The Housing Market in 2024: What's Ahead for Buyers and Sellers

00:00:24 - Mike Mills
I am a local Dallas Fort Worth mortgage banker here, and join me every single week as we chat with industry experts, giving you the insights and tools to excel in this ever changing world of real estate and finance. These days, the real estate market news comes fast and furious. Mortgage rates are plunging, inventory is shrinking, and corporate investors are surging, but 2024 actually looks to be pretty bright. But that gives a big feeling of overwhelming or overwhelmingness. And how are you supposed to keep up with all this and continue to serve your clients on a regular basis? Well, my guest today is the man with the daily industry insights, sent right to your inbox each and every week. But before we dive into today's discussion, please take a moment to subscribe to our podcast, giving us a thumbs up on YouTube and share this episode with your fellow real estate professionals out there, because your actions amplify our voice and ensure that more real estate peeps get access to this valuable information. So help us conquer the algorithms. I really appreciate it. Now, without further ado, let's meet Mr. Lance Lambert. He is the founder and CEO of Rezi Club. Hello, Mr. Lance. How are you, sir?

00:01:26 - Lance Lambert
Hey, Mike. Thank you so much for having me on. Really excited to talk housing today.

00:01:35 - Mike Mills
So how's things going today? Are we New York treating you right as far as the weather is concerned, or how's it up there doing?

00:01:42 - Lance Lambert
Good. I'm actually in Cincinnati now. I lived in New York for five years before the pandemic hit. But then, right when the pandemic hit, I was one of those people who was like, you know what? I'm out of here. Had a house built out in Cincinnati where my wife and I are from and have lived out here since 2020.

00:02:01 - Mike Mills
Great. Okay. Well, we chatted a little bit before you came on, and we're definitely going to get into a little bit of your credentials so everybody can kind of know where you come from on all this and why you're the ninja when it comes to real estate news. But before that, I just wanted to get kind of an overall based on everything that you've seen so far. As we head into 2024, we'll drill down into some of these topics a little bit more, but give me an idea of where you kind of see real estate headed. Are we on an uptrend? Are we going to stay plateaued? Where do you think all this is headed?

00:02:31 - Lance Lambert
Well, let's talk about where we are first. So where the housing market is is a place where there's a bit of a tug of war occurring on a national level, which we have tight resale supply. On a national level, there's not a ton of homes on the market relative to pre pandemic levels. On a national level, we're about down 39, 37% from pre pandemic levels for active listings. And so that has been a bit of a tailwind for the housing market this year. On the other side of it, affordability is very strained. Mortgage rates going up from 3% to 4% to 5% to 6% to 7%. And then this fall, briefly, before receding, hitting 8%, that's deteriorated levels to a place we haven't seen since the mid 80s. So housing affordability today, taking into account incomes, prices, mortgage rates, is actually worse than when mortgage rates were at 10% or 11%, just because house prices have gone up so much, especially during the pandemic. And so that's the headwind to the market. So we have a tailwind, tight resale supply, and we have a headwind of deteriorated affordability. So what that's created in the 2023 market is that the builders have actually done well, single family builders, and it's because tight resale supply and then a lot of existing homeowners who have sold, they've been stubborn on the prices. They haven't come down much. The economics have kind of allowed them on a national level, to kind of keep those top prices, and they haven't wanted to pull back unless they've had to. So builders who've made affordability improvements in a market that is very affordability strained, if they're able to do things like mortgage rate buy downs, maybe at some price cuts, other incentives, they've been able to meet the market and keep transactions going. So home builders have done well. The institutional side, they've really pulled back on buying levels this year. According to John Burns real estate in Q two, 2022, at the height of the pandemic housing boom, institutional investors, operators that own at least 1000 homes, bought 2.2% of the transaction. So 2.2% of overall transactions in the housing market were made by institutional firms. This latest quarter, it was 0.4. So they've gone from 2.2 to 0.4.

00:05:04 - Mike Mills
Quite a bit of a drop.

00:05:05 - Lance Lambert
Yeah, huge pullback. And then they're buying up 0.4%. So about one in 200 homes that have been sold over the most recent quarter were institutional. But if you think about it, in the fact that the overall number of transactions in the market has come down, the pullback on the institutional side has been even bigger. So institutional buying is strained. Home builders have done well. The resale market prices have held firm on a national level, although you have a lot of regional bifurcation, which we can get into later. But the resale market has also had very tight inventory, and this is for a couple of reasons. One, inventory got very low during the pandemic housing boom, because what was coming on the market was just flying off.

00:05:55 - Mike Mills
Right.

00:05:56 - Lance Lambert
A little bit of a different story now to where things aren't necessarily flying off, but there's just not a lot of new listings coming onto the market. There's somewhat of a lock in effect in the market where some of these existing homeowners, who, on a net effective basis, have a 3.6% mortgage rate. So if you take all the mortgages in the US, the net effective mortgage rate of all those mortgages is 3.6.

00:06:20 - Mike Mills
The effect, not a lot of incentive to sell your house when you got it that low. Right.

00:06:24 - Lance Lambert
Even though mortgage rates have come down somewhat over the past two months, the current average 30 year fixed mortgage rate, which is 6.66 as of today, that's still a lot higher than the net effective. So these homeowners, these existing homeowners, if they were to sell their home and go buy something new, they would be getting a higher mortgage rate, but also that much higher monthly payment. And some of them just aren't eligible to do it. They couldn't go out and actually get that mortgage. So the existing home market has stayed very tight and not a lot of transactions. So that's 2023 tight existing home sales levels, tight existing inventory builders have outperformed. And among the ten biggest builders I track, actually, all ten outperform the S and P 500 this year.

