INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Cris deRitis and Marisa DiNatale. Hi guys.

Cris deRitis:                       Hi Mark.

Mark Zandi:                      Action-packed week. I'm here at Moody's HQ, 7 World Trade, and it's a Friday and I'll have to say it was quiet the whole way from Philly. I got on the train in Philly at 30th Street Station, got on the Amtrak Acela, took the train up to Newark, took the path over to World Trade and walked over. Remote work is really here. It was very quiet. Felt like a Sunday morning to me.

Marisa DiNatale:              Wow.

Mark Zandi:                      Really-

Cris deRitis:                       You didn't factor in Super Bowl?

Mark Zandi:                      Oh, you think that's what's going on?

Cris deRitis:                       Yeah. People are celebrating.

Mark Zandi:                      Already.

Cris deRitis:                       And preparing, yeah, those tailgates. They-

Mark Zandi:                      Well, I noticed that Marisa's already prepared. Look at that. She's got- [inaudible 00:01:09]

Marisa DiNatale:              Yeah, I am. I'm wearing an Eagles jersey. Yes, I'm ready.

Mark Zandi:                      And that's a fashionable Eagles jersey.

Marisa DiNatale:              Thank you.

Mark Zandi:                      Yeah, I can't see the whole thing but [inaudible 00:01:16]-

Marisa DiNatale:              It's a vintage, it's a Donovan McNabb jersey.

Mark Zandi:                      Oh, is that right?

Marisa DiNatale:              Yeah.

Mark Zandi:                      From back in the day?

Marisa DiNatale:              Yep.

Mark Zandi:                      And even though you moved out to the West Coast, you're still an Eagles fan. Yeah. Good for you.

Marisa DiNatale:              Right, right.

Mark Zandi:                      Cool. Yeah.

Chris Herbert:                   There you go. [inaudible 00:01:30] Eagle fly.

Mark Zandi:                      That's our guest. He's making fun of Marisa, but we're going to introduce him in just a minute. I was going to ask something. Oh, Marisa, do you know the Eagles fight song? Touchdown song?

Marisa DiNatale:              Of course.

Mark Zandi:                      Can you sing it?

Marisa DiNatale:              Absolutely not going to sing it.

Mark Zandi:                      Because I went to a couple games this year and I should know it by now because they scored. I watched the Green Bay game and they must have had like eight touchdowns. It felt like it. I was singing that damn song eight times. I still can't remember it.

Marisa DiNatale:              It's catchy. It's catchy.

Mark Zandi:                      It is catchy. E-A-G-L-E-S. Yeah. Of course we're all Eagles fans.

                                             And we had a webinar this week too, which is kind of like the three of us. It's kind of like we take the podcast and we make it with slides and that turns into a webinar. It's kind of a weird thing. Have you noticed, what's the difference between a podcast and a webinar? The [inaudible 00:02:26].

Marisa DiNatale:              Yeah, it felt like we were on the podcast. Just more formal.

Cris deRitis:                       A lot less banter though.

Marisa DiNatale:              Yes, more formal.

Mark Zandi:                      [inaudible 00:02:34] less banter, more formalized.

Cris deRitis:                       More professional.

Mark Zandi:                      We had a lot of folks, I think we had 1800 clients on that call on the webinar. And we had... This is bugging me.

Cris deRitis:                       Oh gosh.

Mark Zandi:                      We had 300 on-the-nose people give feedback. You know, you ask for feedback. One person didn't like it. I was, "What? Why? Why didn't you like it?" Should I call that person out? I'm not going to call that person out, although I-

Cris deRitis:                       No, no. You should not.

Mark Zandi:                      Kind of like President Biden at the State of the Union. Yeah, yeah. All right. We got to introduce our guest because he, he's biting it into this conversation. Yeah. All right. Okay. That's not fair. Okay. Chris Herbert from the Joint Center of Housing Studies, Harvard Joint Center for Housing Studies, is our guest today. And Chris, we're going to have a formal introduction where you're going to tell us about your life story. But before you do that, what do you want to say? You want to say something?

Chris Herbert:                   No, I just wanted to say, I hope it wasn't your mom, that was the one guest who didn't like the show.

Mark Zandi:                      Oh, what's that? I missed that. What'd you say?

Chris Herbert:                   I said I hope it wasn't your mom who was the one person who was critical of your show.

Mark Zandi:                      Oh, not my mom. No, no. My mom is a fan. So yeah, through thick and thin, she's a fan.

Marisa DiNatale:              I thought you were going to say, "My mom would never listen to a webinar."

Mark Zandi:                      Well, that too. I felt that that might have been a little too, like a son wouldn't say that about her mom, but kind of thing.

Marisa DiNatale:              I'll say it. Yeah.

Mark Zandi:                      Yeah. You can say it. But yeah, you think, I want to call this person up and say, "What's the deal? What could we have done to... " Usually when that happens, they just disagree with the message so they're shooting the messenger.

Marisa DiNatale:              That's possible.

Mark Zandi:                      That's a possibility, yeah. But the other big event this week, this action packed week, was I was in DC and I saw you, Chris Herbert. And we got two Chris's here. So I'm going to say Chris for Chris Herbert and I'm going to say Chris D for Cris deRitis, just to make this easier. And the joint center, was it his first in-person meeting since the pandemic or first one in DC?

Chris Herbert:                   First one in Washington.

Mark Zandi:                      Yeah.

Chris Herbert:                   It was our third in person, but the first in Washington.

Mark Zandi:                      Got it. Got it. And you told me that I was your second favorite economist. That's the message I took away. Second favorite.

Chris Herbert:                   Well, you're co favorite.

Mark Zandi:                      Co favorite. [inaudible 00:05:04]

Chris Herbert:                   You have two favorites. Just like our children, you can't love one child more than the other.

Mark Zandi:                      I got it, I got it. But I still can try though. Can I try?

Chris Herbert:                   You can. I wasn't that one person, by the way.

Mark Zandi:                      No, no, I know you were definitely not that one person. Well the meeting was fascinating. Well, maybe this is a great place to pause and for you to give us a sense of the center, a little bit of the history because I don't know the history and I'm really curious, and your role there and how you got that role. So maybe just give us a sense of things.

Chris Herbert:                   Sure. So for the joint center, so the joint center's been around since 1959, so we're pretty old by academic research center standards. We were established with a major gift from the Ford Foundation to Harvard and MIT to create a center focused on urban issues. And so this was coming out of time when there was real concern about what was happening in cities across the globe. So Ford Foundation said, "We want to get these two universities thinking about it." So they created the Joint Center for Urban Studies of Harvard and MIT.

                                             So two things, it was joint Harvard and MIT. And it was also broadly urban studies. Fast forward 1971, there was a long, pretty renowned history of the center during that period of time, people like Daniel Patrick Moynihan, who was the director of the center and his work on the black family came out of the center. Nathan Glazer, The Melting Pot. So a lot of very seminal urban work came out of the joint center back in the day.

                                             But then in 1971 the Ford money ran out. Ford said to the universities, "Hey, we did our job, we got it launched, you know, you keep it going from here." The university said, That's not the way we operate. Up to the senators to figure out a way to do this." So Derek Bach, president at the time said... John Dunlop, who was an economist, labor secretary under Gerald Ford sent him over to say, "Shut those guys down."

                                             Don Dunlop really appreciated the fact that having a center at Harvard, and we were very outward focused, we were very intended to be multidisciplinary and also to link academia policy and business. And so John said, "I think we should keep it going. And I think what we should do is get a funding model that gets the private sector to provide funding to provide basic research into these urban issues."

                                             And at that point, he focused it on housing and got a group of companies, which was called our Policy Advisory Board. So that was established in 1971. It's been around for 52 years now. And that created the stable source of funding for us to go forward. We got divorced from Harvard, and there was a divorce in the '80s and Harvard got custody. So we've been the joint center at Harvard since then.

Mark Zandi:                      Oh, I see.

