The text below is a transcript of the audio from Episode 33 of Onward, "On the state of housing, with economist Ali Wolf."
Disclaimer: This transcript has been automatically generated and may not be 100% accurate. While we have worked to ensure the accuracy of the transcript, it is possible that errors or omissions may occur. This transcript is provided for informational purposes only and should not be relied upon as a substitute for the original audio content. Any discrepancies or errors in the transcript should be brought to our attention so that we can make corrections as necessary.
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Ben Miller:
Hello and welcome to Onward, the Fundrise podcast. My name is Ben Miller, I am the CEO and co-founder of Fundrise. My guest today is Ali Wolf, chief economist at Zonda, a leading housing market research and data company. Ali is one of the smartest people I know on housing in the economy so I'm excited to have her on the show. Before we get started, I want to remind you though that this podcast is not investment advice, is intended for informational and entertainment purposes only. Ali Wolf, welcome to Onward.
Ali Wolf:
Thanks for having me.
Ben Miller:
So, I'm super excited about this real economist on our podcast. I want to do the economy first and the housing second because most of housing downstream from the economy.
Ali Wolf:
Yup. But also, what happens in the housing market impacts the economy, usually.
Ben Miller:
Well, let's all get on the same page and start with can you tell me what happened in 2023? So, when we get to now, we're all on the same page, 2023 played out differently than I expected. What happened?
Ali Wolf:
Most people expected. Yeah, exactly. Because going into 2023, the prevailing sentiment was recession. And, of course, there was the odds that, oh, maybe it wouldn't happen but, when you looked at just the Wall Street Journal survey of economists, the majority said, "Yeah, a recession is likely." The general thesis was it would be some minor reset, I don't think anyone was calling for a major recession but, if you look at the year, if you look at the S&P500, we finished up 25% throughout the year, we saw a 9% increase in the unemployment rate but that still kept us on track for the longest stretch below 4% since the 1960s and we saw the return of positive wage growth.
So, instead of having this crash landing, this hard landing in 2023, the economy moved the way that I think policymakers hoped which was that it slowed but didn't crash.
Ben Miller:
Best case scenario. So, why did that happen?
Ali Wolf:
The biggest thing that I attribute it to is the excess savings. We know that 70% of the overall economy comes from consumers and, when you look at the GDP report, consumers were the second highest level of growth. I think they ended up growing, in the most recent quarter that I remember, something like 3% and I think everyone thought, "Okay, we're not giving out stimulus anymore, people have been spending money like crazy, they've got to get to a point that they reached their limit." And I think what we forgot is they can reach a limit of working through their savings but then they have a new tool which is debt.
And so, we saw people, half the year, spend money on savings and then, other parts of the year, put money on credit that allowed them to continue to spend and it helped keep the economy afloat.
Ben Miller:
And so, you're saying you think that consumers have worked their way through the excess savings or even did last year?
Ali Wolf:
Yeah. So, the data that I'm referencing is from the Federal Reserve and they break it out by three tiers. So, they'll look at the excess savings for the highest third, middle third, bottom third and, at least the data that I'm using, the middle and bottom third have worked through their excess savings but it's those that are in the top third that have not worked through it yet. Maybe won't because they have all of their investments that have gone up in value and so they just have higher net worth than they did too and maybe they're able to just put more money away for savings.
Ben Miller:
Okay. So, before we get to 2024, I just want to ask what you learned from 2023. What was unexpected that you came away with a lesson?
Ali Wolf:
I would say I was of the camp that we were going to be in a recession and I think I was just like, "Hey, look at history," and we know that every recession is different but all signs, the leading economic indicators, the inverted yield curve, all of the traditional signs of a recession were flagging that we should have been worried and I think I focused too much on history versus looking at the current state of the data with the consumer. I think I thought there's got to be a point where consumers really get pushed to a limit and that didn't happen. So, I think my biggest shame on me was trying to rely too much on history when we know it didn't help us this time, at least so far.
Ben Miller:
I had the same call, actually, I still have that call but the part I feel like I missed is the excess savings. I didn't appreciate how much of the stimulus got socked away for a rainy day and it seemed to absorb the blow of high interest rates.
Ali Wolf:
Yes, and let me take two of those points. So, the first was I was just thinking I'm part of a dual income no family household, a no kids stink household and I was like, "If we're talking about grocery bills, I just can't imagine a family of four, a family of six and how much that's eating away every month." And I think what I also thought was, "Okay, the student loan forbearance is going to be over in October," and I don't know why I thought, "Okay, come October, everything's going to change." That was another big takeaway is everything just takes maybe more time than we think it would. Because I just thought, "Oh, once people see that they have to pay 300, $500 more again for their student loans, they've got to start pulling back on other things," and we just haven't seen that play out yet.
