Economic Trendspotting with Bloomberg’s Conor Sen

Mike Simonson here. Thanks for joining me today. Welcome to the Top of Mind podcast. If you follow along with Altos Research, you're familiar with our weekly market data video series with the top of Mind podcast. We like to add context to the discussion about what's happening in the industry from the leaders in the industry. Each week, Altos research tracks every home for sale in the country, all the pricing, all the supply and demand, all the new sales, all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's happening in the housing market right now. So if you need to communicate about this market with clients, with buyers and sellers, go to altos research.com. Book a free consult with our team, we'll review your local market and talk about how to talk about the market and news market data in your business.

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Alright, let's get to the show. My guest today is Connor Fan. Connor is a Bloomberg opinion columnist who writes about financial markets, the economy, housing, cities, demographics. He's also the founder of Peachtree Creek Investments and has more than a decade of portfolio management experience and risk management. Connor is someone I look to for economic and financial market expertise. I always appreciate his insightful explanations about what's happening in the markets and the world. This is Connor's second appearance on this show. We're thrilled to have him back. The first one was two years ago, so the world has changed dramatically in that time, but it was a really neat time to have you on before because it was just about to change. So we're going to revisit some of what we talked about then and look at the next couple of years. So Connor, welcome back to the show.

Mike. Thanks for having me again. I feel like when we talked last time, we were about to climb the really steep part of inflation rate Hike Mountain, and now we're kind of on the downs slope. We're almost off the mountain, and so it's a great time to revisit that and think about where we're going from here.

Yeah, yeah, that's a great way to look at it. We had rate hikes, we had that inflation kicking in at the time we knew. I went back and listened to some of the show and we knew that rates were climbing. We didn't really know how far they were going to climb. And so I think in fact that we were talking about maybe mortgage rate, we talked, I think it was literally two years to the day that we're recording this early February, 1st of February 22. And so we knew it was a rising rate environment and at the time though, we were seeing four and a half percent or maybe 5% mortgage rates. So when we look back at that period, what does that teach us and what can we apply to the thinking now for 2024?

Yeah, when I was listening to our show and we were just talking about how crazy hot the housing market was and how the spring of 22 could be even hotter than the spring of 21, and we were thinking about risks and it was like, I don't really see any because the housing market's just so crazy. There's so much demand, so little supply. And I think I was thinking that the move would happen on home price appreciation. And I guess if Jerome Powell was listening to our show, he would've said if we convinced him, he'd be like, I guess rates need to go way, way higher than I thought because the housing market's just that hot and we have to cool it off. And the way I would think about what's changed between then and now, so Redfin puts out this weekly housing market data piece. Like your videos maybe not as good, but it's some decent stuff. And the monthly mortgage payment that you have to commit to sort of looking at prevailing mortgage rates and home prices is 40% higher today than it was two years ago. So I think that sort of shows just how hot the housing market was and how kind of unstoppable it was. But the change happened in mortgage rates, not prices,

And the change happened in volume, sales volume rather than prices.

And I think we were talking about low inventory and how that really protected us from bad outcomes and great underwriting and homeowners that were in good shape. And I think that speaks to the past couple of years where rates went up a lot that really did cool off home price growth and transactions, but nobody had to sell. And that was certainly the story of 2023, lack of sellers, lack of inventory. And even though affordability was bad, you didn't really see much of a dip in prices. And I think 24 is interesting because you see a little more inventory, a few more sellers, but also rates are now seemingly coming down at least somewhat. And so how that all is going to shake out this spring and then later in the year

And rates are still higher than they were a year ago. They came down in December, but they've been climbing mostly for most of January. They climbed and so there was a fed meeting today, rates ticked down a little bit, but they were trying to, the feds definitely trying to temper their rate reduction, their rate cut outlook for the year. You're much more of a Fed watcher than I am. Let's just go into it. Let's talk about rates for this year. What are we thinking? How does that play out?

So I've been thinking we would get somewhere at least a hundred basis points of cuts this year and the market's been priced more for 150. And kind of the way I would think about that is that the Fed has told us they're likely to cut 75 basis points. They're probably understanding it a little bit because inflation's coming a bit lower than they expected in December, so maybe that's a hundred. And then there is some chance of a recession or a really bad outcome that would lead them to cut even more than that. So markets kind of price that in as an extra 50, like an insurance 50 could come at some point. And that's showing up in mortgage rates, even if it's not in the fed funds rate. I actually just look at the screen and maybe it'll change by tomorrow or when this podcast goes live, but 30 year mortgage rates today printed at 6.63%. So we're back into the six point sixes. And I think that could we get into the low sixes? Hopefully, maybe, probably. I don't know if we get to the mid fives or lower than that, but I am mindful of two years ago we kind of did this on the other side. And so I would say if there's a risk, it's probably too much lower rather than much higher.

