Logan Mohtashami talks housing supply and inflation growth
Today’s HousingWire Daily continues the Rundown miniseries, hosted by HousingWire’s Editor-in-Chief Sarah Wheeler and featuring Lead Analyst Logan Mohtashami. In this episode, Mohtashami discusses homebuilders and the all-time lows in housing inventory.
Mohtashami also discusses inflation growth and how the Federal Reserve’s efforts to cool down the economy will impact mortgage rates.
Here is a small preview of the interview, which has been lightly edited for length and clarity:
Sarah Wheeler: You mentioned rates and how builders can sustain costs at a certain rate level, so homebuilding is affordable. So, again, let’s talk about rates and the bond market. What are you seeing?
Logan Mohtashami: Last Friday, we had one of the hottest CPI inflation prints, and the bond market and the 10-year yield are still below 160, right? The bond market looks exactly what I thought it would look like in the recovery of 2021; that 10-year yield range is between 1.33 to 1.6. So, you have the hottest economic and inflation growth in many decades. Additionally, the Fed is talking about tapering rates and their rate hike is in play. In the bond market, the long end is doing exactly what it’s done for four decades. So, it’s a higher rate story again as the bond market channels within each expansion. That’s how it’s worked since the 1980s. Find your range and go with it, don’t just claim mortgage rates should go up for any reason, because if the Federal Reserve is trying to cool down the economy with rate hikes, is that an environment for mortgage rates to really go higher? So, I think that’s the thing about 2022 and we’re going to talk about that in the 2022 forecasts.
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Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:
Sarah Wheeler: Logan, welcome back to another episode of “The Rundown.” So excited to talk about what’s going on in housing economics.
Logan Mohtashami: It is great to be here and being in the studio.
Sarah Wheeler: Yes, today we’re both in the same office, although not in the same space so that we don’t have that reverb, but yeah, great to have you in the HousingWire office this week. We had another amazing week. I feel like every week I’m like, “Oh, last week…” But it just doesn’t stop. It’s just crazy. So, let’s dive in. Last week, you wrote an article for us about would we start 2022 with all-time lows in housing inventory? So, dive into that a little bit.
Logan Mohtashami: Yes, you know, one of the things I didn’t think could happen this year going into next year is inventories getting back to all-time lows. I thought that would be a little bit higher, but I can no longer be assured of that because, again, mortgage demand is picking up, home sales are picking up. What a lot of people don’t know is that we tend to have our best home sale prints, existing home sales, in the fall and winter. That happened last year, it happened in the previous expansion. So, what’s going on is that naturally, inventory falls every fall and winter, it picks up in spring and summer. So, demand is picking up, it is in play to start 2022 at all-time lows in inventory. So, not the best thing you wanna see because, again, you know, from the start of the year, I said, this is an unhealthy housing market because too low of inventory creates too fast…the speed of days on market is too fast. And then it just creates some friction, of course, first-world problems, more Americans are buying homes now in 2020 and 2021 than any period from 2008 to 2019. So, if you’re gonna have a little problem, this would be it.
Sarah Wheeler: Well, and, you know, one of the things that some people…you know, you’re famous for your forbearance crash bros term, but one of the things that completely did not happen was we did not get a huge, you know, inventory coming online from people, you know, in forbearance who had to then foreclose. So, tell us about that.
Logan Mohtashami: Typically, the most bearish American citizens we have are usually housing-crash fanatics, and they had just a pretty awful previous expansion, always talking about housing is gonna get weak, nothing happens. So, when COVID happened, again, they thought COVID was their savior. So, forbearance, because housing didn’t crash last year, they pushed everything for 2021. Oddly enough, people that lacked credit profile experience are rating how good the homeowner’s loan profile was, we had that problem in reverse during the housing bubble years and now it’s like everything else, nothing is like 2008. The loan profiles are fine. The jobs were coming back in 2020. These people were all gonna get off of forbearance. The great hope of housing collapsing for these extremely fanatical American bearish people was never gonna happen, so hence the term forbearance crash bros. Last year, dragged that carcass all the way out to the end of 2021. And now what’s happened? Friday, another big dive in the numbers down for forbearance, and we’re about 882,000. It was near 5 million last year. So, I expect more and more people to get off for forbearance as jobs have come back, especially jobs that are $60,000 and above. The economy is on fire. So, I think the great hope of the housing collapse from these people just didn’t happen, as it shouldn’t have happened in 2021.