00:07:12 - Mike Mills
Wow.

00:07:13 - Lance Lambert
And that's because nine out of those ten have still higher margins today than they did pre pandemic.

00:07:19 - Mike Mills
Yeah. The builder profit margins are pretty significant.

00:07:21 - Lance Lambert
Yeah. Even with doing the mortgage rate buy downs and everything, their margins have stayed high because they got so high during the pandemic and they didn't have to come down that much to meet the market. And then the other thing is the institutional side, which I track very closely at Resi Club, is still very much constrained at this moment. So that's today. That's been what we've seen this year heading forward. The hope here is that the existing home market will start to improve. Mortgage rates have now come off of that eight handle. They've come down now to mid sixes. The Fed is already saying they're probably going to cut at least three times next year. We'll see how that goes, and the financial markets have eased up. So if financial markets can ease up even more and mortgage rates can come in a bit more, I think what will start to happen is that some people who put off selling will start to be like, you know what, we've had another kid. Mortgage rates have come down. Yeah, I'd be giving up my three, but at least maybe if I buy it down a little more, maybe I'll get into the high fives. Right. And that would be acceptable, whereas a seven or eight wouldn't. And so as some of that comes back into the market, we get more of the churn in the market. Somebody selling to then go buy, that'll hopefully start to move up existing transactions in the resale existing market, which I know the industry really wants, because this latest print for existing home sales at a seasonally adjusted rate of three point, like, what is it, 83 million? That's very low. That's about as low as you can go. And that's still in a period in November where rates were over seven. So the market is hoping that some of that resale transaction will start to move up now that it looks like we've hit the peak for rates come down a bit. And we've also had a period of time where people are now accepting, you know what, 3% mortgage rates are probably not coming back anytime soon, but if they've had more kids and their lifestyle has changed, maybe it's time to make that purchase.

00:09:31 - Mike Mills
Yeah, people have to move sometimes, regardless of what the circumstances are. So you're still going to see a fair amount of turnover because people don't have a choice. But if they can choose not to, then they're not making that choice just yet. And I think you've even seen that a little bit in some of the application data that we've seen. Just within the last couple of weeks, after the rates have come down, I think there was a big expectation that we were going to see a big bump in application data. And I don't know that we've gotten that. I think you did a story on that recently.

00:09:58 - Lance Lambert
We've come up some from the bottom. And so in October, mortgage purchase applications on a seasonally adjusted rate hit the lowest since 96. So very low.

00:10:08 - Mike Mills
And that's what we know. We know.

00:10:10 - Lance Lambert
And that's with a country that is much bigger now, tens of millions of more people living in it than 96.

00:10:16 - Mike Mills
Oh, yeah. I never considered the population growth into that number, too. That makes it even worse.

00:10:21 - Lance Lambert
Yeah, exactly. And now we've come up about 17% 18% from that. We're still down on a year over year basis, about 17% from last year. But let's keep an eye on it. It does feel like that was probably the bottom for existing home transactions, especially because it occurred during a month when mortgage rates somehow raced up to eight really fast and then now drawn back.

00:10:49 - Mike Mills
Yeah. The last couple of months have been a confluence of events between normal seasonality, slowing down between the holidays and whatnot, and the higher rates. And so I think we'll get a better gauge on it once the spring buying season comes around. And if rates are still around this 6% range, I think we'll see a little bit, get a better indicator of where things might be headed for the immediate future, at least.

00:11:09 - Lance Lambert
Yeah. And the tea leaves are all looking up. Mortgage rates have now come down from that 8.3. The top rate in 23 years hit on mortgage news daily in October, and we've come down to now around 6.66 as of today. So that's a huge improvement to where somebody who got a $500,000 mortgage, if I'm doing the math right here, that's about $400 less per month, or 300 and $5400 less per month. So that's considerable affordability improvement. So affordability has improved. Two, the forward looking data, the mortgage purchase applications has come off that low. So we've seen that come up, and that leads actual home sales. So that's ahead. And then the third, like you said, we're now starting to make that seasonal bridge between we're in the very slow seasonal period of the year and we'll soon move into that stronger seasonal period of the year. So having had the affordability adjustment, knowing that the forward looking data is going that direction, and then as that seasonality effect takes hold, it'll probably push existing housing transactions up.

00:12:20 - Mike Mills
Yeah. All right. Well, I want to dive into a few things specifically that you mentioned there because that was a good overview of kind of where we were and where we're headed. But before we do that, tell me a little bit about, or tell us a little bit about your history in this market and reporting on real estate news, kind of where you started and what kind of prompted you to start Resi club and what you guys do.

