Fortune’s Lance Lambert on Economic Trends & the Housing Market

Welcome to the Top of Mind podcast from Altos Research. This is the show where we talk to real estate industry insiders and experts about the trend shaping the market today. Enjoy the show.

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Mike Simonson here. Thanks for joining me today. Welcome to the Top of Mind podcast. For several years now, we've been publishing every week the latest market data in our weekly Altos research video series with the top of Mind podcast. We're looking to add context to the discussion about what's happening in the market from 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 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. The market was so frozen solid last year, it was surprisingly strong this spring, and now with mortgage rates, the landscape is changing again. So what happens next? If you need to communicate about the housing market to your clients, buyers and sellers, go to altos research.com and book a free consult with our team.

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We can look at the local market, your local market. We can help you communicate using market data in your business right now. Okay, speaking of communicating about the housing market, let's get to the show. I've got a great guest today, Lance Lambert. Lance is one of the best housing analysts on Twitter for sure. He's a former data journalist@bloombergandrealtor.com and he's now the real estate editor at Fortune Magazine where he writes on the housing market prolifically. He does a ton of great work on local markets on Twitter, and so we're going to dive into local markets. We're going to talk about the future of the market. We've got a lot of things to really understand about what's happening in the housing market right now. So Lance, thank you for joining me.

Yeah, thank you for having me on, Mike, and I'm a huge fan of yours and the data that you put out and the insights and one of the things that I really like about you is you tell it right how the data shows you and you're not afraid to kind of break with what people were thinking at the time and you let the data lead you. And so for me, you're a tremendous resource too, and I really appreciate all the work that you do.

Well, thank you. And I confess that sometimes I am afraid to break with what the other people are saying, but sometimes you just got to trust the data and sometimes it's hard to trust the data because it says things you don't expect.

Yeah. I talked a couple weeks ago with KB Holmes, c e o Jeffrey, and he said something interesting and he's been the c e O there since 2006. So he is seen the boom there, that bust and the really slow recovery. But he said what marks the pandemic housing market is how fast the shifts have occurred both ways throughout this, whether it's March, 2020, the recovery that summer in 2020 with the rate shock in summer 2020, that direction, and then right off the bat, like day one this year, January 1st, that shift that occurred. If anything, what we're seeing now is actually one of the few periods where it's kind of a little bit of a slower shift versus those other four.

Yeah, that's a really good point. I hadn't thought about it that way. Before we dive into all that stuff, we got lots to talk about there. Give me a little bit of a background of how you got here. You're a data journalist and really a great example of someone doing visualization and communicating with the data. Well, so give me some of your background and a little bit of your journey to how we got here right now where you run the data for the housing market for Fortune.

So I wanted to be a financial journalist. I had studied journalism in school. I was also an econ grad, so that was kind of where I was aiming for. And I worked at Bloomberg for a while as a data journalist there. I ran all the flagship rankings for best business schools. So I'd fly out to Harvard and meet with their deans. I'd go to m I t and really was obsessed with business school stuff, but I reached a point where I was thinking about leaving journalism and becoming a data scientist. So I was taken a lot of data courses outside of work and one of the things I thought would be smart was to do a pivot job to where I would still be a journalist, a data journalist, but I would kind of get closer with the data science teams and economics teams. And so I took a job@realtor.com, I was a data journalist there and got to work close with their data collections teams, their team of economists, and I think@realtor.com just going through housing data all the time.

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I just kind of fell in love with it in a way. It's interesting, it's geographical and it's kind of fun to be able to learn to read it and at times you'll think you've got it down and then there's curve balls and you have to kind of learn from it. And so I left realtor.com to go to Fortune Magazine where I was going to build Fortune Analytics, which was a data newsletter for executives. And then I had some other stuff that I was doing. I built a small business for them called Fortune Education, which is a lead gen business. But the whole time the housing market was going through so much crazy stuff and I was just really interested in it. My tweets, all of this, this is just because really interested in what's going on and to see a boom and then kind of be like, what's going to come after this and try to figure that out is really why I'm so sucked into it.

(06:11)
My dad, he had started a business in the early two thousands, a home edition business. He would build either barns or add bedrooms onto homes. And when the bus occurred, my dad's business didn't go down 50%, it went down a hundred percent. There was just nobody was doing home editions once it started to slow. And his actually was completely gone by end of oh six or end oh seven even before the recession really occurred. And so to have that firsthand seat and then my mom and stepdad, they were home flippers and that last flip they did, it took them nine months to sell it and they barely broke even, but a lot of their friends and stuff were flipping and they held onto them for several years and I think some of them actually foreclosed. So to watch that growing up is I was in high school, just kind of got me fascinated with housing in a way too.

(07:14)
Not that I was fascinated then, but it's as I got older and was playing with real estate data, I think it gets, you see what type of downside there could be. And I think that seeing ghost in a way, I think that plays out all the time in housing where even when I was talking to KB home, c e o, I asked him because now they're going out and they're buying more land. They already have the land for 2024, 2025, so they're out securing land for 2026. But last year when the market rolled over very quickly, they stopped buying and they were getting out of projects. And as you've seen things shift this year, they're now going out and they're acquiring more land, ramping everything up. Nothing's paused for them. And so I asked them, I was like, do you have any regrets? You could have been buying more land at better prices last year.

