multifamily starts that we need just to maintain the current vacancy rate for the shortage not to become even worse is probably around 1.6, 1.7 million units. And right now, we\u2019re a little bit shy of that. We just got one more data point though that was somewhat encouraging, but it\u2019s only one data point. For the month of November, housing starts single-family multifamily got to 1.55 million, something like that. So that\u2019s pretty good, I\u2019m pretty encouraged by that. We\u2019ve got to see better than that, but that\u2019s helpful.
The one area where I think it would be good if policymakers could focus is for manufactured housing because the other source of supply on the homeownership side is manufactured homes. That\u2019s about 100,000 units per annum. And of course that\u2019s affordable and that\u2019s where you can get some really good productivity gains through improved manufacturing processes. And so if I were king for the day, I might need a week or a month, but if I were king, I would focus on that market and how to get that going and produce a couple hundred thousand, 250,000 a year. We\u2019ve done it in the past, I mean at the heyday of the manufactured home building.<\/p>\n
Oh, really?<\/p>\n
Yeah, it was a bit of a bubble. But if you go back into, I think it was the \u201980s, there was a period when we were producing a quarter million manufactured homes a year, yeah.<\/p>\n
That\u2019s fascinating. I didn\u2019t realize that. It just seems like such an obvious solution. I appreciate all the other things that people are doing, but correct me if you disagree, but to me, the only way to fix the housing market is more supply. We just need a lot more supply.<\/p>\n
Yeah, absolutely.<\/p>\n
Everything else is a stop gap. And not that stop gaps shouldn\u2019t be attempted, but we just dramatically need more homes and that seems like a good option.<\/p>\n
And some things where the intuition is, oh, if I could only help people with their down payment, or if I could only lower the mortgage rate somehow, or make mortgages assumable or portable, that\u2019ll solve the problem. No. I get the intuition.<\/p>\n
Yeah.<\/p>\n
I get it. But all you\u2019re doing is juicing up demand if there\u2019s no supply, all that happens is you just jack up rents and prices and not helping anybody and it\u2019s obviously very costly. So I really focus on the supply side. I mean, there\u2019s some demand side things that I think we could do, but there are things that would kick in later once we get more supply coming into the market.<\/p>\n
All right, thank you. Well, Mark, this has been super helpful, but before we get out of here, I got to know what\u2019s your outlook for housing prices for 2024?<\/p>\n
Yeah, you remember, Dave, I said I forecast lots of stuff. Some I\u2019m confident, some not so much. This is one of those not so much.<\/p>\n
Good. Me neither.<\/p>\n
One of the surprises for me in 2023 because prices started falling when the Fed jacked up rates in \u201922 and coming into \u201923, it looked like we were going to see more price declines and I expected it to help store affordability. But instead, no, prices have firmed and actually are up a little bit. And the actual prices today are, I think they\u2019re at an all-time record high, not by a lot. Prices really haven\u2019t gone anywhere for a year and a half, but nonetheless, I mean they haven\u2019t fallen to a significant degree. I still believe that we will see some price weakness here over the next couple, 1, 2, 3 years and that goes to restoring affordability. You can only restore affordability if mortgage rates decline, expect that. Incomes to rise, I expect that, but I also think we need some decline in house prices for that arithmetic to work for people to get mortgage payments to a place where they can afford them.
And I think what happens is, I may have talked about this when we met last time, but I think when happens is life happens. Events, life events, divorce, death, children, job change. Those things can happen and you can put off a move for a while, but after a period of time, the helm you\u2019re living in doesn\u2019t make any sense given your demographic need, you\u2019re going to move. And my thesis is that when these folks start moving, then they\u2019re going to have to cut the price at least a little bit to make the arithmetic work for the buyer, to get a buyer for the home. But that doesn\u2019t play out in a month or a quarter, that plays out over two, three years, something like that. Or the other scenario could be that I feel as likely could happen, prices just stay flat for three, four years because there\u2019s a so-called reservation house price. I know this myself, I believe my home is worth what the highest price Zillow ever posted.<\/p>\n
Everyone does, right?<\/p>\n
And I\u2019m going to be very reluctant to sell at a price below that so I might just wait, wait, wait until rates are down, incomes are up enough that I can sell my home at the price I think it\u2019s worth, which is the highest I\u2019ve ever saw in Zillow.<\/p>\n
I think that from my completely observational and anecdotal consensus analysis of economists, I think that\u2019s what a lot of people think is that prices are going to remain relatively flat and you can restore affordability over time by, like you said, by mortgage rates coming down slowly, by wages going up slowly if housing prices just stay flat, affordability will improve. But like you said, it could also be a combination of all three. So appreciate you giving us your outlook. We know it\u2019s very tricky to forecast this right now, but had to get your opinion. Mark, if people want to check out the great reports you\u2019ve put together or follow your work, where should they do that?<\/p>\n
There\u2019s a website called Economic View, and there\u2019s a lot of free content there. It\u2019s a paid site as well, but there\u2019s a lot of free content. And I put a lot of the work I do write, I post it on the free side of the paywall, so you can take a look at that. I also tweet @MarkZandi, so feel free. I actually, I got my handle @MarkZandi gazillion years ago. Never used it because I, \u201cWell, what\u2019s this Twitter thing? Why would I do that?\u201d And so I entered in right before all this recent turmoil on Twitter, which I still don\u2019t quite understand or get. But anyway, I actually enjoyed the Twitter. This is going to sound weird, but when I was a kid, we had a teacher who taught us haiku, you know haiku poetry?<\/p>\n
Yeah.<\/p>\n
Japanese poetry, and it was very rigid in terms of the syllables and the lines and everything.<\/p>\n
Yeah, it\u2019s 14 syllables or something like that.<\/p>\n
I don\u2019t even remember but I loved writing haiku and I love writing tweets. I love it because it\u2019s so therapeutic because you have to get into 280 characters and that really hones what you\u2019re saying. And that really, I think really is quite useful.<\/p>\n
Honestly, I think the economic conversation on Twitter is something you can\u2019t get anywhere else.<\/p>\n
I think you\u2019re right.<\/p>\n
I follow so many different economists and analysts on Twitter for something about the format of Twitter just works really well for this economics financial conversation that doesn\u2019t work on any other social media platform in my mind. So I follow you there, and a lot of the guests that we have here, they\u2019re primarily on Twitter. So if you want to follow Mark.<\/p>\n
We should start a social media for economics. What do you think?<\/p>\n
It would be 20 of us, but I don\u2019t know if we\u2019d get the ad revenue from Twitter, but.<\/p>\n
I don\u2019t know. I like that idea somehow.<\/p>\n
I don\u2019t know. We get a lot of downloads here, so maybe we\u2019ll get our audience over too.<\/p>\n
Yeah, I like that idea. Of course, I\u2019m going to be dead wrong, but I still like the idea.<\/p>\n
Well, you\u2019ve got one follower already from me.<\/p>\n
There you go.<\/p>\n
All right, Mark, thanks so much for joining us. We appreciate it and hope to have you back again soon.<\/p>\n
It was really a pleasure, I really enjoyed the conversation. Thank you so much.<\/p>\n
On The Market was created by me, Dave Meyer, and Kaitlin Bennett. The show is produced by Kaitlin Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at Bigger Pockets for making this show possible.<\/p>\n