00:12:40 - Lance Lambert
Yeah, so I used to work@realtor.com actually for a couple years. I had left Bloomberg, where I was a data journalist, and I decided I was going to become a data scientist. I was done with media. I was kind of ready to do something different. I didn't really see myself as working for a traditional news outlet. My full career, I just didn't see that. And so I took a bridge job. In my mind, it was a bridge job where I would go work@realtor.com. Analyze data, tell stories for them, but really work closely with their data scientists and their economists and kind of be ready and do courses on the side and kind of find a data scientist job afterwards. And so while I was there, it was every day playing with tons of real estate databases in, like, SQL and analyzing the data down to a zip code level all across the country. I learned a ton about real estate data. And at some point during the job, I was like, you know what? I don't want to be a data scientist. I don't want to every day be that deep in the data and not, like, writing and telling stories. And so I kind of decided, you know what? I want to go back and stay in media. So I went to work at Fortune magazine, recruited me. I went there to build a data newsletter for executives and, like, Fortune 500 ceos. That was successful, Fortune analytics. But I also, at the time, started to see the housing market take off. The pandemic had occurred. The lockdowns, mortgage rates got very low. There was the work from home effect in the market, which I was a part of, actually left and bought a house. And I wanted to tell that story. And so I just started writing about it. I started tweeting about it. Of course, I knew a lot about residential real estate data, having worked@realtor.com and over those first couple of years of the pandemic, I learned even so much more about housing. My reporting and writing took off. I started to get a bigger audience for it, especially once the rate shock occurred last year. And at the same time, I was building a business for Fortune called Fortune Education. It was a media business in the legion space, and it was not in a space that I was passionate about. But I did learn how to build a media business. And so having seen Housing take off, build an audience in the space, and really just passionate about writing about housing, I'm just really interested in it. And then on the other side of it, having got a little bit of that entrepreneur bite at Fortune, having built a media business for them, I was like, you know what? I want to build my own business, and I want to do it in a space that I love working in, love writing about. I love talking to people who are agents and people who are brokers and knowing what's going on in the market. What are they seeing? How does that reflect to the data I'm getting. I love talking to builders, finding out what's going on in their space. The institutional homebuyers, of course, that's very opaque. And I've been somebody to kind of crack that shell and get good reporting and data out there. And I was like, you know what? And I want to build my own business in the space. So I left three months ago, left magazine. You know, I just decided spontaneously one day, and this is actually how it happened, is I was like, you know what? It's time to do it. I went and I walked upstairs, bought a flight to fortune to New York to go see them the next day, and I bought the flight. I walked downstairs and I walk in the garage and just oil is everywhere. And my car had, like, something had happened and exploded. A bunch of oil.

00:16:27 - Mike Mills
And then the universe is trying to hold you back.

00:16:31 - Lance Lambert
Yes. And so for some reason I was like, you know what? Now I even want to do this more. And that just was fueling my fire. And I flew into fortune, put in my three week notice, and then three weeks later launched resi club.

00:16:45 - Mike Mills
That's awesome. Yeah. I'm curious, your experience in that environment, because we hear all the time, and this is me doing this podcast, I'm just kind of getting into the world of media a little bit. I'm slowly putting my toe into it. But you hear all this. We call it mainstream media, but I prefer the term corporate media because on more of a large scale, they have a lot of fingers that roll through things. But did you ever get pressure? I know in real estate it's a little different because it's not as controversial in most cases. But is there a certain culture in there where you're limited on what you can talk about sometimes and what you can say, and this moving into your own space gives you a little bit more freedom to comment on stuff, or how does that work on the inside?

00:17:25 - Lance Lambert
I think there is probably some of that that happens at different places. Of course, if you have a lot of like minded people who all see the world a certain way, that's going to tilt things at times. In terms of my stuff, I never really got pushed around much, but you would have to actually work with me to understand why, which is I'm kind of aggressive and I kind of do my own thing. I never was like, hey, this is the story I would like to write. Can I write it? I would just file it. And I was also very prickly in terms of when people try to change my headlines or change my story too much. I'm just a little bit of a prickly person. Not in a bad way, but it's because the reason is I'm very passionate about what I write about, and I spend a lot of time researching this stuff. And in my own personal life, I've gravitated to a lot of people who work in the industry and have made friends with them. And part of it is because I'm just very interested in what they do. I'm always tracking the space very closely, talking to people. And also, it's not like people want to really change. Somebody who's writing about real estate data or housing.

00:18:46 - Mike Mills
Politics or something like that.

00:18:48 - Lance Lambert
Exactly. Those maybe would get more pressure in a certain way. I was kind of always left to do whatever I wanted to do because people always wanted to read it. It got page views, and it's a benign topic.

00:19:07 - Mike Mills
Not too many people, unless you're in the industry, have one. There's no sides necessarily. It's just data. What is the data telling you?

00:19:13 - Lance Lambert
Although to me, I feel like you say that, but then you actually get in the world and it's like. Especially on Twitter.

00:19:21 - Mike Mills
Well, yeah.

00:19:23 - Lance Lambert
Instead of like a political lens, it's more of a bullish. Bearish.

00:19:28 - Mike Mills
Yeah. The crash bros, as we call them. Right?

00:19:30 - Lance Lambert
Yeah. You move out of one area of tension and you move into another. The reason is that housing is very emotional because it's this huge purchase people make. A lot of people can't afford it. Affordability has kind of. It's a big piece, moved very quickly the past few years. And then the other thing is, housing is not a game of a quick decision. It's not a game of months. It's really a game of years because you have to take care of your own career, your own income. That's core. You have to have some type of wealth. There's a down payment and income or access to it.

00:20:15 - Mike Mills
Something like that. Yeah.

00:20:15 - Lance Lambert
And then the other thing is, another big piece is you want to kind of know where your relationship status is, your family life, all of that. So housing is not like this quick decision. It's not like, you know what? I just graduated school. The government's giving me money. I can go to any college I want to, that I can get in. It's not like that quick of a decision. It's something that takes years to get to, especially now, because where affordability is, and Americans have a different lifestyle now, where they're getting married older, they're staying in college longer, so then they get to their careers further along. It takes them longer to get rolling there. So that first time home buyer age has kind of moved up a lot.

00:21:00 - Mike Mills
In the last couple of years.

00:21:01 - Lance Lambert
Yeah. So that's where a lot of the emotional part of housing is at. And some people feel like, especially in some markets like LA or Seattle, New York, DC, that they've kind of been really priced out and that they don't really know if they could ever really own. So there becomes that emotional, another layer that gets put on emotionally.

