How the Pandemic Polarized America’s Property Market w/Lance Lambert

Dave:
What’s up everyone? Welcome to On the Market. I’m your host, Dave Meyer. Joined today by Henry Washington. How’s it going man?

Henry:
What’s up buddy? So good to see you again. Feel like I haven’t seen you a little bit. Glad to see you.

Dave:
I know, it does feel like a little bit. It’s like probably been one week.

Henry:
That’s long enough, Dave.

Dave:
Yes, it is. Far too long. What have you been up to?

Henry:
Oh, man, it’s been crazy. I’m buying deals like crazy right now. Things are selling. It seems like a great market right now.

Dave:
Well, I’m glad to hear that. That’s awesome. Like normal seasonality, like springtime, people are buying, things are getting put on the market, that kind of stuff?

Henry:
People are getting the bug, they want to go buy something, they want to move.

Dave:
You’ve been playing a lot of golf too. I’ve been watching you on Instagram.

Henry:
I have. I have. I’ve been playing is a loose word, playing might indicate that I know what I’m doing or that I’m good-

Dave:
You’re on a golf course though?

Henry:
Yes, I’ve been on a golf course.

Dave:
You’re standing on a golf course.

Henry:
Swinging a stick at a ball and hoping it makes contact, yes.

Dave:
That’s what I do and I would love to do that. We should do that next time we’re together.

Henry:
Sold.

Dave:
All right. Well we do have an awesome episode for you today. We have Lance Lambert, who is a journalist, he is the Editorial Director of Fortune Education and writes for Fortune Analytics. He is probably one of my favorite housing market Twitter follows, because he just does great visualizations and for data nerds like you and I, Henry, he’s always putting up these cool heat maps and helping make data really understandable, and he’s got an incredible wealth of knowledge about what is going on in the housing market. What were some of the things you enjoyed most about the conversation?

Henry:
I loved his kind of personal experience that he wrapped into what got him into being able to be an expert in this. And I love, when you talk about the heat maps, I mean, one of the articles that he’s recently written, when you take a look at it it really kind of shows you just how local real estate is because you’re able to see on a per state basis, what areas of the state or counties within that state are trending up, and some are trending down. In his Fortune article, things are getting really weird in the housing market. He’s got some super cool heat maps from a state basis that show just how local real estate is. You can see where, even within the same state, there are pockets that are going down in price and pockets that are going up in price. And so just literally being able to see the data like that gives you some great perspective on what’s happening across the country.

Dave:
Yeah, absolutely. He really shed some light on some of the local differences between markets and give us just a phenomenal synopsis of what has happened and sort of led us to this position where we are right now, where it’s sort of hard to believe, but the housing market is showing signs of life and he does a really good job explaining the backstory and the data for how you get there.

Henry:
And you want to stick around to the end because I did put him on the hot seat and made him try to tell us where he thought interest rates were going to be.

Dave:
You did. You even invented a whole new segment for the show?

Henry:
I did, I did. You’re welcome.

Dave:
Now we have the On The Market hot seat.

Henry:
Henry’s hot seat On The Market.

Dave:
Ooh, Henry’s hot seat, that’s even better. All right, Kailyn, we’re going to need some cool music for that, which Kailyn is an expert out, so we’ll definitely have some cool music. All right, well we are going to take a quick break, but then we’ll be back with Lance.
Lance Lambert, welcome to On the Market. Thanks for being here.

Lance:
Yeah, thanks for having me. Housing, housing, housing, always a lot going on.

Dave:
Yeah, absolutely. Well we knew that you were the right person to bring on to talk about, there’s always a lot going on, but it feels like right now maybe there’s even a little bit more than usual. Before we jump into all of that, can you just introduce yourself, Lance, and let people know how you are involved in the housing industry?

Lance:
Yeah, I’m the Real Estate Editor over at Fortune Magazine and I’ve kind of, throughout my career on and off, kind of covered the housing market a bit. I used to work at realtor.com, where I was really immersed in housing data. And when I came over to Fortune, I didn’t come over to cover real estate or housing, but what happened is during the pandemic, the housing market awoke and so it’s really absorbed a lot of my attention and mind space and I’ve kind of moved my career, during the pandemic, more and more in the direction of real estate.