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And he's like, absolutely not. I've seen how fast this market can shift and what type of downside there can be. And he said also, they've never had problems acquiring land and all the problems with land or when they get land that isn't the spots that they should have gotten and they have trouble offloading it. And so I think even the highest people in the real estate world, they kind of see ghosts from that period. I mean it really was a housing depression, like six year depression, and the industry's going to see ghosts because of it, and it made the industry more conservative over the past 10 years in some ways that are bad.

So your parents were home flippers. How does that shape your view now? For example, like you said, there are ghosts of 2006 and aid in a lot of this market now. Do those ghosts, do they show up in your work?

Well, I think when you see what happened in the end of 2020 and you see what happened in 2021, all of that amateur jump into the housing market, people buying the Airbnbs, people getting the rental properties, BiggerPockets just taking off. I think that to me was like, oh, I've kind of seen that part before. And so what was so interesting over the past few years, it's like it points, I'm like this, there's some concerns here. But then you also, it's like there isn't as much, there wasn't as huge amount of transaction volume. There wasn't the bad mortgage products. Even now inventory's very tight. There's not a lot of existing resale inventory, so you kind of had to follow all the dynamics. But that part of it, seeing that frenzied bit, that was kind of a red flag having lived through it and seen it with my parents where they're like amateur home flippers. They both had day jobs, my mom and stepdad. And so for them to have jumped in and doing flips, that was kind of crazy. And then you look at my dad who quit his warehousing job to go build home additions. Well, that was only a part of that boom. And now that I actually understand the data, that was a part of the cash out refi boom. That's what was really happening I think. And that's where I think my dad was making his money is people were doing the cash out refis, doing the home additions.

So what market were they in doing the flipping and the additions?

My whole family's pretty much the Cincinnati market, and that's where I live now. And I was living in Manhattan, my wife and I and our three-year-old when Covid hit, and this isn't a joke, that first week of the lockdowns, I went down the elevator to leave Fortune. They were like, you guys will work from home in the next two weeks. And I was like, I'm probably going to figure out how to take my job remote from this. I was like, you know what? I'm going to do really well and I'm going to show I can do the job well and then I'm going to take it remote. And that's pretty much what I did. And I was driving around trying to find spec homes for sale in Cincinnati during April, May, 2020, and I was the first person of fortune to ask to take my job remote.

Wow. And so it was very prescient of you also to be interested in buying a home in that moment because it was not yet clear that the market was going to explode. It did.

Exactly. Yeah. It was kind of like my opportunity to get out and I just kind of jumped on it. And also another thing was I had a lease for a year in New York that I just signed. So I wanted a new construction to be completed by at least February, 2021. And that's why I was really jumping on it faster. I didn't know how great the timing was at the time. That part was interesting to watch unfold. So that goes to one of my other theories that I've had, which is I believe personally that housing has played a huge role in the pandemic economy and then also the inflationary run. And so one theory that I have is that a lot of the people who were leaving Seattle, New York, like myself, San Francisco, LA and them buying these homes in other places, they needed a lot of stuff. So when I bought my home, I went ahead and immediately bought washer dryer fridge. I'm living in a tiny New York Manhattan apartment. I needed everything. I had to go out to Amish country to buy my kitchen table and stuff, which was going to take nine months, the couches, everything. And I think that is what helped to gum up the supply chain in a way was the pandemic migration. And that housing demand boom is one of my theories that I have.

Yeah, as you lived

It. Yeah, exactly. Yeah, having done it, and then when I was buying stuff for the house, my sump pump, it went up like 150% for sump pumps. There was just so much demand for them. And so to kind of see stuff like that. And so I was in a rush to buy things. The prices were moving up so fast, and that was even before the home was done, and that's when the economy still had a seven, 8% unemployment rate that boom was occurring for all of those different goods.

So you were feeling inflation way before it was showing up in the numbers.

Yeah, exactly. And you would see it in your date of course, because the housing inflation data lags so far. And even the things like k sch and stuff took so long to catch it up to it. I mean really it was off to the races right off the bat that summer 2020.

Yeah, we had had three weeks of down market. We had five weeks until it had recovered. Totally from that high point, it was unbelievable. It was a five week correction and that was it. So speaking of that frame of that, the living through with your family, am the bubble burst, especially in the social media world that you and I publish into, there's a huge chunk of folks very vocal who are expecting bubble to burst now and home prices went up and it's very easy to imagine reversion to mean and so that they must come back down. And first of all, what's your view on do you think prices must correct, will correct down, and how is that colored by what you lived through in 2006, 7, 8, 9, 10?

