Mark, Ryan, and Cris kick off this episode by discussing inflation and the latest CPI Report. For the second part, they welcome John Burns, CEO of John Burns Real Estate Consulting, to give a detailed U.S. housing market outlook, that includes the topics of mortgage rates, the potential threat of a housing crash, and the affordable housing shortage.
Mark, Ryan, and Cris kick off this episode by discussing inflation and the latest CPI Report. For the second part, they welcome John Burns, CEO of John Burns Real Estate Consulting, to give a detailed U.S. housing market outlook, that includes the topics of mortgage rates, the potential threat of a housing crash, and the affordable housing shortage.
Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. I am joined by my two colleagues and co-hosts, Cris deRitis. Cris, good to see you.
Cris deRitis: Good to see you, Mark.
Mark Zandi: You're the deputy chief economist. Nothing's changed there.
Cris deRitis: Good to hear. Good to-
Mark Zandi: Oh, good, good. Yeah. I was just asking. Not that I heard any rumors or anything. Yeah, but just asking and Ryan, Ryan Sweet. Ryan is the director of realtime economics and good to see you, Ryan.
Ryan Sweet: Good to see you, Mark.
Mark Zandi: I learned something interesting this week about Ryan. He does these forecasts for the economic statistics as they come out every day. He's really good at it. He spends a lot of energy looking at the DNA of these releases, understanding them and coming up with a forecast. You're the number one most accurate when it comes to forecasting CPI, at least that's been the case for a while here. Is that right, Ryan?
Ryan Sweet: That's Correct.
Mark Zandi: Yeah. He knows what he is doing. In fact, he's in high demand. I probably shouldn't have let anyone know that because some hedge fund might knock on our door or something.
Ryan Sweet: No, no one's knocking on our door.
Mark Zandi: Oh, okay. Oh geez.
Cris deRitis: Wow. Ouch.
Mark Zandi: I did not know that. Oh really? They're knocking.
Ryan Sweet: No. I said they're not. No.
Mark Zandi: Oh, they're not knocking.
Ryan Sweet: You're stuck with me.
Mark Zandi: Oh bet. Well that's because they didn't know. You're hidden gem, but we're going to talk about inflation. This podcast has two parts to it. Part one is inflation because a lot of inflation statistics came out this week, CPI, PPI, lots of stuff. Then we're going to part two. Part two we're going to talk about the housing market. A lot of housing statistics coming out this coming week. Of course, housing's on the front lines of the impact of the higher mortgage rates, no more rate since it's sensitive sector of the economy. We've got a great guest to talk about that, John Burns. John started his own firm a number of years ago. It's grown into a powerhouse now. It's a autonomously named. What is it, Cris? What's the name of the firm? John Burns-
Cris deRitis: Real Estate Consulting.
Mark Zandi: ... Real Estate Consulting. Very good. We're going to have John on in just a few minutes, but before we go there, let's let's talk about the inflation statistics. I think correct me if I'm wrong, Ryan, but we should start with the CPI. What do you think? Is that the number?
Ryan Sweet: Yeah, they got all of the attention.
Mark Zandi: That got all the attention.
Ryan Sweet: But there was other good news on producer prices fell, import prices fell, but what really matters for monetary policy is their consumer price index.
Mark Zandi: Yeah. Just what did it say? I mean, give us the rundown on the CPI for the month of July.
Ryan Sweet: Yeah. For the first time in the long time, consumers got a little bit of relief on the inflation front. Consumer prices month over month were unchanged. They had been rising pretty, pretty quickly over the last several months on a year over year basis. They're still up eight and a half percent, but that's weaker than a 9.1% gain that we got in June. The consumer price data was for the month of July. A lot of the weakness in inflation last month was energy. Gasoline prices were down more than 7% and that really, I think, shaved four tens of a percentage point off month over month growth in the CPI. Lower gasoline prices really helped bring it down.
I think one thing that we were going back and forth like what a surprise was, was the food prices. We had anticipated that the dropping diesel prices would help reduce some of the inflationary pressures coming from food, particularly grocery stores, but that was up more than 1% again. Several months in a row we've been seeing food prices rise pretty quickly. The good news is that that relief is coming. Diesel price is usually it takes a couple months before they start to feed into the CPI for food. Relief at the pump is here. Relief at the grocery store is coming, but are there things that we're paying close attention to, some of the stickier components of inflation, so rents, tenants rents, owners' equivalent rent that's still remains pretty strong. Year over year, it's accelerating and we'll continue. I know John's going to probably talk about this at length. But yeah.