Henry:
Well you picked a good time to move in that direction, man. It’s been a rollercoaster since then.

Lance:
It has been. And right off the bat when the pandemic hit, my wife and I, we were living in the Upper East Side and we had a three-year-old, so we didn’t have a lot of space. I told her, I’m like, “Well, we’re probably going to be remote for a month, so this would be a good time to show that I could do my job remote and then let’s get out of the city sometime this summer and move back home.” We’re both from Cincinnati. And that’s what we ended up doing. Except remote work, of course, wasn’t just a two, three, four week thing, it was a life changing event and then this whole movement helped to awake the housing market in a way that we hadn’t seen in 14, 15 years.

Henry:
Yeah. So on that, give us your, what’s your hot take, what’s your 20,000 foot, what’s the housing market look like to you? Because there’s all these air quotes words that have been thrown around for the past three years, it’s crashing or it’s correcting, or now people are saying, is it normalizing. So how do you feel about the housing market right now? Are we getting back to normal levels or what do you think?

Lance:
Yeah, so I think it’s important to take a step back and look at it from what happened when the pandemic hit. And when the pandemic hit, you of course had … housing markets are really just an extension of a job market regionally, like a metropolitan area, the distance to commute in, that is the job market, it is also the housing market. But we saw that distangle or disconnect a bit during the pandemic, where you know had all these people who had higher incomes in these markets that suddenly they could work from anywhere almost. And at the same time of the low rates and the demographics, the five largest birth years of millennials are 1989 through 1993, and so between 2019 and 2023, they’re all hitting the important first time home buying age of 30. So it all kind of happened all at the same time.
And as that’s all going on and in 2020, housing is already off to the races even though unemployment’s still at double digits, which is interesting, and the Fed really got behind there. As we moved into 2021 and they continued to stay very much in quantitative easy mode, the stimulus, of course, we got a second and then a third package. And all at the same time, people were kind of ignoring the housing cycle and it was rolling, it was cooking. We ended up getting our largest 12 months ever for home price appreciation. We went over 21{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} in a one 12 month window, which is interesting. And so as we moved into 2022 and the Fed kind of realizes, oh, we got behind, but not only did we get behind, a big driver of this is the housing market. And so last year we had a series of Fed papers come out that showed just how interested the Fed had become on housing during the pandemic.
One of the papers by the San Francisco Fed, which I talked to one of the researchers there, and what it found is that there was a huge elevated demand for space during the pandemic, not just the people who could go and work from any market they wanted, but also decoupling roommates. So elevated demand for space, the elevated household formation that occurred during the pandemic. And the San Francisco Fed said that drove 60{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} plus of the home price growth during the pandemic. So that’s the first paper. The second paper is the Fed comes out and at the time, everyone was talking about how this was all very much supply driven. Well the Fed came out and said that, in a Fed paper in June, 2022, that the pandemic housing boom was driven by demand and that had supply increased by 300{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, it still wouldn’t have matched all the demand that was created there.
And the thing about the demand during the pandemic is you can’t see it on the metrics. If you go look at new home sales or mortgage purchase applications, yes you can see the elevation, sales went up, but what you don’t see is all of this demand that was never met, the people who were bidding on the homes that didn’t get the homes, all of that. And so it’s hard for people to really understand just how gigantic that demand was at the top of the pandemic housing boom. And so that was a paper and then another one came out from the Fed and it showed that they believe that 40{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of non housing inflation was driven by the growth in home prices in the housing market, which doesn’t get talked about much, but this is a Fed paper and this is from the Fed Board of Governors-

Dave:
Sorry, Lance, can you say that again? So you’re saying that-

Lance:
40{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of non housing inflation was driven by housing.

Dave:
Just people feeling flush basically, the equity growing in their house?

