Logan Mohtashami talks inventory and housing demand
Housing inventory is at all-time lows as we gear up for the spring homebuying season. In this episode of Housing Wire Daily, Lead Analyst Logan Mohtashami joins Editor in Chief Sarah Wheeler to discuss the current inventory crisis and what, if anything, can slow down housing demand.
Here’s a small preview of the interview, which has been lightly edited for length and clarity:
Sarah Wheeler: In your latest article you focused on the area that you live in, in Southern California — tell us a little bit about what the inventory picture looks like there, in one of the hottest housing markets in the country.
Logan Mohtashami: If you look at the heat maps for Los Angeles and Orange County and San Diego. I mean, basically, we have millions and millions of people living in these areas, and we have less than 7,000 homes [for sale] right now, currently. And that is the problem. It’s not that we have a credit boom or housing bubble, it’s just that people want somewhere to live… I’ve always talked about if you take the total inventory levels of the NAR, if you go 1.5…2 million and under, you can create unhealthy home-price growth, and Southern California is a good example of this. Now, inventory is seasonal, of course, and the inventory always fades in the fall and winter and it’s gonna pick up in the spring and summer. But we’re nowhere close now to where I would consider a balanced. For me, inventory-wise is still historically very low.
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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: Welcome, everyone. I’m Sarah Wheeler, editor in chief at HousingWire here with the latest episode of the “HousingWire Daily” podcast. On Mondays, my guest is always HousingWire lead analyst, Logan Mohtashami, so we can talk about the latest economic news. But before we dive in, here’s a brief word from our sponsor. Okay. We are ready to dig in. Logan, welcome back to “HousingWire Daily.”
Logan Mohtashami: It is pleasure to be here. Thank you.
Sarah Wheeler: As always. So, today, I really want to talk about your article last week on inventory and just where we are on inventory, which even after last year, after 2020, after 2021, we are still in the midst of an inventory crisis. And so that’s the headline of your article is, “Housing inventory crisis continues in 2022.” So, what is going to make the difference?
Logan Mohtashami: Well, I was hoping this wouldn’t be the case in 2022, that we would break to fresh new all-time lows. And the recent data that we’ve gotten it has just verified a troubling trend for myself because I’ve always thought this is the big concern. And we wrote about this in HousingWire a few months ago that the risk is inventory could break to new all-time lows. And again, this is not a healthy housing market on that sense. And we’re in mid-January, we’re not that far away from spring selling season. Mortgage rates are under 4%. Unemployment rates are under 4%. And inventories are at all-time lows. This is not a healthy market on that regard because people just want to buy homes for shelter. And there’s not that many homes out there versus the demand. And as you can see, prices have escalated in years, 2020 and 2021. And hopefully, hopefully, the rate of growth cools down this year to something manageable. But as of right now, we’re in inventory crisis year three, in 2022.
Sarah Wheeler: You have some specific stats in your story, and you kind of focused on the area that you live in, in Southern California. Tell us a little bit about what is the inventory picture look like there. What are the hottest markets in the country?
Logan Mohtashami: If you look at Southern California, of course, California is a massive population state. But if you look at where the heat maps is, Los Angeles, Orange County, and San Diego. I mean, basically, we have millions and millions of people living in these areas with less than 7,000 homes, right now, currently. And that’s the problem. It’s not that we have a credit boom or housing bubble, it’s just that people want somewhere to live. And when you have inventory levels at this stage, I’ve always talked about it, if you take the total inventory levels of the NAR, if you go 1.5 million, 2 million, and under, you can create unhealthy home price growth. And Southern California is a good example of this. Now, inventory is seasonal, of course, inventory always fades in the fall and winter. And it’s gonna pick up in the spring and summer. But we’re nowhere close now to where I would just consider a balanced market. And a balanced market, for me, inventory wise is still historically very low, but it cools the rate of growth of pricing. And we’re just not starting the year off anywhere there. And that to me, again, it’s a year three of a five-year period that I was concerned about this. And now what the article tries to do is show people what we really need is mortgage demand weakness to give a breather for the housing market in terms of inventory going because we don’t want 2023 to start out at all-time new lows again. So, I think the article is a little bit more specific on how to track mortgage demand and use a historical perspective. We’ve had times in the previous expansion where rates go up, things cool down, days on markets grow. But in that article, there are lots of charts there to show that we are not there anywhere close to there.
