Are We About to See the Shortest Housing Cycle Ever?

Tracy Alloway (0:10)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, do you remember this time last year, some of the discourse around the housing market?

Joe Weisenthal (0:21)

Yeah, of course. I mean, this was like really like when people were like waking up to the sort of like eye popping mortgage rates, at least by recent standards, you know, zoom out, maybe not that high, but by recent standards, like, oh, this is it.

Housing is sort of over, crash, prices plunge, we're back.

Tracy Alloway (0:37)

That's exactly it. So we had a really historic run up in benchmark interest rates, and those were translating into higher mortgage rates. And everyone thought that this was going to lead to a, you know, some people thought it would be a house price collapse. Others thought it would be some sort of impact, something significant one way or the other.

And yet fast forward 12 months, I'm looking at the Kay Schiller index. We had like a tiny dip, you know, relatively small going into the end of last year. And now house prices are rising again.

Joe Weisenthal (1:16)

We basically had like the shortest housing bear market ever. Like we had a really tiny dip in prices. Every index you mentioned, I saw some other one, just yesterday, like one of those like national, like Friday ones, I don't know. That's like rocketing up again. Obviously we know that like the homebuilders sort of like slam the brakes, it's like, okay, here's prices falling, buyers drop out, homebuilders get crushed.

Their stocks are as we've been talking about on a bunch of recent episodes, they're like basically at all time high. So somehow this huge repricing of mortgages did not cause the housing bear market that many, but not everyone expected.

Tracy Alloway (1:52)

Yeah, and I mean, it's bad news if you were hoping that house prices would collapse, that you could finally enter the market. Good news if you are a homeowner potentially.

But anyway, you remember we talked to a guest last year, I think it was last October, and the idea was basically we were getting this really weird housing market with rates going up, but house prices actually not that vulnerable to a decline. And I think that scenario has more or less panned out.

Joe Weisenthal (2:22)

Totally, and it's been a theme of a few episodes, but it's totally true, which is that a precondition, so to speak, of like a real housing downturn is unemployment and the existence of forced sellers. And so it's not a very good time to buy, but also very few people are forced sellers other than, I think we like talking about, their divorces and things like that, or people who have to move for their work.

But, and this has manifested itself, not just in firm prices, but like no housing inventory. And the people who track levels of housing inventory, it's like record lows or close to it. And so yeah, demand has dropped with high mortgage rates, but so has supply, and you get your price stability.

Tracy Alloway (3:04)

That's right. So on this episode, I am very pleased to say we are going to be doing a checkup of the weird housing market. Let's put it that way. We're gonna be speaking again with Jim Egan. He is of course the US housing strategist over at Morgan Stanley. So Jim, thank you so much for coming back on Odd Lots.

Jim Egan (3:22)

Thank you for having me back. It's a pleasure to be here.

Tracy Alloway (3:24)

So since we last spoke, I've been following your research, and your thesis when we spoke was this idea of basically a subdued impact on house prices, maybe less housing activity itself. Since then, you've sort of ratcheted down your expectations for house prices and then ratcheted them back up, not by a huge degree, I should say, but walk us through what the past 10 months or eight months or so have been like from your perspective, trying to gauge what's going on here.

Jim Egan (3:56)

Right, so I think you two both brought up a lot of kind of the key underlying points for how we think about the housing market. Our general framework, we like to call it our four-pillared framework where we're talking about demand for shelter, supply of shelter, the affordability of the US housing market, and the availability of mortgage credit. But a lot of what's been going on has been this kind of juxtaposition between supply and affordability.

Mortgage rates move incredibly higher and we see affordability deteriorate at a pace unlike anything that we've ever really seen in 2022