Lance:
If you have 40{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} growth in home prices in a 20 month, 22, 24 month window, everybody feels so wealthy. Now I think the wealth impact also is crypto, stocks, all of it, but that whole feeling high on the hog type effect and it was kind of a release and it was a release into big purchases, big renovations, big lifestyle changes, second homes, third homes, RVs, all of that stuff. And so I think those three would show the demand for space, the fact that the pandemic housing boom was demand driven, and then the fact that the growth in home prices was helping to drive overall inflation, is very much why I think and some of my reporting has suggested, why the Fed was came out last year and did the fastest rate hiking cycle in 40 years.
Because what they’re trying to do is they’re trying to signal to the long-term rates to get very high, very quick. And that’s what we saw with mortgage rates. They went from three, four, five, six by June, 2022 and then later in the year, they kind of hit seven. But some of that was driven by some of the financial stuff that was happening overseas at the end of the last year, it rolled over the housing cycle very quickly. And what the Fed was able to achieve is they were able to essentially stop home price appreciation for about a year. So they were able to stop that. They were able to stop any of the taps in equity because are you going to refinance your home to pull out equity if mortgage rates are six, 7{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}? And that kind of helps to tame down the wealth effect. I also think that the negativity that floated over the housing market in the second half of last year, helped the Fed.
Although not all those very bearish things came to fruition, it was like a psychology change where people were like, “Oh, this could be ’08 again.” And it pulled back some of that excess that was kind of unleashed and that exuberance that came with the pandemic housing boom. And so that was a long-winded way to get myself to your question, which is about normalizing correction crashing type thing. Because I still think the biggest story here, the OA and that cycle, the 2000s housing cycle, what we remember most from it is not the ride up, it’s the ride down. It was the crash, because it was just so bad and it took out so many different industries. My dad, he had a business doing home additions, so you’d add another bedroom to your house type thing in the early 2000s and ’06, ’07 his business didn’t go down 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, it went down 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. It was just poof, gone.
And so we remember the bust last time more than the ride up. I think this one, we’re going to remember the ride up much more than this normalizing period or correction or whatever you want to call it. At least that’s what it appears to be telling us. And so that’s why I wanted to get in by starting by looking back at that boom, because I just think it’s such an important economic story and lifestyle story, anyway you want to look at it, that was just very significant. And so what we’ve seen over the past year is once mortgage rates spiked, the housing market slipped nationally into correction mode, what I like to call correction mode. And in the western half of the country, that actually materialized in house price declines very quickly.
Now it’s not something that it was, taking us back super far, 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} drops in some of these markets was only wiping out three, four months of appreciation because the end of the pandemic housing boom was just so exuberant right there at the end, especially spring 2022. And so we did see a correction in a lot of the western half of the country, the eastern half of the country last year, while you could look at median sales prices or list prices and you would see them going down, I think that was a head fake. And that’s why when I put out housing data and my housing charts, I do seasonally adjusted data because at the end of every year things get a little softer in the market. And so a lot of the price drops that were being reported for the eastern half of the country were really just seasonal declines. There wasn’t that much there.
And then low and behold, as soon as the market rolls into the busier season, the markets that were flat, not down on a seasonally adjusted basis, a lot of them were off to the races, so to speak, this year, once we came into the spring. And then the markets that corrected in the western half of the country, more of them had a little bit of a bumpy start. Some of them are getting going now with price growth for the spring. And then you have what I consider kind of true down markets, like in Austin. I think there was just a level of the exuberance there and prices went up so fast, so quickly and it priced out a lot of the local job market there, that they’re a little detached from fundamentals. And so what’s happening there could take a little more time to kind of play out.
But I refer to what we’ve seen over the past year as a correction. It’s the huge, pressurized affordability, mortgage rate spiking after a 40{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} run up in national home prices, pressurized affordability. And so the market’s reaction to that is what I call the correction. Everything that the market’s trying to do to get back to getting transactions rolling and getting back into a groove, that is what I consider the correction. And that could be things that aren’t necessarily declines in prices. That could be things like seller concessions. The builders on the builder side, they were very aggressive because they had the margin to do it, mortgage rate buy downs, things like that. Of course, not having to waive things like inspections and all of that stuff is a part of the correction process. But while it’s happening, I call it correction, but I think if you zoomed out and you looked back at this period in say five years, I think you would just say, “Oh, that was a period of normalization. It was just the market normalized after a huge boom.”
But I think going through it, it’s not necessarily that because it was so sharp because interest rate hikes were so aggressive that the long-term tail, the mortgage rates went up so quickly, it was just such a sharp mortgage rates shock.

