August 13, 2020

Whats Your Outlook For Home Prices? (w/ Logan Mohtashami)

LOGAN MOHTASHAMI: Home prices.

I think that's where a lot of people haveasked me the question, where are home prices going to go? I think one thing that home prices, real homeprices were negative last year on a year-over-year basis, something not a lot of people knewabout.

I always thought that is bullish.

I even wrote about that.

The fact that real home prices on the CaseShiller Index went negative shows that we don't really have an overheating housing market.

We just have an expensive one for certainhousehold incomes.

The fact that people are thinking this isa housing bubble, that home prices are going to fall 38% to 65% within a very short amountof time, I 100% disagree with that thesis because it was never an overheating demandcycle.

It was never an overheating production cycle.

It was never an overheating home price cycleon a real home on a year-over-year basis.

When supply increases, and I think that'sthe thing going out for the next few months, a lot of people are taking their homes offthe market because they don't want to even try to sell their homes.

Because supply might stay here for a littlebit longer in terms of homes are going to take longer to sell, and you're going to seeincreases of inventory, don't think of that as a housing bubble crash about to happen.

I think that's one of the biggest mistakesI've seen in the last six or seven years, people are thinking just because nominal homeprices went back to 2006 levels that we are prone to a massive decline.

Really, anything that's a bubble means thatit has to go back to trend.

That means home prices have to go back to1996 levels, similar to what we saw during the housing bubble crash.

We don't have that overheating demand cycle, but home prices at some point, will fall.

It's how do you get there with the inventory, because the biggest thing in this cycle for housing is housing tenure doubled.

What I mean by housing tenure, people from1981 to 2007 were living in their homes about five years.

In this expansion, it's gone to 10 years andgoing up a lot longer.

Why are people doing that? It goes back to one of my original thesesyears ago that we've been building bigger and bigger homes for decades, and family sizeshave been getting smaller.

That single family home of 2000 square footor 2100 square foot is acceptable for people that that have two kids.

Unless you're building a massive condo market, a lot of the homes out there are fine for people.

They're just staying in their homes longer.

A lot of people call it the mortgage ratelockdown thesis.

This is something the housing industry hascreated.

I 100% disagree with that thesis.

They say that Americans are sitting at homewith their low mortgage rates and once it goes lower, inventory is going to be releasedbecause people are going to move.

I don't believe in that concept.

I think people are just sitting in their homesbecause they don't need to move.

You move because of your job.

You move because you have more kids.

You move because you want to go to a betterschool for your children, if you lost your job or divorce, but people aren't sittingthere thinking, I got a 4% mortgage rate, I'm going to wait till three and a quarterand then pull the trigger.

No.

I think housing tenure is the story now goingout for many, many decades, how long do people stay in their homes? Because if that's the case, production mightnot ever come back to what people want it to be.

ASH BENNINGTON: You cautioned against toomuch focus on absolute nominal dollar values of housing, other than housing tenure, whatother metrics do you look at to get a sense of where we are in the cycle and what therisk factors are going forward? LOGAN MOHTASHAMI: Two key data lines thateveryone should track is mortgage purchase applications on a year-over-year basis.

When we set that low in 2014, and we're nottalking about the lows in 2006 and 2008, adjusting to populations, the lowest level of the mortgagepurchase application had was in 2014.

We've had an uptrend always intact since then, that uptrend is going to break now, we're going to see much higher year-over-year declines.

After the virus is over, and people walk theearth, you always want to keep an eye on year-over-year purchase application data from basically thesecond week of January to the first week of May.

That gives you a good idea because if thatcomes lower, then inventory levels should increase.

Inventory levels for the existing home salemarket hasn't really gone anywhere too much, except in 2014, we almost got to six monthsor one year.

Inventory levels and purchase applicationdata, that gives you an idea of where the demand and especially with home prices andnominal dollars, where we're going.

Because purchase applications are down andinventory increases, then definitely home prices have to fall because simply it's tooexpensive for the market, it's going to take longer to sell a house and then going outin the future, job loss recession, how many homes are going to be on the market distresssales? That'll increase the inventory out there.