Sarah Wheeler: Right, and, you know, I mean, it’s not like those people got out of forbearance because they went into foreclosure. I mean, we’re seeing forbearance exits in a good way, either they can, you know, start paying their mortgage again, they can get into a different loan term.
Logan Mohtashami: Sarah, I’m dead honest here. Pretty much the most unsophisticated, untalented people we have in economics are these housing crash people, they have an absolutely…
Sarah Wheeler: I believe you.
Logan Mohtashami: It’s become a cult. It has just honestly become a cult at this point.
Sarah Wheeler: Well, you know, as we’re talking about inventory, let’s talk about the home builders, right? So, you’ve had a lot of questions this last week. I think even “The Washington Post” and some other outlets have been asking about home builders in a way…oh, no, it was Reuters who was asking about homebuilders in the last week. Because everyone’s wondering, okay, well, you know…I mean, you wrote an article for us that said, it was titled, “Why we can’t build our way out of this inventory crisis.” Right? So, talk about where we are with homebuilding right now.
Logan Mohtashami: Well, here’s the interesting aspect, the builders confidence has been rising for months, right? And the recent new home sales report was a miss, it was still positive, but it was a miss and the revisions were negative, but the builders’ confidence is still rising. Two things that I’ve tried to relate to the readers is that monthly supply of new homes has stabilized, and that’s really…as long as the builders can sell and make money, they’re happy. Everything else is just, they’re gonna complain about everything else for a very long time, but it’s all about selling that home at a certain price. Because monthly supply is stabilized, because rates are low, their confidence has been rising. What else has been rising? Purchase application data has gotten better, existing home sales have gotten better, pending home sales have gotten better. So, does the new home sales sector actually see some better sales growth? The permits have been doing well, it’s all about housing permits, right? Housing permits are a forward-looking indicator. And the permits have been doing well. Now, obviously, we all know, things take longer to close and complete so the housing starts data itself is gonna lag, the permits is the way to go. The permits had been doing good the last few months with the builders’ confidence.
So, it’ll be interesting to see going out that does new home sales follow the existing home sales market in terms of seeing some better data? And that would correlate with the recent increase, because one of the recent articles I wrote is, “Why are the builders so happy?” Well, they’re making money in selling homes. As long as rates…and I’ve always said, as long as mortgage rates are below 3.75%, the builders are okay, you know, they feel fine. The kind of decline in confidence in a lot of the housing data was just a moderation from the COVID-19 peak and that’s why we talked about moderation in data, don’t overreact to it, a lot of people overreacted to it. So, it’ll be interesting to see the housing starts data this week to see if permits still hold that. We always have to remember, housing starts data can be wild month to month, sometimes you get these really positive headlines or these real negative headlines, trend is what matters because it has to get averaged out. If permits are holding good, it confirms the confidence of the builders rising for the last few months.
Sarah Wheeler: So, that’s one of the things we should look for this week. You’re gonna be writing that up for us when that comes out. But also, you know, talk a little bit about lumber prices. So, lumber prices were the story in the spring, then, you know, they got better. What’s happening now?
Logan Mohtashami: Lumber prices are going back up, right? Inflation is up, lumber prices are up. And I just wanna add that a lot of the extreme housing bears in America, we’re trying to save because lumber prices were crashing, that meant housing was crashing in 2021. Now that it’s rising, do those people have the same sophistication to realize that what they said in the past is increasing so they should be talking about well, home sales are gonna go up? So, of course, lumber price is an input cost, and it’s never a good thing for it to go on. But again, as long as the builders can pass…and let’s add this, the builders are making money, their margins are excellent. Why? Because they can pass the cost on. This is something we wrote earlier this year as well. The builders have the ability to do this because rates are low. If rates rise, especially above 3.75%…we saw what it did to the home sales sector at 5% rates in 2018. But as long as rates are low, they’re passing this cost. Now, it can’t go on forever, it’s not a positive that lumber prices go up. But again, lumber price is up, builders confidence is up, housing permit is up, purchase application data is up, pending home sale is up, existing home sale is up. It’s December. Merry Christmas.
Sarah Wheeler: I love that recap. Well, you know, you mentioned rates and how, you know, builders can sustain…you know, they can pass on those costs, as long as we have a certain rate level so that, you know, people can still afford to build those new homes. So, again, let’s talk about rates. What happened in the bond market? What are you seeing?