Chris Herbert:                   And we kept our multidisciplinary nature going with the joint part by being joint between the Kennedy School of Government and the Graduate School of Design where urban planning is. So we've been focused on housing at Harvard. Used to be much more aligned with the Kennedy School. Now we're more aligned with the Graduate School of Design. I report to the dean of the design school.

Mark Zandi:                      Oh, I got it. And Chris, you've been, are you the executive director or, what's your title?

Chris Herbert:                   My title is Managing Director.

Mark Zandi:                      Managing Director. So how long have you been managing director?

Chris Herbert:                   Since 2015. And I was research director for five years before that.

Mark Zandi:                      And was it, I can't remember, was it Eric Belsky who was... ?

Chris Herbert:                   Were you [inaudible 00:08:21] Eric Belsky. I succeeded Eric and Eric, beforehand was Nick Retsinas.

Mark Zandi:                      Oh, Nick. Yeah, I forgot about that.

Chris Herbert:                   He was the director for about 12 years and was really seminal, and he built up the policy advisory board and did a lot to make us a much more prominent player in a lot of spaces. So [inaudible 00:08:42].

Mark Zandi:                      You were a researcher at the center before you became Managing Director. I see. Okay.

Chris Herbert:                   Yeah.

Mark Zandi:                      Okay, great. So you've been a kind of a housing guy for a long time then? Kind of a, [inaudible 00:08:53].

Chris Herbert:                   I've been a houser for a long time. I got a master's in the '80s and then I went out and worked in affordable housing for a little while, decided I wanted to be a researcher, came back to the Kennedy School and got my PhD in public policy in the '90s, worked at ABT Associates doing research and evaluation on housing for about 12 years, and then I came back to the joint center.

Mark Zandi:                      Great, great. So one thing I find so cool about the joint center in these meetings is you've got a large number of folks from across the... It feels a lot is from the house, home building, housing supply, building materials. You've got a few mortgage folks sprinkled in there, a few mortgage originators, but it feels more kind of housing supply related. Is that fair to say?

Chris Herbert:                   Yeah, we actually try to curate the group who are part of the policy advisory board. So right now it has 64 members, and they're basically all household names in the housing sector. And we try to make sure we have a good group of home builders. And the reason is that they are driving so much of the housing market in terms of the industry side. And then we have all the manufacturers you can think of, Pella, Armstrong, Kohler, all the kind of... We walk down an aisle in Home Depot or Lowe's, those companies are all there.

                                             Then we have housing finance, we have folks in information transaction side, so Zillow and CoreLogic and move.com. And then we're trying to get into some more of the spaces that are emerging. So we've got invitation homes, so the single family rental space. So we really try to make sure that when we have that group come together, and Mark after you spoke to them, we passed the mic around and say, "What's happening in your world?" It's like a fed Beige Book for housing. So you've got the home builders, single and multi, you've got the manufacturers, you got the distributors, you've got the retail distributors, you've got the realtors, you've got the financers. And so you're seeing from all those different parts of the ecosystem what's happening. And that's where the group gets a lot of value is sharing insights among each other.

Mark Zandi:                      Yeah, it makes sense. Well obviously housing is kind of front and center here from a macroeconomic perspective because it's in recession, I think it's fair to say. I mean home sales are, have gotten nailed since mortgage rates rose. They've risen quite considerably from where they were at the end of 2021 going into 2022 when they were at record lows. And we've seen home sales come back down to kind of levels we saw in the teeth of the pandemic, or not quite to the lows of the great recession financial crisis, but pretty close. Home building is weakening and now house prices are rolling over. So I suspect, and I got a sense of this, but maybe you can give us a better sense of it. The mood in the room was, how would you characterize it? Is it consistent with what I just said or are they... Of course these guys are always glass half full kind of guys, which is important, very important if you're in the business.

Chris Herbert:                   Otherwise they wouldn't be in that business. The mood of the room was, I was not going to say cautiously optimistic. I would think it was kind of surprisingly optimistic and surprising on their own self. I mean I think, there's a lot of chatter. I mean people have just come back from the international builders show. Builder confidence is moving up. There's a lot more traffic that the builders are seeing than they expected to see in the early signs of the spring season.

                                             The manufacturers, when they're in that room, they're looking over at the home builders to see what they're saying because they know that's what's going to hit them six months later. They had a big backlog they're still working through. Multifamily has stayed up, commercial has been doing well. So they're all still feeling pretty good and kind of saying, "I think bad things are coming. But now the home builders are saying they feel like this might be the bottom." So the room was much more optimistic than I would've thought. And I say optimistic, it's not glowing, optimistic. More like, they think that on the single family side they might be at a bottom. Multi-family, actually I think what I heard was the there's red lights flashing and a downturn coming.

Mark Zandi:                      Yeah. Do you think on the single family side, I think we have to make a distinction clearly from the single family and the multifamily. Is it, do you think it's largely related to the movements in mortgage rates? So mortgage rates, they were, just for context, the 30-year fixed was sub 3% back, late '21 at the low. If you go back to late 2022, it peaked at about 7%. And now that it's come in, it's bouncing around but it feels like it's somewhere closer to six, maybe six and a quarter, something like that. And with those movements it does feel like it is having some impact on kind of demand, general sentiment is. Do you think the mood in the room is reflecting those swings in the mortgage rate?

Chris Herbert:                   Yeah, and I think it's an important distinction between, as you say, between single and multi-family. So the movement in rates hit the single-family market pretty much immediately. And so it, single family starts went from pushing 1.2 to 900,000 I think now. And certainly softening. Multi-family starts are staying up. And I think the interest rates really just drove the buyers out of buying homes. That meant that they were going to stay in the multi-family market longer.

                                             Other thing I think is that the interest rates are going to affect multi-family point with a lag. And so multi-family folks have deals in place that got their equity and debt financing lined up. They were not about to stop last year 'cause they knew if they stopped they were going to have trouble getting that financing in the future. So there's a lot of momentum. It takes a long time to get that.

                                             But what I heard at that table was, the financing is now not available for 2023. And so trying to get new starts to pencil out is going to be tough. And so I think the multi-family kind of defied gravity for a little while, but it can't do it forever. So I think we're going to see multi-family starts turned down and then what I think people are seeing is that consumers were shocked by 7% interest rates but then they're moving from seven down towards six so, "Oh, six doesn't feel so bad anymore."

Mark Zandi:                      Yeah, right. Yeah. You turn up the temperature to scalding and you turn it down a little bit and you go, "Oh, I think I can live with that." Yeah. That's the sense I got when I was there, that on the single family side, a bit of relative optimism. Maybe the worst is over kind of optimism. But on the multi-family side I got the opposite feeling, that the storm is about to come, and of course they were looking at it through the prism of supply and construction and they're saying, "Look, we can't get financing. The capital markets have shut down. Banks are pulled back on their underwriting, they've raised the bar here for getting credit and we're not going to have the financing we need to continue to produce at the pace we have been in 2023." That was kind of the sense I got.

Chris Herbert:                   Yeah. I think the market fundamentals are that vacancy rates were at historic lows, rents were growing through the roof. Vacancy rates have started to turn up. Rent growth is clearly slowing along with house prices. So that's also going to give them some pause. But still vacancy rates are, as much as they're coming up, they're still not high by any kind of historical standards. And those two markets are linked. If there is recovery in the single family market and people are able to get into home buying, that's going to mean less demand for apartments. And so they're kind of moving on, which way is demand flowing will affect this, the relative strength of those two markets.

Mark Zandi:                      Hey Cris, let me turn to you. I mean, does that surprise you, what we just said about the mood in the room? Is that consistent with- [inaudible 00:16:36]

Cris deRitis:                       I think that's consistent with some other data points as well. The one thing I would say on multi-family is just the pipeline is still full. So even though new permits, new starts may be down, certainly because of the financing issues, there's still a lot of supply that's going to come online over the next couple years here. So the building is going to continue, there's still quite a bit of demand, or quite a bit of activity I should say, to complete those projects. But that's also going to potentially have some downward pressure on prices and rents as well. So I can understand the mixed emotions around the two markets.