00:21:25 - Mike Mills
Well, speaking of kind of some emotions tied to housing. So one of the topics that I see come up from time to time. And I will tell you, for me personally for a while I was kind of on the this is happening, it needs to stop kind of the bandwagon. And then reading a little bit about what you put out there and a little bit about what Lance put out there. I'm starting to maybe change my tunes some because you waffle between is this just hype in the media or is this actually happening? And that's the institutional investor impact.

00:21:54 - Lance Lambert
What market are you in?

00:21:55 - Mike Mills
I'm in Dallas Fort Worth. So we're in Texas.

00:21:58 - Lance Lambert
Here's the interesting thing, is that on a national level, institutional homebuyers, those with at least 1000 homes, those operators, they own zero point 73% of the single family housing stock. Now, if you're like Lance, but you're cutting them off at 1000, maybe you need to bring that number in. If I take that number all the way down to ten and this is still rolling up the different llcs and making sure that we have them right, it's still only 3% if you go down to operators that own ten homes or more. Right. That's national. But there are six markets in the US. Atlanta, Dallas, Houston, Phoenix, Tampa, Charlote, where 35%, well, 36% of all institutional homes are in those six markets. So the institutional buyers are not a huge piece of the overall housing market. The US housing market, they're about one out of a hundred. But in some markets they are a bigger piece. And then if you go into those markets, there's parts of Dallas, there's parts of Atlanta, there's parts of Tampa, there's parts of Charlote, parts of Phoenix, Houston, where they own 45% of the rentals and some of these zip codes. So on the national level, they're not a huge player. And these six markets, they're more concentrated. But within those markets there are certain zip codes where they're bigger players. But my goal at Resi club is to not necessarily know huge take sides necessarily. I'm trying to tell the story. So I did a story recently about how Atlanta is the epicenter of institutional home buying. So on a national level, it's zero point. 73% of all single family homes in Atlanta, it's 4.4. Now, that's still not a huge number, but 4.4 is starting to get to a meaningful number in one market, and then in certain zips, it's a little bigger. I just want to tell what the actual story is, find the data and less exaggeration. And let's just look at the numbers. Let's get the numbers. And so I track the institutional operators. I'm finding out at all times, like, who's selling, who's buying, where is it happening, what's the story? But in terms of, as of right now into 2023, institutional operators are a smaller piece, a fairly small piece of the market. But at the margin, in some markets, it's significant.

00:24:39 - Mike Mills
Yeah, I mean, we've seen where it came kind of to a head last. I guess it was last year, middle of last year, there was an article in one of our local newspapers, Fort Worthar Telegram, that said that 50% of the homes purchased in 2022 in our county specifically, which is like Fort Worth, Arlington, where the Cowboys are, that 50% of those homes were purchased by institutional investors.

00:25:02 - Lance Lambert
Now, I think the headline was probably wrong. It was probably investors.

00:25:06 - Mike Mills
Yeah. That's a good thing to know because like, even how you said where you kind of sectioned it out, bifurcated it out to where if you own ten homes or more, then you're classified in that institutional investor range, as opposed to the mom and pops who have one or two or three private investments, that.

00:25:24 - Lance Lambert
They are the biggest player in the space and they will continue to be the biggest player in the rental space. Yeah, I think that headline was probably investor data. Yeah. What happens all the time is that investor number gets reframed in articles. People are sloppy and they just call it institutional and they're not really doing their due diligence. But again, I think Dallas is one of the markets where there are more institutional. I'm so I did an, I have, and I don't want to tell what my whole content calendar is the next six months. But other five cities I mentioned, Tampa, Dallas, Houston, Phoenix and Charlote, I'm going to do one off stories about institutional buying in those markets, highlight all the zip codes where it's actually occurring, and just get the hard data so people can see. But that is coming well.

00:26:19 - Mike Mills
And I even saw recently there was an article, it was kind of a passing one that was, I guess Bezos has invested pretty heavily in this company. I believe it's called applied. I have to look up the name. It starts with an arrives. Arrived. Arrived. That's it. And the concept is it's fractionalization, essentially. It's not blockchain related, I don't think, based on what I was looking at. But it is fractionalizing rental properties and then letting investors purchase multiple pieces of multiple different properties. So you see stories like that. And my biggest fear of being in the industry for so long has always been housing is the cornerstone of the path to wealth for the average American in the United States. That's how if you go back far enough and you look and say, okay, you buy your home, you build up that equity, you sell and you slide up to scale, and then when you're ready to retire, you've got this asset that's going to be able to help you sustain.

00:27:10 - Lance Lambert
So here's a question, though.

00:27:12 - Mike Mills
Sure.

00:27:13 - Lance Lambert
Do you own single family rentals?

00:27:15 - Mike Mills
I do.

00:27:17 - Lance Lambert
So you think you should be able to buy single family rentals, right? Yes, of course. Do you think you should also be able to invest in funds that buy single family rentals? Because that's what arrived is. Arrived is a little different than the other ones where arrived. You just go to them, you give them a few hundred bucks and you can kind of invest in their funds to buy single family.

00:27:37 - Mike Mills
It's almost like a reit, kind of, sort of.

00:27:39 - Lance Lambert
Yeah. But it arrived is a little different where it's very focused on the little guys. It's pulling money from them, allowing them. And they don't own a ton of homes yet. I don't even know if they own 1000 homes yet.

00:27:51 - Mike Mills
No, what I saw, it was less than 400. And their portfolio right now is somewhere in the neighborhood of like 125,000,000, something along those lines.

