Housing Markets In The Time Of Coronavirus (w/ Logan Mohtashami)
ASH BENNINGTON: You've been writing about the mortgage market meltdown. Where are we right now? How did we get here? What's going on? LOGAN MOHTASHAMI: We're still in the chaotic stage right now. When March 9th came in and the 10-year yield got down to about 32 basis points and mortgage rates fell with it, the first thing that came to my mind is early payoff risk, which means that refinances would accelerate, it would cost the industry a lot of money, because if you're providing-- a good example is if you're giving $10,000 to give somebody an interest rate, you need to keep that loan on the books for at least 18 months to break even or make money. Basically, all the loans in 2019 and even 2020 were at risk of having an early payoff. That is a financial burden. Then the mortgage rates are moving so much that you had margin call risk, and these are things that aren't really familiar to the general public. You had two hits right now on the mortgage side of the equation. Then as always, whenever a recession is here and as of March 12th, you can see that was the last day we had good jobless claims data, so credit tightens up as well. You're getting hit on multiple sides. Just to add another layer, the fourth one is that the servicers are going to be at risk because of the forbearance, the forbearance was open to the public in general, and they don't really have enough capital to take that money, that much payment that they have to give to the bondholders on top of that. You have four significant factors all coming into the mortgage market in a matter of weeks. This is why we see this credit stress, this is why mortgage rates went up. That first week of March 9th , rates actually went up 1% that entire-- those five days. There's just a lot of stress right now in the mortgage market, and some of these things are going to be with us even if the economy recovers in Q4 and people go out and can walk the earth again. I still think the credit tightening is going to be here for a while. ASH BENNINGTON: Yeah, you played a bleak picture. Let's walk through those one at a time and just explain a little bit about what the context is and why it matters so much. LOGAN MOHTASHAMI: Well, first of all, the non-QM side, non-QM loans are basically loans that aren't guaranteed by the government. They're a little bit out of the box. Now, they're nothing like what we saw during the housing bubble. These aren't 80-10-10 option arm loans, loans that are going to recast on you and create a foreclosure. These are just a little bit out of the box in terms of bank statement loans, those things especially in the jumbo market are gone for the most part. It's very little. I think that market gets hit, FHA lending which below 620, which isn't that big either, the credit standards have gone up so that market for a short time is gone. That's where the credit tightening which would happen in every situation when you're going to a recession, I estimate about-- ASH BENNINGTON: Just real quick, for context, what's the percentage of total loans that are non-QM? LOGAN MOHTASHAMI: I would say that this is actually just about, say 3.7% to 4.3%. Roughly. That's basically the non-QM alone. It isn't a significant portion of the mortgage market. Some of these buyers are actually very well qualified, they just don't show income, they have to do bank statements. Some of these are what I call a rich man's loan, but that's gone. That portion of the demand is going to be out for a while. You're looking still at a 6 million total home sale market, you're looking at a couple hundred thousand homes that just aren't going to be back until credit gets better and Wall Street wants to come in and support some of these markets. That aspect is out of here and no matter what happens with the economy, until you see credit get better, this part of the housing sector just won't come back quickly. ASH BENNINGTON: It's interesting, you're talking about a percentage of the market that's less than 5%. When things like this happen, there's the swings at the margin. Does that have a potential impact, have a more significant impact on general price levels in the housing market? LOGAN MOHTASHAMI: Well, here's the interesting aspect. The first two months of the year, not only the economic data was better, housing for the first time in the cycle was breaking out so much that if we didn't have the virus, I would be writing about home price growth 8% year-over-year on a nominal basis is way too hot at this stage of the cycle. Typically, housing gets softer when the 10-year yield is above 2.62%, which is roughly 4.5% mortgage rates higher. This is a little bit different. Housing has accelerated the first two months of the year. 13-year highs in existing home sales, inventory is down year-over-year to the lowest level so this notion that there's no homes to buy twice in the cycle, cycle highs in demand with inventory at cycle lows. The housing market was doing really well. What we see now is this is not like a typical recession where demand just basically fell off because of the economy itself, people aren't going out and looking at homes, people aren't having traditional open houses. Just like all economic data, purchase application data has the ability to drop 54% plus on a year-over-year average. The first eight weeks really of the heat months, the heat months I've talked about for many years, it's the second week of January to the first week of May, we had double digit year-over-year growth every week up until March 18th. That was the last one. The last two weeks, we saw negative 11% year-over-year and negative 24% year-over-year. That's not because demand has just simply fall off or the homes are too expensive. It's just simply people aren't going out and buying homes at this time. The next 90 days, we have to look at housing data with a little bit of a grain of salt because I think sometimes we might get overly too bearish and inventory levels are just going to skyrocket. Delistings have fallen off. I think Redfin had an interesting data line where 148% year-over-year delisting because some of these sellers are just going to, hey, I'm just going to wait till this lockdown is over before I sell the house where in 2006, monthly supply was already above six months. Home sales were falling noticeably in 2006 on a year-over-year average. We're also working from a very extreme level. Here, it's not that case so it's going to be a little bit tricky looking at housing data for the next 90 days. ASH BENNINGTON: To what extent is this market regionalized, and do we see major differences or is this something that because there's a systemic transmission mechanism, we're seeing some level of homogeneity across the country? LOGAN MOHTASHAMI: It's basically California, New York, and then everything