Mark Zandi:                      And that's exactly what someone, a large multi-family developer in the room told me. He said starts are going to weaken next year. Because we've been, the starts, the actual beginning construction, very strong in 2022 going into '23. But that's going to really start to tail off because I can't get credit, but the completions are going to remain very high and even improve in 2023, because I've got all these units sitting in the pipeline going to completion.

                                             In fact, it's almost a million, record number of units, million units that got bottled up because of supply chain issues and labor market issues related to the pandemic, immigration, that kind of thing. A lot of immigrants work in the construction trades. And now those constraints are easing and I can finish these homes and it's going to show up in completions next year.

Cris deRitis:                       That's right. I thought that was very interesting.

Mark Zandi:                      Which does, I think we talked about this in the past, does call into question what's going to happen with construction jobs. They may not fall off. They haven't fallen off. Cris, have you noticed, construction employment continues to rise.

Cris deRitis:                       Yeah.

Mark Zandi:                      There's been no decline in construction employment, and that feels like it's, that's going to continue here going forward.

Cris deRitis:                       Well, you got the infrastructure as well though, right? So that-

Mark Zandi:                      Yeah, that too.

Cris deRitis:                       That's certainly going to continue and even increase in the future. So there'll be some offsetting if you're looking at construction overall. But the resi will remain strong because of the pipeline, for now at least.

Chris Herbert:                   The manufacturers were saying that commercial construction has been a bright spot for them. And I don't know if Cris, if you've got insights to that. I was a little surprised. I was thinking office space has got to be weakening. Retail space has been weak for a while. But there is [inaudible 00:19:08] commercial they're saying was a bright spot for them. So offsetting what's happening in the residential side.

Mark Zandi:                      Well I think we're seeing a lot of construction in manufacturing, believe it or not, manufacturing facilities, which goes to kind of supply chain resilience and de-globalization. A lot of manufacturers are bringing production back home, and that's really lifted manufacturing construction.

Marisa DiNatale:              And warehousing and that kind of...

Mark Zandi:                      What's that, Marisa?

Marisa DiNatale:              And warehousing and the stuff that's sort of adjacent to manufacturing.

Mark Zandi:                      Yeah, it's been very strong. Yeah. So Chris, what do you think was at the top of concerns for the group? What's kind of most worrisome? I guess other than the general economic environment, which was, I was there. Hopefully I cheered them up a little bit, because I said no recession at the end of the day. I don't know if they bought into that or not. But other than that, what else is on their minds? What's kind of top of mind for them?

Chris Herbert:                   It's the same issue that's been in some sense top of mind for the last decade. And it's labor,

Mark Zandi:                      Labor.

Chris Herbert:                   It's amazing. And given where we are in the business cycle, the issue that keeps coming up is just a shortage of workers. And so even at a time when you might be thinking about slowdowns, they all talk about how hard it is to get workers. And obviously the construction side we've talked a lot about, but manufacturing and transportation drivers, they keep talking about that. And one of the themes too was that the manufacturer was saying, "Even if we have a slowdown, we're not letting anybody go because it's taken us so hard to get them."

Mark Zandi:                      Amazing. That's amazing.

Chris Herbert:                   Labor, labor, labor. So one of the speakers we had the next day was this guy Andrew Sealey from the Migration Policy Institute, because one of the things they keep coming back to is, we don't have enough workers, we need to get more immigration because we need to get more of workers of all stripes.

Mark Zandi:                      Yeah. That that's definitely a theme that is evident across a lot of industries. I think businesses are very reluctant to lay off workers because they know on the other side of the current adjustment we're going through, the number one problem they're going to have is finding and retaining people. So it's going to be very, very difficult.

Cris deRitis:                       And construction is an old, older occupation, right, where you have people retiring out, so how do you replace them?

Mark Zandi:                      Yeah. Did you see that paper written by Austin Goldsby and another researcher on construction industry productivity growth? I mean, one way out of this box is to improve productivity, be able to produce more homes with fewer people, fewer workers. And the point of the research was, that's not happening. That there's no meaningful improvement in construction productivity growth, in recent decades really. Did you see that paper?

Chris Herbert:                   I haven't read the paper directly. I've seen the news accounts. I read Ezra Klein's piece on it, so I need to go back and read the paper. But it goes back to the 1970s. And in some sense my take on it was, it's probably a response to that McKinsey work a few years ago pointing out the lack of productivity growth. And this one seemed like it was even more pessimistic, that it wasn't just slow, it was almost negative over that period of time.

Mark Zandi:                      Yeah, I belong to this kind of email group of folks in the construction industry broadly. And one of the members sent out this paper and said, "What do you think?" And it was pretty amazing, right, Cris D?

Cris deRitis:                       Yeah.

Mark Zandi:                      I mean there was a lot of different theories. A lot of it revolved around regulation. They're moaning, people... That's not the right way of saying it. People were pointing to the increase in the regulatory oversight in a lot of things, some of which are good, like worker safety would be an example of some regulation. But they were pointing to that as the key reason for the lack of productivity growth.

Chris Herbert:                   Did you find the paper believable? Since you- [inaudible 00:23:10].

Mark Zandi:                      Well, I did, and Austin is good. He's now going to be the, well, I think he already is the president of the Chicago Federal Reserve. And he's a great academic from the University of Chicago. So yeah, I find it very credible. I mean there's a lot of measurement issues, like in everything. So I wonder if there's, in the construction trade, it might be particularly difficult to measure some of the things that are going on, I guess. But it is shocking how the data, the numbers that are produced suggest that there's been very little productivity growth, if at all in construction.

Chris Herbert:                   It doesn't, aside from the fact that people use nail guns now, there's not a whole lot about the process that's very different.

Mark Zandi:                      Yeah, exactly.

Cris deRitis:                       I mean there's been, maybe some of the safety measures, right? Some of the processes. So one question I guess, or one pushback or whatever. Maybe we've been measuring productivity in a very naive way or an incomplete way, if we're producing houses with fewer deaths of construction workers but it takes longer. If you did a full social calculation, it may not be, look so bad. It may actually improve.

Mark Zandi:                      Right. Well I think the other thing that came out of the discussion for me was just how serious the shortage of housing still is. I mean that kind of, it's gotten kind of pushed the sidelines in the last year because of the housing recession. But the severe shortage, particularly of affordable housing, continues to be an issue, continues to be a problem. And actually to some degree may be getting worse because construction activities come down, producing fewer single family homes today than we were a year ago. And so that's not helping. And you had HUD Secretary Fudge there, and she was talking about what can we do to address these supply side issues to try to get more supply. If you were king for the day and maybe king for the week, is there a policy or two that you would focus on that could move the dial here in terms of supply, trying to help with regard to more affordable housing?

Chris Herbert:                   I think a lot of the conversation about just the complexity, the length of time, the obstacles in place, particularly to smaller, higher density housing, is a big part of the problem. And so I think we would, if I were king for a day and I... Or maybe better put, if I were governor for a day, then I think at the state level we need more action to take back from local governments the ability to make building restrictive. It's really a state prerogative. They delegate that authority to local governments. And obviously local governments are not thinking about anybody's best interest but their own. And in their interest it may be good to restrict supply because it pushes up prices and keeps out folks that might demand more public services from them. And so I think states need to take steps to say, "No, we have a collective need to produce housing of different types in a broad range of communities."

                                             So I'll give an example from my own state. In Massachusetts, under Republican governor Charlie Baker, passed a law that communities served by the mass transit system, either directly or adjacent, and it's 175 of them in the broader Boston area, have to have a minimum of 50 acres of land zoned as of right for housing at a density of 50 units an acre. And that 50 acres is a minimum. If you're a bigger town, you'll have to have a larger requirement. My own suburb of Lexington, that came out to 82 acres.

                                             And I can tell you, it changed the whole dynamic in my own town from... As the planning board, I was on a comprehensive plan advisory committee coming forward to say, "We need to have a greater range of housing in town." And there's a lot of public sentiment in support of it, but it is difficult to push through.