And you don't think there's a risk right now of the economy coming in hotter than expected, which keeps the fed from cutting maybe less than a hundred basis points this year or maybe doesn't start until later in the year and therefore rates if the market is just the other way, we get a jump in rates, do you think? That seems unlikely.

Seems unlikely. The strange thing right now, and so I want to kind of give myself some outs is that we know that supply chains have gotten better and inflation, and particularly for things you buy cars, things at the grocery store, electronics, there's basically no inflation in that stuff right now. Prices are still up a lot from two, three years ago, but the change now is very, very low. And as a result, because consumers are still getting wage increases, you're getting your wage increase and the stuff you buy isn't going up in price and so people can buy more of it. And so December, it looks like January as well have been very strong for goods consumptions, people buying stuff. And that's starting to show up in some of the economic data. So it looks like that stuff's getting better, but at the same time, it seems like there's this generalized white collar hiring freeze going on right now.

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And in January we certainly saw a lot of layoff announcements and they were different from what we saw last year, but sort of PayPal and Square and eBay and a lot of middling tech companies that maybe aren't as profitable as they could be have been restructuring their businesses. It's not that businesses getting worse, but it's more of just like in a higher interest rate environment, investors are looking for profits, not growth, and companies feel like there's still more that they could do on that front. So the labor market has some signs of sogginess, but consumption has been very strong. And I think the labor market stuff and inflation being low is what is going to get us the cuts. But I guess if the goods consumption were to really pick up from here and lead to higher prices, then all bets are off, but that's not what I expect.

Got it. So the slowing job market, it is definitely slowing. It's still pretty, the job market is still pretty strong, but definitely slowing around a bunch of the edges. And so that seems to be the predominant force that we will cut into this year is the expectation.

The way I would think about the label market right now is that if the unemployment rate is, call it around 4%, it's 3.7, but for this we'll just say four. So 96% of people are employed. I would say about 90% are in pretty decent jobs in a good place, nothing to worry about. But if you are the fraction of people who have lost a job or might lose your job in one of these restructurings, it can be quite difficult to find a new job right now. So even if most people are in a very good spot, a small fraction are probably hurting. And again, it's not impactful at the GDP level, but for those workers it is tough. And I'm sure there are some in the Bay area in that spot right now.

Yeah, for sure. I know a few folks in that space, tech recruiters are having a hard time. They went from having really good gigs to being hard to fill that again,

I saw Google in their earnings this week had an interesting dynamic where their CapEx, so spending on AI chips and investing in AI was up like 50% year over year, but their headcount was flat. So they're kind of holding a little line on payroll, but they're spending a bunch of money on Nvidia chips to invest in ai.

Right, right, right. Fascinating. Okay, so if we look at that employment picture, what does that tell us about the housing market?

So I would say for the housing market, what matters more is interest rates rather than the labor market. Just given what could change if the unemployment rate went up a quarter of a percent, even a half percent, I don't think that would do much to impact housing demand relative to mortgage rates dropping another 50 basis points. So we have a really imbalance in terms of what would drive housing market activity and home prices where a little bit more softness in the labor market if it comes with lower interest rates, which I think it would probably boost the housing market rather than weakens sit.

Right. So that's right. So we get in an environment where we get more unemployment that encourages the fed to cut, then the rate curve starts dropping that actually spurs demand for housing more than joblessness and might slow demand for housing.

Just I think that mortgage rates are so constraining right now, and so there's a lot of room for rates to fall potentially, but I don't think unemployment would go up a whole lot. So I just think that sort of the risks of each moving are tilted more towards lower rates and more housing activity.

And while we're talking about housing and rate cuts and things, I think a couple of years ago when we were on, we had risk of recession looming, certainly looming in the media zeitgeist, right? People talking about it. I seem to remember that you were pretty much in the no recession camp because there was just too much momentum on too many fronts. And so when we think about now, and in fact I'm pretty sure I asked you this question was the yield curve I think was already inverted two years ago, which typically implies looming recession. It's still inverted. And so what do your take on risk of recession now?