Yeah, so I think one thing that's really interesting is to look at the last three recessions. The first one, the early two thousands at that time, we went into a recession, but housing actually started to boom. Rates had went lower home, prices started to take off then in the early two thousands, and then you have the oh seven rollover, which is essentially the biggest housing depression of the century for the US and prices crashed and it's like the only nominal price crash nationally since the Great Depression. And really it's a huge historical outlier. And then you have the 2020, which is we go into recession and rates drop and housing actually boomed. So of the past three recessions are three of the biggest outliers for housing in like 50, 60 years for recessions. They're very unique ones. They're not like the seventies, the eighties, which were very much like construction bust, but then prices held stable.

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And so we don't have the things that we had in the oh 6, 0 7 8 runup. We don't have the bad mortgage products. There wasn't a ton of people even today who are getting into the market at this deteriorated affordability. I think that actually matters for housing that we have. So low transactions at the point in the cycle where affordability is deteriorated. Last cycle when affordability deteriorated, there was still a lot of transactions happening. And so a lot of people were getting in who were getting stressed and the lending standards were very different then. And then when unemployment broke because it broke alongside a property bust, it was actually a very deep recession, lots of layoffs and it lingered for a long time, which is a huge pain point for housing in the economy. And so I don't like to make any calls. I try to stay away from that.

(17:30)
I see myself less as a housing analyst and more of somebody, a journalist who's very informed in the space and can ask some of the tougher questions and also has some of that skepticism, which I think serves me well in both directions. But what I do think is that what if unemployment were to break? I think it would probably be different than either of those three stories, the 2020 boom and then 2000, 2001, the affordability was in a much better place going into those. So that I think is the element that is different that'll keep maybe this from being the boom that was the 2020 recession or 2000 recession, but then I also, it's not the oh eight or oh 6, 0 7, 0 8 9 kind of lead up, so I really don't see that type of downside risk even though affordability is so deteriorated because existing and resale supply is so tight and things would have to change so quickly there and they just haven't been. I think it would be a little bit of a different story right now if let's just assume and say we're heading for recession. Let's just say we are, not necessarily that we are, but let's just assume we are if we are.

(18:57)
What has not occurred in the lead up is active listings haven't shown meaningful growth. We got the three, four months last year and then since then we've really tightened up and we haven't had that huge jump up there. So I know I'm not doing a great job of answering your question, but that's kind of how I see this one. It's different than the past three we've had, and it's also not the seventies and eighties where it's like construction bust because we're not overbuilt for single family homes. Now there's arguments for multi and some submarkets, but nationally for single family homes, I think a lot of the evidence, unless you think that the vacancy rates are complete nonsense, I think there's a structural need. And so if we were to go into a downturn, I think what you could see is what we saw in the second half of last year, which is builders have these great margins and so the cycle rolls over further on affordability, they just roll out more mortgage rate buy downs, they cut prices, they offer money at close, they still have the margins that if they need to go further, they could.

(20:16)
And so that's why I don't think it's the seventies, eighties construction bus type setup either.

Great. I think that's a terrific answer to the question. I appreciate that. In there, you said the skepticism serves you well on both sides. What is your skepticism right now telling you? What are you looking at that's maybe conventional wisdom or you keep hearing this but you're like, ah, I'm skeptical of that. Where's that radar going off for you?

Well, one of the things that I think could change, and so let's look at Austin. Last year with Austin, the inventory and active listing numbers for Austin were bottom of the barrel. For history of Austin, they were so low, but Austin, when the demand demand shock occurred last year, they had some tick up in new listings a little bit and it didn't last too long. But what you really saw is that days on market really shot up there. So because the churn of homes stopped moving off the market as quickly, they were able to go from that super bottom of the barrel, like 2000 active listings to 10,000 super fast they shot up. And a lot of that was just days on market like normalizing, and then they went further than normalized, they really shot up. So I think if there were a situation where days on market could move up very quickly, I think you could get breathing room on actives fairly fast given just how low days on market is.

(21:52)
It's just not normalized. So I think that's one part where I'm like, I stay kind of alert there. I don't talk about it much, but I kind of think about it then. But on the reverse side, it's like, okay, let's say downturn hits mortgage rates fall, that's an affordability improvement. So that's kind of like that. It's like where would days on market actually go is one of the big questions for me then. But if it's a situation where days on market shot up really fast really quickly, it could get more markets I think into correction mode.

Got it. So Austin is sort of the canary in the coal mine that implies that the conventional wisdom is like we're kind of screwed on inventory for a generation, but Austin shows us that if buyers go from multiple bids to no bids on a house, we could indeed see that inventory story change quickly rather than taking multiple years.

Yeah, I think that's it. And it's not like it throws us back to the crazy high inventory levels of the past, but I think it could get us closer to pre pandemic levels in some markets really quickly. And what we've seen there is the markets that have done that really quickly because affordability is also so deteriorated, have softened up more on prices. And I think the issue for the bears is just they haven't seen much of that. So many of the markets across the country have tightened up so much for actives despite affordability being so deteriorated. So I think how I see the market is there's a huge tailwind which is very tight existing and resale inventory, and I think there's a huge headwind which is deteriorated affordability. And so they clash. And because they are each such strong forces that if the equilibrium moves one way or the other, I think it can move the market fairly quickly.