Dave:
Lance, that was an incredible description of everything that’s gone on over the last two or three years. That was amazing. Thank you for sharing that. And I tend to agree, and I’m so glad you said that about seasonal adjustments because I feel like I’ve been arguing with people on social media more than is mentally healthy to do about that. But I do want to ask you about the Fed and basically what you were saying, that they’ve released these papers talking about housing contributing to inflation. Given what’s going on, is this a big enough correction for the Fed? Do they want to see the housing market under more stress, or is there risk that given that it plays such a role in non housing inflation, is it possible that this could drag out the fight against inflation?

Lance:
Yeah. And so when it comes to home crisis, I don’t necessarily know if the Fed is eager to pull them down more than has already occurred, because there becomes a certain point, if prices go down too much in some of these markets, you affect people’s actual lives. Some of the markets like Seattle that have moved down 15, 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} in some parts of this market, that’s kind of getting to that dangerous level where the people who bought at the top, that could really hurt them. But I think the concern for the Fed here with housing is, okay, so the builders had these very frothy margins during the pandemic. They built up huge margins, they could charge whatever they wanted and although the inputs like lumber and everything were going up so high, they had a lot of flexibility to move prices up faster.
And so they took that big margin and when the mortgage rate shock occurred, they just pulled down their margin and they cut prices in some communities, they did their incentives, and then they really got into a groove with the mortgage rate buy downs. And that is allowing the new home side to recover, it looks like it could be a faster than expected, I’ll say that. And so why that matters is that the housing market is a transmission vehicle for the Fed. So if they jack up mortgage rates or put upward pressure on mortgage rates by telling the market, “Hey, we’re going to move up rates by so much for the short term,” then the long term tail moves up. And so then they can push down activity in the housing market fairly quickly. But if the builders had the margin to just pull back on price and that now allows activity to rebound, the transmission of slowing the overall economy through the housing cycle is affected.
And so the greater concern might be for the Fed less about, okay, home prices are moving up a little bit in some of these communities and more, oh, the builders who are the real economic engine of the housing market, they could get going a little bit here and that could strengthen the overall economy. Because one of the goals of the Fed that they’ve said is that one, the housing market was overheated and they’ve stopped that, two, that the labor market is overheated. Well, if the housing market you were able to stop, but it’s now getting back to life before you’ve stopped the overheating in the labor market, then have they achieved their goal? And so I think that’s the potential concern, is if they can’t cool down the economy as much as they would like to because the resilience in the housing market.

Dave:
What about the correction in terms of housing affordability? It seems like your whole premise here that you’ve been saying is that there was so much demand that even with higher interest rates, as demand gets pulled out of the market, it’s still there and there’s still enough. Is there risk of that running out though if rates stay this high for a while? Is there a potential that the market may be stabilizing now as it sort of works through that excess demand for the last couple years, but then shows weakness once things sort of work through?

Lance:
Yeah. So if I had to say where my kind of reporting is, it’s not like, oh, last year was red and then now we’re green, in terms of, oh, the housing market was bad for the housing market and now good for the housing market. It’s more of a yellow. It’s like there’s some caution here. Affordability is very pressurized, we don’t necessarily know where the overall economy’s going to go and we don’t know what could happen once … like labor could break, if jobs claims and unemployment were to start to rise and then how that could potentially affect the market.
But the market’s health here, well, so the thing that’s hurting the market is affordability, we’re pressurized at levels that we’ve only been at a few times in history, like the late ’70s, early ’80s, the top of the 2000s housing bubble, and then now. So affordability is the issue, but what we don’t have a lot of is the supply overhang. We don’t necessarily have a lot of the overbuilding, because even if something bad were to come, the builders are already kind of winding down and getting into a better position. So we don’t have as much of that issue. And then also you don’t have the glut of the bad loans from last time. But I do think there is some caution, especially the fact that you do have some of these markets at least like Austin, that on paper look like down markets. And so being a down market, while unemployment is at three and a half percent, 3.4, what does that then look like if things were to change in that regard fairly quickly?
But I think the economy right now is signaling some strength. And Mark Zandi, I talked to him last week, for mortgage rates, his outlook is six, five for this year, which he’s been at for 10 months. And then by the end of 2024, he’s 5.5 and a lot of that coming as the spread between mortgage rates and the 10-year kind of shrink. But he says if the economy continues to prove resilient, there is some risk that we could go up and test seven again for mortgage rates this year. And so that that’s something to look out for too.