So the weird thing is that you could look at, it's easy to tell a story for both sides. I could say that if inflation now is basically a two, which it has been since June, the eight month inflation has been about 2% and interest rates, the fed funds rate is at almost five and a half. That's a very high real or inflation adjusted interest rate. So that's restricted policies. That's concerning, especially at a time when the labor market has been slowing, particularly the white collar labor market, which we know there's the sogginess going on and I could tell a story about how that would tip us into recession, but at the same time, existing home sales went from 6 million a year to below four. It's a huge decline in housing activity. I think we both agree that housing activity will be up somewhat this year.

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We don't know if it's 5% or 15%, but it'll be up. Mortgage rates will be lower than they're not going back to 8%. I feel confident in saying that. So the housing part of the economy will improve versus last year. And then the goods part of the economy, the movement of goods, freight production, stocking shelves at Costco and Walmart and Target, that should be a bit better. And then you have, there is this AI boom, which is maybe narrow, but that's still activity for the economy. You have the government investing in infrastructure and chips and green stuff and EV plants and battery plants. That seems like a lot of stuff that will keep us out of recession even if PayPal and eBay are laying off people. So I think the risk of an overall recession is still quite low, but there are soft patches in the white collar labor market and white collar employers that we should pay attention to just in case those get worse.

Yeah. And are you a fan of the SOM rule for using unemployment as a metric or a trigger?

I think it's a reasonable thing to think about. And now that we've kind of maybe 3.3% unemployment was unsustainably low, and so now we're in the high threes. So if we were to get to four point a 5%, I would call that recession. So I think the move from 3.3 to 3.8 is not recessionary, but if we were go up another 50 basis points from here, that would be in the territory of where we'd have to think about it. So I think we could flirt with it, but I don't think we'll get all the way there.

Okay, got it. But that also can happen quickly. We can see that the sentiment could change very quickly.

The nice thing about the setup we have is that households do have great balance sheets. Home equity is a big part of that. And because housing really bottomed out so much last year, it's just hard for housing to be the trigger the way it has been in the past. And then it doesn't seem like tech will be the trigger either because a lot of the pandemic investments in hiring has already trickled out of the system and the AI boom probably has some legs to it. So if it's not housing or tech or government, it's just hard to see what would be enough to push the whole thing into recession. But there are certainly some soft spots.

And the housing and the household balance sheet is really fascinating because while as you mentioned, mortgage payments, average mortgage payments for new purchases are up 40%. Everybody else in the country, 96% of those people have really, really low payments, like dramatically low debt payments compared to previous

Years. And I think it's something like the effective mortgage rate that homeowners are actually paying is around 3.5%, might even be a bit below that. And it's only rising very, very marginally. So even at the end of this year, it'll probably still be no higher than 3, 7, 5. Yeah,

It's only four or 5 million people buy houses this year. And so only those folks have their payments reset. And that's why you can understand why consumers are still spending on stuff because they have significantly better cashflow than they did in normal times in cycles like this, that, and it's dramatic, it's thousands of dollars a month for a lot of people.

And I think if 90% of consumers or workers are benefiting from lower inflation and a half percent of workers are losing jobs or struggling, just the 90 way outweighs the half. And so in the aggregate we're better off even if again, there are people hurting out there, I don't want to minimize that.

Right, for sure. Which is always a tricky part of the discussion when talking about measuring the economy and the strength of the economy, especially on places like Twitter, people are like, what about the people who are hurting? And so that actually gets to an interesting question that I've been wrestling with lately. And that's the consumer interpretation of the economy has been super bearish compared to the data and what is your take on got there? Or B, when you talk about it, some people say, well no, you're looking at the wrong data or they are lying about the data. People are out there because they want to talk bullshit you into buying more. I dunno what the thing is, but so what's your take on that world of where that mismatch of the consumer view of the economy and what does that mean for the rest of the year where we go from here?

So I think until the middle of 2022 was probably where I think consumers were, right? And the economists were wrong where inflation was outpacing wage growth. And even though we were adding a whole lot of jobs and for the people who were getting jobs, again, that was great news and the aggregate workers were falling behind. So there was no question that was happening. And then starting in mid 2022, which is when the fed really ramped up their rate hikes and gas prices finally started coming off, there was about a one year period where paychecks were outpacing inflation again, but people understandably were digesting all the inflation they had already absorbed. And so they didn't recognize that. Or if something goes in price from four bucks to six bucks and then it goes to only six 30, you say, oh, well this is still a lot of inflation.