Ben Miller:
No. Same takeaway I had but at the company level where, our organization, we just saw higher interest rates, interest rates hit everything that we do and it slowed our hiring and it just made everything much more constrained and I just assumed that's happening to our company and we're probably better off than most companies, it must be widespread and yet small businesses continued to lean into growth and hire. And so, I was confounded by, both on a personal level and a corporate level, what I was experiencing firsthand and what I was seeing in the headlines in the Wall Street Journal.
Ali Wolf:
Well, and that was the thing too. We went through this period of time where it felt like, every week, you saw a massive layoff announcement and you were like, "Okay, it's happening. All these big firms are laying off thousands of workers." But I think it went back to the JOLTS data, the employment data that just shows how many job openings were still there, were down from where we were at the height of the pandemic but it seemed like people that lost their job, instead of struggling to find a job, they were able to get reemployed quickly which also made those headlines not as alarming.
I thought that those headlines would create more of a self-fulfilling cycle, that you start to see and then you're like, "Oh, well, if Goldman's laying off, what am I missing? Maybe I should lay off." I think companies were like, "Well, things aren't that bad for us right now so maybe we don't need to go through that firing."
Ben Miller:
What were you right about?
Ali Wolf:
The new home market at the end of 2022 fell into a pretty severe housing recession and it was bad in particular for the builders and developers that were Texas West. And, as we started to see 2023 come, at first we thought, hey, maybe this is going to carry into 2023 but we started to see some green shoots pretty early. And I remember going on record saying that the new home housing recession is over in early 2023 and I remember getting so many comments about, "Wow, that's really premature, she doesn't know what she's talking about," just lots of criticism about it. But we just started to see enough consumers come out of the woodworks, look for deals, reenter the housing market and 2023 ended up being a pretty solid year at least for new home sales.
Ben Miller:
Yeah, and we can come back to housing because I'm excited about that. I remember, December of '22, we were with all these builders, we have lots that they take down from us and I remember, all of a sudden, they started getting optimistic and, the home builders, they get excited really quickly. A couple of weeks of good data and they're off to the running. So, 2024, okay. So, we are now in 2024, we're shifting to people now have moved to more of the same expectations. Okay, we've had a soft landing, soft landing is down with the conclusion we've moved on. And so, what is your forecast for 2024?
Ali Wolf:
I still feel a bit silly saying it because we did think, 2023, we were going to have the recession but we're carrying that call with us into 2024. We still think it is going to be mild but, this goes back to history so maybe I'm making the wrong mistake again, but an article headline pops up in my mind and I've been presenting on it recently where it's exactly what you said. Now the prevailing sentiment is that we've made it to the soft landing and I show an article headline that says Recession, question mark, Not So Fast. And everyone, I say, "Oh, you're probably seeing headlines just like this," and people are like, "Oh, yeah, yeah, market's good, everything's good." And then I show the date and that was written in March 2008 and it's really easy to miss a recession coming at you.
The way I think about how the economy progresses is you go from overheating and then you slow and, as you slow, it will look like a soft landing because you're slowing into that point. The hope is you stop there but the trends, if they continue to slow, is when you ultimately fall into an economy that's receding. I'm nervous about consumers, while we talked about they led the charge in 2023, I think they may be part of the pullback in 2024. Because of the reliance on some of the debt, some of the early indications of people falling delinquent on their loans and because of the return of those student loan payments which, like I said, they were making those payments in October of last year but I don't think that's been enough time for them to have to readjust their spending.
So, my belief on a slower economy comes down to a consumer that is actually starting to feel the pinch of what has happened over the past few years.
Ben Miller:
We do seem to agree a lot, I'm worried about confirmation bias. I often describe it internally as a pendulum. So, right now, it's right at the center but a pendulum doesn't just stop, it keeps going but I've been wrong. And so, I had a very similar view, I was very outspoken about it and so, for me to have learned a lesson from last year, I have to actually incorporate what I got wrong. What I feel I got wrong is I underestimated the importance of government intervention and that includes both fiscal and monetary stimulus. There continues to be fiscal stimulus, I think deficit is 1.8 trillion or something. Can you have a recession if the government continues to stimulate the economy?