There are some areas where we're seeing some acceleration in services. That's why we need a lot more goods disinflation to offset that services inflation that we're going to see over the next few months. But one month isn't a trend, but it's a small step in the right direction that we should see inflation continue to roll over as long as energy prices don't resume rising.
Mark Zandi: Right. Right. Going back to those food prices, I noticed ice cream prices are up an awful lot.
Ryan Sweet: Yeah. That's going to make my vacation very expensive.
Mark Zandi: Right. Anybody with children, that's going to be pretty difficult.
Ryan Sweet: It's going to be pretty pricey down at the Jersey Shore with ice cream prices. I think over double digits. It's like 10 or 11%.
Mark Zandi: Yeah. It's double digit growth year over year. Yeah. I look carefully. It was a little softer in the month of July, but no pun intended.
Ryan Sweet: [inaudible 00:05:15] I was going to say.
Mark Zandi: Let me ask you something about food prices though. I have in my mind that the cost of transportation, diesel, is a big chunk of that. Do you have any rule of thumb as to what percent of the acceleration in food costs over the past year, let's say, has been energy, the higher cost of diesel in transportation?
Ryan Sweet: Yeah. I don't have the rule of thumb, but I did look at it. If you look at growth in the CPI for food at home, so basically grocery stores and diesel prices, they're not perfect. They don't track identical. They're not on top of each other, but they generally move in the same direction, but there's a two to three month lead. Diesel prices come down. It takes a couple of months before it starts to feed into food prices. That's why we should start to see some relief at the grocery store in the next maybe not August, probably by September.
Mark Zandi: Well, it feels like we're going to get some really good additional inflation news here, right, for month of August going into September. I mean, gasoline, diesel, jet fuel prices continue to fall into August. It's going to bleed through, as you say, or flow through, as you say, into food prices. We get some relief. It feels like vehicle prices, used vehicle prices are declining now. It feels like new may start to roll over as we get the supply chain's ironed out, more chips, more vehicle production, more inventory. We got the retailers out there saying I got too much stuff in inventory. Apparel prices fell I think in the past month. We might see more discounting. It feels like for the next couple of three months, I mean I hesitate to look much beyond that, but it feels like we can say we're going to get some pretty good inflation use here in the next couple three months. Is that [inaudible 00:07:01]?
Ryan Sweet: Yeah. I wouldn't be surprised if the CPI fell in August. I mean, gasoline prices are already down six, 7% so far. If they follow where wholesale prices, and that leads retail gasoline prices, by two weeks they should be down 10% month over month. That's going to shave a lot off the CPI. Airfares they're still going to drop. Lodging away from home because now that we're on the other side of the summer travel season, those prices are really coming in. Rental car prices dropped a ton in July. They're going to continue to drop. Then new and used vehicle prices they should really start to moderate. I agree with you. We're going to see some pretty good... July was a small step in the right direction, but August is going to be very, very helpful.
Mark Zandi: Cris, do you need to add all to all that?
Cris deRitis: It all sounds good for August. I worry about after August, September now in post labor day, China opening up perhaps. We got all the sanctions kicking in.
Ryan Sweet: Hurricane season.
Cris deRitis: Hurricane season. I'm a little bit more cautious when it comes to energy prices and whether this decline, which is definitely something we need is going to stick. We may actually see a reversal here. One of these factors kicks in.
Mark Zandi: Yeah. I want to play statistics game before we bring John on, but there's one other thing I want to tackle on inflation before we move forward on the game. That is okay, we're going to see this moderate... It feels like a pretty significant moderation in inflation between now and hopefully the next couple three months, unless something goes off the rails like a hurricane knocking out a refinery or something like that. But then inflation may very well settle in say it's eight and a half percent July year over year CPI. It settles in maybe half that, four or 5%. As you point out all the sticky parts of inflation stay sticky like the rent and some of the service side inflation. We're kind of stuck there, and that's where the real risk to the economy is now starting to manifest because if it does stick there, that's when the fed says, "Oh, I got to press on the brakes even harder. Raise interest rates and weigh on the economy to get that inflation, that sticky inflation, actually down."
Ryan Sweet: Correct.
Mark Zandi: Does that sound right? Is that how you're thinking about this as well, Ryan?