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So I think even that made sense to me where I could point to the data and say that real wages are growing again, but consumers had gone through this inflationary shock and it's understandable they'd be upset about that. And it finally seems like in the past three or four months, we're seeing this rebound in confidence. And I think it's because inflation's now come off a lot where consumers have had enough time to recognize that the stock market's rallied again. And if you're watching the news, that's an easy way of saying, I guess things are picking up if the stock market's going up and then because it looks like we're going to get interest rate cuts this year, mortgage rates finally fell. So when mortgage rates went to eight in October, I could get somebody saying, well, if mortgage rates are 8%, this is not a good economy. But now that they're back in the mid sixties and the stock market's at highs and inflation is lower and gas prices are still low, finally people are saying, oh, I guess things are kind of getting a little better. And it seems like now we're at the point where the data and sentiment is starting to sync up again. Okay,

So that was maybe the consumer mismatch with the numbers was maybe still tail end of pandemic weirdness playing itself out?

Well, I think especially the middle part of last year when inflation was falling, but mortgage rates were rising, that's kind of a strange thing that was going on. And in hindsight, maybe seeing the tenure year at 5% when it looks like inflation's now getting close to two, again, that was a sign that things were, we were due for this sort of rally in the bond market and declining in mortgage rates. And it's good that we're finally seeing that because that was a tough stretch I'm sure for people. For your listeners, 8% mortgage rates were I'm sure a really, really tough time.

Really tough, really tough. And like I said, there's still so mortgage rates are still higher than they were a year ago. And as a result, inventory is greater than it was a year ago. And that spread is increasing. You can still see that impact in the housing market. And we can see though, as you point out, that home sales will grow this year and I mean there's a lot of signal of home price increases pushing this year. So it's fascinating to see those dynamics play out in a world of unaffordability, but those payments are 40% higher.

And I think what's tough is this is a market where housing is a market, but it's also something that a lot of people have to do regardless of where the market is. If you have a birth in the family or a marriage or death in the family schools, mortgage rates might be a certain place, but you still might have to make a move, a job change. And so I think for a year, 18 months, people held off if they could maybe mortgage away insurance from three to six or seven and it's like, I'm not selling, I'm going to ride it out. But a lot of people, two years is a long time and a lot of life changes happen. And I think we're seeing in the new listings where the sellers that are selling now probably just have to sell and they've held out for a long time and actually I'm seeing it in my circle. Two people on my street are probably going to move this year, one for a job change, one for just more space. The kids are getting older and we haven't had a house for sale on my street in 16 months, and I think we're going to have two in the next six months. So I'm seeing it locally as well.

That's an interesting anecdote. Yeah. Okay. So let's wrap up the view of 2024. We have year expectation is a hundred basis points cut in the Fed from the Fed. So that's not mortgage rates per se, but it has ultimate downstream impact on mortgage rates, but the market's priced for 150 basis point move on the Fed, and you're assuming fewer less cuts because you're assuming basically a stronger economy for longer.

Well, I think it's sort of the 80% base case is four cuts, but the other 20% is probably another a hundred plus basis points of cuts. And so that averages out to 50 more. But I mean the risk of one 50 is much more likely than 50. So if I were trying to figure out what do I do about rates, I think the odds of only getting two cuts is very, very low given where everything's shaking out.

Okay, got it. And therefore wage growth continues this year,

Moderates, but probably kind of closer to that pre pandemic, three to 4% is where I think we're settling out.

I mean, that seems like a terrific gain for mortgage rates for income, right?

Yeah, I think this is a year in the labor market of general stability and the benefit for households is really going to be more about lower inflation and lower financing costs.

And then, alright, so are there other things like dynamics about the 2024 economy that you think are getting underplayed that we should pay more attention to or be aware of?

So I think there's still room. We've had the supply chain normalization theme for 18 months, maybe two years, and I think there's still room for that and fed share, Powell spoke about that at the press conference yesterday. And Delta Airlines is a great example of how this works in practice where for so long a lot of companies were looking at how are we doing versus 2019 rather than year over year because the year over year changes were so noisy and Delta feels like 2023 finally represents a stable new normal of demand. And so they can optimize their operations and resources for that demand footprint. And they think there's still more room to squeeze out productivity from that because their flight operations are back to 2019 levels, but they're 10% overstaffed versus 2019. So they think they can grow capacity without growing headcount, which is sort of good in the economic scheme, but again, speaks to not a need for hiring. They said pilot hiring is down 50%.