                                             But then when you say, "Oh, there's a state mandate, we have to do it, where are we going to put it?"

Mark Zandi:                      Oh, interesting.

Chris Herbert:                   It just changes the whole conversation. I think it'll be interesting to see what happens in Massachusetts as a result of this, because it's going to allow as a right development in every community in the Boston area, and not huge areas, but enough to say that's a lot of housing if it got built out. So I guess that would be my magic wand, due to that kind of a thing in a broader range of places.

Mark Zandi:                      So you're saying that you need leadership from the governor to kind of lay down the law to the rest of the local governments to say, "Hey, you've got to change your zoning and permitting to allow for more higher density kind of construction?"

Chris Herbert:                   Yeah. And it's important, flipping it. Rather than saying, it's up to you, we suggest it, it's saying you have to do it, where are you going to do it?

Mark Zandi:                      Yeah. Isn't that a tough thing to do? I mean, maybe in Massachusetts, but I don't know. That feels like it's a pretty tough thing to sell.

Chris Herbert:                   I mean, Massachusetts is a blue state, but I will say that the typical, the mantra has been that liberalism ends at the driveway. And so even though we're a blue state, the governor was pushing for a number of years to try to change the laws relative to votes at the local level to have a zoning change, which had been two-thirds majority. And it took forever to get it to change to just a simple majority. But he got it through and then he got this through. And I think, he's Republican.

                                             I think it does bring together Republicans and Democrats, folks interested in affordable housing from the point of view of folks, the residents needing that housing, but also businesses who said as a state, we're not going to grow if we don't have an opportunity to bring more people in. So Utah is another state that's having a lot of action at the state level to try to overcome local barriers. And that's a very red state, but they've, the business community is spearheading it out there.

Mark Zandi:                      Okay. I think we can allow you to be governor for at least a day. Which state do you want to be governor for? Just asking. Pick a big one. Go Chris.

Chris Herbert:                   I love my own, my home state. But Maura Healey, she's doing a good job. I don't want to kick her out just yet.

Mark Zandi:                      Well, it sounds like you're announcing for governorship. That's what it sounds like. No?

Chris Herbert:                   Not here. [inaudible 00:29:30]

Mark Zandi:                      Yeah, yeah. Got it. Got it. Hey, Cris D. How, I've lost a little bit of track here. We estimate the shortfall in housing supply based on looking at the vacancy rate. If we look at the vacancy rate across the housing stock today, it's extraordinarily low. You compare that to kind of typical levels and you do a calculation of how many units need to be constructed to be able to get back to those kind of typical levels. Do you have those numbers? I'm putting you on the spot, but do you have those numbers at hand?

Cris deRitis:                       Yeah, I just looked at this last night. 1.5 million.

Mark Zandi:                      1.5 million. Units? Homes?

Cris deRitis:                       Oh, units. Correct. Correct.

Mark Zandi:                      Right. That's about a year's worth of construction.

Chris Herbert:                   And that's what the home builders have at a very similar estimate.

Mark Zandi:                      I think they got it from us, Chris. I'm just saying.

Chris Herbert:                   Did they?

Mark Zandi:                      They're all [inaudible 00:30:28] around.

Chris Herbert:                   Do you know why Freddie Mac's is so much higher?

Mark Zandi:                      For some of them, I'm their favorite economist, Chris. I'm just saying. Yeah, go ahead.

Chris Herbert:                   Chris. Do you know why Freddie Mac's number is so much higher than yours?

Mark Zandi:                      I believe they're just wrong. No offense to Sam Khater, the chief economist, but he's... Of course, do you want to explain?

Cris deRitis:                       I was going to keep it simple as I believe they're assuming a higher vacancy rate at equilibrium than we are. So that naturally you would assume that we-

Mark Zandi:                      We're looking at the vacancy rate for homes for sale and rent, and they're looking at the broader universe of homes off the market, which is a mismatch of all kinds of stuff. And it makes a number feel a lot bigger. So I don't think that's my own view, obviously. I think it's the homes for sale and rent that you need to focus on. And if you do that calculation, it comes up to about one point, as Cris D said, 1.5 [inaudible 00:31:32] units.

Cris deRitis:                       It's possible [inaudible 00:31:35] might pull more of those vacant homes out, but a relatively small share, let's say.

Mark Zandi:                      Right.

Chris Herbert:                   I don't know if you all are Woody Allen fans, but there was a line, I think it was in Annie Hall where he talks about, the two kinds of people in the world is the horrible and the miserable. You just want to be miserable. You don't want to be horrible.

Mark Zandi:                      Yeah, there you go.

Chris Herbert:                   I mean, either way it's horrible or miserable. Right? It's 1.5, 1.6 or three. It's a lot of homes.

Cris deRitis:                       It is. It is.

Mark Zandi:                      Let me turn to another kind of thorny topic in the housing space, and that is investor demand. This also has kind of been pushed to the side a bit in this housing recession. But if you go back a little over a year ago, a lot of hand wringing about the increase in the share of sales. Home sales are going to investors. And an increasing share to institutional investors, big financial institutions that are able to go to capital markets, raise a lot of money and come into communities and buy up homes and then rent those homes out.

                                             So buy to rent, and a lot of worries that that is a problem for home ownership, because these institutional investors are going to be able to buy these homes long before the average American household can because that household has to go out and get a mortgage and negotiate a price. And by the time they figure all that out, the investors bought the property. How do you think about the advent of increased investor demand? And I'm sure this is going to come back. As soon as that housing market kind of finds footing again, and we're recovering, these guys, the investors are going to back with a, I think quite aggressively because they've got a workable business model and they're going to be in these markets buying a lot of property. Do you have a perspective on that, Chris?

Chris Herbert:                   Yeah, I guess the short answer is it's complicated. But one thing I think that that's challenging in this phase too is this focus on institutional investors. And there are a lot of different classes of investors. And so I think it's important to differentiate them and their relative advantages and their differences in their management strategies. Because you highlighted the concern about crowding out home buyers. There's other folks who are really concerned about their practices as managers and how well they treat their tenants and their potential predilection to evict more quickly or the like.

                                             And I just caution against painting too broad a brush of institutional investors versus others. We had a doctoral student who did some work on this using some, I believe it was... Now I don't remember. It was Zillow or CoreLogic. It was a cross-sectional point in time, but he linked all the different buyers and was able to use, it must have been mailing addresses or the like to try to aggregate up to see how much the portfolio was with these different classes of owners. And institutional owners the way he characterized were more than a thousand units.

                                             But there were a whole bunch of folks, institution, entities that owned between a hundred and a thousand units. And he looked at where they were buying homes in terms of the racial composition, the income level, the price level. And institutional investors tended, into the largest scale investors tended to be in the kind of moderate income suburbs. And a lot of the smaller investors were in lower income minority communities. And so you think about the kind of old investors of slum lords or the like. So there's a whole bunch of class of investors in different places. So I just want to make sure we kind of distinguish what our concerns were.

                                             But to go back to your question about crowding out home buyers, which can happen from Wall Street, but it can happen from all these other investors too. I do worry about there not being a level playing field in the sense of, what's the financial return to the investment? And if you think about it, with the mortgage interest deduction, homeowners should have an advantage, right? Because I can deduct my interest and my property taxes and I don't have to claim any income.

                                             But we have very few people, particularly lower income folks, who claim the mortgage interest deduction because it's so limited now, given the standard deduction and everything else. But if I'm an investor, I can claim all my, deduct all these expenses plus depreciate the asset. So I was in conversation with one institutional single family firm, and they noted that their cost to rent the home was less than what a home buyer would pay in a monthly payment.

                                             And one disadvantage Wall Street might have is that they might have a pretty high required return from equity investors that might raise their cost of capital in some ways, even if their debt is lower. But if they get those other advantage of depreciation, et cetera. So I think we need to think about how do we make sure that homeowners don't have a higher cost of capital, a higher cost than these investors, if we think that giving them an opportunity to own is important.