We've never been able to get to six monthspost-1996 unless we had a job loss recession or a housing bubble crash.

This is why it's difficult because peopleare staying in their homes longer.

ASH BENNINGTON: I'm more pragmatic or individuallevel, if you were unfortunate enough to be someone who listed your house on March 1st, we hear all kinds of advice about this that people are saying lowering prices isn't good.

Pulling it off the market isn't good.

What's your advice for people who are in thatunfortunate position right now? LOGAN MOHTASHAMI: Everyone has to have theirown game plan of why are you trying to sell? If you're selling because you have to moveup to a bigger house, then you can leave your home on the marketplace and see what happensbecause I know a lot of buyers are saying, hey, listen, I'm not going to get outbid here.

I'm going to go into the market right now.

A few home buyers, I don't know, just saidit's actually refreshing that I wasn't outfitted this time.

If you're concerned about price, and you don'tneed to sell, a lot of people have already done this, they've taken their homes off themarket.

They're just going to go listen, I can't havean open house.

The process of buying a home has changed completelyand I know everyone is doing these virtual open houses, but nothing comes close to actuallyhaving buyers come in your house and looking at the home.

For those people that are concerned aboutprice, maybe you take your home off the market, wait until lockdown protocols are taken off, give it about 30 days even.

Then I would put my home in the market andthat's if you're priceoriented.

If you need to sell your home because youhave to because you have to move, then you got to take your chances in this type of marketplace.

Just know that it's just not a functioningeconomy as long as lockdown protocols are in place.

ASH BENNINGTON: What else are you lookingat right now, Logan? When you look to the future, what are youthinking about and what are you looking at for potential events that could move thismarket? LOGAN MOHTASHAMI: Well, first of all, thebond market will lead you– it led us down, the 10-year yield started to break much lowerbefore jobless claims started to take off.

For me personally, the 10-year yield credit, the St.

Louis Financial Stress Index was at an all-time low in February and it has goneparabolic.

If you want to know when the economy, andespecially for the housing market will get better, that 10-year yield should be gettingabove 1.

33%.

In fact, the 10-year yield today, though it's75 basis points, is still too high relatively to the economic damage that we're seeing rightnow.

The bond market is already telling you, hey, listen, Q4 is going to be better than Q2, which isn't saying much as Q2 is going tobe horrific.

Keep an eye on it.

When the 10-year yield goes up, and yes, thatmeans mortgage rates have gone up, that means we're starting to get the process back towhere we get back to just a normal economy where people could walk the earth.

The St.

Louis Financial Stress Index willstart to come back down, we saw this in 2008, and jobless claims as parabolic and as horrificthat data line has gotten– those three things, you want to keep an eye on them, jobless claims, the St.

Louis Financial Stress Index, and if a 10-year yield heads up higher, it's agood thing.

That means the bond market is looking forgrowth to happen again.

Right now, we're still so far away for anything.

I look at it from my data points is separatingthis economy into three different stages.

The BC, before coronavirus.

The AD, after the disease which we're seeingright now some of the most horrific economic data we'll ever see in our lifetimes, butthere's going to be an AB stage, America's Back.

For America to come back, you've got to getlockdown protocols off, you got to see the bond market, bond yields rise, you got tosee credit get a lot better, high yield index, financial stress index come down, and joblessclaims comes down.

When that happens, believe in it, after 2008, when we saw those data lines get better, a lot of people who didn't believe in that missedout on the longest economic expansion ever recorded in history, the longest job expansionever recorded in history.

Those three things are what I'm looking for, because I think that benefits the housing market, which was looking really good thefirst two months of 2020.

ASH BENNINGTON: Yeah, we're outside of thedomain of finance and predictability here and we're into the domain of biology, whichnone of us are experts in.

It's a bit of a frightening– LOGAN MOHTASHAMI:It is.

That's a really good point.

For myself, virus modeling is just like, ohboy, this is a brand new world.