Henry:
So I think you touched on what most of us are saying is the million-dollar question, I’m sure everybody wants to know where you think mortgage rates are going to go. But before you get there, you touched on this a little bit, you talked about supply issues and it kind of seems like as a country, we have supply issues. I know here in my local market when we look at the supply numbers, supply is up from the boom of 2021, ’22, but we’re still at about half or less of the houses on the market that we had pre-pandemic levels. And so even with interest rates fluctuating, hovering, say they get back to the seven, it’s hard to see how that’s truly going to have an impact on sales when there’s still so much … there’s so little inventory. How do you see supply affecting the housing market going forward?

Lance:
Yeah, so last year I think that we very much saw the decline in sales that was driven by affordability getting so pressurized and demand pulling back so quickly. But then now this year we’ve seen the equilibrium of the market get into better balance and that’s helped some markets to see price growth to return. But now the potential growth for existing home sales is very much constrained by the lack of inventory, the lack of new listings coming onto the market. So yeah, I think there’s two C words for the market right now, depending on where you are and one is constrained, there’s just not a lot coming onto the market and so it doesn’t quite feel like a normal market. But then also, depending on where you are, the other one is competitive, it can be competitive, you can have a constrained market that is also competitive and it’ll be interesting to see how that kind of changes and moves from here.
But I think the good news for the market is that essentially since October when affordability was the most pressurized, when mortgage rates were what, seven three, 73.7 I think is the highest mortgage news daily rating last year, since then, affordability has improved gradually. And even right now as prices kind of inch up in some of these markets, it’s still not occurring as fast as incomes are growing right now. And if mortgage rates could come down a little more and price growth doesn’t exceed income growth, then on a real economic basis, affordability would gradually continue to improve. And as that occurs, the gradual improvement in inflation adjusted affordability, plus what economists would call acceptance, people being like, “You know what? Mortgage rates are six, they used to be three four, but three fours gone. I have another kid, I just got to go move. I need another house.”
And so that churn of the move up buyers and sellers could slowly start to come back as affordability improves a little bit, plus acceptance, people just accepting things have changed, this is how it works now. And I think acceptance, improved affordability and then seasonality is already what put the market into better, closer equilibrium when we entered this year.

Dave:
I’m curious, when you look at the market, and you do a lot of this, at least I’ve seen on Twitter, of comparing different regional markets, based on everything that you’re seeing, this competition of constrain and competition, what is the distribution of outcomes for housing markets that you’re seeing in forecasts? I think last time I saw Austin was down, I think 12, 13{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} year over year, something like that. There’s still markets that are up double digits. Is that where you are seeing things ending at the end of this year, that things will be so polarized in the housing market even as it plays out for the next six months?

Lance:
That is something I was thinking about today actually, which is, I don’t know if you saw the map that I posted for Tennessee, rural Tennessee’s kind of on fire. The first three months, a lot of those markets are up 5{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, those zip codes and 5{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} on an annualized basis. So 5{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} in three months, annualized, that’s 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, but we shouldn’t annualize it because it is the spring, the peak season. But there are going to be parts of the country that are up plus 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} this year, unless something really dramatically changes, that’s what it looks like the trajectory’s on. And actually some of those markets could hit the 10 just in the spring alone. And there are other markets where there’s already so many declines that got measured in, that maybe were some carried over from the end of last year, but they hit the indexes this year, that there’s some markets that are already like … any way they could get out of being down for the year.
I don’t know how Austin could not be down for the year just based on the three, four months of declines that got carried over. And maybe that’s going to age really bad and the market’s going to take an upswing or something, but I think right now, and the word that I introduced a few months ago and it’s kind of caught on a little bit, is the bifurcation of the market. But then again now there’s even a little less bifurcation because more the markets that were trending down have started to trend up mildly. So any number that you throw at me from minus five to plus like 12, 13, 14{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, I could probably find a market that I think would fall into that bucket for the year. And that saying that real estate is local, it really is true, and you’ve got to know your local market that you’re buying in and selling.