00:27:58 - Lance Lambert
Yeah. So the interesting thing about the institutional side, too, is there's been some. So one thing that's occurred in the US is that in 2008, we had a tightening of lending standards. We had, as a country, decided that because we saw the subprime crisis, we were like, you know what? Too many people at the bottom are getting in. And so there was a tightening of lending standards, and it occurred for a few more years after eight. But what ended up occurring is that they not only got rid of some of the products that were causing the crisis, they also tightened lending standards to where people who would have normally been able to buy in the didn't.

00:28:47 - Mike Mills
Yes.

00:28:48 - Lance Lambert
So that caused more of a crash on single family home prices at the bottom of the housing market, really like entry level. And because builders didn't have their seller there that they had traditionally sold to, they pulled out. And so what we saw is we saw a lot less building for that entry level single family housing. And we never saw lending there improve or go back to where it was in the. So what we've seen now is that to get more building going on there, a lot of institutional companies have stepped in and doing build to rentals with these builders to build these communities at those price points, that entry level that wasn't built and do them as rentals. Now, is that right that there's a certain group of Americans who used to kind of be homeowners and now aren't, but then at least the builder stepping in, or the institution stepping in to do these build to rents, it at least keeps the housing stock in that part of the market coming in. Because if you don't get that, then rents at those levels actually increases even more. And so if you ban institutional buying, you also ban the build for rent, which is actually adding housing supply. So I think it's a difficult conversation to have, which is what are the actual things? One, what is the core issue in the housing market? A lot of people view it as there's not enough single family homes at the entry level side. And so what are the things that will actually add to that supply? And then some of the things that we might do might be regressive and hurt that supply. A lot of the solutions you see to housing are, hey, let's just give more money for down payments, or let's do x, Y and z. And all those things do is just accelerate demand and not necessarily add to supply. Housing is a game of years or almost a game of decades, and it doesn't move fast.

00:30:56 - Mike Mills
Have you seen much out in the world? Because the supply, I think, and I'm sure you agree with this, the issue isn't interest rates. The issue isn't necessarily institutional investors. The issue isn't any of those things. The issue is supply. We don't have enough homes to meet the demand, which is why when interest rates went up to 8%, we saw little to zero fall off in most markets on prices. Because even though at 8%, demand fell off a cliff, the overall sales prices did not adjust that much. And only when you see the median stuff, everybody gets, oh, well, the median home price is down. Well, that's just because those are the mix of homes that are being bought at a lower level because the $800,000 house someone's not trying to buy necessarily at 8%. So are you seeing any kind of innovative ideas on how to help this issue? Like one of the things that this isn't necessarily supply, but it does help with it's a demand thing. Like Robert Kennedy, for example. He's mentioned a couple of things because he's talking about housing, unlike the other two candidates out there about the issue. And one of the things that he says that Fanny and Freddie have $130,000,000,000 worth of surplus that they could use to incentivize, or not incentivize, but supplement builders to help them build more affordable housing. He mentioned something about creating a 3% 1st time home buyer fund where investors buy in at 4% and then that actually is what funds those particular types of loans. So he's thrown out a couple of ideas. But have you seen anything out there that you think could be a solution or are we just destined to be in this housing shortage into perpetuity?

00:32:31 - Lance Lambert
Well, so I think taking a step back and kind of knowing what created the issue. So one problem was that a lot of these cities where people wanted to work, Seattle, Los Angeles, San Francisco, New York, DC, they didn't build enough homes. And this goes back to even before the bubble into the, you know, there was a lot of regressive stuff where they were trying to stop homes from being built in certain communities. Only one in single family homes in some of these areas. And so in some of those areas, they got behind on the building.

00:33:06 - Mike Mills
Right.

00:33:06 - Lance Lambert
And it deteriorated affordability. And it caused a lot of outmigration to other markets like your own Dallas, and then that affordability there.

00:33:15 - Mike Mills
Right.

00:33:15 - Lance Lambert
So that's one part. The second part is that the housing crash, there was a correction in the market that probably was healthy and needed. Right. But then we really went too far and prices dropped so far in the existing market, and there was so much existing inventory out there that the builders really got hit harder than they should have. And so single family production and the building there went way too low for too long.

00:33:42 - Mike Mills
I've seen the charts you've put out there about showing like after eight, how the builders permits just went through the floor.

00:33:48 - Lance Lambert
So eight, nine, maybe that was fine, right? Maybe that's the correction. But did we really need to go as low as we did in 1011, 1213, 14? And so that's what put us behind in housing supply and it's super cheap money. And then the next part that happened is that during COVID we had an acceleration in household formation as a lot of people were like, you know what? I'm done living with these roommates. I want my own space now that I'm at home. I can't stand this person, that when I was around this person for an hour a day, it was fine. But now that it's like 910, I need to be out. So there was an increase in household formation. Of course, that was helped by low rates and a lot of stemming money. And then we saw a lot of work from home migration, where people could just leave the market and continue to make what they were and go to a more affordable market. So there was that arbitrage, and again, people fleeing a lot of these markets that had underbuilt Los Angeles, San Francisco, New York, Boston, Washington, DC, Seattle, where affordability was very deteriorated, left those places. And then the places they went, the Dallas, the Tampas, the Charlotes, Phoenix's affordability deteriorated in those places as that spillover occurred and all that money came in.

00:35:02 - Mike Mills
Yes.