Interesting. Okay. So let's shift to demographic trends. I know you write a lot about millennials and their part in the cycle. So tell me what we need to know about millennials now.

Well, I think we're now at the point where the average millennial is probably 33 to 35, born in the late eighties to early nineties. And so they're fully in the phase of entry level starter home phase. And we talked about that two years ago, how that was the opportunity probably for another couple years. But I think it's interesting to look at the apartment market entry level housing and then trade up housing is kind of now it's sort of like that's Gen Z, young millennials, old millennials. And we're seeing in the apartment market that that's now at least temporarily oversupplied and we're seeing basically no rent growth and its sort of demand is still strong, but we just had so much construction and so much demand, our production still coming online over the next couple of years that there's not really a lot of rent growth in our future and what we'll have to see about when that comes back.

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But millennials have now moved out of the renting phase or into the buying phase, and we're now at the point where starter homes are probably strong for another few years. But my guess is that the big home price appreciation has mostly happened in that part of the market at this point. So if you're a builder, you can sell profitably, there's still more demand. But if you're buying a starter home today, I probably wouldn't look for a lot of appreciation over the next three to five years. And I think the opportunity that's on the horizon is more on the trade up market.

So starter homes, there's still demand there, but then there's sort of that demand starts to taper off as the millennials age out of starter homes. And so that'll be interesting to see if that weakness plays out there. You also talked about apartment supply, and so we've been building a lot of apartments. Have you paid attention to regional impact of where we're building those apartments?

Yeah, so it's interesting where, because so much of the construction was in Charlotte and Austin and Phoenix, Dallas, Atlanta, those markets have negative rent growth and we could see another year of negative rent growth just because there is so much supply coming, even though net absorption has been quite strong because they do have the demographics, people are moving there. It's just that supply growth has outpaced demand growth. Although if mortgage or interest rates where they are, we are seeing new apartment starts have tapered off, which should impact supply in 20 25, 20 26, that's probably the opportunity for rents to rebound in a couple years. Starter homes is probably where apartments were three to five years ago where we're going to build a whole lot of 'em, but prices have already moved up a lot. And if you buy a starter home today, it's a place to live and you need a place to live. But probably if you're going to get home price appreciated, it's more from a decline in mortgage rates rather than something in just starter homes appreciating just because that monthly payment is so high, it's hard to see how that's going to increase from here for another two, three years

Really is hard to see. And it's why the appreciation we're seeing right now was surprising to me because we are bumped up against that affordability challenge. So on the construction side, so we had a good boom in starter home, and I think we can see that in things like the size of the homes has actually been falling a little bit, which is a bucks a trend of previous years. I think one of the surprises for me last year was what a blockbuster year for the home builders 2023 was, even while rates were high, unaffordability was high and we had fewer transactions overall, but it was a banner year for a lot of home builders.

Tell me about what happened

There.

They had the perfect storm of, there was very little resale supply people needed to buy and then mortgage rates were high, so builders could offer mortgage rate buy downs and they could sell, even when mortgage rates in the market were seven, they could sell at five and a half. And then there was very little inventory for sale. I think I saw a Redfin story today that 32% of all homes for sale right now are new homes. And historically that was more like 10 to 12. So we're probably peaking on that level on that metric just because resale supply is picking up. But I think we'll look back at 2023 is as good as it gets for home builders. They'll still do fine, but I think they'll look back fondly at what a great year it was for 'em

And they were well positioned going into this one as opposed to having too many. And the process, they weren't places where they were overbuilt or it seemed like there's a lot of starts underway, but

Well, and one more thing they had going for them was that they had this huge backlog of supply chain issues, so their build time really extended and as that compressed, and most builders have said that that's largely fixed at this point, they were able to convert inventory into cash and then turn their inventory a lot faster. So just from a kind of return on capital basis, just much, much better. And they've also repaid debt, their leverage is pretty low. And for the first time, I would say since the mid two thousands, they're in a position where they can play offense and look to expand any new markets and do more stuff, which is interesting. And I think a theme for this year, I'm watching to see what they do now that land costs have gone up, but they don't have to repay debt anymore.

Yeah, that is interesting. Does that mean that there are tertiary markets that start to benefit like Greensboro?

It seems that way. Yeah. And also just the outer Phoenix rather than core Phoenix just because if you are trying to hit a $400,000 price point for entry level buyers with land prices where they are, maybe you can't do that in core Phoenix anymore. So you've got to go farther out. You've got to go to markets where maybe builders traditionally haven't been. Maybe the builders that are there are smaller, less efficient, and so Dr. Horton can go in and sort of use its scale to throw its weight around and undercut existing builders. So that's something I'm watching this year. Okay.