Logan Mohtashami: Well, we just had one of the hottest CPI inflation prints last Friday. And the bond market, a 10-year yield, it’s still below 160, right? The bond market looks exactly right what I thought it would look like in the recovery in 2021, that 10-year yield range between 1.33% to 1.6%. So, you have the hottest economic growth in many decades, you have the hottest inflation growth, you have the Fed talking about tapering, you have Fed rate hike in play, and the bond market, long and is doing exactly what it has done for four decades. The higher rates kind of story, again, remember, bond market channels within each expansion, that’s how it’s worked since the 1980s. Find your range and go with it, don’t just throw out, you know, mortgage rates should go up for this reason. Because if the Federal Reserve is trying to cool down the economy with rate hikes, whatever they’re gonna try to do to cool this economy down, is that an environment for mortgage rates to really go higher?
So, I think that’s the thing about 2022. We’re gonna talk about that in the 2022 forecasts in details because you’ve got to give details, you’ve got to give models that gives people a pathway to move forward. So, what the bond market is doing and mortgage rates are doing, it looks completely normal to me, and that was the forecast for 2021. And this looks right on target.
Sarah Wheeler: So exciting. So, just to recap, if I’m a mortgage lender, if I’m in real estate, what you’re saying is you don’t see rates going up anytime soon.
Logan Mohtashami: There is a reason why I’ve never been predicted over 1.94% on the 10-year yield, that means no 4% mortgages after 2019. There’s a lot of things that have to happen for rates to go up higher. A lot of this is the world economies have to come together. I mean, our bond market cannot go too much higher if we’re still dealing with COVID variance and all the economies not there yet. If the world economies are working together and we have no more delays and no more, you know, all the stuff that we have to deal with with this virus, it could be a different story, but we’re not there yet. So, the 10-year yield is pretty much looking in line. So, don’t be shocked if we have a two-handle, right? Nobody wants to talk about a two-handle mortgage in 2022, but definitely in play. And we’ll go more into that the details with the 2022 forecast.
Sarah Wheeler: I know that that’s music to a lot of people’s ears, maybe not happy for some other people. So, when should we look for that 2022 forecast?
Logan Mohtashami: It is coming toward Christmastime.
Sarah Wheeler: Awesome. So, a little bit of an early Christmas present there for our readers who can get your whole take. They should look for that, they should look for your story coming this week, and revisit all the things that you’ve been writing because they’re all still in play.
Logan Mohtashami: Yeah, and just, you know, the low inventory and…the bigger story here is that inventory has been falling since 2014, total inventory, purchase application data has been rising. Everyone kind of wants to be the hero and say, “I’m gonna be the expert to tell you when housing is gonna crash.” There is a long-term story here that has been in place. And again, if demand is stable, it is literally impossible to have inventory skyrocket. It doesn’t work like that. You know, demand has to go down, it has to go down for a long time. Remember, we’ve had the 2005 to 2008 housing, that was three years of basically purchase obligations going negative from a very high level that couldn’t be sustained. We’re not at a very high level, we’re back at 300 in the purchase application data, which was the longer-term forecast in the previous expansion. We’ll hit that level in years 2020 to 2024. So, if you’re looking for escalation in inventory, you need demand to fall. Supply and demand, it’s not that difficult. But demand can’t be stable and have an inventory increase.
Now, I do believe that we want to see total inventory levels get to about 1.52 million to 1.93 million. It’s historically very low, but kind of in the 2018/2019, it creates more days on market, people have a more relaxed experience. But I think one of the flaws that I saw this year is that a lot of people saw those Fannie Mae surveys and they said, “It’s the worst time to buy homes in America.” They use that as the premise for housing crashing. No. People just don’t wanna deal with competition, right? Demand is there. Typically, when that gets lower, it means that people have to compete with other American citizens using mortgages to buy homes, and they don’t wanna do that. So, yeah, I totally understand why that data line fell but I didn’t agree with the premise that that meant that housing was crashing in the second half of 2021. So, sorry to my housing crash friends, didn’t happen. Move that goalpost to 2022.
Sarah Wheeler: Logan, as always, it’s a pleasure. Thank you for sharing your insights with us, and we’ll look forward to seeing what you write this week and to that forecast.
Logan Mohtashami: Definitely.
Sarah Wheeler: Thanks so much.