Mark Zandi:                      Yeah, that makes total sense from a tax code perspective. You don't want the tax code to benefit one class of a buyer over another class.

Chris Herbert:                   Right.

Mark Zandi:                      And that's what's happening, particularly in this case. They were saying, we're going to give the benefit to, the tax benefit to an institutional investor over an American family. I mean really that doesn't make a whole lot of sense. That's a really thorny problem to try to figure that one out.

Chris Herbert:                   It is. And we don't really have, so what's the policy solution? You're going to make it so investors can't own single family homes? You can't do that. There's a whole host of reasons why actually having capital flow in is a good thing, and having that supply of housing. So it's really, you need to have tenant protections to make sure people are treated fairly. And then I would think we need to think a little bit more about how do we make sure on the financial side there's more of a level playing field between homeowners and investors.

Mark Zandi:                      And when you say financially, you mean the tax code?

Chris Herbert:                   Tax code.

Mark Zandi:                      The tax code, yeah. Hey Cris D, you've done a lot of work in this area too. Anything else that you want to bring up here? Or Marisa, I've been kind of, locked you out, but just wait, I'm coming back to you in the [inaudible 00:37:52], we're doing the game shortly and tradition is you start, so you're up. But do you guys have anything you want to bring up here with regard to investor demand?

Cris deRitis:                       I would agree that it is complicated. I do think we need a mix of buyers.

Mark Zandi:                      That feels a little wishy-washy to me. Yeah, it's complicated. Yeah.

Cris deRitis:                       Yeah. But well, it is complicated. It is complicated. I've been on both sides. Personally, I've been on both sides of this issue. I've rented from small time mom and pop landlords. I've rented from big corporations. I have been a landlord. So from that perspective, I can understand the complications, and I can't say that one is necessarily better. There's good and bad in all the different camps. And if the number one goal though is to increase housing generally, right? Let's solve that problem first. I think you need those investors to be in the market building, risking capital. So locking them out or just painting them with a broad brush, I think does a disservice as well. So it is complicated, but I think we need a good mix of all types of buyers and sellers.

Mark Zandi:                      Yeah. I mean there's certainly a benefit. You know, you got to go back to the financial crisis. In the wake of the crisis, the housing market was evaporating, house prices were down 20, 25%. And the only thing that turned it around as fast as it turned it... It ultimately would've turned around. But the thing that turned it around as fast as it was turned around was investor demand, right? I mean, these institutional investors were kind of born out of that period. They came up, came in, took a lot of risk, bought up distressed, foreclosed property and helped put a floor under, finally put a floor under pricing and allowed the market to start to recover from a price perspective. So it's not like they don't provide some benefit. But in this case, I worry about the home ownership effects.

                                             I do want to come back to home ownership, Chris and Cris D and Marisa. I think that's also something I'm worried about longer run. But just to break things up a little bit, I want to do the game, the statistics game, and I'm sure it's going to be very housing related anyway, so I'm sure that'll be the case.

                                             But the game, we each put forward a statistic, the rest of the group tries to figure out what that is based on questioning, clues, deductive reasoning. The best stat is one that's not so easy, we get it immediately. Although that's pretty hard to do with Cris D in the podcast. He's pretty fast. And not too easy. Not too hard that we can't, we'll never get it. And if it's apropos to the topic at hand, that's a bonus. So the tradition is now Marisa, you're a first up on the game. What's your statistic?

Marisa DiNatale:              Okay, there's two statistics, related. One is minus 1.6% and the other is plus nine and a half percent.

Mark Zandi:                      Is it related to the senior loan officer survey?

Marisa DiNatale:              No, no.

Mark Zandi:                      No. She's laughing. She's laughing. Because we were going back and forth on that one all week long.

Cris deRitis:                       Is it housing related?

Marisa DiNatale:              It is.

Mark Zandi:                      Minus 1.6 and positive 9 point?

Marisa DiNatale:              Nine and a half.

Mark Zandi:                      Nine and half?

Cris deRitis:                       MBA related?

Marisa DiNatale:              No.

Mark Zandi:                      Is it house price related?

Marisa DiNatale:              Yes.

Mark Zandi:                      Ah, is it from the realtors median existing house prices?

Marisa DiNatale:              It is. Yep. So these are Q4.

Mark Zandi:                      Oh, I know, I think I know what it is. It's the highest and the lowest house price change over the past year across metro areas.

Marisa DiNatale:              No. It's not. It's not. It's two [inaudible 00:41:49]. It's two metro areas that I picked.

Mark Zandi:                      Oh geeze, Louise. There's 400 plus metro areas. Okay, all right. Fair enough.

Marisa DiNatale:              They're not randomly selected [inaudible 00:42:01].

Mark Zandi:                      Year over year?

Marisa DiNatale:              Yeah, it's year over year. In the fourth quarter.

Mark Zandi:                      San Francisco is the minus 1.4.

Marisa DiNatale:              No.

Mark Zandi:                      LA.

Marisa DiNatale:              You're close.

Mark Zandi:                      LA? San Jose. San Jose.

Marisa DiNatale:              Orange County.

Mark Zandi:                      Oh, your [inaudible 00:42:17].

Marisa DiNatale:              Where I live. Where I live.

Mark Zandi:                      Yeah, where you live. Yeah. Oh, they're down minus 1.4. That home- [inaudible 00:42:21]

Marisa DiNatale:              1.6. 1.6.

Mark Zandi:                      ... project you get is looking less like a good financial [inaudible 00:42:24].

Marisa DiNatale:              Yeah, right? Yeah. It's down one six. And then the plus nine and half percent is...

Mark Zandi:                      Philly?

Marisa DiNatale:              No, but good guess.

Mark Zandi:                      [inaudible 00:42:36] Let me think. Is this a small area?

Marisa DiNatale:              Uh-huh (positive).

Mark Zandi:                      Of course. It's like Kalamazoo, Michigan.

Marisa DiNatale:              No, it's-

Mark Zandi:                      York, PA. No. Oh, [inaudible 00:42:51] Florida.

Marisa DiNatale:              It's Vero Beach. [inaudible 00:42:58]

Mark Zandi:                      I'm very- [inaudible 00:43:00]

Marisa DiNatale:              This is where Mark lives, Chris, half the year.

Chris Herbert:                   Yeah, I know. It's unusual. Housing economists usually don't buy in places where prices go up.

Mark Zandi:                      I've owned this place for 15 years, Chris. I'm just saying. Oh my gosh. Really, it's up nine four. I'll take it. [inaudible 00:43:18] I was going to say, I'll pull that realtor data.

Marisa DiNatale:              So this is the National Association of Realtors median house price, quarterly data, not seasonally adjusted in the fourth quarter of '22. 90% of the metro areas in the country had positive year over year growth in house prices. But there were a bunch that actually are now declining year over year. And most of them are in California. Most of the ones that now have year over year declines are in California, LA, San Francisco, San Jose, where I live. Orange County, all negative over the year. Plus a few other metros like Nashville, Austin, Salt Lake City, that had a lot of demand over the past couple of years. Almost all of the metros that have the largest year over year increases still are in Florida.

Chris Herbert:                   And so this is the realtors, right? So it's what's transacting.

Marisa DiNatale:              This is, right. This is the realtors. Yeah.

Chris Herbert:                   It's the median price.

Marisa DiNatale:              And it's median.

Chris Herbert:                   Yeah. So that's influenced by the mix of homes transacting.

Marisa DiNatale:              Right. Not our favorite house price measure, but very granular at the metro level.

Chris Herbert:                   And it's what people are buying. So it's not unimportant.

Mark Zandi:                      That feels just weird. But I can't figure out why, what... I mean you would see, the high ends got hit harder. So you would've thought that that would bias lower the NAR median price. Right. But it's not.

Marisa DiNatale:              Yeah. And nationally it's up 4% year over year, from the NAR.

Cris deRitis:                       Yeah. Interesting. I guess it's what's actually transacting, right?