Sarah Wheeler: I think one of the very distinctive things about this time period is as opposed to the last time where we just had demand, you know, through the roof or that imbalance in the housing market. It’s not because people are making crazy loans to people who shouldn’t be homeowners, we just have more homeowners, right?
Logan Mohtashami: You know, I’ve always thought the housing crash addicts in America, the core reason why they’ve been wrong for 10 years now, going into year 11 is that we never really had a housing boom from 2008 to 2019. We’ve always had millions and millions of people buy homes, but we’ve never had a credit boom. And this is why I always focus on these purchase application jars that the MBA shows. 2002 to 2005 was kind of an anomaly on a housing sense in terms of credit, credit expansion, the type of credit, the debt leverage. We don’t have any of that, even today. You don’t have a credit boom or housing boom. Millions of people buy homes, it’s just that this time around inventory has been falling. And again, the main story here is this has been how happening since 2014, demand picks up, inventories fall. It’s been slowly falling for eight years, is going to year nine. And people think that, all of a sudden, inventory is going to skyrocket like this, like a magic beanstalk kind of event. And this is why I harped on the Forbearance Crash Bros last year. Our housing crash addicts are not very talented people, so you have to explain to people why inventory isn’t going to skyrocket anytime soon. But, again, for every positive story, because this is kind of a first-world problem, Americans make more money, rates are low, people are buying homes, or they’re securing their shelter costs at a very low rate, but it also drains the inventory. And I was hoping this wouldn’t be the case, that we would break to new all-time lows, and we are here right now currently.
Sarah Wheeler: We’re going to get to mortgage rates here in a minute. We always do, right? I mean, our audience wants to know, and lots of things happening there. But, first, I want to ask you, you know, you mentioned MBA mortgage purchase application data. And in this article, you really talk about a specific time period that you track. And I thought it was really interesting that you’re really showing people if you want to see where this is going to break or if it’s not going to break, here’s the time period you need to focus on.
Logan Mohtashami: Yeah, and this is a good example of what happened in 2013 and ’14. 2013, home prices started accelerating really hot, but we didn’t really have the demographic demand back then to support that kind of price growth. And what happened is mortgage rates, the 10-year yield went from 160% to 3%, mortgage rates went up 0.5% to 1% in a very short time. The rate of growth of pricing cooled down significantly. And that happened toward the second half of 2013. And then in 2014, purchase application datas were down on-trend 20%, year over year. It got to the lowest levels ever adjusting to population, and even back then monthly supply never broke over six months. And you’re looking at the lowest levels in that index versus the population. So, I would love for something like that to happen, just to create more days on the market. But that was a good example of what, you know, softness looks like without crashing the market, and I think that’s the context. We’ve always heard people, well, when rates rise, housing will crash. Rates rose a few times in the previous expansion with the weakest housing recovery, ever. And guess what? It cools the rate of growth of sales, it cools the rate of growth of pricing, but it doesn’t crash housing. Millions and millions of people buy homes, and even with 5% mortgage rates in 2018, total home sales, new and existing got to about 6 million. So, we’re so far away from that. What I want is the 10-year yield to break over 1.9 for a sense of how cool the market is because that’s something we’ve talked about here on HousingWire since the summer of 2020. Like, what could cool this down? The 10-year yield is getting over 1.94%. What is the thing I don’t think can happen last year? The 10-year yield is getting over 1.94%. What is it today? Still, 1.72%.
Sarah Wheeler: Well, and, you know, rising rates work against the inventory in another way. If you refi and you have this amazing rate now, why… you know, if you already own a home, not the first-time homebuyers. If you already own a home, we’re seeing that tenure rise, right? People are staying in their homes longer. And one of the reasons is we just had all those millions of people refi. And now as rates rise, if they’re going to buy a new home, a step-up home or whatever, they’re gonna be paying much higher rates. And even though they’re still historically low, if you’re the person who just locked in this amazing refi rate, it’s gonna discourage you, right?