Ali Wolf:
At least when I looked at the most recent GDP and that's my way to look at the breakout of the economy. So, just think everyone remembers consumer spending, business investment, government spending and then net exports is that high level roll up. And you do see that, at least in the most recent data, that the government did prop up the economy but it's not the biggest share. You look about the share of GDPI, it said 70% is consumers which leaves 30% for those other three categories. I don't think the fiscal impact can be so pronounced that the economy can't pull back if they're still government spending.
Ben Miller:
I've seen you present on this and so I'm just going to recapitulate it again because I love it when people take something very complicated and make it simple and understandable. So, you have the economy, it's made up of consumer, C, plus, I, investment by businesses plus government plus net of imports and exports. And so, we know C is the majority of it but you're talking about G, government. The government normally spends 2 trillion and they've spent 4 trillion, that's basically the math of it. So, the government spending was and is $2 trillion more than normal and so basically adding 10% to the economy. Isn't that a lot?
Ali Wolf:
Yeah. And I would say I haven't approached the discussion of a recession by looking at it. Beyond the fact that we talked about how the stimulus helped support the market, I assumed not throwing as much money into the economy, it wasn't as big of a factor so maybe that's just an oversight on my end.
Ben Miller:
Yeah. There's a guy I love, his Twitter handle is FedGuy, he says, "As long as the government's running such huge deficits, you can't have a recession," and I've wanted someone to go look at past recessions and say, "Have you ever had a recession when the government was running huge deficits?"
Ali Wolf:
Yeah, we haven't done that before.
Ben Miller:
I feel like, in '07, they were because I think they ran deficits ever since, basically, '01.
Ali Wolf:
I think what's interesting is, when you think about a recession, I think one of the other arguments that I hear is it's an election year so we won't be allowed to go into a recession. And that one always tickles me a bit mostly because people say, "Oh, Jerome Powell's going to help the Democrats," when Jerome Powell is a registered Republican. And so, sometimes when you hear that, to me, I have to break out the logic of, one, the Fed is independent and shouldn't be doing that anyways but, two, he's not politically aligned to be helping a certain political party and so that's, to me, one of the most frustrating arguments about what might happen to the economy this year.
Ben Miller:
Yeah. And I also believe that the Fed can't stop a recession.
Ali Wolf:
Yeah, because they would if they could.
Ben Miller:
Typically, they're actually dropping rates into a recession and they didn't stop it in '08 and they didn't stop it in '01 and they didn't stop in '92. I gave you one reason why we might be wrong, what are other reasons why we might be wrong about consumer weakness?
Ali Wolf:
In my belief, we would see, if consumers start to pullback on spending, then businesses will start to pullback on hiring and/or do layoffs. And if businesses already, I know a lot of companies are already operating on a lean staff, they already said, "Okay, we already right sized and now we're at a place," if they don't need to start cutting staff and we don't see layoffs, then I don't think you really see any kind of massive slowdown.
Ben Miller:
How are they able to do that?
Ali Wolf:
Just if they've already done it. If they've already done some of the layoffs.
Ben Miller:
If they have reduced revenue that eats into margins, and they have fat margins, right? Aren't margins as high as they've been in history? So, couldn't they afford to basically have margin squeeze?
Ali Wolf:
I know we're talking about housing later but we're seeing that all throughout the housing industry too. There's room for margin compression.
Ben Miller:
We can talk about it in a bit but it's how the home builders have kept the machine running is they've actually used margin to buy down rates. My other argument I've heard that I find compelling is that labor supply is tight, demographically, there's less and less young people and so, as a result, it's hard to have high unemployment when labor supply is so tight, demographically constrained. So, people, if they're laid off, they get hired by someone else because you just have this chronic undersupply of labor.
Ali Wolf:
And that's what we saw last year so it played out then at least. And then, especially, you're talking about the younger people but also the older people retiring. Every boomer will be of retirement age in the next six years and who's going to backfill some of those jobs?
Ben Miller:
Yeah, I remember reading this back in 2012 that 10,000 boomers will retire a day starting in 2020 or something. Let's go back to what causes this recession which is high interest rates and inflation. How do you forecast inflation over the next year or two? Do you think it's higher for longer or do you think it's coming down and how far down?
Ali Wolf:
So, my answer comes really from my specialty which is the housing industry and, if you break out the components of inflation, the shelter component just feels too high. I haven't looked at it maybe in a couple months but last I looked it was five or 6% growth year over year and there aren't many rental markets across the country that are averaging five to 6% rent growth, there aren't many housing markets averaging five to 6% rent growth. Many indications point to softening rents into 2024, I think that's going to be the drag that we need. But the challenge is I thought we would've seen a more pronounced pullback the end of 2022 with shelter and I don't know. And I know how it's calculated but I don't know if there's always going to be a bit of an imbalance that's going to push it too high. But shelter, I think, is the key reason why I feel confident about the trajectory of inflation.