For myself, I've always talked about two dates, May 18th and September 1, why? Because before we had even 1000 cases, justlooking at other countries that started to do testing and lockdown protocols, I thoughtonce we get to 27, 000 cases confirmed six to eight weeks after that, our data shouldlook better.

I know in New York, some of the data linesare starting to look a lot better, but by May 18th, or even before that, the curve shouldget look a lot better in terms of new cases.

That is the first step because I think thesummer heats, June, July and August, it buys us some time to get ready for the second waveand then– we can't have this happen over and over again.

We can't have this shutting down the economy.

Even if we put in six to $10 trillion disasterrelief in this, it's simply we cannot function that way.

We've got to use that time, that summer toprep for the fall and winter so we don't have a reoccurrence where we say, hey, everybodygo back at home, because again, that is the biggest risk as we can see.

Shutdown protocols are the biggest risk toany economy out there.

Those summer months are really key for usto prepare for the virus coming back in the fall and winter.

ASH BENNINGTON: When you mentioned governmentsand government responses, what are you looking at in terms of policy action from the federalgovernment that could ameliorate or potentially dampen the recovery? LOGAN MOHTASHAMI: Send more checks out becauseright now, this isn't– the economy is shut off so basically, the fact that we've enhancedunemployment benefits and we're sending checks out, it'll stabilize this and when I lookat how much money is being thrown out, if you look at people who make $46, 000 and less, if you take weekly unemployment benefits, the average, take about $100 off of that, then you add a $1200 check to it, they're not going to have what we call depressionaryloss in wages, because they're going to get some incomes.

Send checks out, help fund small businesses, because right now, the crisis is what are we going to look like in four or five months? Because some companies just aren't going tomake it.

No matter how much the SBA loans are, somecompanies are simply not going to make it.

Small business, whether at 15 days on cashon hand, you lose 70%, 90% of your revenue, you're done.

Whatever it takes, you throw as much moneyas you can to keep people as solvent as possible.

Even with the $2 trillion fiscal stimulusand the 4 trillion monetary, I would be doing much more to just keep as many people solventto get back to the AB where people start to walk the earth again.

I think it's excellent to see that we justwent to that route right away, but don't let up.

I expect for more fiscal stimulus and moremonetary operations to try to keep as many companies and people as solvent and possibleuntil they could start working again.

ASH BENNINGTON: Talking about sending checksfrom a slightly different angle, what's your thought about loan forbearance, mortgage forbearance, the potential impacts, the potential risks and also the potential upsides? LOGAN MOHTASHAMI: The main risks that I seeright here is that they made it open-ended.

When you make anything open-ended, some peoplemight take that advantage when they don't need it, which puts stress into the servicemarket.

Hopefully, right now, the FHFA and Mark Calabriaand Mnuchin and everybody's trying to think of a way to mitigate the damages because youcan't just open-ended say nobody, call it nobody, mortgage payments go all the way andrent goes all the way.

There's a financial aspect behind that.

I think for every American, call your servicerand see what the plan is because some people don't realize that some of these plans, yougot to lump your payment, after three months, you got to pay it all at once.

Some of these other plans, you read everysingle line of what forbearance is, but if you don't need to do it, my advice is don'ttake it.

There's no benefit for you.

If you are struggling, you lost your job andyou can't pay, then absolutely take advantage of the situation but if you could keep onmaking your mortgage payment and your rent, do so because we don't know what the implicationsare after that process.

It's just that when we just made a basicallyan open-ended call that anybody can miss their mortgage payments, and there isn't an efficientprocess like the loan modifications that were actually terrible back after the financialcrisis in 2008.

You still had to qualify for it, you stillhave to show stress.

In some cases, you don't even have to do that.

Just be mindful, nothing is really free.

If you're definitely stressed, if you definitelylost your job, you definitely have even if one dual household income, if one of yourspouse lost income, you definitely want to look into that and see the best benefits butmake sure to read everything first.

I think there's this notion that it's justbasically free, and when they will take back to the loaner, it's not that simple for everyservicer.

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