Logan Mohtashami: Well, here’s something, I’m not a big fan of the mortgage rate lockdown premise. I know it gets talked about a lot, but we’ve actually never had a period of time where mortgage rates were higher for a very long time. And we’re talking about a few years. So, what occurred in 2018 is mortgage rates got all the way to 5%, and purchase application data had like maybe, I think three negative prints. People still bought homes, people bought homes with higher mortgage rates because there’s a certain type of homebuyer every year that needs shelter, right? Whether it’s a move up, move down, or first-time homebuyer. Millions of people buy homes. Now, the mortgage rate lockdown premise, I think, if housing tenure was running at five years or less, like, we saw from 1985 to 2007, that premise might have had a little bit more validity to it. But the thing is that people buy home and they stay there for a really long time. So, even if rates came down low, there was a theory that if rates go down low, inventory will increase. Yeah, that’s never happened. Okay. What happens is demand gets weak and inventory increases a little bit, and we’ve seen that in the previous expansion. So, there’s not enough turnover of homes for that to really be a big driver. I think if you have, let’s say, I’m going to give a hypothetical, let’s say mortgage rates were 5% to 6%, for like six to seven years, and you’re looking at a 2.5%, the cost of debt to purchase a home is you’re paying more. And if you’re buying a bigger house, most likely you’re paying more. But, in theory, if you needed a house, it’s still that total payment value, whether it’s a 5% or 3%. It’s, do you need to move, right?
And since tenure the past 10 years, a lot of people just buy and they’ve sat there. And again, there is a positive and a negative to every story. And the positive, if you look at homeowners they’re on paper, the best ever, right, fix low debt costs, rising wages, they stay in their homes, have nested equity. A lot of people have equity, if they needed to buy a house, they could sell and put a bigger downpayment on. But the rate situation, we’ve never really had a period where rates were higher for a very long time. I think 2017 and 2018 was a recent example. Mortgage rates went all the way up to 5%. In 2018, we still had 6 million total home sales. The rate of growth of housing cools with higher rates, it doesn’t crash the market. But, again, people just love their homes they live in and they stay in there longer and they fix it up, it’s up. It’s just not a very turnover sector right now, and it’s doubled. In some areas, I know here in Southern California, it’s 15, 16 years. I’ve been in my home for 17 years, so it’s one of those things that doesn’t get talked about enough, but I really do believe it’s a very big story. And it explains the downtrend in total inventory since 2014, which if you look at the purchase application, you know, what happened since 2014? Purchase application data has been rising. So, you kind of, again, don’t make it complicated, you know, demand is rising, supply is falling, supply is low, you know, and it’s an issue right now because we’ve broken down a key level for me, and this was the concern about years, 2020 to 2024.
Sarah Wheeler: You know, I watch a show on HGTV or one of the networks, I don’t even know, “Love It or List It”. And the premises, someone’s going to come into your home and make it… you know, they want to leave, but if you could transform my home I’ll stay. Meanwhile, there’s a real estate agent who is like, “No, I’m going to get you your dream home, everything you want.” And then they almost never pick to move, almost never, they… you know, even if they hate their home and they’re ready to move, when they come in, they see it changed, they’re just… you know, people are just always rational people, right? And the real estate guy’s like, “I got you everything you wanted?” And I’m like, “No, no. We’re gonna stay.” And I just think there’s a lot of psychology that work there.
Logan Mohtashami: Yeah, it is. And the psychology is that we’ve created an industry on how to make your home better, and a lot of money goes into your house. So, I mean, just personal experience people go, “Well, we could buy something or we could fix it up. Well, look at Home Depot and Lowe’s, and their stocks have done great.” We have an enterprise of financial networks that show you, “Hey, listen, you can do it yourself.” So, it’s much different than what we saw from 1985 to 2007, right? So, I think that’s always been a big theme on minds. People are staying in their homes longer, they don’t really need to move. And something I talked about on Twitter this morning is that if you look at post-1996, monthly supply, and the reason I would go post-1986, the civilian labor force is much bigger and mortgage rates took another leg down. If you take the housing bubble crash, the credit boom, job loss recession out of the equation, it’s actually extremely rare to get monthly supply above six months for the existing home sales marketplace, right? It took a credit boom, bust, and recession. And we had a few years where supply was over, but we’re not there now. Again, the homeowner going into this COVID crisis was in much better shape, and people just don’t foreclose for no reason, right? You know, if you have a fixed load, get costs, rising wages, you’re living here, your family, your kids are going to school, you built a relationship with that community, that’s different than an investor. And this is why I always tell people, be cautious of real estate investors and their housing takes. They look at the world much differently, and this is why a lot of these individuals on their YouTubes and various other channels have been wrong for a very long time.
Sarah Wheeler: Yeah, no, that’s always good to note. So, let’s talk more about rates. You touched on it. So, last week, we had Freddie Mac, their average rate that they tracked in their PMMS, mortgage survey, average 30-year fixed was 3.45, so that’s on the upper line, right? But that’s still within your channel of what you think, you know, hey, you’re looking at tenure in this channel, which means you’re looking at rates in this channel. So, explain to us why that doesn’t bother you.
