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Has the Fed Broken the Housing Market? Unpacking the Dual Impact on Demand & Supply
Deerwood Realty and Friends
Deerwood Realty and Friends
Has the Fed Broken the Housing Market? Unpacking the Dual Impact on Demand & Supply
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In today’s real estate landscape, few voices carry as much weight as Mohamed El-Erian, Chief Economic Advisor at Allianz. John Schink, Founder of Deerwood Realty in St. Louis, Missouri, unpacks El-Erian’s recent remarks on the profound effects of the Federal Reserve’s policies on the U.S. housing market. As we navigate a period of fluctuating mortgage rates and uncertain market dynamics, understanding the broader economic forces at play becomes crucial. In this video, we’ll explore the intricate ties between Fed decisions, global economic indicators, and their ripple effects on both homebuyers and sellers. We also shed light on what these shifts mean for the future of real estate in the U.S. and beyond. Join us for a comprehensive analysis, blending expert opinions with real-world market insights.

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[00:00:11] Good evening. How are you tonight? It’s getting late here in St. Louis. Now, you might be watching this some other time, but I wanted to go over something I saw. Now this came out quite a while ago, but but it had what I would call like reverberations in the space, in the real estate news space.
[00:00:31] There’s this economist. His name is Mohamed El-Erian.
[00:00:38] He’s been at Pimco. He’s been in a bunch of places. We’ll talk about him a little bit of it, but he had an interview on CNBC where he said some things that have caused some people to kind of take notice. And so I wanted to go over that with you tonight and just kind of go over the whole thing and why it was interesting that he said that and the response and so let’s get to it. It says he said in a quote, there’s a real issue as to whether we’ve broken the housing market. And when you hear that from an economist, it’s like, what? So let’s go through the article a little bit.
[00:01:14] There’s some quotes here I just wanted to pull. It says, when you go from record low mortgage rates to levels we haven’t seen for almost 20 years, you destroy both the demand and the supply. And we’re going to get into just an easy example of both of those things so that we can kind of talk about it on the same level.
[00:01:31] And then he is also quoted as saying we’ve got to be very careful. The housing market is central to the economy. And that’s so true.
[00:01:40] Housing is a big deal. Housing is a big part. Healthcare is a big deal, is a big part of the economy. Manufacturing big part of the economy. And so when one of these things is being messed with, it’s kind of something we need to pay attention to. And then finally there’s a quote that says the Fed Chair Jerome Powell says he’s determined to bring inflation down to 2%, but he doesn’t see it cooling to that level until 2025. And El-Erian says the key issue is 2% the right target, who also suggested there’s a real possibility americans could simply end up living with a stable inflation rate of over 2%. What we’re looking at right now is a possibility that headline inflation will head back up. Now look, the 2% thing is a farce.
[00:02:26] If you look at our yesterday or the day before, I did a video on how much interest or how much inflation has occurred since 1960. It’s about 900%.
[00:02:40] So no matter how much their target has been, 2%, they’ve absolutely missed. And so we’ll go over that as I get through my stuff. So let me go here. And then I took notes because it’s not easy for me to remember all this stuff or to write it, to say it right. So wish me luck. And here we go. So right now, one of the big problems, at least in housing, from my perspective as a real estate agent, is we have high mortgage rates, right? So what does that mean? Well, right now they’re at 7.51%, which is a 22 year high. So high rates make things more expensive, right? It makes it harder for somebody to buy a house because I would say gosh 80%, 90% of people initially buy a home with a mortgage.
[00:03:26] And so the Fed is tasked with this 2% inflation target and so they manipulate all kinds of levers to try to get to that 2% target, which they never seem to get to. And lately it’s been talked about that maybe that rate shouldn’t be 2% of that target, but that’s why it was so fascinating. We have an economist who is openly questioning whether the 2% target makes any sense now. And then we have the Fed doing action, making action. They’ve been raising and raising rates, although they did pause just recently, I believe on Wednesday of last week.
[00:04:14] But a pause is not lowering of the rate. So Elerian’s warning is he said that the housing might be broken due to the rates, the high rates. And then we’ll talk about this destruction of both demand and supply and what that really means. People get really confused by demand and supply. I get confused by it. And so some people say there’s I mean, we’ll get into it, but some people say there’s hidden inventory. Some people say that we’ll get into the hidden inventory. Some people say that’s not true, there’s nothing. Everything is great. We have the best packages of mortgages ever and so there should be no issues there.
