The Fed Hiked Rates Rapidly and Housing Is as Broken as Ever

Joe Weisenthal (0:10)

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

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, housing. I feel like we'll never get away. I mean, we'll never get away from this topic ever. It doesn't matter, boom, bust, we're gonna be talking about this forever.

Tracy Alloway (0:26)

Well, I mean, everyone lives somewhere, right? Like you're either in an apartment, probably hoping one day to own a house or you're already in a house and you're very, very conscious of whatever's happening to the price of your most important financial asset. So I feel like this is on everyone's minds.

Obviously, there's been a lot of talk about it because rates have gone up so much. And at the same time, I think we wrote about this late last year, it's been a really weird housing market in many ways.

Joe Weisenthal (0:52)

Well, and we had that conversation, of course, with James Egan of Morgan Stanley. And at the time, he sort of made the bold prediction and he said, even with the mortgage rate shock, it's like, I don't think prices are gonna come down. And I think that's been pretty validated.

The one thing that did come down in a meaningful way was housing starts and home builder activity. And you see all the lines sharply moving lower at the end, throughout basically the second half of 2022 And yet here we are in spring 2023, home builder stocks are basically back near the tops and housing starts picked up again. And it's not like rates have really come down. So even the one category that was like affected by rates was not affected by rates.

Tracy Alloway (1:35)

Well, it's sort of like a great microcosm of the soft versus hard data debate, which is the hard data is still coming in relatively active and strong, but the soft data is quite weak at the moment. And you see that in the home builders as well. So there's activity, but if you look at, for instance, the confidence survey of home builders, that's gone down quite a bit, although it is starting to pick up again.

Joe Weisenthal (1:57)

No, it is. And you know, like I was reading through DR. Horton's recent earnings report, and they're like expressing some optimism. They said some of the supply chain issues are behind us, but still like the sort of like deep structural, like under housing. And I have like two questions sort of related to this that I'm thinking about is like, still like the problems of like the post-Great Financial Crisis period.

And we taught, there's like a big odd lots theme, like how much did that scar the home builders? And then this sort of like mini home builder recession that we got in the second half of 2022, is that like that all over again, where the home builders were like, well, you just pulled the rug out from us once again.

And if the whole point of rate hikes, it's like e-supply and Jerome Powell specifically talked about that as like one of the goals, like have we accomplished anything from these rate hikes so far?

Tracy Alloway (2:47)

Definitely a lot to talk about.

Joe Weisenthal (2:48)

All right, well, I'm very excited about today's guest, the perfect guest we've had her on before. We talked to her about the home builders during the absolute peak of the mania. And here we are again with Ali Wolf, the chief economist at Zonda. So Ali, thank you so much for coming back on Odd Lots.

Ali Wolf (3:05)

Hi, Joe. Hi, Tracy. Thanks for having me.

Joe Weisenthal (3:08)

Absolutely. Thank you so much for coming back. So how is this that we hit this huge rate shock? Like one of the fastest hiking cycles ever.

And we couldn't even like slow down like the new construction market. It's like picking back up again, home building stocks shooting up. Like we had a lot of like a three month housing recession out of it.

Ali Wolf (3:29)

Yeah, so I think the important thing is to go back to the beginning of last year. So we had rates in the threes and almost overnight, it felt like rates went to the sixes. And there was just this huge fear that, okay, no one's gonna wanna buy anymore. When in fact, we actually saw sales continued to be strong once rates got to six. And there was this big question mark. This is kind of spring selling season last year.

How is this happening? This kind of defies logic. This defies what's happened to the monthly payment change.

And it was because there were a lot of people that were saying, oh gosh, if they've already gone up, are they gonna continue to go more? I don't wanna miss my opportunity to buy a home.