00:35:02 - Lance Lambert
So that's a backdrop of the story that we've seen. So affordability has deteriorated because an underbuilding and a certain number of big metros, an underbuilding of single family homes following the housing bust and then an acceleration in household formations during the pandemic and housing demand going up. Housing supply, the Fed estimates, would have had to go up 300% to match the increase in demand during the pandemic, which it couldn't. Supply can't move that fast. So that's the backdrop of the story. So I think what kind of would work well for housing going forward is one. The most important part is government does policy smart. So that avoids future interest rate shocks. If you can keep the inflation down, you can keep from rates getting jacked up really fast. That prevents future disruptions in the housing market, because if we were in a position right now where inflation was still higher, what would occur is the Fed would be like, you know what? Now we really got to go after it. And then you would see mortgage rates go to even higher level and the home builders would get hit. There's a point where they would get hit. And what that would do is just further deplete housing supply.

00:36:17 - Mike Mills
Right.

00:36:17 - Lance Lambert
The most important federal government does smart policy. The second is probably just allow things to play out. Allow things to play out. Builders are in a good position. They're going to build these single family homes. And as we go through the next several years and get closer to 2030, the demographics are less favorable, and the housing shortage will probably narrow between now and 2030. Just if we continue to build single family homes at an elevated pace, maybe go up even a little bit higher than today, we'll probably get into a better spot. And then the third thing is probably some of these cities where there's been a lot of regressive housing policy and they've kind of prevented development, allow more of it. I think those would be the three things. But in terms of all these, creating new federal programs and throwing money for this thing or that thing, I don't know if it'll necessarily do much. I think housing will take a long time to work out, but affordability could be improved over time if the federal government just gets in a smart place, prevents future rate shocks, and allows the market to kind of just build.

00:37:27 - Mike Mills
Well, you brought this up a little bit a minute ago. It does seem to see that if you let the market kind of do its thing, you've got a couple of factors playing in that. And I've seen where people are talking about the baby boomers are kind of aging out, they're retiring, they're dying off, unfortunately. I mean, I don't mean to put it in morbid terms, but that's kind of what's happening. But then you also have the other side of it where you mentioned where we have less household formations occurring at a slower pace, so people are waiting longer. They're not having as many kids, maybe they're not even getting married as much. All these things are kind of starting to play a role. So if you have more supply coming onto the market from a generation that's fading on, and then you have a little bit less of a demand just due to the next generation of Americans that aren't forming households or having kids as much, maybe they want to be a little bit more mobile, then maybe you do have a kind of a reset of a little bit of that supply, because just on its own, it may take five or ten years, but that could head and fix itself, right?

00:38:26 - Lance Lambert
Yeah, I think that's probably right for the industry. It's not a bad thing to be underbuilt. All that means is there's going to be a lot. We'll need a period of time where building maybe can outpace household formation for a prolonged period of time, and then you kind of work out of it. It's not the worst place to be. It's much better than where China is. So China is going through an actual property bust right now. They have had a lot of speculation into their real estate market because the chinese government doesn't allow them to invest just in whatever they want to. And so a lot of the domestic money in China has over the past several decades, invested into real estate. And so there's been a lot of developments built where, because they can raise money to pay for it, because they're getting a lot of these retail investors, they're building these developments, they built them that don't have anybody living in them.

00:39:24 - Mike Mills
Yeah, their population is falling.

00:39:27 - Lance Lambert
You have that too. So you've had an overbuilding for a prolonged period of time. And then because now that the music has kind of stopped and these developers are in trouble and, yeah, you have the demographic headwinds where population is going to do an outright decline. And so housing demand is going down, but because it's been such a huge economic engine for the whole economy. So here in the US, home building is about 5% of the economy. In China it's 10% and that 10%. And so the thing about residential construction that's always been true across history, across country, is that it's cyclical. It can move down and up, depending if your country needs more homes or it doesn't. And because it contracts like that, and in China it's such a big percentage. And the fact that property, when you've overbuilt, it takes a really long time to work through that. They're in a period where they're in a property bust and it's going to be a headwind for their economy for probably a prolonged period of time. But that's the opposite side of the spectrum. We're on the side where we're underbuilt on single family homes. And so while that's a headwind for affordability and sucks for the buyers, it's a better place for the industry probably to be, especially if you're in the residential construction space. Although I can hear people in the industry who are frustrated in the existing home market transaction space, because now that affordability has deteriorated so far, it is really kept a constraint on the volumes of existing home sales.

00:41:04 - Mike Mills
Yeah, well, people are frustrated just because incomes haven't really kept up with supply or, excuse me, inflation and what the cost of things are. Everybody complains about it. But you go back to the, you could have one person working in your household that provided and paid for college, paid for cars, paid for housing, you could have a spouse stay home with the kids and help raise the family. And now that's a really challenging thing to do, especially for young adults coming into the workplace, because you have to have a two income household in order to have the standard american lifestyle. It makes it challenging. And then the cost of housing going through the roof like it has, it just gets people frustrated.

00:41:43 - Lance Lambert
Yeah. Especially on the consumer side. Yeah. There's a rightful reason for some of that.

00:41:51 - Mike Mills
So let's talk a little bit about interest rates, because one of the things I was surprised by, and please educate me if this is a normal thing. But when I look at what the Fed did last week when they came out and they, I think everybody in the market had anticipated they weren't going to raise rates. I mean, that was pretty much a guarantee at that point, and we were all kind of ready to sit in for the long haul. Right. We're all going to be here on the pause for a minute. And for Jerome Powell, they released the dot plots and kind of give us more information that not only are they pausing rates for now, but they also have told the market that we're going to cut rates. We're going to cut rates in 2024. They gave a three to four rate cut forecast. And then, of course, subsequently right after that, which we're experiencing right now, the stock market takes off and crypto blows up and everybody in the housing industry is celebrating. And my question is, it seemed od to me because everything that Powell had set up leading up to that was data driven. We're going to just keep taking it one month at a time and see where we're at and kind of follow where we're headed. But now they just tell us they're going to cut rates, which is great, but it's just like, why is the need to say that? Why would you need to come out and tell us that? And you can maybe even speak a little bit to, with the inflation numbers and the lag effect being with housing rental specifically about right now, I think it was 6% is what they were showing, the inflation rate. But we all know that these new contracts signed for rent have gone down, actually. And so those numbers aren't going to reflect for probably another six months. But why do you feel like it was necessary for them to come out and say they were going to do rate cuts unless there's something that they know that we don't? What are your thoughts on that?