Ben Miller:
Well, let's talk about housing here because I feel like we're-
Ali Wolf:
We're going there anyways.
Ben Miller:
So, here's my big question about 2023. Why didn't housing prices fall as much in 2023 as you would intuitively think when interest rates went from two, 3% to seven, 8%?
Ali Wolf:
So, we need to break it out by new and existing. So, in the new home market at the end of '22, the phrase that was used most commonly was that builders were ripping the bandaid off, builders were dropping prices 10, 15, 20%. When you were looking at home price forecasts among new home forecasters, most were saying we're going to see a double-digit drop in pricing. And we did see that double-digit drop in pricing in '22, the end of '22, in select markets, peak to trough, pretty dramatic drops. But once the builders lowered their pricing, they said, "Okay, now we need to protect our backlog. We need to protect people that have bought our homes and we're going to shift more to an incentive heavy strategy."
So, an example, right now, 80% of every new home community in Tampa is offering an incentive and that average incentive dollar value is 5% of the list price. So, in that market right now, instead of lowering prices 5%, the builder is willing and able to give consumer 5% in closing costs, mortgage rate buy downs, flex dollars, whatever it may be. So, I think, from a builder point of view, it's they've shifted what they're going to do with their money. So, they've definitely felt the equivalent of pricing coming down but they're trying to preserve prices to preserve the integrity of who's already bought their home. We saw cancellations occur, again, back in late 2022 because people said, "Why would I want to buy a house if it's gone down 50,000 in value?" and people were canceling. Builders don't want to deal with that again, they've restrategized on what to do.
From the existing home side, it's, yes, demand pulled back but supply pulled back more and so you still found yourself in a supply and demand imbalance that ... I think the latest number is existing home sales are up 6% in 2023 over 2022. So, you still saw growth despite a more than doubling of interest rates.
Ben Miller:
Okay. So, what does that mean, do you think, for prices in housing in 2024?
Ali Wolf:
So, from the new home side, we pull builders and we ask them how they think prices will go and our data that we collected in early January '24 is that the majority of builders think prices will be flat to up and their reason behind that is twofold. So, one from the builder side, land prices are flat to up, land represents 20 to 50% of the final home price depending on the market. Beyond that, while we're not seeing input price inflation as bad as we've seen in the past, we still have prices that are high, it's just that the rate of growth is not going up as much. So, I think part of it is the cost to build a home is still extremely expensive but, besides that, many builders are predicating their belief on prices going up to the fact that they think rates will be flat to down throughout this year. And so, that just helps with affordability, maybe gives them a little bit more pricing power again, helps drive demand and so that's their take,
From the existing home side, I've talked to a few existing home experts recently, their belief is a three to 5% growth. So, I think there's this general consensus, more of the same. I did an event with Bank of America recently, they had a poll that said 90% of the respondents thought home prices would be minus five to positive five this year. It's a fairly wide range but it's just that general consensus of not too great, not too bad, just more of the same, I guess.
Ben Miller:
When you get these surveys from builders, do you ever backtest if their predictions of expectations are actually reliable?
Ali Wolf:
It's a fair question. We've not sat down and backtested it but, when the market was slowing in '22, the builder said prices are going to go down pretty dramatically and they did but that's an extreme case. I think we stopped asking them questions when the market normalized because we were just like, "Oh, okay, we can figure out our own home price appreciation forecast," go into questionable periods of time where we ask them for guidance but I don't think I could say, "Oh, yeah, for sure they're always right," and I don't think they would be. Because you said something earlier that's really important about the new home space which is a couple weeks of really good news or a couple weeks of really bad news changes that forecast so quickly.
Ben Miller:
The home builder, it's a funny thing because you think they're building this asset that may last, all intents and purposes, essentially a hundred years or forever and yet they really short term mindset in the way they build. And we work with home builders and I'm seeing them go hog wild and buying lots, they're shoving more lots into the pipeline than I've ever seen in my life. So, they're really happy with the market and they're really busy and it's because they've taken huge market share. So, twice as many homes are being bought that are new than normal because the existing homes aren't ... There's no supply so the home builders is filling the gap.