(24:02)
I think that's what happened this year as we came into the year resale and existing inventory was so tight, affordability was deteriorated, but all it took was some buyers regaining confidence and the seasonality effect coming back. And I think that's what kind of bumped it up. And I think it's possible that right now we could be seeing the reverse of that where for the second half of the year, the weaker seasonal period, this headwind is still there despite how strong things were in many markets in the first half. And now that rates have kind of bumped up a little more alongside the seasonality, I think it kind of moves the equilibrium the other way. And so it'd be interesting to see how the second half of this year plays out. And then if the economy is still in its strong place that we are now, does the other side of the market that tight resale and existing inventory next spring do the same thing and just kind of grab it back?

Yeah. All right. Well, I really appreciate that approach. Tell me about your methodology for, you do publish a ton of data, you use a lot of sources, but tell me about what you do to stay fully informed, to keep yourself fully informed.

I talk to a lot of people and I usually like to talk to them for an hour. And I think if now I haven't talked to you, but I also kind of watch your video so I know where you're thinking. And that's what I try to do is I try to understand how people interpret data. Once I do that, it builds for me the more that I can see how different people interpret things and what data they've collected, it's helped to shift how I look at housing. One thing that I did in the spring of 2022 last spring is I went to a lot of the different economic groups like Moody's and some of the other ones, and I got their risk scores by market and I just did a spreadsheet and I put them all in and I just waited them evenly across it.

(26:13)
It did a standard deviation, weighted 'em evenly, and it told me that the most risky market in the country was Austin and Boise, and then it was Phoenix and then it was Las Vegas and Reno. And so when absorption started to break last summer, and those were the markets that shot up very quickly for actives, it was like, okay, I think we're kind of seeing something play out correction wise with these. So I think that was helpful. And I think just going out and constantly trying to find more data, because I'm just kind of interested in what's out there, has kind of helped to inform me too. And I'm always trying to create new charts. And so one that I rolled out this past month is the net profits of the 10 largest publicly traded builders in the country. And I think that chart's great because it shows just how high margins have stayed. And then coming into this year, they cut into them a bit to find the market, and then now in the middle of the year, those margins went back up a bit. And I think that what that tells us is if in the second half of this year as things slow down further builders because they raise prices a bit this first half of the year, they'll just cut into the profits, roll out bigger buy downs and go find the market again if they need to.

Yeah. So the risk scores that you looked at last year actually seemed to be precise in predicting the areas that had their most risk.

None of them were precise standalone, but when I aggregated them all, that's when I got the good stuff. So some of the risk ones like CoreLogic's risk ones, they didn't do as well with the Boises and Austins and stuff, but what CoreLogic was great at was the west coast, the very high cost markets that have had those acute housing shortages for so long, prices got so high. And so I think what it's always going to be now from Seattle down to San Diego, anytime rates move up quickly, there's just more of a shock in those markets because prices are so high that people, there's an initial shock and some of the data just didn't catch that Moody's as great for the west coast, but Moody's was great for the boom towns that had gotten really far beyond their local fundamentals like Austin, Boise and some of the ones I mentioned. But once I aggregated them up, it was like, I don't know, it just kind of matched closer to reality than any one of them by itself.

That's neat. Have you done that risk analysis for this year looking at next year? Do the markets change?

Not as much. I'm kind of still sticking with what I've had, and I kind of still think the risk ones are probably still in that order of the Austin, like the secondary markets where local fundamentals have gotten distorted so far. And then if you have a slowdown in migration that really puts those risk, those markets more at risk.

Yes, right. The California people paying 150 grand over asking in Austin when rates are 3%, it's a couple hundred bucks a month when they're 7% I don't do deal.

Yeah, exactly. Yeah, I think that's it. And I think some of the west coast markets were helped this year by the fact that because they have such acute housing shortages, they just never got the active listing. Growth, I think is one of my theories. And then the other thing is I think the stock rebound and some of the confidence regained in the tech sector, not a ton, but just enough I think really helped those markets. And if you go and look at the price data from 2018, while you didn't really see markets like San Francisco and San Jose get hit, they did in 2022, what you do see if you go look at that data is that those were some of the few places where prices sunk a little bit like San Jose, San Francisco, Seattle, San Diego, not a ton. They would get just a couple month over month negative readings.

(30:39)
But I think what it told us is that in a way, the rate shock we saw last year was just, and I think I've kind of heard you or Logan say this too, but it was kind of like the 20 18 1 on steroids. And so I think what it tells us now is if you ever get really strong rate shocks, you'll get an initial dropdown in price in the very high cost Western markets. And a part of that is because not only are they rate sensitive because the price price are so high, but because the sectors of the economy are also rate sensitive, I think that kind of explains it. At least that's how I kind of see it.

