Whats Your Outlook For Home Prices? (w/ Logan Mohtashami)
LOGAN MOHTASHAMI: Home prices. I think that's where a lot of people have asked me the question, where are home prices going to go? I think one thing that home prices, real home prices were negative last year on a year-over-year basis, something not a lot of people knew about. I always thought that is bullish. I even wrote about that. The fact that real home prices on the Case Shiller Index went negative shows that we don't really have an overheating housing market. We just have an expensive one for certain household incomes. The fact that people are thinking this is a housing bubble, that home prices are going to fall 38% to 65% within a very short amount of time, I 100% disagree with that thesis because it was never an overheating demand cycle. It was never an overheating production cycle. It was never an overheating home price cycle on a real home on a year-over-year basis. When supply increases, and I think that's the thing going out for the next few months, a lot of people are taking their homes off the market because they don't want to even try to sell their homes. Because supply might stay here for a little bit longer in terms of homes are going to take longer to sell, and you're going to see increases of inventory, don't think of that as a housing bubble crash about to happen. I think that's one of the biggest mistakes I've seen in the last six or seven years, people are thinking just because nominal home prices went back to 2006 levels that we are prone to a massive decline. Really, anything that's a bubble means that it has to go back to trend. That means home prices have to go back to 1996 levels, similar to what we saw during the housing bubble crash. We don't have that overheating demand cycle, but home prices at some point, will fall. It's how do you get there with the inventory, because the biggest thing in this cycle for housing is housing tenure doubled. What I mean by housing tenure, people from 1981 to 2007 were living in their homes about five years. In this expansion, it's gone to 10 years and going up a lot longer. Why are people doing that? It goes back to one of my original theses years ago that we've been building bigger and bigger homes for decades, and family sizes have been getting smaller. That single family home of 2000 square foot or 2100 square foot is acceptable for people that that have two kids. Unless you're building a massive condo market, a lot of the homes out there are fine for people. They're just staying in their homes longer. A lot of people call it the mortgage rate lockdown thesis. This is something the housing industry has created. I 100% disagree with that thesis. They say that Americans are sitting at home with their low mortgage rates and once it goes lower, inventory is going to be released because people are going to move. I don't believe in that concept. I think people are just sitting in their homes because they don't need to move. You move because of your job. You move because you have more kids. You move because you want to go to a better school for your children, if you lost your job or divorce, but people aren't sitting there thinking, I got a 4% mortgage rate, I'm going to wait till three and a quarter and then pull the trigger. No. I think housing tenure is the story now going out for many, many decades, how long do people stay in their homes? Because if that's the case, production might not ever come back to what people want it to be. ASH BENNINGTON: You cautioned against too much focus on absolute nominal dollar values of housing, other than housing tenure, what other metrics do you look at to get a sense of where we are in the cycle and what the risk factors are going forward? LOGAN MOHTASHAMI: Two key data lines that everyone should track is mortgage purchase applications on a year-over-year basis. When we set that low in 2014, and we're not talking about the lows in 2006 and 2008, adjusting to populations, the lowest level of the mortgage purchase application had was in 2014. We've had an uptrend always intact since then, that uptrend is going to break now, we're going to see much higher year-over-year declines. After the virus is over, and people walk the earth, you always want to keep an eye on year-over-year purchase application data from basically the second week of January to the first week of May. That gives you a good idea because if that comes lower, then inventory levels should increase. Inventory levels for the existing home sale market hasn't really gone anywhere too much, except in 2014, we almost got to six months or one year. Inventory levels and purchase application data, that gives you an idea of where the demand and especially with home prices and nominal dollars, where we're going. Because purchase applications are down and inventory increases, then definitely home prices have to fall because simply it's too expensive for the market, it's going to take longer to sell a house and then going out in the future, job loss recession, how many homes are going to be on the market distress sales? That'll increase the inventory out there. We've never been able to get to six months post-1996 unless we had a job loss recession or a housing bubble crash. This is why it's difficult because people are staying in their homes longer. ASH BENNINGTON: I'm more pragmatic or individual level, if you were unfortunate enough to be someone who listed your house on March 1st , we hear all kinds of advice about this that people are saying lowering prices isn't good. Pulling it off the market isn't good. What's your advice for people who are in that unfortunate position right now? LOGAN MOHTASHAMI: Everyone has to have their own game plan of why are you trying to sell? If you're selling because you have to move up to a bigger house, then you can leave your home on the marketplace and see what happens because I know a lot of buyers are saying, hey, listen, I'm not going to get outbid here. I'm going to go into the market right now. A few home buyers, I don't know, just said it's actually refreshing that I wasn't outfitted this time. If you're concerned about price, and you don't need to sell, a lot of people have already done this, they've taken their homes off the market. They're just going to go listen, I can't have an open house. The process of buying a home has changed completely and I know everyone is doing these virtual open houses, but nothing comes close to actually having buyers come in your house and looking at the home. For those people that are concerned about price, maybe you take your home off the market, wait until lockdown protocols are taken off, give it about 30 days even. Then I would put my home in the market and that's if you're priceoriented. If you need to sell your home because you have to because you have to move, then you got to take your chances in this type of marketplace. Just know that it's just not a functioning economy as long as lockdown protocols are in place. ASH BENNINGTON: What else are you looking at right now, Logan? When you look to the future, what are you thinking about and what are you looking at for potential events that could move this market? LOGAN MOHTASHAMI: Well, first of all, the bond market will lead you-- it led us down, the 10-year yield started to break much lower before jobless claims started to take off. For me personally, the 10-year yield credit, the St. Louis Financial Stress