This Is What 7% Mortgages Will Do To the Housing Market

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, there's nothing better than a good chart.

Joe Weisenthal (0:19)

What chart do you have for us today? What chart are you gonna ask listeners to visualize in their minds since they can't actually probably look at it right now? What chart should they be thinking about?

Tracy Alloway (0:29)

I actually have a bunch in mind. There are some extreme charts at the moment, given everything that's been happening with markets. I'm thinking in particular, bond market volatility, what we saw with sterling and gilts very recently.

But if you're looking for the most interesting charts at the moment, I gotta say, I really think the housing market and the mortgage market are where it's at.

Joe Weisenthal (0:51)

I completely agree with you. And you know, like, look, the Fed is raising rates to slow down the economy, to beat inflation.

But the number one sector of the economy that's most sensitive to rates very directly is housing. And so you just see some insane charts. We've been posting a bunch, but if you look at the price of a new 30-year mortgage, just like through the roof compared to six months ago, so many things like that. And housing is so crucial to the overall economy. Everyone wants to buy one or wants to live in one.

And what does it mean when these numbers are moving so fast, so hard?

Tracy Alloway (1:27)

Right, well, everyone also has an opinion on where housing is going. But you mentioned a couple of those charts. You can look at pretty much anything.

Like the pure acceleration in mortgage rates has been unprecedented. The spread between mortgages and the 10-year US Treasury is now at a record housing affordability, is at a record low. There are so many you can choose from.

But it really feels like given the unusualness of the situation and what we're seeing in some of these charts, it feels like there's a lot of uncertainty. So yes, everyone would expect higher interest rates to have a negative impact on the housing market. But we've also been talking about how there's low inventory and there's a structural need for more housing in the US. So maybe things are different this time.

Joe Weisenthal (2:14)

It's a really weird market because I think everybody is still kind of scarred from the great financial crisis. And you see these huge moves and you're like, well, aren't house prices, don't they have to fall off a cliff?

And yet if no one is forced to sell, what's gonna happen? Is the housing market just gonna go away? Like no transactions except for people who get divorced or have to move or something like that? Seriously, it seems like a possibility.

So much weirdness. Pull up a chart of how many people are refiing their mortgage. I mean, it's basically the closest thing you find to a zero in a chart. No one is refiing with mortgages at 7% or whatever.

Tracy Alloway (2:51)

I thought you were gonna mention the REITs, which is another good chart as well. So there are big questions about this market. And it does-

Joe Weisenthal (2:57)

It's a weird market.

Tracy Alloway (2:58)

Yeah, and the other thing going on is you have a lot of people talking about market structure issues. So how mortgage rates are actually set, what's going on in the market for mortgage-backed securities. A lot of people have been saying, oh, it's broken, there's something going on.

So I am very pleased to say we are going to get into all of these issues, or at least try to, because there is a lot of uncertainty and we really do have the perfect guest.

Joe Weisenthal (3:22)

Let's do it, I'm really excited. I have so many questions, let's get going.

Tracy Alloway (3:26)

Okay, we are going to be speaking with Jim Egan.

He is Morgan Stanley's US housing strategist and does some great research on all of these topics. So Jim, thank you so much for coming on.

Jim Egan (3:37)

Thank you so much for having me. It's an honor to be here.

Tracy Alloway (3:40)

So maybe just to begin with, we should talk about, is this environment that unusual? You've been analyzing US housing for a very, very long time. When you look at what's going on today, how remarkable is it to you?

Jim Egan (3:55)

I would say that a lot of the statistics that we use to forecast things like housing activity, and by that we mean home sales or housing starts, as well as home prices, are at levels that we either haven't seen before, or if we've seen them, we haven't seen them for decades. I think you've already mentioned a few of the pretty important aspects of this. Like when we think about the housing market and taking a step back, we have a four-pillared view.