Yeah, I tend to agree with that, that the rate shock gives us initial price cut, it gives us our days on market climb and therefore it gives us an inventory. So rates up, inventory up rates down, demand is spurred inventory down because we're buying more. And I follow that pattern I think similarly. So one question. We've been talking about the west coast and the boom markets, but you're in Cincinnati. Were you surprised at how Cincinnati and the Central and the Northeast responded this year especially? Were you surprised by that?

I wasn't as surprised with the Midwest. The Northeast was kind of surprising because the prices are so high. The Midwestern one was, it kind of made sense because there's a, well, let me just say it was interesting and surprising to see what overall has happened across the country and there's been a lot of resiliency, not even in the Midwest and in Northeast, even a lot of these West coast markets. So to see how fast that resiliency came into effect, that was very interesting. But I think in general, Columbus, Lexington, Cincinnati, Indianapolis, Louisville, Cleveland, Pittsburgh, it wasn't surprising for me and part of it's because I know so many people who live in LA or New York or DC who moved home during the pandemic and people are still moving home. I have a colleague here, she moved from LA back into the Cincinnati area. And so still kind of seeing that too, so that firsthand experience and understanding that the work from home arbitrage is still alive and well, that didn't make the Midwest part for me too surprising.

(33:19)
That was kind of understandable. Now what's been interesting to see is how much of that has occurred across the country in different ways. And so what I mean by that is what you've seen happen because affordability has become so deteriorated, you've seen people shift expectations to give themselves an affordability improvement. And what I mean by that is people looking at other cities like Midwest, Northeast, and when I say northeast, I'm talking about Syracuse, Rochester, Harrisburg, those types of places. And then you've also seen people move down the ladder, get a smaller home, move further out, making expectation shifts that have translated into the top end of the market being much colder than the bottom half of the market right now, like entry level homes, even in San Francisco and Seattle, the Zillow data shows that San Francisco in the bottom third of the market is only down 4%.

(34:30)
And in Seattle it's only down 1% and in the top third of both of those markets are down at least 10% still in the Zillow data. And so I think those affordability improvements because affordability has deteriorated so fast so quickly has been interesting to see. And then also the builders now are shifting more to smaller homes and a lot of people have went to new construction because they're one of the few places in town that'll give mortgage rate buy downs, that'll give money at close, that'll throw those incentives in. So because affordability is so deteriorated, the buyer is desperately seeking it out and all of the places that have relative affordability, they've seen much stronger and resiliency. On the price side,

I think it is under publicized how the builders have had the power with mortgage rates this year, and that's really been a catalyst for buying new construction. It can be significantly cheaper if they're going to buy down the rate to the fives suddenly that is a lot cheaper for that monthly payment. I think it's been under noted

And that one actually matters for the economy. That's why I love that builder profit chart that I've just made because the fact that the builders can set their own rate environment like Jerome Powell can set his, but then they can set theirs. It is kind of been fascinating to see and maybe that's prolonging the cycle. I don't know. It's interesting. But you are also seeing that to some degree in the auto sector where they're another rate sensitive part of the market, but they can do affordability adjustments and their profits have also skyrocketed to crazy levels because of just what we saw during the pandemic. And that's huge mismatch between demand and supply.

Neat. That's a great parallel. So you talked about the charts you were building, and I noticed you do very excellent visualization, data visualization. You have rules or tips that you can for communicating with the data that you could teach

Me. I just have a lot of fun with the charts. One thing I do think that people is they the charts to change to look at it in different ways and which can sometimes be bad for economics because economics, these are the things that matter. These are the charts that we should be looking at. We don't always need to get so fancy. And so there's kind of that hesitancy to be like, let's just stick to the core. We know what the core is telling us, but I think people do like it to be changed. And that's one thing I try to do is I'm kind of trying to always hunt for different things and different ways to look at things and finding ways to quantify them. And then I think one thing that's important is when you find the things that do matter that are maybe unique to the cycle in the moment, to just keep going back to those.

(37:50)
So one thing I like to go back to now is that inventory map that I have comparing the given month versus the same month in 2019, and it's usually down 40, 50% across the whole country, but you see those parts of the mountain west and some softness in Lake Nashville and of course Austin, which is back to pre pandemic levels. But I keep going back to that chart because it's so true. The places that had saw more of the price growth in the first half of the year were those places with very little active listing. And one of the few markets that's kind of still in that correction mode is Austin, which just so happens to be the one that's back to pre pandemic inventory levels.

Yeah, it's so funny that Austin by itself is really an outlier there in terms of pre pandemic levels of inventory of prices correction off the peak, although still up from 2019 or 2020 even by a lot home prices in Austin.

I think one of the things with Austin, so one of the things that we see a lot for us because we deal with people who were very bearish on housing all the time and we interact a lot with them is they're always throwing out these different theories. And I think Austin is one of the places where some of the things they were saying in 2021 to 2022 about investors getting over their skis and that type of stuff. I think it was true in Austin, it just wasn't as much everywhere else. And so when I've done some of my own reporting on Austin, what I've come across is some investors who were buying properties that didn't cash flow and they were buying them because Austin home prices for the past, not just the pandemic the past 10 years, Austin home prices boomed. This is not like a new thing.