Ali Wolf:
And that's what we're seeing. So, builders used to represent 10, 15% of overall inventory, today they're at 30%. Existing housing stock, obviously, as time goes on, continues to age, right now it's tied for the oldest housing stock on record. New homes used to be 30% more expensive than existing homes because we've seen a greater increase in existing home prices, new homes are only 9% more expensive than existing homes. Inventory in certain markets on the resale side is down 50% compared to pre pandemic so builders are able to capture that share. So, right now, it really feels like it's the builder's market, it's their opportunity to be successful and builders are offering the incentives. So, not only do they have fundamental shifts in the market that are supportive of their success, because of what we talked about earlier with margin, they're able to be fairly aggressive with incentives to help bridge the gap with affordability.
Ben Miller:
Okay. So, you have a forecast for pricing that basically is flat to slightly up three to 5%?
Ali Wolf:
Yeah, three to 5% is from other existing home experts. I think, if we were to net out, our assumption is that rates are flat to down from here. And if that's the case, then I could see three to 5% on a national level but it is very dependent by market. When you think about what's happening with pricing, a lot of it comes down to inventory and I think everyone's so used to referring to, oh, inventory is so low, no one wants to sell their house, inventory is so low. And, nationally, we do find that inventory is down 30% compared to pre pandemic but there are markets across the country where inventory is above pre-pandemic levels or inventory is right in line with pre-pandemic levels. A market that has 15% more inventory and a market that has 50% fewer listings will not be behaving the same. It's not the same opportunity for builders, it's not going to have the same pricing advantage, very different dynamics.
Ben Miller:
Are there certain markets or regions that are more likely to have that dynamic? What's the big difference?
Ali Wolf:
The markets that I can think of, I know Tampa, Phoenix, Orlando and a few more are about within 5% of pre pandemic. And I think about those markets and I think a few common characteristics. One of them would be a payment to income ratio that these markets have never seen before which has gotten to a point that ... Before, we said, "Oh, demand came down but supply came down even more." I think in some of those markets, demand dropped enough that there is some standing inventory, there are some homes that aren't selling as quickly because affordability just doesn't make sense or consumer is just not willing to, why would I pay that much money for that house. I think another characteristic that those markets have is a lot of them were big investor markets and perhaps investors are saying maybe I want to sell now, sell while the market's still strong enough and maybe that's playing into it.
Ben Miller:
That's an interesting point. I've heard this said and it's compelling to me even though maybe it's not right but the average home price in America from 2019 to 2023, for a three to four-year period, went up $250,000 to 410,000 or some really outrageous increase and that just seems wild to me. That's a huge effect on basically what people can afford and especially in some markets where it went up way more. Is that basically something that you think will be given back by the market? You're basically saying that's the new normal.
Ali Wolf:
I think it's the new normal. Barring some massive correction, some financial crisis, some massive inventory shock, I don't see how we return to pre-pandemic pricing. The challenge is then ... Think about millennials. Let's just think about millennials, they're the largest living generation, they're the group that everyone said, "Oh, they never want to own homes," and yet, from 2014 until 2022, they were the most active buyer. The homeownership rate for older millennials, I can't remember the number but it's high, it's a lot higher than I think people expect.
You think about millennials and you say, "Okay, you have this group of millennials that have bought homes since 2014, they've been able to enjoy the run-up in home prices, they've been able to see their wealth go up, they're saving to themselves by having their monthly payment locked, their largest share of their budget," but then you have those that are renting that maybe can never buy a home. Payment to incomes are so out of whack. I know we're going to talk later about long term but that's one thing that really keeps me up long term.
Ben Miller:
Maybe this is beyond your purview but the social, cultural, economic consequences to shutting out tens of millions of people from homeownership because they can't afford it, how do you think about that and are there any historical parallels?
Ali Wolf:
I don't know about historical parallels. I think the thing that I think about is to what extent does it cause discontentedness that causes maybe political or social instability just with that gap. I acknowledge it as an issue, I don't think I've thought much more beyond that.
Ben Miller:
Let's talk about rates for a minute. You've implicitly said this but, with inflation coming down, do you have a rates forecast for 2024 and beyond?
Ali Wolf:
We do. I will not publicly say our beyond forecast but for 2024. And I want to say, when we talk about rates, I think that there's a lot of frustration from passive housing watchers to how wrong people have been with mortgage rates. And people being the most esteemed economists you could ever hope to learn from to the everyday economists. What we need to remember, and this is a big caveat to give you my number, is when the lockdowns were on, we didn't know that China was going to be more severe about COVID for longer, we didn't know there was going to be a war in Ukraine, there are a lot of these exogenous shocks that can play into mortgage rate forecast. But assuming there are no new shocks and we are assuming the Fed cuts rates towards the second, third, fourth quarter, somewhere towards the second half of the year, our forecast right now is 6.3% for year end on mortgage rates.
Ben Miller:
Is that four and a quarter for Fed funds rates approximately?