Mark Zandi:                      What's that, Cris?

Cris deRitis:                       I guess it's what actually transacting, right?

Marisa DiNatale:              Sale prices. Yeah.

Mark Zandi:                      Yeah, right.

Cris deRitis:                        If the lower end of the market's just, there's no inventory, then I don't know.

Mark Zandi:                      So you think there might be just more transactions at the low end that's driving down the price?

Cris deRitis:                       That doesn't feel right.

Mark Zandi:                      Yeah, maybe you're right. Maybe.

Cris deRitis:                       I don't know. It sounds like a mix issue is what I'm saying.

Mark Zandi:                      Sounds like a mix issue. Anyway, we're now in the, we're deep in the weeds.

Chris Herbert:                   I got to say, I feel very much at home here with you housing data nerds. This is fun.

Mark Zandi:                      We're right there with you, Chris. How many households are there in the United States and how many has it changed over the past quarter of the past year? Answering that question is a debate we're having with each other. And we've agreed to disagree on that mean, which means there's no definitive number, which is really bizarre. I just find that so weird. Anyway, I'm ranting.

Chris Herbert:                   No. I mean, there's two ways to do it. Right? And one way to do it is just say, we know how much housing there is. We know the size of the stock. We can go out and we count, what's the vacancy rate? And the households are the residual. And so trying to capture how many housing units there are I think is challenging, because there's a lot more fluidity in stock than we realize in terms of subdivisions. And they're like... The other way we think, so that's what the HBS does. The CPS says, "I'm going to ask you if you had a household and you, Mark Zandi are what, however old you are, white male, and I know there's X million in the country," and of the ones that answered the survey, X percent say had a household, weight it up using those population control totals. What's interesting is the CPS and the HBS are the same survey. But they each give a household count. One uses housing unit controls, one uses population controls. So we get two answers.

Mark Zandi:                      And quarter to quarter, sometimes massive differences between them. Yeah. Massive.

Chris Herbert:                   Right. But it's the same survey.

Mark Zandi:                      Yeah. Bizarre. Okay. Cris D, Chris deRitis, you're up. What's your stat?

Cris deRitis:                       61.6.

Marisa DiNatale:              The home ownership rate?

Cris deRitis:                       Nope.

Mark Zandi:                      Oh no, that's more like 66%. Yeah. Is it a housing statistic, Cris?

Cris deRitis:                       It is, it is. One of the few housing statistics that came out this week.

Mark Zandi:                      Oh, and it came out this week?

Cris deRitis:                       Yeah, this week.

Marisa DiNatale:              Say it again.

Cris deRitis:                       61.6.

Mark Zandi:                      And it's not the realtor's data?

Cris deRitis:                       Nope. No.

Mark Zandi:                      It's not anything related... It's housing, not mortgage related.

Cris deRitis:                       It is housing related.

Mark Zandi:                      It's not, it's housing related.

Marisa DiNatale:              Oh, is it the increase?

Cris deRitis:                       It's one of my favorites.

Mark Zandi:                      It's one of your favorites.

Cris deRitis:                       I've used it before.

Mark Zandi:                      Oh, you have? Is it from the housing vacancy survey.

Cris deRitis:                       Nope.

Mark Zandi:                      Okay.

Marisa DiNatale:              Is it the increase in the average monthly mortgage payment over the year?

Mark Zandi:                      He said it was housing.

Cris deRitis:                       Nope, that's not it. But.

Mark Zandi:                      Is it-

Cris deRitis:                       That's a good one.

Mark Zandi:                      It's along. Oh, it's along those lines.

Cris deRitis:                       No, no.

Mark Zandi:                      Oh, okay.

Cris deRitis:                       I'm just saying, just acknowledging that that would've been a good statistic.

Mark Zandi:                      Hey, can I just stop for a second and say, doesn't Cris look like George Clooney a little bit? Look at him. Yeah. He looks like George because of the beard. There's like, he's grown a little bit of a beard here.

Chris Herbert:                   Oh, I thought you meant- [inaudible 00:48:22].

Mark Zandi:                      That Cris. [inaudible 00:48:31] Sorry. I'm so sorry. I'm sorry. That's so funny.

Chris Herbert:                   Yes, he does. Absolutely.

Mark Zandi:                      Doesn't he? Yeah. What do you say?

Marisa DiNatale:              He does look like George Clooney.

Mark Zandi:                      Yeah, George Clooney.

Cris deRitis:                       My mother-in-law says the same thing.

Mark Zandi:                      Yeah, there's a Clooney-esque element there.

Marisa DiNatale:              Not a bad person to look like.

Mark Zandi:                      Yeah. I'd say, yeah. All right, back to 61.6. Give us a hint, Cris. Or you can't give us a hint.

Chris Herbert:                   Is it related to existing home sales?

Cris deRitis:                       No, it's sentimental.

Mark Zandi:                      Oh, it goes to sentiment. It's Fannie Mae kind of...

Marisa DiNatale:              Oh, home builder sentiment?

Cris deRitis:                       No, it's the Fannie Mae home price Sentiment Index. [inaudible 00:49:09] point six.

Mark Zandi:                      It's his favorite and I never look at it. That's why I never get it.

Marisa DiNatale:              Can you explain that?

Mark Zandi:                      Yeah. Can you explain it? Yeah. Good.

Cris deRitis:                       It's a survey they conduct to get perceptions of buyers and sellers opinions about the market. So this 61.6, it's an index level, it's a combination of several of the questions that they ask. I guess the most important part of it is that it is up 0.6 points from December, which was the low. So it's consistent with this idea maybe we are coming off bottom, but we're not roaring ahead. Maybe we're putting in a bottom here. One of the key questions I would focus on is buyer sentiment. But only about 17% of the survey respondents said that it's a good time to buy. I'm sorry, 17% said it was a bad time to buy. 82% said it was a good time to buy.

Chris Herbert:                   Good time, huh.

Marisa DiNatale:              82% said it's a good time to buy.

Cris deRitis:                       I'm sorry, I'm confusing that. 82% said it was a bad time to buy, 17% said it's a good time.

Mark Zandi:                      Yeah, that makes sense. Yeah. Oh, interesting.

Cris deRitis:                       Very pessimistic still.

Mark Zandi:                      That's a quarterly survey that comes out from Fannie?

Cris deRitis:                       Monthly.

Mark Zandi:                      Is it monthly? I got to start looking at that. Yeah, I don't look at that. I should look at it. That's a good one. That's a really good one. Chris H, do you want to go?

Chris Herbert:                   Sure. I'll give it a shot. I'm not sure that I'm up for the caliber of this group, but here's my... The answer to the question is 42.

Mark Zandi:                      42 [inaudible 00:50:38]. 42. And I am sure it's housing related.

Chris Herbert:                   Housing related.

Mark Zandi:                      Yeah. And is it a statistic or is it just a [inaudible 00:50:49]?

Chris Herbert:                   It's a statistic.

Mark Zandi:                      It is. Okay.

Marisa DiNatale:              If you tell us the units, will it give it away?

Chris Herbert:                   Yes.

Marisa DiNatale:              Okay.

Chris Herbert:                   But let me see if I can give a hint. It's indirectly related to the supply issues we've been talking about.

Mark Zandi:                      Indirectly. Indirectly related. 42. Is it the measure of [inaudible 00:51:14]? Oh, sorry, go ahead. Cris, Marisa, go ahead. You ask your question.

Marisa DiNatale:              Is it the measure of time, Chris? Is it... ?

Chris Herbert:                   It's related to time.

Mark Zandi:                      Is that the length of time it takes to put up a multi-family unit start from permit to completion?

Marisa DiNatale:              Or to get a permit?

Mark Zandi:                      Number of months?

Chris Herbert:                   It's not, but that's actually not a bad number to have.

Mark Zandi:                      42 would be a long time though. That would be three and a half years. That feels long. But maybe from start to completion, but that's not what this is. No. That's some time to get solar in California.