(39:45)
Austin has been booming and they were buying homes because they thought appreciation would continue to soar. So they're like, I'm going to take a loss on the monthly, but I'm going to get the appreciation. And that's how you get caught. That's like the bad risk that gets put into the market. And so that was going on. Plus Austin is one of the places where builders can build a lot and they can sprawl. And so that speculation on the investor side, coupled with the supply and the new construction market and the fact that builders very quickly in Austin cut prices a lot. Some of the prices in Austin on new construction went down 2020 5%. There was some real cuts and that puts the existing resale market at a disadvantage. And when you have a lot of the investors who are kind of bleeding and you've taken away the appreciation from them, that kind of puts you in a place where it takes time for the market to kind of work through it. And not to mention an important part for Austin is that the local fundamentals got distorted so quickly by the influx of people coming outside of the market. And so once those buyers pulled back once the inflow of the new ones, then Austin finally had trouble with its fundamentals. I think Austin getting to this point isn't only about the pandemic, it precedes it a bit.

That's a great observation. San Franciscans have been moving to Austin for a decade,

And I don't mean anything negative towards Austin, I think I've tweeted this before. Sometimes the markets that go through corrections and even this predates the mid two thousands one, sometimes those are the markets that have the best outlooks and the best futures and investors know that and that's why they got over their skis is they're chasing that future growth. And so this is just something that Austin will have to go through. And we are also, it looks like at least for now, assume all else equal, nothing changes dramatically in the economic landscape. The worst of it has been over for Austin. The worst was the second half of last year when it was in that flash crash mode. And then now we're now starting to see more month over month declines in the seasonal second half, but they're not huge ones for Austin. In the repeat indexes that I track, of course the economy hits shit, hits the fan, things can change. But I'm just saying based on what we're seeing now, the biggest drop for Austin was the second half of last year.

I absolutely agree with that. The biggest change was last year though. I can see in the last few weeks as rates have gone from seven to 7.5%, we can see things like price cuts and days of market climbing in Austin. Austin's back to the top of the list in terms of the greatest percentage of the market that has had price cuts. And that's really in the last handful of weeks is rates surged again late summer.

Yeah, I'm definitely seeing weakness in the repeat ones that I see and you're kind of ahead, so I'm sure I'm going to see even more weakness. But what I mean there is last year what happened in the second half of last year in Austin, they gave up prices as fast as we gave up in the second half of oh eight nationally in the repeat sales indexes, they were giving up two 3% a month for a little bit, just briefly. It was like a flash crash type thing. So yeah, even if they're getting some negatives now, it doesn't necessarily mean that we're back to what happened there.

That's a fair solid take on Austin. And you mentioned the outlook, the long-term outlook, and obviously Austin's a growth economy. There's a lot of still attractiveness about the inbound migration there. Give me the rest of your outlook, other markets or the country as a whole, what are you thinking next year and beyond? What do you see in the data?

Well, I think one thing that we've seen so far is that affordability has not approved affordability's in a very tight spot. And the longer that affordability is this deteriorated, the primary is going to be affordability. And so I think that as long as we stay here and the economy doesn't take a really bad turn, I think it means that more people will be chasing some of the relatively more affordable markets, the Columbus', Indianapolis. So I think in a way I'm kind of bullish on the Midwest in some of those markets. And an interesting one is Florida on the other side where they saw the first affordability shock, which was overheated price growth in 2020 through 2022. And they even added some more this spring. And they also saw the second affordability shock, which was mortgage rates going from 3, 4, 5, 6, 7 that everybody saw. But now what they're also starting to see is a third affordability shock, which is a unique one, and that's these insurance shocks. And so that'll be interesting to kind of see how that plays out because now affordability isn't one of Florida's great selling points right now, and that was one of its selling points. No income state, they have a lot of new construction, more affordable than some of these northeast markets now. The math has kind of changed a bit and the boomer wave can only last so long. So I think Florida on the downside risk and then the Midwest more on the upside.

Great. I love that as a general call. I love that insight. The question I have is unaffordability durable? Can we be chronically unaffordable or does unaffordability imply that home prices at some point have to correct back so that they are affordable to enough people?

Yeah, I don't know if there's hard rules here. People show the fundamentals the averages through time and they use that as the baseline for fundamentals and that can change. You look at Canada where they've kind of went up and set a whole new bound for deteriorated affordability, they're off the charts. And I think that's the thing. If you were to ask me the thing that keeps me up at night, it's not necessarily really bad downside risk that affordability moves into a place that's even worse than now, now isn't great and if it moves into a place that's even worse, this that's concerning.

(47:34)
So I think that's the part that's like ugh, because some of these countries that have got ahead of us more deteriorated than us, we are now where they were several years ago, we've caught up to them and then they themselves have went up and set new levels of unaffordable. So that's a bit of a concern and you would hope that because the builders are in a good place and they're feeling more confident, they still have these high margins that we can continue and maybe even get higher on construction and kind of stay in a good place there. I think at the end of the day, that's what alleviates the fundamentals over time and puts us in a place to where we can correct and an inflation adjusted basis.

