Get Ready For Another Shock to Housing Affordability

SPEAKER_2 (0:02)

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Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:25)

Tracy, you know, one of the big themes, obviously, in American life and the most recent election was inflation. And there are a lot of things that people think of when they think of inflation. Maybe they think of egg prices. That's in the news these days. Maybe they think of gasoline prices. But a big story is like, the cost of living is the cost of housing.

Tracy Alloway (0:45)

Yes. Actually, it's kind of funny. Everyone has their own personal benchmarks for inflation. And mine is probably the cost of mayonnaise, because I've been tracking that for a long time. Not because I eat that much of it, but I just find it interesting because it contains eggs and oil and packaging and labor and all that stuff and rent. And guess what, Joe, my rent's going up again.

Joe Weisenthal (1:07)

What about your mayonnaise consumption? It's funny to me. Sorry. When you said mayonnaise, I have to admit the first thing that came to my head was like, just like imagining you in your apartment with the gigantic...

Tracy Alloway (1:17)

Storing buckets of mayonnaise.

Joe Weisenthal (1:19)

A gigantic tub of Costco mayonnaise, eating it with a spoon. I'm sorry. And I was like, well, you're really consuming a lot of mayonnaise if this is what comes to your mind when you think about the cost of living.

Tracy Alloway (1:29)

Well, as part of my research for this, I can tell you, you can buy buckets of extra heavy mayo off of Amazon.

Joe Weisenthal (1:35)

Sounds good. We're actually not doing a mayonnaise episode. We're talking about the other one. We're talking about...

Tracy Alloway (1:41)

I tried to throw in my rent stat.

Joe Weisenthal (1:43)

Yeah, I know.

Tracy Alloway (1:44)

To keep you on topic, but you wanted to talk about mayo.

Joe Weisenthal (1:46)

We'll do a mayo episode at some point. But rent is really interesting. Actually, in the government's measure, there's so many moving parts with anything housing. But most recently, actually, the government's measure of rent price growth, which has been a key contributor to overall inflation, etc., actually has been moderating lately. We're sort of getting back to the point where we're like at pre-COVID levels of rent price growth.

Tracy Alloway (2:09)

Right. So it's still going up, but just not as much as it was before.

Joe Weisenthal (2:13)

But the perversity, perhaps it's a perversity, is that obviously the Fed jacked up interest rates quite aggressively to fight inflation. Inflation has come down, took a little longer than people expected, but you know, it has come down. But one of the things that we do know that happens is that when the Fed jacks up interest rates, that really has an effect on housing development, which of course requires a lot of capital and leverage, etc. And if you look at a chart of say multifamily housing starts, buildings, five units or more, that's come way down since its peak like in 2022

Tracy Alloway (2:46)

Yeah. So we had this huge wave of supply in sort of late 2021, 2022, as you said, it's fallen quite a lot. The interesting thing that I see here is like, yields on bonds are still going up. Yeah. So we're at 4.55 percent or so on the 10-year, and that is higher than when the Fed started cutting rates. So the cost of financing these projects is still going up, and there's not that much activity.

Joe Weisenthal (3:15)

Well, we did an episode in November, 2023, and our guest said something really interesting to me that I've repeated probably many times, which is that for a lot of multi-family developers, they might prefer a hard landing in the economy because sure, that might mean demand for rent goes down, or some of their tenants can't pay their rent. But if it means that you get a dramatic drop in interest rates because of how levered they are to the cost of money, that might actually work out better for them, which is sort of, still blows my mind, but it is what it is. And so one of the other things that we're thinking about is like, well, what's going on with all these multi-family developers carrying big debt and so forth, given the fact that rates have not come down?

Tracy Alloway (3:58)

Yeah, let's talk about it.

Joe Weisenthal (3:59)

Well, we are going to be speaking with the same guest who commented that in 2023 We're going to be talking about all of these dynamics. Really, the perfect guest. Thrilled to welcome back onto the show, Lee Everett, head of research and strategy at Cortland, which is a multi-family owner operator, roughly 80,000 units nationwide. Lee, thank you so much for coming back on the podcast.