Dave:
Yeah, I mean, I’m not some old hand here, I’ve been investing for 12, 13 years though, enough, but this is by far the most differentiated market, I would say, that at least I’ve seen. It used to be some were going up slowly, maybe they’re up, down one or 2{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, but you’re talking about potentially spreads of 20, 25 percentage points, anywhere from down five 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} to up 15, 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. It’s an enormous spread. And I don’t know if those are the exact numbers, but it’s just wild to see how differently different parts of the country are. And even, I think you’ve reported on this as well, even places that are geographically relatively close to each other are having really different outcomes. You see places in Texas, for example, or Florida where the outcomes are just really different even though some of the more macro factors seem to be similar.

Lance:
Well, yeah. Right now on a year-over-year basis, there’s no major market in the country among the 100 largest, that has more appreciation than Miami. But then you go over to the other side, where they just had that hurricane in September and some of those markets didn’t even see a seasonal decline in inventory heading into this year. No seasonal decline, they just kept going up and that’s within few hour drives of each other. So it does feel like that. And that’s why on my Twitter feed, I’m going to continue to post more of these zip code level maps. I kind of wish I did more of it last year because I think it helps to kind of tell the story right now.

Henry:
Yeah. Could I get you to add a few more states to your article on things are getting weird, because looking at this, this is good stuff, man. Rural Tennessee’s crazy, Ohio looks like their values are increasing all across.

Lance:
And that’s where I am. I’m in Cincinnati.

Henry:
I’ve always been a fan, we’ve had these arguments, I like these unsexy markets, man, it’s pretty cool. But yeah, man, like to see a whole … I could send you a few more states off the record.

Lance:
Yeah. And hit me with them and I’ll do them.

Dave:
Are there any markets, Lance, that were down, you said Austin, you think that can’t avoid a downturn, but some of the other ones that were leading the way in terms of decline, Seattle, Boise, San Jose, San Francisco, are any of those starting to show signs of recovery?

Lance:
Yeah. They are, more of those. And I’ve never really grouped Seattle, San Francisco, LA, those very west coast markets, with the markets like Phoenix or Boise or Las Vegas. And so here’s why, the markets like Seattle and San Francisco and LA, the affordability there or the prices at least were all the way maxed out to what people could afford. And this has been this way for years. Those prices are so far extended from incomes and people have been pushing them up for so long that anytime mortgage rates move up, they’re just more mortgage rate sensitive.
And so you can see this in the data in 2018, 2019, actually San Jose was one of the few markets in the country that went down year over year after mortgage rates moved up from what, four to five and a half very briefly in 2018. And the reason is it’s just very rate sensitive out there because there’s no supply and there’s been no supply for so long that they’ve just kind of overheated themselves to the max, that anytime affordability changes very quickly by mortgage rates, it becomes over extended, it goes over the top essentially. It kind of goes over the top. But what they don’t have is a lot of supply. So while the market briefly corrects, it then has to deal with that, the fact that there’s just no supply in the market. So it kind of meets back to equilibrium faster is the theory.
Austin is different. Austin has a real supply, it’s a boom town with a lot of building and anytime the music stops in a market where you’re having a boom, boom, boom and then the market changes, if there’s a lot of supply that can roll on and create a temporary supply glut on the market. And so I think that’s why we’ve seen a market like Austin move up so much faster for inventory. And I think that will also potentially make it to where a market like Austin takes longer to work out of it than say LA or Seattle, it’s more of a typical boom bust type scenario. Whereas it’s kind of hard to say, boom bust just doesn’t sound right for an LA, Seattle.

Dave:
They’re all used to being crazy expensive, it’s been like that for years.

Lance:
Yeah. And to me, the word bust kind of implies construction in my mind. I don’t know, that’s kind of how I see it, and maybe I’m naive with it and maybe they’re all way more similar than I think, but I’ve been looking at them as different types of markets for a while. And also if you look at a market like Austin, something that’s interesting is the top of the market has actually been a little more stable than the bottom. But then if you look at those West Coast markets, the entry level is way hotter than the top. And so I kind of think that’s because the people coming into the market have detached a market like Austin from the local fundamentals. I don’t know, that’s kind of my hot take on it.

Henry:
All right, well speaking of hot takes, you know we got to put you in the official On The Market hot seat, and it’s really nothing that official.

Dave:
He just made that up.

Henry:
Yeah, I totally made that. I feel like we need one of those fire sounds or bombs going off. But yeah, so I think everybody wants to know where you think interest rates are going to land by the end of this year?