00:43:36 - Lance Lambert
Yeah, so where we have been, and I think it's important to take a step back, is that since the middle of last year, inflation has actually been tamed. Now, yes, some of the data is a little warmer because the housing side really lags on the reporting, which is nonsense, because in the real world, the housing inflation actually occurred before and started before a lot of this other inflation. Yes, which is wild to me, but so we've seen inflation tamed for a period of time, really over twelve months. And the Fed during that time continued to jack up. Interest rates, continued to be hawkish. And a lot of what was probably happening is the Fed just wanted to wait and see, make sure inflation didn't take off again. They kept it down, allowed some cooling into the job market. And while they didn't see unemployment move up very fast, what they did see is they did see some cooling in the job market. Immigration moved up quickly, which of course put downward pressure and prevented a bigger increase in wages. Had we not had that immigration wages might have taken off. Even so, we saw the number of job openings that come down. Yes, there were some layoffs, but it didn't really move up the unemployment totals a bunch. Unemployment rate did tick up just a little bit. But what the Fed was able to do is they were able to make sure that inflation and disinflation continued and that there was some softening in the job market. And all of this has been expected. The market's been watching this. The prices of stocks have actually been moving up all year, especially in the home builder space that I track closely. And I think this past meeting at the Fed, the Fed kind of finally acknowledged, like everything is going to script and this inflation is stuck. The job market has kind of cooled enough. And then Jerome Powell acknowledged that the supply chain issues in the economy have kind of unwound. And a part of that is because of housing. So what happened is during the pandemic, because there was so much of this pandemic migration and people moving or people separating from apartments, people bought a lot of stuff, and of course, stimulus money and low rates, but they bought a ton of stuff. And anytime you sell your house and buy a new house, you buy stuff. You buy stuff. And so when rates got jacked up last year and existing home transactions went way down, what we saw is a lot fewer resale transactions. There was like a million fewer home purchases over the past year than otherwise would have probably happened if rates were low. That's a lot fewer fridges. That's a lot fewer appliances. That's a lot of stuff. And that stuff we can see in the retail numbers went down. And that actually helped to ease the supply chain issues in the country. And so that easing of the supply chain issues, which is now no longer a tailwind for inflation, the Fed kind of got to see that unwind. So this latest meeting at the Fed was them acknowledging we've moved to a different place with monetary policy, and now we're kind of moving into the rate cuts. And on the dot plot. The typical FOMC member at the Fed, they expect three rate cuts next year. A few actually expect like four, or know there's some others that are like two or one, but they're now acknowledging the rate cuts. And so I think what occurred this month was less of a huge shift and it was more of like an acknowledgment of the shift we already expected. And now that people finally got to see it and financial conditions did ease up over the past month and heading into that meeting, I think especially in the housing market, people are feeling a little more optimistic now that rates have come down a bit.

00:47:37 - Mike Mills
Yeah. When they came out and acknowledged that the intent was to cut rates next year, obviously they're saying three or four, but the market has like six or eight priced in, which is crazy, but that's how it all works. I mean, it's all emotional. And we ride this emotional roller coaster in housing especially. So I can understand.

00:47:56 - Lance Lambert
But it just was, we play out in housing. It doesn't matter when the Fed actually does the cuts, the long term rates, like the ten year treasury yield and the 30 year fixed mortgage rate, we're ahead. They price ahead of the market and trying to look at future financial conditions. So the expectation of the market is actually even a little more important than what the Fed says their expectation.

00:48:20 - Mike Mills
Yeah. Well, again, I welcome it, and we all do in the space because we've all have gone through a pretty bumpy last 18 months. And so any kind of relief inside is going to be a good thing. But also, too, and we've said this in the industry for a long time, that over the last five years, there's been a lot of realtors and a lot of lenders and a lot of other people get into the business because there has been such a boom in real estate, and maybe a calling isn't the worst thing in the world. Maybe we get back to a little bit more professional folks in the business and not just the fly by nights. So I don't think that it was a bad thing necessarily. It was just painful for a little bit. One topic that I haven't seen you touch on a ton, and I wonder if it's something you're working on or if you have any thoughts on it. But with all this real estate commission stuff, that's been happening with Nar and all these lawsuits that have been coming down the pipe. Have you been following that much? What are your thoughts on that?

00:49:19 - Lance Lambert
Yeah, I do follow it. It does seem like that decision, the Missouri case was a bit of an earthquake in the industry. And really what it's done is it's done two things, create a tremendous amount of uncertainty, and it's going to be a payday for a lot of lawyers across the country, and it's going to take time to play out. I don't have big, bold predictions on, you know, kind of in the boat where everybody else is, which is kind of wait and see how this plays out. What are your thoughts on.