Ali Wolf:
We're in the camp of two to three cuts and I think, unless we see a dramatic pullback, they're probably 25 basis points, maybe 25, 150. Our belief that rates go down is twofold. It's partly the Fed lowering rates and partly the federal funds rate going down but it's partly the relationship, the spread between the 10-year treasury yield and the 30-year fixed rate mortgage compressing a bit more. We're seeing some early signs of that and, if nothing else changed, if the Fed didn't even do anything different, but that compression went back to a more normal range, you could get to our forecast fairly easily. I think there's a debate of do we ever fully get back to the old gap which was 1.7, the historical average, during the height, I think we got up to a gap of 3.2. History is, 12 to 24 months, you see almost a full reversion in the compression.
Ben Miller:
We are buyers in the aspect securities market so we buy issuances by originators of mortgages. We bought one last week, a year ago we started buying these are more junior tranches so places somewhat higher in the risk profile and we were getting nine, 10, 11, 12% yields on rated investment bonds and those are now priced, I think, 7.6%. So, the spread tightened so much in the last 90 days, it's actually shockingly tight. And actually, on this property, it was a SFR portfolio, single family rental, and the debt yield was five and the equity yield was 3.4%, [inaudible 00:28:39], which is illogically below a bond.
The point is you're saying that a mortgage rate is made up of two things, it's made up of the base rates from the Fed and then the spread which is basically the markets premium it's asking for to take the risk of investing in that mortgage. And during 2022 and three, spreads blew out because the banks, one of the big buyers, left the market. And the Fed was also a big buyer because the Fed was expanding their balance sheet and so those two buyers left the market and spreads really gapped out. And since the Fed's not going to come back and banks probably don't come back as much either, there's a shortage of buyers compared to before and, as a result, spread [inaudible 00:29:19] is going to be higher than they used to be.
Ali Wolf:
Yeah. We had a call with one of the big banks this week and they were going through their mortgage rate forecast as well and I think they were of the belief that banks do step in as buyers. And so, their forecast, I think their base case was the 10-year this year, I think they had 4.25. They had it going up as their base case but they said it could be as low as 3% or something and they were like, "Well, that's because there's just so much uncertainty as to who steps in." But applying that to mortgage rates, so I said ours is 6.3%, we believe that you need to have a lot of humility in forecasting certain things in the economy. Clearly, you and I started the conversation about having humility about where the economy goes and how there are different key pillars that can move the market one way or another. But when I look at mortgage rate forecast, the range that I've seen, I think on the high end is 6.5 and on the low end is 5.5, this range of higher for longer-ish.
Ben Miller:
How come you have, on one hand, expectation of a recession, on the other hand, higher rates for longer through 2024? How do you square those two views?
Ali Wolf:
The timing of the recession for us, so happening later in the year. So, going back to our biggest mistake was thinking things happen quickly, our belief is things happen more slowly. And it's mild that we've forecasted into, we have the cuts starting towards the end of the year and we have rates coming down. I think we're probably going to be wrong on both but I think most people are going to be wrong on both but we're trying to reconcile it. I think the Federal Reserve may prove to be cautious if the economy starts slowing. I think they may get nervous to not cut too fast because I think it's, lovingly to the Fed, a little bit apparent some of the damage that happened with rates being too low for so long and I think they may be trying to learn from that.
Ben Miller:
That's what the Fed watchers are saying, Waller said something like that, Q&A recently and I agree with that, we don't know. Do you have certain cities or markets that you feel like have great growth potential over the next three to five years? Point of view of affordability, population, jobs, are there certain markets that rank highest?
Ali Wolf:
I really like Columbus, I like Indianapolis, I like Cincinnati, Louisville, Portland, Oregon, parts of South Carolina. I think that there is still a lot of potential in the Carolinas in general, including North Carolina, my only concern for Raleigh and Charlotte is have they grown too fast for their own good right away. I'm a little bit concerned of a more near term ... They're still doing well, all things considered, I'm a little bit concerned that maybe they hit a bit of a stall but I think, longer term, if we're thinking out five years, I still like the Carolinas.
I'm getting a little bit more cautious on Florida than I've been for a while and I would say a bit more cautious on parts of Texas and a bit more cautious on Arizona. Partly because we recently did an analysis, we haven't published it publicly yet, but we did an all in housing cost and we said, "Okay, people often will start their search by looking at home pricing," and then they may look at, okay, what does that pricing translate to a mortgage payment but then they need to say, "Okay, what is our all in housing cost? What are we paying for insurance? What are we paying for energy costs?" We have a whole bunch of different inputs into it, property taxes and, when we ran the numbers, I just think some of the relative affordability that's been a big driver for Florida and Texas starts to get hit with the property taxes and with the insurance costs.