Yeah, I think that's a really terrific insight where in the sense of where you always fight the last war, the worry about the housing market is that home prices are going to crash like they did in 2008 that we're in a bubble and therefore home prices have to crash down. But the real crisis we're facing is a supply crisis and therefore the thing we should be worrying about is prices not falling. It is prices and affordability getting worse from here. They have in a lot of other countries,

I mean I don't know about your data, but the data that I track, there's markets up and these indexes, it's rare for this to happen, but there's a lot of markets up 8% in the first six months of the year. That's not good. Now if you have a second half of the year where there's softening and seasonality comes into play and we blow off a third of that, that's a little more reasonable. But in some of those markets that are up eight, let's say they knock off three, they're still up five inflation's not 5% this year. That would mean on a real basis those markets saw a growth and it's like we're not so okay. It's one thing for prices to not fall much on a nominal basis, but if we're not even going to give up on a real basis and we're going to get even worse there, that's concerning.

And that absolutely is in our data in some of those markets. You can see surprising strength and you could see it. We've been talking a lot about the builders. The builders had an outstanding year who knew that was coming I think a year ago when we were right in this moment when we had rates were starting to spike again, and then we watched inventory climb and we watched demand drop really quickly. And so then we rolled into the fourth quarter and it was looking at this year being a big down year or a slight down year for home prices watching inventory build. And none of those things happened.

One of the thesises that was out there for why prices could fall more this time was because builders had such big margins that if they needed to, builders were always going to find the market this time they were going to find the market, but it was a question of how much they were going to need to cut to find it. And they had huge margins to do it, but what happened is coming into this year, because existing and resale was so tight, they didn't have to really give up all of those margins they had accumulated during the pandemic. So because they didn't fall as far, that meant that resale and existing wasn't put the biggest, the bigger disadvantage that could have been had builders cut as much as their margins would've allowed the inventory, the resale and existing market this year would've been at an even bigger affordability gap between IT and new construction. And that's where you probably could have seen the existing market give up more, but you saw kind of the reverse where existing and resale supply stayed so tight. Builders were just able to meet that market faster than was expected and didn't have to cut prices as far.

So the builders sort of helped keep a floor on the market this year. And one of the questions I had coming into the year was, would investors if investors stop, would they exacerbate a downturn or would they come in and see, wow, we've got home prices in Austin or they're down, I have opportunity for the first time in years or Phoenix is even a better example, and do the investors come in? Do the investors exacerbate a downturn or do they put a floor in because they want to all of a sudden their numbers work out again? And I think what we observed in most markets is that the investors put a floor in the market they were willing to buy as soon as there was any price correction in there.

The mom and pop types more so. Right?

Is that what you'd see?

That's what seen more of. Yeah, especially for the Phoenix on the institutional side, they're still kind of gummed up right now. Now they are out there playing and they're trying to raise money and stuff, but it's definitely more of a constrained market and taking a breather. And a part of that is because cap rates are just so out of whack. Prices have gotten so high, rent growth is slowed, and these interest rates that they're taking on are sometimes eight, nine, 10% almost in that space. So that market is all about yields. That's why those institutional investors go and investors will put money with these institutional firms as they're trying to chase yields and the yields just aren't as attractive at the moment. The mom and pop people, this is more of a business for them. They're trying to build this as a retirement, they're focused on this, they're trying to accumulate the rentals and they're less of like, oh, I can get this yield in the bond market, why would I buy a home? They think less like that, whereas the institutional guys, they do. And that one guy on YouTube, Nick, is it

Like the professional housing market? Bear that guy,

And he's raised that point last year, which is that it doesn't make financial sense to invest in homes right now because well, you could go get a 5% return in the bond market, right? Yeah, totally. And he's right in a way that the institutional people think like that, but the mom and pop people, that's just not how they think.

They don't. Well, and that guy's been wrong for a decade, so he's been calling for a housing market crash for a decade.

Well, yeah, and he was very bearish even from the onset of the covid taking all, and last year I definitely got concerned once it became clear how much prices had moved up in the first half of 2022, and then once it became clear how acute that rate shock was going to be, and I think the math just going from three to six and then once we push seven is bigger jump than it sounds like if you actually do the math. So that's where it was definitely way more concerned then. Plus there was the idea that maybe the economy could roll over faster than it has, which we haven't quite seen that at least as of September, 2023.

Yes. So then I can't believe we're almost at an hour already, but let me ask you to wrap it up. So you got pretty bearish midyear last year. We could see, we saw the runup and we saw the change in the demands happening very abruptly. Where are you now?