And have you watched some of the regional differences, not maybe with home builders, but also in the markets? One of the trends that I thought fascinating from 2023 was we had the big slowdown starting July one of 22, and we had buyers and sellers pull back. We had our first price adjustments so that by April of 23, we had negative year over year home price appreciation across the country, April may timeframe. But then by the end of the second half of the year, we moved back to home price climbing regionally. One of the things I noticed was the western, the boom markets, the western boom markets slowed way down in 22. Most of those recovered in 23 like Phoenix. You mentioned Phoenix and Phoenix surprised me by how quickly it recovered in 23, but Austin, Texas did not and a few others did not. Do you have a take on what was going on then?

So my thought is twofold. If you look at an Austin buyer, because prices went up so much and then mortgage rates went up so much, just the payment shock was ridiculous. And so it really just had to come down. And then if you think about, well, who's the Austin buyer? It's probably somebody who lived in California and maybe they had the mortgage rate lockin, so they had a 3% mortgage rate in Milpitas or Dublin or something in the East Bay. And they were like, well, I'd like to move to Austin, but now I'm caught in the mortgage rate. And so people were stuck in California when existing home sales are below 4 million, people aren't leaving or buying. And so I think that if rates come down, you kind of get this double benefit for Austin where payments get better and then Californians can sell and move, and then you can get that sort of migration pipeline going again. Okay.

So you think that if rates fall substantially this year, like mortgage rates drop low sixes, then that will probably reignite some of the California Texas migration pattern?

Yeah, higher migration is a big theme for me this year. Again, if existing home sales go to four and a half million even then the move from 3.8, 3.9 to four and a half, that means more sales and more migration because a lot of buyers are migration buyers. And so just more transactions should mean more migration.

Great. Okay. So what other implications of higher migration should I think about? Well,

So again, it means more demand for your Boise and Austins your big pandemic markets that have been shut off for two years. And then also if people can then leave New York and California again, then that opens up inventory in those markets for people who maybe want to buy in New York and California. So it kind of unclogs the whole system and gets things going again.

Great. Are there other implications like equities or other implications about higher migration that you play that theme out further?

I mean, I think there are so many. You think about the economic impact of a home sale, it's probably about 10% of the home price because you have the mortgage that the lender, the underwriter, the appraisal, maybe some furniture moving costs, photographers paint. There's just so much that goes into that. So if you get another, let's say half a million home sales this year at an average price of 400,000, oh gosh, I'm going to have to do math inma on the spot. I don't know. You take 10% of that. It's a pretty big number and it goes all to, it's very labor intensive income because it goes to people who are directly involved in the housing process. So a lot of housing related industries and communities stand to benefit.

And so higher migration flexibility it generally leads to is another step of economic strength for 2024,

I think so. And it might not be a big boom impulse, but it helps mitigate recession risk. That's probably the key story.

Right. Okay, great.

Yeah, just home sales up 10% probably doesn't happen during recession, right?

Yes. Okay, that's great. And it also speaks to your point about why the rate adjustment is probably a bigger deal than an employment adjustment. It probably is more impactful for the housing market than just having employment unemployment start to rise.

Yeah, I think an interesting way of thinking about this is if two years ago, supply chain problems meant lumber and appliances and garage doors and trucking and all that, the big supply chain problem remaining in the economy is interest rates. And that's something the Fed can directly fix whenever they want. And so I think most of the problems in the economy can be fixed with lower interest rates. Therefore the Fed can really mitigate recession if and when they get spooked.

The big supply problem remaining is rates, is interest rates. Okay. That's an excellent way for me to think about it. So higher migration is one of your big themes for 2024. What are your other big themes?

I think it's normalization in the economy and then the impact of lower interest rates. And it's easy to think about the direct impact of wealth. Mortgage rates go from seven to six and a half or six and a quarter, that means this for payments. But I think so much of the past two years we've thought about vibes in the economy, what are the vibes? And I think there is momentum in the economy where if things are getting better, that tends to have a life of its own. So if you just have businesses that have had negative comps for 18 months and those comps turn around, they feel better, they spend more, and that has some flywheel effects. So I think when we get into spring, as those rate cuts begin and the year over year comps get better, what does that do to business sentiment, consumer sentiment?