And I think that was fine for a while before we saw such a massive run-up in home prices. But I think, now, as you start to talk about affordability and that idea that maybe we have home prices that don't see a massive correction, I think it's going to be a little bit tough on some of those markets in the more medium term.
Ben Miller:
What's something non-obvious or unintuitive about the housing market most people don't know that you think is important?
Ali Wolf:
We already talked about it and it may not be right for the listeners of this but I think the biggest thing to me is that you can know every single day where mortgage rates are by looking at the tenure. I just think a lot of regular people don't understand the importance of, if you're trying to time when you're going to lock in your rate, I think that's a huge thing. Another big thing is we created what we call structural demand. Structural demand to us is, yes, people have locked in their interest rate but, and you've probably heard me say the phrase before, life happens. People are still getting married, people are still having kids, people are still dying, people are still getting divorced and we ran a calculation to understand what that structural demand is.
So, let's say any other discretionary buyer moving for fun leaves the market, how many transactions should we have? And I think we give a little bit of handicap to each of those, not assuming every marriage results in a purchase, every divorce results in a purchase, every death, we discount that. I think the number we got to was 4 million and we know, for 2023, we ended up selling 4.1 million existing home sales. And I think that there's ... Especially when I talk to loan officers or real estate agents and the market feels a little bit tough, I still think about there were still 4.1 million transactions last year and, yes, it's the lowest since 1995 but, if you're marketing yourself right, you can still gain some market share in that market. You had asked earlier how are home prices still going up with mortgage rates more than doubling. Because at a certain point, some people still need somewhere to live and they still want to lock in their payment. The fact that the market did do as well as it did with higher interest rates is what forced us to do that analysis how is this even possible.
Ben Miller:
That's super interesting. So, we are big investors in build for rent because, basically, we feel like customers want homes, they can't necessarily afford to buy or don't always want to buy so they want to rent. And I know you guys have done a lot of pieces on build to rent so what is build to rent and why is it getting institutionally hot?
Ali Wolf:
Yup. So, we have a whole report, it's called our Rental Housing Outlook, it's a full report where we go into the built to rent space but there's many different layers of built to rent. The two high level I want to focus on is there's either the idea of buying homes to convert to rent and that doesn't have to mean buying an existing home. There are some investors that talk to builders and say, "We want to buy some of your standing inventory and we want to turn that into a rental." So, we call that maybe more a single family rental and then built to rent is an intentional, hey, we want to buy this land and, instead of building brand new homes for purchase, we're going to build brand new homes to rent.
It's what you said, when you look at demographics, overwhelmingly, there still is this desire for millennials and Gen Z to ultimately become homeowners but, when you look at the math behind it, and we had already talked about how difficult it is if you haven't already become a homeowner or if you haven't been invested in other forms of wealth to help you cope with a down payment, et cetera, we have found that there are a lot of folks. It's not even younger folks, I think that's what people assume too, it's usually younger. They want to find somewhere that lives like a home. Maybe they want a backyard, maybe they have kids and they need a good school district but maybe they can't come up with a down payment. So, it really serves a purpose in the market whether it's a flexibility play, it's a good school district play, it's a space play or it's an affordability play.
Ben Miller:
Or work from home.
Ali Wolf:
Or work from home.
Ben Miller:
Let's go a little longer run for a second because I think we're going to end up starting a new economic cycle. I believe the cycle will start in 2025, maybe it starts in 2024. We just lived through 2008, 2020 and so much of 2010s was driven by 2008. What happened, the lessons learned, the scars, policy. So, whether it's a soft landing or a mild recession, you can likely put some gating around what the beginning of the next cycle looks like and so how do you think about the longer term forecasts around this cycle, demographics, housing and growth?
Ali Wolf:
I think that the builders have been very focused on the idea of we're X million units undersupplied. And we're not of the camp of four or 5 million, we think that's too high but we are of the camp that there's an undersupply of housing, in particular, there's an undersupply of attainably-priced housing. And as we talked to builders, you had mentioned earlier that builders are going through this massive land grab, our data backs that up completely. So, just a lot of builders are saying, "Hey, maybe right now feels uncertain, maybe there's some risks but we're in the business of building and selling homes but also, in a lot of cases, developing land and working with our developers and getting land ready and moving into new locations where infrastructure is not already there and it takes time."