[00:04:53] But let’s get into the basic stuff. So who’s Mohamed El-Erian? Mohammed El-Erian has served as a high profile person in the financial world. He’s known as the chief economic advisor at Allians, one of the world’s largest financial service providers. Before that he was the co Chief Investment Officer and CEO of Pimco, which is one of the world’s largest investment management firms. They were bond traders. And then why should we care? Why should we care about this guy saying it, right? Like if I were to say it, would I be on CNBC? Would anybody? No.
[00:05:28] So these are the reasons why we should care. His Expertise given his vast experience and in depth knowledge of both macroeconomics and financial markets, Elerian’s analysis are rooted in a deep understanding of global economic mechanisms. He has a track record throughout his career he has provided accurate insights and forecasts on various economic events, reinforcing his credibility and from a global perspective, due to his diverse roles and engagements around the world, el Airen possesses a global perspective, making his analysis relevant not just for the US, but for internal national markets as well. And then he has a clarity knack for explaining complex economic concepts in an accessible manner, making it easier for the general public and investors to grasp the implications of global economic events. So Mohammed Elherian’s observation that the housing market might be broken due to these rates is a big deal. The housing market broken.
[00:06:24] So let’s talk about just a simple example of supply. And I’m just going to give it to you here. Go in a little bit of a story. So imagine a small town with 100 homeowners. If ten of those homeowners decide to list their house for sale, then the supply in that town’s housing market is ten homes. If only five homeowners list their properties, the supply is five homes. This supply can fluctuate based on various factors such as economic conditions, interest rates, seasonality or regional developments. The number of homes or supply directly impacts the housing market dynamics. If there is a low supply, fewer homes available, and high demand, many buyers looking it can lead to a seller’s market where homes price might increase. Conversely, if there’s a high supply with low demand, it could lead to buyers market where prices might decrease. So what would you say? What kind of market are we in right now? Well, right now people are saying that there’s not enough supply. Okay. People are saying this doesn’t mean that I believe it, it doesn’t mean that it’s right. We’re just going to go with people say there’s problems with supply. And so their solution to supply is we need to build more houses. If we have more units, then we should have more supply. And that should in theory, bring prices down. Okay, but how does the Fed impact supply?
[00:07:51] The impact on supply, there could be a reluctance to sell. So homeowners who have existing mortgages with lower rates might be disincentivized to move and thus sell their homes because they don’t want to lose their current low rates. If they move and buy a new home, they’d likely have to secure a new mortgage at a now higher rate. This can reduce the number of homes listed for sale. Now how does that, I mean, does that ring a bell? Is that what we’ve been talking about for months now? And then in new construction it says higher interest rates can also affect the construction industry. When borrowing becomes more expensive due to high rates, builders might cut back on new projects because of the increased cost of financing. Fewer new homes being built means less supply added to the market. Now I feel like I can’t prove it, but the amount of units being built in the multifamily sector, okay, these massive amounts of apartments are coming online units. I mean, it’s impressive. Now some people will say, well that’s good, we’ve needed it for a long time.
[00:08:50] I am of the opinion that you’re not going to build yourself out of this one. And we’ve already overbuilt.
[00:09:01] That’s just me now and it’s home equity and refinances rates rise. Homeowners may find it less advantageous to tap into their home equity or refinances could mean fewer renovations or upgrades, which often precede selling a home. So we just talk about the housing market in general. So now if nobody’s doing any sort of remodeling or taking on bigger projects in their homes, the construction guys aren’t working, the plumber is not working, these people are not working. It’s a bad situation. And we already know that refinancing is just dead because who’s going to refinance when they’re at 3% and they’re going to refinance up to 7%? That doesn’t make any sense. It doesn’t make any sense. Now we did have a story yesterday about how there was an uptick. Maybe that’s because people are needing cash. Let’s hope not. But let’s look at demand in the housing market. So here’s the example. Imagine the same small town with 100 homeowners, let’s say 50 individuals or families in the surrounding region are looking to move into this town over the next year. These 50 represent the demand. If these 50 are actively searching and ready to purchase a home in the town, the demand is particularly high. However, if over the next year only ten individuals or families are looking to buy a home in that town, then demand is relatively low. The balance of demand in relation to supply determines market dynamics. If there’s high demand and low supply, it can drive up home prices as buyers compete for the limited houses available. On the other hand, if there’s low demand and high supply, home prices might decrease as sellers complete to attract the limited number of buyers.