Ryan Sweet: Yeah, I would agree. I mean, the sticky components of the CPI worry me, but they won't be sticky for long because eventually the fed's going to kill it. They'll push the economy into a recession if they think inflation's sticking around four or four and a half percent. I mean, even after the CPI, the fed officials, all the fed speak, is still saying we're going to avoid what we did in the 1970s. We're going to keep raising interest rates until inflation gets back down to 2%.
Mark Zandi: Cris, anything on that question about sticky inflation down the road here?
Cris deRitis: Yeah. I think Ryan characterize it correctly. That sticky component is really hard to unstuck, unstick with the-
Mark Zandi: Unstick.
Cris deRitis: ... on the supply side. Perhaps we can get the oil resolve, we can get the food result, but then the rents, we're not going to get a whole lot more supply anytime soon. That's not going to really [inaudible 00:10:19].
Mark Zandi: Well, I guess in the baseline scenario where we don't have a recession, the fed doesn't need to step on the breaks. We have the fed raising rates a few more times here, the terminal funds rate, the high point in the cycle is three and a half percent. We're at two and a half percent now. Assumes that inflation does continue more or less to moderate. That it doesn't stick at four or 5%. It continues to moderate. That's based on the expectation that the economy's growth is going to slow. That job growth is going to slow, almost to a standstill. We may even see some increase in unemployment from the very low three and a half percent. That takes the steam out of wage growth, which is the key source of inflation on the service side of the economy. That's enough to keep inflation moving lower.
Then as you move towards the end of next year, going into 2024, at that point, you'll see rank growth starting and shelter cost inflation starting to moderate because you're already seeing market rank growth kind of roll over. Still extraordinary double digit, but it's just not quite as extraordinary as it was earlier in the year. That's kind of the baseline. Does that still fit in your thinking or would you take [inaudible 00:11:28] with that?
Ryan Sweet: That's what the bond market's saying too. If you look at five year, five year forwards, it's like measures of inflation expectations, inflation swaps. They all indicate that the fed is going to get inflation back down to target over the next couple of years. The bond market isn't saying that inflation's going to be stuck at four or four and a half.
Mark Zandi: Because they're they seem to be saying we're going to get there with a recession because the yield curve is deeply inverted now, two year tenure. It doesn't feel like they're on the same page we are.
Ryan Sweet: Yeah.
Mark Zandi: Yeah. Okay.
Cris deRitis: Well we get to the same destination.
Ryan Sweet: But it's just different ways.
Cris deRitis: Different ways.
Mark Zandi: I that's a big difference guys from my perspective, for sure. Big, big difference. But I don't want to talk about the yield curve now because we don't have enough time. We're going to talk about that maybe next week. A lot to talk about there and we're going to come back to that in part two. I think I brought that up in part two, will bring up in part two in the housing market, but let's play the game, the statistics game. We put forward a statistic, the rest of us try to figure out what that is through clues and questions and doctor reasoning. We want to a statistic that's not too hard, not too easy, kind of related to the topic at hand. Okay. Let's go, Cris. You go first. I always go to Ryan first on this thing, but let's go this week to you first.
Cris deRitis: All right. 62.8.
Ryan Sweet: Is this from the CPI report?
Cris deRitis: Nope.
Ryan Sweet: Ooh.
Mark Zandi: Is it inflation related?
Cris deRitis: No.
Mark Zandi: Is it a statistic that came out this week?
Cris deRitis: Yes.
Ryan Sweet: This is from the NFIB.
Cris deRitis: No.
Mark Zandi: National Federation of Independent Business, Small Business survey. Is it from the University of Michigan survey?
Cris deRitis: It is not.
Ryan Sweet: We're running out of things here.
Mark Zandi: Wow.
Cris deRitis: It is housing related. How about that?
Mark Zandi: Oh, housing related.
Cris deRitis: It's sticking to the theme.
Mark Zandi: Oh, is this something around from the housing vacancy survey?
Cris deRitis: No.
Mark Zandi: Because that came out a week before.
Ryan Sweet: It came out this week, you said?
Cris deRitis: Yes.
Mark Zandi: Oh, okay. Well, sorry, Ryan. Maybe I've got my weeks messed up.
Ryan Sweet: There we go. Wouldn't be the first time.
Mark Zandi: You're such a data snob. You know that? You lord it over the rest of us. I know the data so well.
Ryan Sweet: Oh, here we go. Is this one of your surveys that no one-
Cris deRitis: Yes.
Ryan Sweet: Okay.