Chris Herbert:                   It was 42 at the last measure in 2021. But in 1995 it was 28.

Mark Zandi:                      Oh, in 1995 it was 28. Is that, I don't know. Is that, I want to say the average, is it days?

Chris Herbert:                   No, it's years. That was the...

Mark Zandi:                      It can't be the... Is it the average? No, the home buyer is older than...

Marisa DiNatale:              It's not the age.

Mark Zandi:                      Is it the average age of the single family housing stock? No.

Chris Herbert:                   Of the overall housing stock.

Mark Zandi:                      Of the overall housing stock.

Chris Herbert:                   So that's the median. So the median housing unit is now 42 years old. It's the oldest it's ever been. And it was, in 1995 it was 28 years old. So one result of not building housing is that the housing we have is a lot older.

Mark Zandi:                      Wow. That is interesting. So in 1995, the average age of a housing unit, single and multi together, was 28 years. And now it is 42 years.

Chris Herbert:                   Yep.

Mark Zandi:                      Wow. That is an interesting statistic.

Chris Herbert:                   So you think about it in the '90s, right? We had, the post-war housing stock was old and decrepit, right? And then we had enormous wave of building in the '70s and '80s, '60s, '70s and '80s.

Mark Zandi:                      Oh, that's true.

Chris Herbert:                   We had young housing stock in the '90s and now we haven't been building that much. And so it's old. So this is why the remodeling market's so strong.

Mark Zandi:                      Of course, in the '80s we had a boom in multi-family, right? Tax related. I mean it was a massive, a massive number of units went up in the '80s. So that might have had an impact. But it's interesting. Okay. That's a really good statistic. Okay. You ready for mine?

Chris Herbert:                   Yep.

Mark Zandi:                      And it is housing related. I'm going to give you two numbers. Ready? 5.8 and 0.8. 5.8 and 0.8. Both, and they're very much related, same release, housing.

Cris deRitis:                       Came out this week?

Mark Zandi:                      I think it came out this week. It's all a blur to me. So it's in the vicinity of this week. If it wasn't this week, it's in the vicinity. Spitting distance of this week, if it wasn't exactly this week. This week went fast.

Cris deRitis:                       Housing, not mortgage?

Mark Zandi:                      Very much housing. Goes to supply, the supply issue.

Chris Herbert:                   Existing home sales related?

Mark Zandi:                      No, no.

Marisa DiNatale:              Vacancy rate?

Cris deRitis:                       Vacancy rate.

Mark Zandi:                      Exactly. Very good, Marisa.

Cris deRitis:                       Home owner and rental.

Mark Zandi:                      Excellent, excellent. So the, what's the 5.8?

Cris deRitis:                       Rental.

Chris Herbert:                   Rental.

Mark Zandi:                      Rental vacancy. What's the 0.8?

Cris deRitis:                       Homeowner?

Mark Zandi:                      The homeowner vacancy rate. So this is, goes to supply. I mean the homeowner vacancy rate, we'll start there. That's the vacancy rate for homes for sale. 0.8 is the lowest on record. And that comes from the housing vacancy survey, the HVS that you mentioned earlier, Chris, and obviously it goes to the 1.5 million shortfall in units. I mean we are very low. And typically you would see a vacancy rate of 1.5%. So we need, we're about half of what we typically would want in a kind of well-functioning housing market. And by the way, that's one reason to suspect that if we get price declines, and we are getting price declines, house price declines, they should be modest, right? Because we have this really tight physical market and that should provide a lot, that should provide a proverbial floor under price. And that should be very, very helpful.

                                             And it's across the country. All over the country, we're seeing these kinds of shortages. 5.8 is the rental vacancy rate. That's not the lowest on record. That was lower back in the '70s and '80s when we were putting up with all those homes, rental homes. But it's pretty darn low. In a typical market, a well-functioning rental market, you would want a vacancy rate around seven. So we're still well below those kinds of vacancy. So it goes to the shortage.

                                             Yeah. Very good, Marisa, you got that one. Very good. Okay, let's, we're coming to the end of time. I do want to double back and end it with one longer term issue. We kind of began with near, what's top of mind right now, the housing recession. I want to end with thinking a little longer run here in the home ownership rate. And I want to try something out on you, Chris Herbert, and I've tried this out on Cris D before, but I would like to try it on you.

                                             I'm nervous that the home ownership rate is at a high watermark going forward. That going forward it's going to be very difficult to raise the home ownership rate for three broad reasons. One's affordability. I mean, right now the fixed mortgage rate is about six to six and a quarter. In my calculation, in the long run, the fixed mortgage rate should be somewhere between five and a half to six. And so that means if we have an affordability problem at six and a quarter, we're still going to be an affordability problem at five and a half, six. So that is going to remain an issue.

                                             Second, the investors that we were talking about, my view, those institutional investors, they figured this out. This is a business model and they're going to take advantage of that tax code all day long, and it's going to be very difficult, particularly for lower income households who need a mortgage, particularly, okay, a FHA mortgage, because it's going to be harder to get that home.

                                             And the third is this pure demographic. It's the distribution, the ethnic distribution, the racial distribution of the population. The white home ownership rate... The overall home ownership rate is two-thirds. The white homeownership rate is 75%. The Hispanic home ownership rate is about 45%-ish, maybe a little higher, and it's about 40 for Black Americans. And we know that the racial composition of the population is going to continue to move away from white to non-white. And debt mere fact means if home ownership rates don't change across races, that we're going to see the home ownership rate decline.

                                             So it feels like to me, unless there's some kind of policy change or reduce something, 10 years from now, 20 years from now, 30 years from now, the home ownership rate is going to be lower than it is today. Two questions. One, should I be worried about this? Do I care that the home ownership rate's declining? And that's become more of a topic recently. And secondly, if we should care, do you agree with my characterization of things? And finally, I guess third question, what should we do about it to address it? So a lot there to unpack, and I'll just throw it into your court and have you respond.

Chris Herbert:                   All right. Number one, should we care? I would say yes. And you know what? The joint center, we'd like to be fair minded and equal. And so I don't want to say that renting is bad, I just want to make sure people recognize that. I realize renting has value. There's lots of people choose to rent, we have to have a well- functioning rental market. But there are a lot of benefits- [inaudible 00:59:09]

Mark Zandi:                      He is running for governor. Do you see how he?

Chris Herbert:                   I just don't want to get a call from- [inaudible 00:59:14].

Marisa DiNatale:              He's appeasing everyone.

Cris deRitis:                       Yes.

Chris Herbert:                   No, but look, it's what most people prefer. It is an important source of financial stability. I mean, you can generate wealth, it locks in your mortgage payment, and there's a whole host of reasons why people prefer it. So I think we do care about it. I think it should be a policy concern, particularly in a market where house prices keep going up, which they've only done over the long period of time. And so if you think about what just happened with house prices, if you were a homeowner, you know, you hit the lottery. Your house price went up 20%. And so you're a hedge, so you're insulated. So I, in the housing market, I benefit from that upturn. So I think there really are a lot of strong reasons why we should encourage and enable people, not lack of encourage, enable people to get into home ownership. So your second question was?

Mark Zandi:                      Do you agree with my forecast that if nothing changes here, it feels like home ownership is going to be lower 10, 20 years from now?

Chris Herbert:                   Yeah, it's hard to see. Yes. I think all those three things that you pointed to. So the affordability, demographic changes.

Mark Zandi:                      Just the racial composition of the population.

Chris Herbert:                   Yeah. Are all going to be ones that'll make it more difficult to buy a home. And one of the things that we point to is, as much as the interest rate's going up to five and a half to 6%, but it's also house prices at the level they are. It used to be 25 years ago, typically prices were three times income. Now they're more, nationally level, about five times income. And some markets they're 8, 9, 10 times income. And more places have that five times income ratio, like Denver and places that didn't have that. But that means is you have to have a whole lot more cash, even for a small down payment mortgage. And a lot of folks, particularly folks of color, don't have anywhere near that amount of cash and they don't have the bank of mom and dad to go to. So I think the affordability issues are going to be really significant.