Lance:
Yeah. So I kind of made a bet last year, so I don’t make predictions publicly with stuff, but I think if you could see where I put my time last year, I very much made a bet with my time that mortgage rates were going to go up a lot quicker than the industry thought. The industry came into 2022 thinking the mortgage rates were going to be three seven, three six four, and I [inaudible 00:38:02] called BS on that because if you looked at November, 2021, Powell said that inflation was not transitory. And if you looked at the numbers, unemployment was down to … the unemployment rate was mid threes and inflation was six, and it was still moving up and it’s like, and housing’s booming. Everything there was signaling the Fed was going to move from focusing on unemployment to inflation and very quickly and that they were kind of behind on the eightball.
And then mortgage rates did move out very fast. And that of course had a very acute effect on the housing market, and I was kind of well positioned to recover it and write about it. I don’t necessarily have a big bet like that, where I feel like everybody’s so wrong and it’s so obvious. That, in hindsight, was super obvious. Inflation is running, the housing market is really booming and the economy is so strong that the Fed can jack things up fairly quickly, like that, I think in hindsight, is pretty straightforward. Right now, it’s trickier because it’s like even a lot of these macroeconomists, you talk to them and everyone will tell you a different story in terms of how they think the overall economy is going to respond to the rate hikes and there is a lag in terms of transmission from rate hikes going into effect and then the impact on the economy.
So we haven’t necessarily seen it all yet, but I think where the overall economy goes is the biggest question to being able to figure out, okay, where do mortgage rates go from here? I think if we go into a recession, I think history kind of tells us that the 10-year mortgage rates come down, but if the economy continues to prove resilient or maybe inflation starts to kind of show it’s a little sticker than people thought, then the rates could maybe stay up higher than longer. One interesting thing that Zandi told me recently, Mark Zandi, Chief Economist at Moody’s Analytics, is that there’s a huge spread right now in terms of the 10-year mortgage rates, it’s like three percentage points, and it’s normally 1.75, two percentage points.
So if things normalized, mortgage rates today would be like five five instead of six five. And he says one thing that’s keeping that from normalizing right now is the turmoil in the banking sector, because they’re not getting the deposits and normally the group of buyers that competes with the Fed for buying those MBS securities are the banks, but they don’t have the deposits right now and they’re not buying as much. So moving into this year, into 2023, the thought was that that spread would start to normalize as these other buyers like banks kind of picked up the slack. Well then you had the bank failures earlier in 2023 and the spreads had made progress before the bank failures, in terms of coming down a bit. And that’s why mortgage rates actually hit 5.99 for that one rating in February. And since then the spread has just went right back to where it was last year, at three percentage points, a full three percentage points. So I’m just saying very uncertain is the call.

Dave:
Unfortunately we can’t pin you down. But I just want to explain a little bit to everyone listening what the spread means. Basically if you look at the correlation between mortgage rates and bond yields, they are very closely correlated, the yield on a 10-year treasury and mortgage rates move very closely together. When one goes up, the other goes up, when one goes down, the other goes down. Normally the difference between them is, as Lance said, about 175 basis points to 200 basis points. So if the yield on a 10-year is at 3{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, you would expect mortgage rates to be somewhere around 4.7 to 5{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. Right now, they are really elevated. The spread between bond yield and mortgage rates are up at around 300 basis points or 3{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. And that is due to a lot of different factors, but basically the market sees risk in buying mortgage yields as opposed to bonds. And so it’s higher right now than it has.
And the reason that this is so important is that that can come down without the Fed lowering interest rates. So there is a path for mortgage rates to come down before the Fed starts lowering the federal funds rate. And so I just want to make sure everyone understands how that is technically possible.

Lance:
Yeah. And really the market that we’ve seen over the past 12 months would’ve been very different had we not had that huge spread. Had we had a normalized spread, the market wouldn’t have seen a steep up of a correction last year. And then this spring if the spread was normalized and we were at a five and a half percent mortgage rate, it would be a very different, much warmer market, much more activity, much more the move up buyers and sellers than we’ve seen so far. So yeah, while it’s one of those kind of nerdier topics, it has a huge impact on the real market.

Dave:
The more you learn about economics, you realize that bonds just rule the world. It’s sad, but it’s true.

Lance:
I mean, I spent a lot of my day just looking at the 10-year.