So, I think that we have a lot of builders, if their capital allows it, trying to think through the near term and say we need to be setting ourselves up for success because I think, Ben, they have the same belief you do which is, sooner or later, we're going to get over this uncertainty, we're going to stop talking about a recession and we're going to talk about growth and they want to be in a position to be successful. So, I think, from the building community, I anticipate a lot of them will be going full steam ahead to this extent that they can, the limiting factor, of course, will be the lot availability and also the suppliers.
There's an important thing, I would say, we've studied but we haven't thoroughly researched which is what could happen 10 years down the road, 15 years down the road with our demographics. With more women that are in the labor force, that are having children later, when they have children later, they have fewer children. We have the millennials that are larger than the boomers but you have the Gen Z that aren't as large as the boomers, you're backfilling a larger generation with a smaller generation. So, I think there's some concerns in the much longer term. I don't think this is the 2025 cycle that you're talking about, I'm not really concerned about it for that point of view but more longer term, I think, that's one of the biggest risks.
Ben Miller:
You look at the long term, kids who are five years old, that generation, there's a million less kids than there were 15-year-olds. New population birth has been plummeting since '08 and plummeted again in 2020 and then you have aging demographics so this probably ... You're saying it's a 2030s problem, not a 2020s problem. It's such a dramatic change to the nature of our country and the world. It's like climate change, nobody in Florida cared about it and then, just one year, it just absolutely changed the housing market.
Ali Wolf:
When you talk about the aging demographics, I think there have been a lot of researchers that have tried to put a number to. I think Zillow coined the term the silver tsunami. Put a number to the fact that we're saying, "Oh, no one wants to sell their homes, Inventory is tight," but homes are predominantly owned. The propensity to own goes up with age so you have a higher homeownership rate among the older individuals and what happens to those homes. Are they passed on? Is it inherited? Are they sold? Are they occupied? Are they turned into rentals? I think there is this question of, if we're going to say there's an undersupply, that's assuming that housing stock on the resale side remains pretty limited. But if that changes, as demographics change and as life stages change, I think that's another wild card to the idea of how much building do we really need.
Ben Miller:
Just to cap this off, I'm going to try to recapitulate your big points. 2023, you and I are both wrong about our recession call. However, I literally have the exact same view which I went back and looked and saw that, typically, there's a eight to 18 month lag from when rates peak to when there's actually a downturn. So, there's massive lag effect but the government has been stimulating which creates an uncertainty. But all things considered, you're still talking about a pretty good outcome in terms of how bad the recession could be and how housing prices look like in the near term. So, basically, even with the caveats of a potential recession, it still feels better than it has in a long time.
Ali Wolf:
And one thing I'll add is, as we look at the early start to the housing market in 2024, at least from the new home side, really positive green shoots. Just a lot of optimism, oh, there's more people out and we're seeing a little bit more traction. But when I asked builders to describe the market in three words or less, the word cautious came up the most. So, I think there is optimism and I think there is this idea of, okay, yeah, rates are coming down so that's good but I think there's also ... It goes back to how deep is the buyer pool, how much can interest rates go down without there be a recession, that's what you had asked about the rates and the forecast. I think there's just angst still. It just feels is the worst yet to come or is the best yet to come. So, I think there's the optimism but still the concern.
Ben Miller:
That's terrific in my view because, basically, a cautious optimism is actually the most balanced economy. And when it was 2021 or '07 or 1999 where there was just caution thrown to the wind, that's usually a really dangerous sign. So, I'm optimistic, even though I do think there'll be a mild recession, that's been a big change for me for a long time. It's heartening for me to hear somebody who knows so much about the economy and housing to have a similar view, maybe we'll have to regroup a year from now and see if, basically, how were we wrong.
Ali Wolf:
Because I feel like we're in an echo chamber. Oh, I agree with you, we have the same views, we didn't know we had the same views. But yeah, I think that can become dangerous too.
Ben Miller:
The one big X factor where he keeps talking about geopolitical. Yeah, it's been an amazing run for the US. The US' growth has been and continues to be better than almost anywhere in the world. I feel so fortunate to be here and, hopefully, my little part participating and pushing it forward. Thanks again for coming on the show, it's been wonderful and onward.
You've been listening to Onward, the Fundrise podcast, featuring Ali Wolf, chief economist at Zonda. My name is Ben Miller, CEO of Fundrise. We invite you again to please send us your comments and questions to onward@fundrise.com. And if you like what you've heard, rate and review us on Apple Podcasts and be sure to follow us wherever you listen to podcasts. For more information on Fundrise sponsored investment products, including relevant legal disclaimers, check out our show notes. Thanks again, we'll see you next episode.