else is different. Whenever the 10-year yield increases-- in 2013 to 2014, we saw that happen. In 2018 and 2019, it's the coastal areas that get hit, pretty much everywhere else is the same. It's not like we ever had a crash in demand in this cycle for housing, but you definitely see that the coastal areas that are tied to mortgages, when mortgage rates get to even 4.5 or 4.65, even though on a historical basis, it seems very low, those sectors get hit. Now, obviously, it's not the case now. Mortgage rates are lower, but it's always the coastal areas, Seattle, Los Angeles, San Francisco, San Diego, New York, that get hit and that's because of higher mortgage rates and I think everywhere else is okay. We've seen that in the data, but also new home sales. New home sales to me is the area that gets impacted. It's the most crucial area in terms of housing to GDP because it's construction jobs, it's housing starts. What we saw in 2018 when mortgage rates got to 5% is that we saw a spike, a recessionary spike in monthly supply of new homes. That basically meant 2019 total housing starts were flat even though historically, they were still low, that is the area to always look up because that's the most important area for housing for the economy and higher mortgage rates have impacted new home sales always. Again, even new home sales were accelerating the first two months of 2020. We really have to be mindful that what happens in the next 90 days might not happen when people are able to go out and walk the earth, because demographics for housing is the best right now. A lot of my work is that this housing cycle from 2008 to 2020 would be the weakest ever recorded history because demographics were more favor for renting. Years 2020 to 2024, ages 26 to 32 are the biggest in US history. Your first time homebuyer age is 33. The existing home sale market should do fine, but we should always be mindful of the new home sale market because that is prone to drastic hits when mortgage rates are higher, because it's a very small marketplace competing against this massive existing home sale market that are cheaper homes, geographically spread out all over. The new home sale, to me, was always something we have to be mindful of for the next five, 10, 15, 20 years, because it's at a disadvantage versus the existing home sale market. ASH BENNINGTON: Logan, two questions. First of all, what's the total proportion of new home sales on a number of sales basis, and also on a dollar basis relative to existing home sales? Second, what's the macroeconomic outlook for new home sales going forward in terms of construction? LOGAN MOHTASHAMI: The best way for me to showcase this is that the existing home sales market, the last data line was showing that 5.77 million and the new home sales market, the last sales was 765,000. Now, there's always a one to six model new home sales versus the existing home sales market. One of the reasons why new home sales have really underperformed for many years is that this is a much more expensive home. We've been building bigger and bigger homes, really, since 1975 but when mortgage rates started to really perk down lower, 1996, if you look at the median square foot of a single family home where roughly we're at 2000, we got as high as 2700 during the previous expansion. ASH BENNINGTON: That's just square feet. LOGAN MOHTASHAMI: Yeah, square feet, so meaning square feet, but if you look at the size of families, they've been falling. We've been building bigger and bigger homes for the new home sales market while family sizes have gotten smaller. You can see the advantage of the existing home sales market, which if you look at housing in general, it's a $30 trillion industry. That sector always has an advantage over the new home sales sector. Going out for many decades, now, the builders have gotten the memo after 2014, I think 2014 when they had this big sales miss, and if you were looking for 20% sales growth that year, we barely finished a positive working from a very extreme bar. They're trying to provide smaller homes. I just think it's going to be difficult for them going out for decades, because they're always competing against a massive existing home sales market. Whenever you hear economists over the last few years always talk about well, we have to produce more homes, we have to produce more homes, the key is that the builders never purposely oversupply the market. They're basically always keeping in line to their supply/demand models and their profit margins. You're never going to see an oversupply of new home sales marketed and sold unless the government comes in and basically, it starts building on their own. I think that's the thing going out for many decades is that the new home sales market is always going to be at a disadvantage. Every decade that we progress on, there's just more and more existing home sales, or existing homes out there, so it's difficult for the building because that's their main competition. We're not talking about-- we produced almost 2 million housing starts in the last cycle. There's homes out there that are just cheaper, smaller, and there's more of them in any city. I think that's the difficult part that the builders have to work with because new home sales have had this weakest cycle ever recorded in history. They're just working off a lower bar. That's the advantage of new home sales market has over the existing home sales market is that underperforming for many years, you just have a low bar to work with. ASH BENNINGTON: Another thing that you watch very closely and that you do a lot of charting on is employment and employment cycle related information. What's the potential impact or the feedthrough of a decline in new home constructions? What's the outlook look like? What does it portend more globally from a macroeconomic context? LOGAN MOHTASHAMI: Well, a lack of production definitely means construction jobs go down, big ticket items go down. Now, on a historical basis, when you have an overheating housing market or housing starts above 1.5 million, you're always at risk of production coming down. Except now, we've never oversupplied the market, we're underproduction. If this recession is a few quarters, you'll see us, a production cut maybe for just a few months and then we just go back to trend because we're not working from any hits. If you actually adjust it to population, housing starts are still very low. They're not that much higher than what we see after a recession. Housing, because it's underperformed the cycle, won't get as hit as hard as let's say the car market. We've had the best five-year car sales, and now, we see 43% decline year-overyear, the car sale is more at risk than something like in the housing market because new home sales and total housing starts are still relatively low versus the population.