Cris deRitis: This is the survey. Everyone should be-
Mark Zandi: Oh, like a Fannie Mae survey.
Cris deRitis: Yeah, of course, the Fannie Mae home price sentiment survey.
Mark Zandi: Oh, that's-
Cris deRitis: Home purchase sentiment survey.
Mark Zandi: And who pays attention to that survey except Cris?
Ryan Sweet: Cris. Yeah.
Mark Zandi: Yeah. Okay. What's 62.8?
Cris deRitis: That is the index value for July. It is the lowest since 2011. Right.
Mark Zandi: Wow.
Cris deRitis: It got down to 63 in April of 2020 during the pandemic. Right. This is people's feelings of whether the housing market is a good time to buy, a good time to sell, whatnot. Ask a bunch of different questions about housing. Sentiment around housing is quite low. One thing I found particularly interesting is that both questions around whether this is a good time to buy and whether this is a good time to sell fell a lot over the last year. There's pessimism on both sides of the equation right now.
Mark Zandi: Yeah. That sums it up, and really good statistic to lead us into part two on housing.
Cris deRitis: I thought so.
Mark Zandi: Yeah, no, that's a good one. That is a good one. I'm going to put that way in my memory banks because I know it's going to come up five times in the next five years, this survey. All right. Ryan, what's your statistic?
Ryan Sweet: All right. I got a trifecta, so 0.3, 0.4, 0.5.
Mark Zandi: 0.3 is core CPI?
Ryan Sweet: Correct. Very good.
Mark Zandi: 0.4, is that median CPI?
Ryan Sweet: Oh my God. This is unbelievable. Yes, that's correct.
Mark Zandi: It is 0.5 trimmed median CPI.
Ryan Sweet: Oh, how did you do this?
Mark Zandi: Oh, this is baby, baby.
Ryan Sweet: That's a cowbell. All right. Now I'm really impressed.
Mark Zandi: And because I got yours, that is definitely not collusion. There is no collusion.
Ryan Sweet: No. No, there's no collusion there. That is really impressive.
Cris deRitis: I don't know. I don't know.
Mark Zandi: That was the smallest the way I said that, small.
Ryan Sweet: When I was looking at this, I'm like Mark's going to give me grief because it's median and trims. Wow, that was impressive.
Cris deRitis: Suspicious, very suspicious.
Mark Zandi: What are you talking about?
Ryan Sweet: Mm-mm. There's no way.
Mark Zandi: All right. Explain yourself.
Cris deRitis: You guys, I don't know.
Mark Zandi: What are these numbers now-
Ryan Sweet: There's different ways-
Mark Zandi: ... that everyone knows that I know, that you know that I know whatever?
Ryan Sweet: There's just different ways of measuring inflation. Hold on.
Mark Zandi: Is that all you're going to tell us, different ways of measuring inflation?
Ryan Sweet: The Bloomberg-
Mark Zandi: Are you that depressed? You're that [inaudible 00:16:03].
Ryan Sweet: The Bloomberg [inaudible 00:16:04] was talking to me, so I got distracted.
Mark Zandi: Oh, you got distracted. Oh, okay.
Ryan Sweet: Yeah, there's different ways. The core inflation, that excludes food and energy, and then the Atlanta fed puts out different ways of measuring inflation as well. Looking at the medians, like the middle of all the price changes. Then the trimmed, I like the trim one because it kind of takes the extremes out. So big price movements, big increases and big decreases, cut those out and take out some of the noise and just look at the signal. But overall, the general takeaways that looking at median and trimmed, that these price pressures they're starting to broaden out. That's what you can really see in the CPI data.
Mark Zandi: Got it. How do you feel about 0.3, 0.4 and 0.5 in the grand scheme of things?
Ryan Sweet: It's a lot better than it was a few months ago.
Mark Zandi: Yeah, exactly. 0.3 core, I'll take that all. It feels like I'll take that all day long. Give me that one. Hey, I read something you wrote, which is important that based on the CPI and the PPI reports, the producer price report, that we can now have a pretty good forecast for the core personal consumption deflator, which is measure that the fed uses. What is that saying? What do you think? What's your forecast for that?
Ryan Sweet: It's going to be up 0.1%, which puts year over year growth at 4.7%.
Mark Zandi: That's core.
Ryan Sweet: That's core.
Mark Zandi: Okay. 0.1, that's pretty good. That we take all day long because that means we're back. Well, that would be back to the old days when inflation's too low. Right.
Ryan Sweet: Exactly.