[00:10:35] So what is the Fed impact on demand? Well, higher mortgage rates. When the Fed raises interest rates, it generally leads to higher mortgage rates. Higher mortgage rates can make home loans more expensive. For prospective buyers, the monthly payments increase, making homeownership less affordable. As a result, fewer people might be able to or are willing to buy homes, reducing the demand and consumer confidence. If the public perceives the Fed’s policies as a reaction to potential economic downturns or instability, this can erode consumer confidence. When people are uncertain about the future, whether they’ll have a job, whether their income will rise or fall, they’re less likely to make significant purchases like homes. By influencing both the cost of borrowing and general economic sentiment, the Federal Reserve’s policies can concurrently dampen the desire or ability to buy and the incentive or the feasibility to sell or construct homes. This dual effect can lead to stagnation in the housing market. Now if you just look at the examples we’re seeing all of this take place and it’s basically just now it’s the rate of how this is happening as they’re squeezing off the availability of cheap credit. It’s going to impact demand. Okay? The demand is home buyers buying homes. Okay? Now I reject the idea that anybody in the housing market, as far as buyers, the young couple just buying their first home has any clue about consumer confidence based on the Fed. I just don’t see that. I don’t see anyone paying attention to the Fed. The only time anybody knows that the Fed is doing anything is when you have high rates, but they don’t really equate it to the Fed. So I disagree with that. I don’t think it’s really a big deal.
[00:12:25] Now, what we’re having that’s even more problematic is we’re having what should have happened if the economy were working correctly. In my opinion, humble opinion, we should have had when the interest rates started to rise and the monthly payment therefore, would get more expensive. We should have had a lowering of house prices. Okay? The house prices, the asking prices for homes should have lowered, should have decreased. They did not.
[00:12:56] Why didn’t they?
[00:12:58] Well, the argument there is there’s still so much demand to buy houses. Some people are arguing that it’s a population situation. Other people are arguing the opposite, that actually there is a time bomb in the population of the United States. We’re getting to be fewer and fewer working age people.
[00:13:18] So that’s kind of fascinating, too. Now, we have seen a drop in the mortgage applications because, again, why would anyone pay 7% when they’ve got a mortgage at 3%? It makes no sense to refinance. And it also makes I mean, the amount of money that it costs for a monthly payment now versus when rates were 2% on a $400,000 house. I mean, it’s a dramatic difference.
[00:13:47] So let’s talk about this really quick.
[00:13:50] This idea about the Fed’s inflation goal or target, which for the amount of expertise in the room, I just don’t understand how they’ve managed to botch this so badly over the years. If you look back at my videos in January, 2 or three years ago, I was saying the inflation is not transitory. Get ahead of this. Raise the rates. Don’t let this get to be an issue.
[00:14:18] Did anybody listen to me? No. Because I’m just a real estate agent in St. Louis, Missouri, happily showing buyers homes and sellers homes. That’s my day job. That’s what I do.
[00:14:31] El-Erian is able to get away with saying something that is hypothetical. Okay, the Fed themselves have said 2%. They can’t deviate from that.
[00:14:47] They can. But it will cause a lack of confidence in the economy immediately because it’s been used for so long.
[00:15:02] So the fact that El-Erian said it, he can get away with it, basically.
[00:15:09] But let’s talk about this. So why 2%? Why not 6%? Why not 10%? Let’s just get into it. Part of it is, remember, these are philosophies. These are thoughts from learned academics, which if you think highly of academics, well, then you should be fine.
[00:15:29] But let’s just go over it. So the idea is that a 2% inflation rate helps with stability and predictability. A stable and predictable inflation rate helps households and businesses make informed decisions about spending, saving, and investment. A 2% target provides this stability.
[00:15:46] If you believe that, fine. Avoiding zero or negative inflation deflation, which is negative inflation, can be harmful because it can lead consumers to delay purchases in anticipation of falling prices, and it increases the real burden of debt. Even very low positive inflation rates can pose risk because they leave less room for real interest rates to fall in the face of an economic downturn. A 2% buffer helps reduce this rate. Now, look, if you look at used cars, if you look at new cars, okay, how many people are out there right now going to go buy a new car at higher than 7% interest rates on a five year note?
[00:16:28] So people are naturally going to wait, or if they can, okay, if they can, they’re going to naturally wait until things cost less. That is deflation, wage flexibility, which I find to be an interesting argument in itself. It says sometimes wages may need to adjust relative to overall prices for labor market reasons. If there’s some inflation, nominal wages, which are wages not adjusted for inflation, can remain stable or grow slowly, even if real wages, which are wages after accounting for inflation, need to adjust downward. This avoids the politically and socially challenging scenario of cutting nominal wages. But they don’t say it that way. Okay?