00:49:53 - Mike Mills
I mean, I think a couple things need to happen. First. Think regardless of what people want or don't want, I think the Department of Justice needs to step in at some point and give some guidance on it because my bigger fear isn't, I mean, I think things are going to change. I do. I don't know to what degree or what that's going to look like, but it's not too dissimilar to what happened to the mortgage industry back in eight, just some things were going on and I don't think there was anything. They try to make it out to be this like cabal of conniving real estate agents trying to steal sellers money. And I don't think it's that at all. But what I do think is the Department of Justice needs to come in and give some sort of guidance because the ambuLance chasing lawyers out there that are looking for anybody to sue and any reason to put together some sort of lawsuit because they see blood in the water, I think is a negative thing for the industry as a whole. Because when you're starting to pit buyers and sellers against realtors and what you don't want to happen is you don't want to get to a place where you've villainized agents to such a degree that the representation for buyers especially, I think listing side, I don't think they're going to have any issues in long term. But I could see a world where buyer's agents get marginalized and less agents want to participate on the buy side just because the income possibilities aren't there. And then that ultimately, to me, hurts the consumer. You're hurting the buyer in the transaction who doesn't historically have a ton of cash to throw around, especially these days with affordability being an issue. So if they can't afford to pay that buyer's agent, then I could see a world where you have a large corporate entity that could step into that space and fill that void, and that could be a good or a bad thing. But if you look at somebody like Zillow, come along and say, okay, well, you can pay us $500 and we'll represent you as the buyer in the transaction. But there isn't, I mean, what is that level of representation and what are they really doing for. There's. There's a lot of things that could happen, and I'm with you in that. I don't think anybody knows what's exactly going to occur. And I think once the ruling from the Sitzer Burnett case, actually, the judge gives his actual judgment in it, I think that'll set precedence for a lot of things. And I think the fact that they're taking so long to put that out is, I don't know if that's a good or a bad thing. Maybe they're putting some really good thought into it, or it just seems like it breeds more chaos. And I would prefer that. We prefer order more than anything else. So if we can just get a few, whether it be Department of Justice or that particular ruling, to give us some direction on where things are headed, then everybody can start to reset and the market can actually go forward. But until that happens, I think we're in this world of unknowns. And like you said, I think you have attorneys running around trying to make as much money as they can right now, throwing out frivolous lawsuits.

00:52:41 - Lance Lambert
Yeah, I think that makes a lot of sense. And so based on the things I said today, is there anything that you kind of disagree with or maybe on the ground or seen things a little differently?

00:52:55 - Mike Mills
No, not really. I mean, like I said, the biggest change in my framework over the last six or eight months is the institutional side of things, because I did think it was a bigger player than it was because you see headlines and you just read into that. But with guys like you driving into data and really giving the actual numbers and where that stuff's coming from, I think that's a huge benefit because it helps our industry understand a little bit better what the threats, opportunities, weaknesses, all that kind of stuff is, so you can navigate your business a little bit better. Because what I try to do here every week when I interview folks like you is I'm trying to help agents know what's coming and know what's happening in their market, because that's the only way that you can plan for what you're going to do going forward, especially into the new year, because I do think 2024 is going to be different again. How that looks or what that is, I don't know. I don't know that we're going to see the housing boom, maybe that everybody thinks that's happening unless we have a significant downturn in the economy and the Fed has to cut rates faster than they're anticipating and we see mortgage rates go down and then refis pop back up again. But even as you said, if that does happen, refis will happen. But I don't think they're going to happen at the same clip as what it occurred before because you're not going to have that many people that are still going to want to get out of their 3%. So unless they come down to that level, I don't think you're going to see a big boom there either. But I think it's going to be more of a plateaued market where everything's more steady. And I think ultimately long term that's a good thing. This volatility I think is bad. These big booms and busts and up and down, I don't think is a good thing. I think as a whole, housing is better suited to stay steady and flat. And if that is what 2024 brings, I think that's a good thing.

00:54:41 - Lance Lambert
Yeah, I think that makes a lot of sense. Well, Mike, thank you so much for having me. I really appreciate it. This was great.

00:54:48 - Mike Mills
Well, thank you for coming on. Tell everybody a little bit about Resi Club, how to get to you, your premium subscriptions, all that kind of stuff. So if anybody wants to subscribe to the newsletter, they can check it out. We'll definitely put it in the comments and I'll put it in the show notes. But for anybody listening to.

00:55:00 - Lance Lambert
Yeah, so I have a newsletter that's free daily called Resi Club and you can find it at Resiclub analytics. You just go to resiclubanalytics.com and then on that homepage you'll drop in your email and it might take you a second, but once you get the green check at the top, your email is submitted. And then every day of the week during the Monday through Friday, you'll get an article from me. And then I also have a premium data newsletter that has a lot more data, a lot more analytics access to my Lance Lambert house price tracker, which is over 3000 counties, every metro and micro area in the country. And then also my house price inventory tracker, which again is 3000 plus counties and 800 metros and updated every month. That plus more interviews with executives Amherst, Co. They own like 44,000 single family rentals. Recently interviewed him. A lot of ceos of the home builders. And so that is Resi Club pro. And that's $150 a year. Comes with three additional articles, access to my trackers, and a lot of my rankings and analysis there. And to upgrade to that, you go to resiclubanalytics.com. Once you've typed in your email, you then will see a screen where you could upgrade if you want to get pro.

00:56:26 - Mike Mills
Well, that's awesome, Lance. I greatly appreciate your time. I am glad that you were out there putting together all this information so people like us can digest it a little bit and really separate fact from fiction. And you're doing a great job with that. And I commend you. And I really hope that you keep pushing along this thing and maybe sometime here in the next several months when market starts to change again, we'll have you back on and give us a little bit more insight on what's happening. So I really appreciate everything that you're doing out there, and I appreciate your time today. So thanks for joining me.

00:56:55 - Lance Lambert
Awesome. Thank you, Mike.

00:56:56 - Mike Mills
All right, guys, everybody have a good weekend. Have a happy holidays, merry Christmas, and we will see you after the holiday. Okay? Take care. See you later.