Index was at an all-time low in February and it has gone parabolic. If you want to know when the economy, and especially for the housing market will get better, that 10-year yield should be getting above 1.33%. In fact, the 10-year yield today, though it's 75 basis points, is still too high relatively to the economic damage that we're seeing right now. The bond market is already telling you, hey, listen, Q4 is going to be better than Q2, which isn't saying much as Q2 is going to be horrific. Keep an eye on it. When the 10-year yield goes up, and yes, that means mortgage rates have gone up, that means we're starting to get the process back to where we get back to just a normal economy where people could walk the earth. The St. Louis Financial Stress Index will start to come back down, we saw this in 2008, and jobless claims as parabolic and as horrific that data line has gotten-- those three things, you want to keep an eye on them, jobless claims, the St. Louis Financial Stress Index, and if a 10-year yield heads up higher, it's a good thing. That means the bond market is looking for growth to happen again. Right now, we're still so far away for anything. I look at it from my data points is separating this economy into three different stages. The BC, before coronavirus. The AD, after the disease which we're seeing right now some of the most horrific economic data we'll ever see in our lifetimes, but there's going to be an AB stage, America's Back. For America to come back, you've got to get lockdown protocols off, you got to see the bond market, bond yields rise, you got to see credit get a lot better, high yield index, financial stress index come down, and jobless claims comes down. When that happens, believe in it, after 2008, when we saw those data lines get better, a lot of people who didn't believe in that missed out on the longest economic expansion ever recorded in history, the longest job expansion ever recorded in history. Those three things are what I'm looking for, because I think that benefits the housing market, which was looking really good the first two months of 2020. ASH BENNINGTON: Yeah, we're outside of the domain of finance and predictability here and we're into the domain of biology, which none of us are experts in. It's a bit of a frightening-- LOGAN MOHTASHAMI: It is. That's a really good point. For myself, virus modeling is just like, oh boy, this is a brand new world. For myself, I've always talked about two dates, May 18th and September 1, why? Because before we had even 1000 cases, just looking at other countries that started to do testing and lockdown protocols, I thought once we get to 27,000 cases confirmed six to eight weeks after that, our data should look better. I know in New York, some of the data lines are starting to look a lot better, but by May 18th, or even before that, the curve should get look a lot better in terms of new cases. That is the first step because I think the summer heats, June, July and August, it buys us some time to get ready for the second wave and then-- we can't have this happen over and over again. We can't have this shutting down the economy. Even if we put in six to $10 trillion disaster relief in this, it's simply we cannot function that way. We've got to use that time, that summer to prep for the fall and winter so we don't have a reoccurrence where we say, hey, everybody go back at home, because again, that is the biggest risk as we can see. Shutdown protocols are the biggest risk to any economy out there. Those summer months are really key for us to prepare for the virus coming back in the fall and winter. ASH BENNINGTON: When you mentioned governments and government responses, what are you looking at in terms of policy action from the federal government that could ameliorate or potentially dampen the recovery? LOGAN MOHTASHAMI: Send more checks out because right now, this isn't-- the economy is shut off so basically, the fact that we've enhanced unemployment benefits and we're sending checks out, it'll stabilize this and when I look at how much money is being thrown out, if you look at people who make $46,000 and less, if you take weekly unemployment benefits, the average, take about $100 off of that, then you add a $1200 check to it, they're not going to have what we call depressionary loss in wages, because they're going to get some incomes. Send checks out, help fund small businesses, because right now, the crisis is what are we going to look like in four or five months? Because some companies just aren't going to make it. No matter how much the SBA loans are, some companies are simply not going to make it. Small business, whether at 15 days on cash on hand, you lose 70%, 90% of your revenue, you're done. Whatever it takes, you throw as much money as you can to keep people as solvent as possible. Even with the $2 trillion fiscal stimulus and the 4 trillion monetary, I would be doing much more to just keep as many people solvent to get back to the AB where people start to walk the earth again. I think it's excellent to see that we just went to that route right away, but don't let up. I expect for more fiscal stimulus and more monetary operations to try to keep as many companies and people as solvent and possible until they could start working again. ASH BENNINGTON: Talking about sending checks from a slightly different angle, what's your thought about loan forbearance, mortgage forbearance, the potential impacts, the potential risks and also the potential upsides? LOGAN MOHTASHAMI: The main risks that I see right here is that they made it open-ended. When you make anything open-ended, some people might take that advantage when they don't need it, which puts stress into the service market. Hopefully, right now, the FHFA and Mark Calabria and Mnuchin and everybody's trying to think of a way to mitigate the damages because you can't just open-ended say nobody, call it nobody, mortgage payments go all the way and rent goes all the way. There's a financial aspect behind that. I think for every American, call your servicer and see what the plan is because some people don't realize that some of these plans, you got to lump your payment, after three months, you got to pay it all at once. Some of these other plans, you read every single line of what forbearance is, but if you don't need to do it, my advice is don't take it. There's no benefit for you. If you are struggling, you lost your job and you can't pay, then absolutely take advantage of the situation but if you could keep on making your mortgage payment and your rent, do so because we don't know what the implications are after that process. It's just that when we just made a basically an open-ended call that anybody can miss their mortgage payments, and there isn't an efficient process like the loan modifications that were actually terrible back after the financial crisis in 2008. You still had to qualify for it, you still have to show stress. In some cases, you don't even have to do that. Just be mindful, nothing is really free. If you're definitely stressed, if you definitely lost your job, you definitely have even if one dual household income, if one of your spouse lost income, you definitely want to look into that and see the best benefits but make sure to read everything first. I think there's this notion that it's just basically free, and when they will take back to the loaner, it's not that simple for every servicer.