[00:17:08] If you look at the Fed’s last speech, he talks about softening employment. His goal is to soften it. What does that mean for people like me who just work every day and don’t get to pontificate our academic expertise, like Jerome Powell, that means he’s going to get rid of some jobs, there’s going to be some pain.
[00:17:25] Okay? That’s what that means in wage flexible. It’s fascinating. If you look at real wages from 1960 to today, it’s an absolute joke. It’s an absolute joke.
[00:17:36] Another point in the 2% plan is the room to maneuver. A slightly positive inflation rate gives central banks more rooms to use monetary policy to combat recessions. If inflation is too low, central banks might be constrained by the zero lower bound. As an example, they can’t set nominal interest rates below zero, though there are some exceptions. Look, they got down to, like a quarter point, I think, and the spread was what was getting us into two. So they can get pretty darn low.
[00:18:08] I just don’t buy some of this stuff.
[00:18:12] And then finally, look, it’s a balancing act. While moderate inflation is deemed acceptable or even beneficial, high inflation can be problematic. You think we’ve been living through this now for the past two years. It’s absolutely disastrous. It erodes purchasing power. It’s a tax on the poor. It creates uncertainty, and it can distort economic decision making. 2% is seen as a level that captures the benefits of some inflation without the disadvantages of high inflation.
[00:18:36] So, look, did the Fed break the housing market? I mean, how would that have been done? Well, you raise the rates very quickly, and you get people locked into low mortgages that they’re not going to see again. Now, unresponsible agents, people I just can’t stand, will sit there and say, date the rate.
[00:19:05] I wouldn’t marry the house. Date the rate. The idea being that the house prices, which it just falls on its face. So you’re going to buy this house right now at 7% interest, and it’s an inflated price.
[00:19:20] And then their idea is, well, the rate will go lower.
[00:19:25] So let’s say it goes down to 5% or 4%. Now, you refinance, but there’s two problems with that. One, you’ve just bought a house like maybe, what, 100,000 or $200,000 over what it went for two years ago. You still have to pay that. And two, if there’s an economic downturn and the price of houses goes down, now you’re in a negative equity situation, and you have to bring that money to the table to do the refinance.
[00:19:54] That’s not, you know, how are we to take we should we be upset with what the Fed’s been doing? I think it’s natural. I think it’s natural to be upset with the Fed all the time because the Fed isn’t going to like, I can yell at the Fed all day long. Fed is not going to care a bit.
[00:20:18] I do not own them. They do not care, okay? They have a mandate. And even if they fail, they will fail up. I mean, if you look at Ben Bernacki, it’s not like he can still afford food. He’s doing fine. That was a former Fed chair. I believe Yellen was a Fed chair at one point in time. She’s on record as saying everything’s fine, which not fine. I guess it depends on who you are, though, right? I mean, if you make six figures every year on speaking engagements, inflation doesn’t hurt you too bad. I mean, what do you can’t buy the fourth car or the fifth. It’s the people that go to work every day that are under the most amount of stress and just trying to get by the middle class. And it’s just kind of gross to watch these people dictate how you’re going to live your life anyway when someone like Elerian comes out and says, the Fed may have broken the market, how should you take that?
[00:21:22] You should put something into that because this is somebody know, they’re looking at the numbers, they’re looking at what’s going on and saying, you raised the rates too fast.
[00:21:33] You raised it too fast, and now you may be overcorrecting, which will cause a recession, and then you will get your lower rates. Unfortunately, no one will be able to buy a house at that point in time or fewer people. I don’t know. It’s something I wanted to go over. I’m sorry. It was a couple days back and I didn’t get around to it till today. But it’s something to pay attention to on CNBC. When you have a commercial real estate broker talking or let’s just say an investment firm that owns tons and tons of real estate.
[00:22:08] They are never going to tell you that high rates are good for them. They’re always going to pound the Fed. They’re always going to say, hey, this is terrible, this is terrible, this is terrible. The Fed should lower rates right now. So they’re biased. This guy not as biased. Not as biased.
[00:22:25] It doesn’t benefit him too much to say something like this. And so that’s why we should try to kind of take that and pay a little bit more attention than we otherwise would.
[00:22:35] That’s all I have for today.
[00:22:37] It was an effort. I’m trying.
[00:22:40] I don’t know if I made it, but I wanted you to understand supply, demand, how the Fed is responsible for this, or how the Fed impacts these types of things in the housing market. And that way when we talk about secret, secret supply, like coming on the market that nobody knows about, things like that, you’ll at least have a better understanding of where I’m coming from. So with that, I’m going to head out. Thank you for watching. Thank you for listening. And I will catch you on the next one.

Podcast Transcript

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