Well, yeah. So I would put myself then as concerned watching, concerned knowing how fast affordability was deteriorating and trying to see how that would play out, less bearish in terms of I know how it's going to play out. I think I would even say, I don't exactly know how this is all going to unfold. And it's been to watch it in real time to figure out, okay, here, why is the new construction market getting so resilient so quickly and following it and trying to get the charts for it. And outlook wise, I don't necessarily have an outlook on where home prices are going, where the market is going to be in 12 months from now, 24 months. But what I do think will probably be true is that affordability is going to remain fairly deteriorated in where we are in the bounds now. Yeah, rates could improve some and we could get some let up, but affordability is going to be a very big concern.

(57:09)
And the other thing is the existing side of the market on the churn is just going to be gummed up for a while. It would be really hard to see us moving back to existing home sales levels that we saw during the pandemic anytime soon just based on where we are right now. But if the affordability market, the side of the market were to give, you could see the existing side move more and we haven't seen it. Instead, we've actually seen affordability deteriorate further this August and September and it looks like the existing side of the market is even going to get more constrained as a result.

I tend to agree with you, it seems like the signals now if rates fall, we will improve affordability, but we'll stimulate demand a lot and therefore we're we're going to drive prices up because we already have supplies super, super constrained.

Now my one question there, which goes back to one of the things that I think about, one of the concerns is like, okay, yes, affordability improves if rates decline, but it's like if on the other side of the, and if there's anything that could happen that would drive rates down, that also means days on market moves up depending on what type of recession it is. That's one of the, and because affordability is so deteriorated and if rates move down to six, okay, that's nice, but depending on where the economy is, then that could maybe be a bit of a different story. But what I'm trying to do now is that's actually one of the things I'm most interested in is getting different people's views on how the housing market would react if we actually get into a downturn.

Yeah, great. Well, I look forward to that journalism from you, that reporting from you on how the market would react to a recession. I've only lived through a handful of recessions myself and so I'm really, really, there's certainly nothing in the data yet that indicates how housing will react to the recession, but I also don't study consumer spending and household formation and all these macro things that will drive that are related to housing. I'm just tracking the housing.

Yeah, well, and that's why I brought up the last three examples because they were literally opposite ends of the spectrum in terms of what happened to housing. I mean two of those were straight up booms and then one of course the historic nationwide bust. So it'll be interesting to see where the market goes from here and can we get any more balance? Are we going to get some active listing growth at the end of the year with affordability being so deteriorated or are we kind of stuck in this bound? So I think that'll be interesting to see. And the guy that at TELUS is you each week with this data, so I'll be keeping a close eye.

Well, I can tell you we're recording September 8th. This will be out in a couple of weeks, but it's Friday afternoon now we'll get our weekly data is just starting to come in and inventory has been growing late in the year as rates have risen. So that is following right along with your observations in Austin and other places. But we peaked at about seven point a half percent in the last couple of weeks ticking down a little bit and it looks like inventory maybe peaked for the year now, but unless there's another surge. And I was talking with Dr. Jessica Lotz from N a R today for another podcast and she was talking about signals that what if we see 8% mortgage rates are those coming? And in that sense I would see, I could see us having even later in the year inventory build. Not yet in the data though,

One of the things that I think now hurt the market is that I think last year people were too quick because they had the oh eight ghost plane and they saw the market slow down quickly. I think some of the sellers cut prices and sold faster than maybe they had to. And had they been more like, I'm sticking to this price, I'm going to wait it out, that might've helped. Well that would've a seen less prices decline, but it might've helped days on market at inventory climb up more last year and get us in a little bit more of a balance. But instead they cut the prices, that inventory moved quicker and we just entered this year at too low of a place.

Alright, Lance, this has been terrific. I really appreciate your insight and your process and I know you said you like to be a reporter, less of an analyst, but I appreciate your analysis very much. It's useful to me to hear your approach and your methodology. So this has been exactly what I like to get out of these kind of conversations. So thank you so much. Where can our listeners and viewers, where should they find you?

Yeah, where they can find me is at News Lambert on Twitter or at News Lambert on Threads. They can Google Lance Lambert in Google and they'll find my author page. I also go on Michael ER's one Rental at a Time, YouTube channel every week on Thursday. They could find me there. And one of the other reasons that I don't like to necessarily make more calls or have very vocal stances is one of the needs that I think that I'm filled over the past year and a half or two is there's so much great housing data and research and great experts in the field that I like to be one of the places where I put out those forecasts and share more of it. And I feel like if I have very entrenched views on everything, I feel less of that need. And I think having Lance Lambert Housing Analyst is less valuable than having this resource where I present as much of the analysis and forecast as I can.

And I appreciate that. And my approach is like I'm just trying to report on the data. We collect the data, we report on the data, and I sometimes have views of what the data means, but really it's like I'll change my view if the data's changing.

Yeah. Yep. And I've seen you do that in real time on many occasions.

Great. Lance, thank you so much everybody. This is the top of Mind podcast from Altos Research and we will be back with more data and another interview. Thanks everybody. Thanks for listening to Top of Mind. If you enjoyed the show, I'd really appreciate leaving a nice review on your favorite podcast app that helps other people find us as well. Be sure to subscribe so you don't miss future episodes