Logan Mohtashami: Well, personally, I actually want to rates cool to market, but, again, what I want and I could get never happens. In this regard, it’s the same thing I’ve talked about going into 2021, it’s very hard for the 10-year yield to get over 1.94%. And this is started actually from 2019, the second half of 2019 when we had an inverted yield curve. So, let’s rewind, let’s take all the things that we’ve had happen to us since 2021. We’ve had the hottest economic growth in decades, we have smoking hot inflation data, and the 10-year yield today. Even with all the aggressive Fed talk, taper, rate hikes, everything is at 1.72%… The 2021…
Sarah Wheeler: Did you have to say we are recording this ahead of time so it may not be 1.72% on…
Logan Mohtashami: It is true. Yeah. Monday morning, it might not be, but we just had the Federal Reserve just talking about being very aggressive and wanting to fight inflation, and still, 1.72%. I’ve always cautioned people that the higher range of this kind of a 10-year yield forecast between 62 basis points, or 1.94% is about 3.375 and 3.625. There has been times in the pre where my bond yield ranges actually get broken above a little bit and under the duration of the year, right, really typically stays in there. If we can close above 1.9% to get bond market selling, then we can get rates above 3.75%. And then maybe that’ll cool down housing and create more days on the market. But as you can see, it is very difficult to do that. And that’s more of a technical basis on the bond market, go down your trend from 1981. And if you look at it in that way, the mortgage rates and the 10-year yield makes sense. If you’re trying to incorporate… Well, inflation, as hot it was, you know, decades ago, and mortgage rates were above 10%, yeah, that’s not working out for you, that hasn’t worked out for you for a long time. So, trend is your end, and this is why I say wait until we could close above 1.94%. I even give a premise in the 2022 forecasts on how we can get the 10-year yield to 2.2%, but none of that is still here. And today, we’re still below that 1.94%. We haven’t even come close to testing it. So, the upper range of the forecast is here, the same thing I talked about last year, 3.375% to 3.625%. I know some people could say it’s a little bit higher, it’s a little bit lower. In any case, you get the drift, right, 4%. Unemployment rates are under 4%. Inventory is at all-time lows. It’s an issue here, right? It’s not a healthy market in that regard.
Sarah Wheeler: Yeah, it’s great. And, I mean, you know, obviously, 3.45% is still incredibly low. It’s just if you compare it to 2020. And yet, same time, the rate was 2.79%. So, it really just depends on what you’re looking for.
Logan Mohtashami: You know, it’s the payment, you know, in some cases, it’s $17 higher, in some cases, it’s $38 higher, or in some of the… $8. It really depends on the size of the loan. But in general context, you can see why post-1996 it’s really rare to get existing home sales under four because the general payment level, the total principal interest, taxes, insurance, or as mortgage people call it, PITI. The total is just very low compared to the people’s wages. And I think that’s the context. And when I talk about, you know, how to cool the market, you can get sales, the rate of growth to climb. Even back in 5% mortgage rates, you know, we went from $3.71 million to about $4.98 million, that’s sales range. The rate of growth slowed down, but you still had 6 million total home sales because the payment levels are there. So, of course, people say, well, there’s a down payment issue, or guess what? Listen, if housing was really soft, inventory demand goes down noticeably for a long duration, it’s not been the case, it can fluctuate with the rate levels. But, again, we’re talking sub 4% now. And people got to realize there’s a group of Americans, which we call the DICE, double income, college-educated. College-educated income people with double incomes make money, right? And the payment levels are just not high enough to really crash the housing market, especially sub 4%. I do believe the rate of growth can slow down, but you need that 10-year yield to crack. And again, the frustration is that it’s just as hard for me how we see fresh new all-time lows and inventory, and we’re not that far away from the selling season. And areas, it’s just not enough homes, and prices can rise in an unhealthy way. And this would be year three of year five, and then that means a majority of the period of time inventories are down to that level. And it’s just not what I wanted to see, but the thing is, we have to analyze it and try to find inflection points here at HousingWire and that’s my job. But, again, if growth and inflation was your meal ticket to 6%, 7% interest rates, not happening, hasn’t happened. Follow the bond market. She is mother economics in its purest and biggest fashion. She doesn’t really care about what you perceived to be the correct case. She’s just following the long-term downtrend.