Alright, that's excellent. So we go from the vibe session to the vibe expansion.

Right, exactly.

Alright. Okay. So has your view of the second half of the decade changed? So we talk about themes for 2024. What are themes for the rest of the decade that we should be thinking about?

I think the millennial housing story is going to be with us for years, and it's kind of just this thing that'll live in the background and maybe at some point it'll be front page, but there are just this wall of demand that is going to be there for a long time. And there are people who want to get into entry level housing and by the time they do that, it might be at an age where traditionally people have looked at trade up housing. And so if rates and affordability ever allow it, I think you could see rapidly just people push into the next phase of housing as they can afford it. And then if we're really worried about a big recession risk, to me it would be when AI spending right now, I'm not going to talk people out of an AI boom. Sure there's going to be one.

(37:51)
But what's interesting is these chips are so expensive and play the AI game is so expensive, and yet there aren't any business models associated with, nobody knows how to convert an AI chip into a dollar of profit yet we're all just kind of trying to figure it out. So Microsoft's built its copilot and there's chat GPT and the image viewers, but there aren't any profits from this yet. And so if there were ever a point where the AI CapEx were to tail off at the same time that maybe the EV battery plant stuff were to tail off, that could be kind of the big investment collapse that would be associated with a recession. So that would be like if you're looking for a real recession we've seen in the past like 2001 or 2008, that's the sort of thing I would worry about. PayPal laying people off or interest rates being a little too high. It's when does this big AI green investment cycle end, and that's probably still years away, but it's probably happens before the end of the decade. It wouldn't surprise me. Right,

Right. So we have a normal, it is a mega boom in the same way that early.com or mobile, it's another one of those phases, and so it's got to go through a cycle of its own. Okay. That's a good one to keep in mind. Demographically, when did the boomers finally sell their houses?

Yeah, I keep pushing it out at this point. I think it's maybe early 2030s. People are living longer and they're staying in their houses longer. So it's probably not until people are in their eighties. And then that's really, you don't even start getting that until the latter part of this decade. And then for it to show up in the aggregates, it's probably not until the early to mid 2030s, and that will certainly free up supply for millennials, but what kind of condition will that supply be in? Will those be considered trade up housing if they haven't gotten any work in 20 or 30 years? So that to me is again, where the trade up housing story will be a big one in five or 10 years as millennials are looking for those homes. And maybe you can finally get that house in Pasadena, but it hasn't gotten any work since the 1990s and you'll have to put probably hundreds of thousands of dollars into these homes to make them equivalent to what a toll brothers can build today.

The difference is that you're doing it in Pasadena rather than way out in the Inland Empire somewhere.

So that'll shift the residential construction impact of it from the exurbs and maybe tertiary markets back to core markets just because those core neighborhoods haven't opened up in so long.

Yeah. So really though 2030s before we see that kind of,

I think so. I think it'll start getting a little better by the latter part of this decade because builders are building more, it looks like we can probably get to 1.2 million single family starts, maybe a little bit more than that, and as sort of the imbalance between millennial demand and boomer supply narrows, then things start getting a little bit better. But I think in terms of when does that boomer supply really hit the market, probably not for another eight to 10 years.

Wow. Yeah. Okay. And people have been talking about it for 10 years already.

Well, I mean, we talked about the boomer retiring thing and it seems like until covid, you really didn't feel it in the labor market. And we finally just hit that point now. And if you think housing lags the labor market by maybe 10 or 15 years, then we still have a ways to go. We still

Have a ways to go. That's fascinating. So there's where we can see cyclical changes in the second half of the decade. We still have mostly millennial tailwinds pushing us through the second half of the decade. It shifts from starter homes to the trade up homes as the millennials roll into their forties, and then maybe after that there's finally a space in the inner close in markets which shift us to a rebuild mode rather than a build from scratch. Does that sort of sound like the

Yeah, I think unless we get a big wave of immigration, we're not going to need a lot of increase in housing supply in the 2030s. It'll just be about fixing what we have. And maybe that means some urbanization or gentrifying. We'll have to see. I mean, we can do a podcast on it in six or eight years and see how it goes.

There you go. We'll still be at it. So you are really great at connecting the dots and putting that framework around the trends and describing it. Obviously you write it very well in Bloomberg. Tell me about what information you consume to put those pieces together. Tell me about, can you teach me to build some of the frameworks that you do? Talk to me about how that works.