Dave:
I think, yeah, that’s the course of anyone who studies macroeconomics, you look at all this different stuff and at the end you’re just looking at bond yields. All right, Lance, well thank you so much. This has been super helpful and insightful. I really appreciate your opinions here and all of your great research. Is there anything else you think our audience should know about the housing market in 2023?

Lance:
No, I think we’ve covered the really big stuff. I think one lesson here is that we’ve heard a lot of opinions of people saying where the market’s going to go over the past three years, and the market has just done its own thing. It really has. And so I would say even take the things that I’ve said with the grain of salt and take a lot of these forecasts with the grain of salt. And while I do share all the forecast and as they get revised, I would still say take things with a grain of salt and try to look at the fundamentals in your market.

Dave:
Awesome. Well thank you, Lance. If people want to follow your work, I know you’re very active on Twitter, can you share your Twitter account and anywhere else that people should follow your work?

Lance:
Yeah, they can find me @NewsLambert on Twitter. And that’s Lambert, L-A-M-B-E-R-T or you can Google Lance Lambert Fortune and you’ll find my author page at Fortune Magazine.

Dave:
Awesome. Great. Well, thank you so much for joining us, Lance. We appreciate it.

Lance:
Yeah, thanks for having me.

Dave:
So what’d you think of Lance?

Henry:
I think he was great. I mean, talk about a wealth of knowledge and not just a lot of knowledge, but he did a great job explaining some pretty complex topics and summarizing it in a way that I think will make sense for a lot of people. I told him off camera that I thought his explanation of kind of what’s happened in the market over the last three years was a great one. And so I think people should rewind this and listen to that first answer again if you really want to get a sense of kind of what’s been going on in the market.

Dave:
Yeah, I loved what he said about how much extra demand there was in the market, that is just truly impossible to measure. You don’t know how many people are still trying to get a house after a year or two and are still willing, and as he said, accepting new mortgage rates because they’ve been at this for years and there still is just this excess demand that is working through the market and combining that with low supply, it’s just wild. I mean, I don’t know how you feel about this, I try and be sort of objective about the market and just give my opinion on whether it’s going up or down based on no emotion, but part of me feels like the correction is not big enough. I own property, I don’t want it to go down, but the lack of affordability does worry me long term, even if right now it’s enough to sustain the housing market. It just doesn’t seem good to me that housing is, as he said, one of the three least affordable times in recent history, last 50 years in the housing market.

Henry:
Real estate has always gone up over time, but it’s just that people have been able to keep up with it as wages have increased and things of that nature. And so, I don’t know, man, it is kind of scary. I think that affordability will continue to be a problem. I mean, I personally don’t think we’re going to see too much more of prices dropping. I mean, when you looked at the heat maps he had on his article about the housing markets getting weird, just seeing just how many markets are seeing prices still go up, even if it’s single digits. I mean, we’re still seeing that prices are increasing in a lot of the country and here in my local market, it seems like the market’s healthy, because if a property is priced right and it’s done right, it sells so fast. And if it’s priced poorly and it’s done poorly, then it sits and isn’t that what’s supposed to happen?

Dave:
Yes, that’s exactly what’s supposed to happen. Yeah, it’s just a strange situation. So I’m curious to see what’s going to happen. I think the trajectory we’re on right now, we’re recording this sort of the beginning of May, middle of May, is I agree, I think prices are going to start coming back slowly in the majority of markets, unless something big changes. There always could be some geopolitical shock or natural disaster, whatever, but just the way the reliable indicators are pointing is the correction may be bottoming out a little bit. Not in every market, of course, but on a national level.

Henry:
All the more reason you guys that you’ve got to be … it’s so much more important now than it’s ever been for you to be educated in what you’re about to take on from an investment perspective, and also educated in your local market, because this time, this is the poster child for real estate, is local. Every market seems to be a little bit different. And so please, please educate yourselves on your local market before you dive into something and realize you made a mistake.

Dave:
Yeah, absolutely. Well, thank you all so much for listening. If you like this episode, please, we would love a review on either Spotify or Apple. We always really appreciate that. It really helps us grow and it does help us land really good guests. They definitely look at our reviews and so when we have all these nice reviews, we get great guests like Lance. So if you haven’t yet, we would really appreciate it. Either way, we will see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.