Sarah Wheeler: I think your point about how we’re about to come into the spring selling season is just very important. I follow the Sacramento Appraisal Blog, with Ryan Lundqvist, who’s an appraisal in Sacramento writes, and I find it, you know, very interesting. And it’s one of the things he said is like, if you look on days on market right now, if you look at the activity right now, this is supposed to be sort of the low season, right? I mean, we’re in winter, and it is lower, it is lower than the last spring or summer, but it’s not your typical fall, winter season.
Logan Mohtashami: You know, what’s really interesting, and I’ve written about this for HousingWire, our best existing home sales prints have always come in the fall and winter. They came this year, it came last year, it came the year before and in the previous expansion, it has as well. So, there could be demand during this period, but what I try to focus people on is the days on market on the NAR reports. When you get above 30 to 45 days, I remember when that was happening in 2018, ’19. I know a lot of realtors weren’t happy, but things weren’t selling fast. But I was like, “Wow. This is a balanced market. People have choices. This is good.” Now, if we just have a market like this, you won’t get frenzy. So, here we’re at 18, anything on the teenager side, and even in that article, I show the NARs report on the days on market, comparing it to even parts of 2020. We’re still at a teenager. This is not what you want to see because what happens is there’s just not enough homes out there. And the whole forbearance thing wasn’t going to, you know, create millions of homes that come on the market like that, that was never the case. That’s not how it works even. But we’re going into the spring season with a teenager print. We have one more sales report for the month of December. But for myself going into 2022, the sales ranges forecasts that I have are actually lower than what we have. Because to me, existing home sales have been outperforming. We’ve seen mortgage demand pick up the last 18 weeks of the year. So, we’ll see what happens in spring. But right now, again, crisis, again, year three of this unique five-year period in U.S. economic history.
Sarah Wheeler: So, people can go to housingwire.com. They have to be… it should be plus members to read your stuff. And so, you know, that’s a very, in my opinion, a very reasonable amount to pay for the kind of insight that you’re getting. They get other long-form news as well. But you have your inventory story on there, you have your 2022 forecasts. That’s already on there. What are you looking forward to this week? What what are some of the reports coming out?
Logan Mohtashami: Well, housing starts are going to come out. And again, you know, the builders are really happy lately, you know, for all the complaining about lumber, and material costs, and delays, and everything. Why are they so happy? Because they can pass the costs on to the consumer. As long as they can sell their homes or they perceive they think they can sell their homes, that trend will increase. So, look at it in that context when you see the builder’s confidence, it is rising now. We’ve had recent new home sales misses with negative revisions, but the permits have been picking up because the builders feel okay. We can sell this product. I know if you look at the builder’s earnings or profit margins are good because they could pass it along. Again, another very unhealthy sector in terms of you could see the median price growth really pick up in 2020 and 2021. They’re making money, that’s their job, right? But, again, it’s the long-term sustainability of a balanced market gets at risk when you get inventories as low. And they have benefited from total inventory levels falling to where they are in the existing home sales market, which never was the case from 2008 to 2019. As you can see a lot of things change in two years, 2020 to 2024 that we didn’t have to worry about in the previous expansion.
Sarah Wheeler: Well, people should be tuning in listening to this podcast, but also look on housingwire.com. In addition, I am hosting the virtual 2022 forecast event on February 8th, which features you, and features Selma Hepp from CoreLogic, Marina Walsh from the MBA, and Jeff Tucker from Zillow, all economists talking about, you know, what does this look like going forward? I’m really excited about that.
Logan Mohtashami: Yes, all the nerds getting together, it’s good times.
Sarah Wheeler: And, not only are each of you going to get an opportunity to talk about your own asset, different parts of the housing, how that affects housing, we’re going to roundtable at the end and people can ask questions, which I know you get tons of questions on social, we get tons of questions for you through our portals. So, really excited people can tune in and they can send questions to you ahead of time that you can consider, correct?
Logan Mohtashami: Yes. And also, you know, if people have Instagram, my Instagram is basically 24/7 nerds best, and ask as many questions. I will literally give you answers back. Again, my job is to show you the pathway to where the economy is going and where the housing market is going. So, no questions or bad questions. Any question is a good question. So, don’t be afraid to ask questions. Questions are good thing, like really.
Sarah Wheeler: All right. Well, Logan. We appreciate you so much. Thanks for once again being on “HousingWire Daily.”
Logan Mohtashami: My pleasure to be here always, Sarah.