So I obviously love your videos. I love the Redfin weekly update that they do. I love going through the home builder earnings calls just to understand what they're seeing and thinking because they're the ones building the homes. So what better way of figuring out the housing market than going to the people who are building them, and then your John Burns research, Allie Wolf, a lot of the people we talk to, anyone involved in the industry to see what they're seeing and thinking, and then just kind of watching just broad economic stuff to see what pops up related to that. So unemployment rate, stock market, things can change year by year. So you always have to be nimble and pay attention to see, I don't think weight loss drugs will change housing much, but things always pop up and so you never know what the next thing's going to be.

Yeah, right. Exactly. And are there other macro data sources that you go, this is my daily or my weekly check-in to see how I am connecting the dots for the world?

I think just the same stuff as everybody else. So the reports from the government, obviously Bloomberg, I'm going to give them a shout out and just kind of the big sources. We all kind of have the same information and just about how we interpret it.

Mike Simonsen (45:01)

Yeah, all right, that's fair enough, fair enough. So, okay, what, let's see, what didn't we cover yet today? What's, what is like, one of the questions I like to ask my guests is like, what, are the headlines getting wrong right now? You know, where are we, what are we missing? 

Conor Sen (45:24)
Whew. Yeah, nothing immediately comes to me. We've covered a lot. I think just, we're so shocked by all the economic trauma of the past 20 or 25 years and we're waiting for that next thing. And it just seems like we're generally in a period of stability like we haven't seen since the nineties. And I don't know if we're gonna get a big boom or bust over the next few years, but hopefully we can just. 

Conor Sen (45:47)
build the homes we need, people can move into them, and we can try to get some stability restored to the housing market rather than this just crazy one we've had seemingly forever. But I'm hoping that 2024 is a start of normalcy rather than just the craziness of the past few years. 

Mike Simonsen (46:01)
Okay, I like it started normalcy. Um, speaking of normalcy, uh, one question that people have been asking me lately is, uh, are there election year impacts that we should be planning for or expecting? Uh, they ask about housing. Um, do you have, are there, are there election year things that, that come into play? Um, 

Conor Sen (46:28)
I mean, the stock market in election years often is kind of a grind just because people are just waiting around to figure out what the election is going to mean and it's, you know, I actually don't want to step into that too much, but I don't know that the 2016 election had a huge impact on the housing market and we, because politics has become so all consuming, we assume it's going to have a big impact on every industry and there are certainly impacts, but I think it's sort of more psychological than direct, like 

Conor Sen (46:58)
This is, I mean, I guess you would say the salts or maybe mortgage interest rate deduction with the tax cut and jobs act, but I don't, I don't feel like policy is a big part of the debate of this election. It's really much more identity existential, but no one's really campaigning on their housing plans. So I don't know that, uh, there'll be a big housing impact, regardless of what happens. 

Mike Simonsen (47:14.)
Right. 

Mike Simonsen (47:19)
Yeah. Okay. I think that's a fair assessment. And looking at housing in election years, 2020 was like, that was, there was a crazy year, it had nothing to do with the election. 

Mike Simonsen (47:40)
2016 was just the middle of an up decade. 2012 was just turning the corner from the 2008. Like all of those were far bigger macro global things that impacted housing. And they were essentially independent of the election. 

Conor Sen (48:04)
Right, and I think that's gonna be the case again this year. I don't feel like anything that happens on the campaign trail will really have a big impact on housing. 

Mike Simonsen (48:11)
Yeah, okay. Connor, it's been terrific. I really appreciate your time and your insights. I got pages of notes that I've been taking as we're talking, so I always appreciate your insight. So, Connor Sen on Twitter, the Bloomberg Opinion column, any other place that you're publishing lately, those are still the main ones. 

Conor Sen (48:34.)
I feel like I should get more on LinkedIn, but I don't do a lot there. But maybe that'll be a New Year's resolution for this year to get a little more active there. 

Mike Simonsen (48:40)
I'm trying to do a little more on LinkedIn as well, like diversify just a little bit. And it feels weird going, okay, I just posted this on Twitter and I put it. I'm simple. But, okay, well, I really appreciate it. And everybody, this is the Top of Mind podcast. And if you enjoyed this show, I always like to ask for a reviews, give us a bunch of stars on your favorite podcast network that helps other people find. 

Conor Sen (48:50)
Yeah. 

Mike Simonsen (49:10)
the show and we'll be back next week with more data and another couple of weeks with another interview. Thanks everybody. 

Conor Sen (49:23)
Thanks Mike, great to be here.