                                             And what do we do about it? Well, and here's the challenge, is that you want to try to create pathways to home ownership that help the people who but for it wouldn't get there and aren't themselves inflationary. So I do think we need to think about having another proponent of down payment assistance. Because I think that wealth barrier, savings barrier is a big one. Obviously a proponent of thinking much more about how do we get targeted down payment assistance. Targeted, and I think the folks who have talked about first generation buyers that are like, the ways of targeting it to people but for this might not get there.

                                             I'm also a proponent, we haven't talked about this much in policy circles lately, is of ways that encourage and match savings. I do think that we want to make sure people are prepared for home ownership, and the ability to save is an important financial skill and a signal of resilience. I don't think having equity in the house has proved to be as significant in terms of skin in the game. I think what we learned from the crisis was so many millions of people were underwater and never walked away from their mortgage.

                                             But the reason why down payments matter is because it shows financial capacity. So I think matched savings approach is another way to kind of say we're going to kind of limit who gets it because you're going to have to wait, or wait a little while to build up. But I think down payment assistance is really going to be important. And I think finding ways to make sure it's targeted to the right folks who need it is important.

Mark Zandi:                      Yeah, there's actually this cool program I think that's going to be unveiled in California where the government, the state will provide down payment assistance, and in exchange get a shared appreciation claim. When the home is sold, they get a claim on some percent of the appreciation and the value of the home, so that they could take that money, the funds they raised to help make this thing a self-financing kind of down payment assistance program. That sounds like a pretty cool idea, particularly a place at California where generally house prices continue to move higher.

Chris Herbert:                   And I think if you're going to give, it's one thing, if you've given folks five or $10,000 in down payment assistance. Then it's not really worth the bureaucratic hassle of tracking it and getting a shared piece of it. But if you're in California, you're probably going to have to give people substantial amounts of equity to make home ownership feasible. And then having some ability to get it back makes sense. It's another way to limit it, right? Because if I have the ability to buy a home fee simple without that kind of encumberment and entanglement, then I will. But if I need the help, then I'll take the entanglement. So it's a good targeting mechanism too.

Mark Zandi:                      Of course these down payment assistance programs don't really work all that well unless you have supply, unless you've got homes that you can put people in. Right now we got this severe shortage, so if you layer on something that juices up demand and there's just no homes, it just jacks up prices and rent and no one's better off as a result. So I think the first thing we got to do is we've got to get more supply. We got to figure out how to produce more housing units and make sure that when we provide that down payment assistance, it just doesn't simply end up at a higher house price. So we've got to make sure we calibrate those things.

                                             Cris D, is there anything there, or Marisa that you wanted to add on the home ownership side that I missed? Actually, Cris D, because I know you think about this carefully, would you agree with my characterization of home ownership going forward?

Cris deRitis:                       As usual, I'm going to push back a little bit.

Mark Zandi:                      Okay. Yeah, fair enough. Yeah. Good. Yeah. Well, can I just say as preface, and we're going to end this shortly. We forecast a lot of things. We model a lot of things to help produce forecasts and home ownership is, if not the hardest thing to model and forecast, it's pretty darn close. It's very difficult to get a good model for that. But anyway, with that is a preface.

Cris deRitis:                       Yeah, fair enough. I think a lot depends on your time horizon, right? Because the demographic trends are certainly changing within the country. So if you're talking about the next 10 years, absolutely. I think everything you mentioned in terms of the trends that we're seeing, that that's all going to take place, and very hard to push up the home ownership rate.

                                             As we get on to 15, 20 years from now, given projected growth rates in the population, the aging of the population. So you mentioned the racial composition of home ownership, but there's also a very strong relationship with age. So as the population ages, even within those racial categories, you're going to get more home ownership. So I think that might be a factor here. But just abstracting from that, as the population, as hostile formations actually start to come down, there're going to be more opportunities.

                                             Actually, we could go from too little supply to having excess supply in terms of housing, potentially. It all depends on what goes on with the birth rates, immigration policy. But as you get further out, I suspect we're going to look a lot more like Europe than we have in the past, where we do have... Well that's another question. But in many countries where you have this older population, you do have fairly high home ownership rates. So that would be my own caveat here. It depends what time horizon we're talking about here.

Mark Zandi:                      Right. Got it.

Chris Herbert:                   I think that's a great point, Chris, because we get caught up in the conditions at the moment and feel like this is a permanent condition. And I think, we talked a little bit about household formation, which is running really high, but if you look at the demographics, I mean they are projections and they need to be updated when we get some good population projections from the census, says we're going to slow to about a million households pretty soon. And that's a whole lot less than we have now.

                                             There's a piece that, I don't know if you're familiar with, I think Gary Englehart did it for RIHA, looking at baby boom turnover. And he estimates that'll be about 4 million housing units a year coming from the boomers as they get into their '70s, late '70s and '80s. And so there is going to be a big supply, existing supply response coming. So we could be in a very different market. And I'm not sure the timeline, five years, 10 years, certainly 15 years. So I think your point's well taken.

Mark Zandi:                      Yeah. Good. Well, we covered a lot of ground and I'll just end by throwing out an open-ended question. Chris, did we miss anything we should have been talking about? Is there any issues that you think we missed? Anything glaring? No?

Chris Herbert:                   Nothing glaring. I would say, I mean the one thing that I, that's percolating up a lot more in the policy front is the question about enhancing tenant protections. And five years ago people said to me, "What do you think about the possibility of rent control?"

                                             And I said, "No, that's never going to happen." And now obviously various forms of it, and I think it's important to distinguish between what Oregon and California have done and what St. Paul did, and now the renter bill of rights that the Biden administrations put forward, very contentious. But I think given the fact that, I would say that tenants don't have a lot of protections, and given the fact that staying stable with the house is so important, we need to have a real conversation about what would sensible tenant protections look like. Sensible meaning they don't discourage supply, that they don't demean the role that landlords play in providing this housing. But at the same time, rent increases of 20% are really hard for people to tolerate. And so I don't know, this is a debate that seems to be growing and one that's filled with a lot more heat than light.

Mark Zandi:                      Yeah. And I kind of feel the political ground shifting here a little bit. So you're right. I mean, economists hate rent control for the obvious reason that if you control rent, you're going to control, you're going to restrict supply. I mean, builders aren't going to put up units and that's the exact opposite of what you want. But you're right, I think there's more nuanced thinking around this that's going on. Maybe there's some things that can be done to help address this issue. Hopefully we get more supply and rent vacancy normalizes, gets back up to that 7% and rent growth normalizes. And then we'll be okay.

Chris Herbert:                   Right. But maybe it's a subject for another podcast for you with some appropriate [inaudible 01:09:45].

Mark Zandi:                      Yeah, exactly. Yeah.

Marisa DiNatale:              This is an enormous, I live in California and you could do a podcast on housing in California. Just there's so much going on. There's state, there's still state moratoriums on rental increases in effect, layered on top of county, like Los Angeles County has their own. The city of Los Angeles has their own. I have a friend who's an attorney in landlord tenant law, and she just said it's week by week changing regulations that she has to keep up with to understand what the state's doing, what the county's saying, what the city is saying. And yeah, it's a huge debate here, just if you take Los Angeles. And then there's the homelessness issue on top of it too, and trying to find housing and converting commercial buildings to residential units. So there's a lot going on that I think is fascinating that I would love to hear your expertise on at some point, Chris.

Mark Zandi:                      Well, we're going to have to have you back, Chris. You can see we're already setting you up for the next podcast. And it was your fault because you brought it up. We didn't. But thank you so much for joining us. It was a wonderful conversation, very thoughtful and insightful, and we will be in touch because we do inside economics, give our guests a small token of appreciation that's within the guidelines of Moody's gift policy. But I will be in touch in that regard. But thank you for spending the hour, hour plus with us. Much appreciated. And with that dear listener, we are going to call this a podcast. Talk to you next week.