Mark Zandi: Yeah. But that, of course, is not happening here. Okay. You're ready for mine?
Ryan Sweet: Yep.
Cris deRitis: Yep. Let's see.
Mark Zandi: I actually think this is a good one and I'm not sure you're going to get it, but it's a really good one. Ready? 3.64%. I'll give you a hint. It has nothing to do with inflation. 3.64%.
Ryan Sweet: Is it at interest rate?
Mark Zandi: It is not. You would think it might be, but it is not.
Cris deRitis: It's a housing related.
Mark Zandi: It's mortgage related. Yeah. That's a big hit by the way.
Ryan Sweet: Delinquents.
Mark Zandi: Yeah. The mortgage delinquency rate. Yeah. Yeah. That came from the mortgage banker system.
Cris deRitis: Oh yeah. Yeah.
Mark Zandi: Cris, did you know this? This is Q2, the data. It hit an all time low in the data 3.64%, which is just incredible. You saw a big... Now I thought maybe what was going on is because of the end of these very forbearance programs you might see because as you know during the pandemic, people could go, if you had a Fannie Mae, Freddie Mac or FHA loan, you could get forbearance from paying your loan. That program is expired. You have people that are rolling off the forbearance program and I thought maybe they'd be going in. You did in fact, see a big decline in 90 day plus delinquency, and you have seen a bit of a pickup in foreclosure. That's part of the story, but even if you add the delinquency rate plus the foreclosure rate, it's an all time record low. It's an all time record low, which is amazing.
Now it still probably overstates the case because there's about a half a million people that are still in the forbearance programs. Let me ask you this interesting question. How many people, households, do you think got forbearance during the pandemic on their mortgage, at one point or another during the pandemic? I know this because the Philly fed puts this great report together on the forbearance programs every month. Take a guess.
Cris deRitis: Yeah. I was watching it closely for a while, but not anymore.
Mark Zandi: Just to give you a hint, there's about 50 million people out there with mortgages. How many of them do you think actually were on the forbearance at some point?
Cris deRitis: At some point?
Mark Zandi: Yeah. Nine million.
Cris deRitis: Yeah. I was going to say 10%. Yeah.
Mark Zandi: Yeah. I mean, that's pretty, pretty significant, right?
Cris deRitis: Yeah.
Mark Zandi: Yeah. Nine million and we're down to 500,000 as the month of I think July or early August and they're coming off quickly. We might see some increase in delinquency, but my point is, well, first of all, the borrowers, the mortgage borrowers since the financial crisis, are really good borrowers. Very high credit scores and getting 30 year, 15 year fixed rate loans, kind of plain vanilla and nothing exotic, no neg M, no two year subprime. Of course, with the house price growth that we've seen, they've got a ton of equity built up. And because unemployment's three and a half percent, people still have their jobs and they're making their payment on their mortgage. That's a that's through the month of... That's through the second quarter of this year. That gives you, in my view, a sense that the American family household, certainly the homeowners, R in pretty good shape coming into this.
Cris deRitis: Homeowners, homeowners. Yeah.
Mark Zandi: Homeowners, but that's two thirds of the population, right, and that's where the bulk of the spending is. I mean most of the spending.
Cris deRitis: Yes.
Mark Zandi: I thought that was pretty, pretty interesting. Anyway, no one got a cowbell on that. No. Yeah. But I'll have to say I was very impressed with my response to Ryan's.
Cris deRitis: Surprise. Surprise.
Ryan Sweet: Yep.
Mark Zandi: All right. Well, now here we talked about inflation. That was the past week. Now we're going to think about the coming week in housing and no better person to have on to talk about housing, as I said earlier, is John Burns. John, welcome.
John Burns: I'm ready to roll whenever you are.
Mark Zandi: Rock and roll. Well, it's good to have you on. You're not on video because your WiFi isn't all that great. Where are you? You're kind of backwoods of Alberta or something. Where are you?
John Burns: Oh God, if you saw my view, it would kill you. I'm in a resort called Terranea in L.A. I'm looking at the Pacific ocean, but the WiFi here is horrible, which is a way of them saying you should not be working when you are here.
Cris deRitis: You should be looking at the ocean.
Mark Zandi: That is intentional.
John Burns: Yeah.
Mark Zandi: It sounds like it's intentional. Yeah. Well it's so good to have you, John. I don't think you've been on the podcast. Have you? This is the first time you... I think this is the first time you've been on. It's good to have you on. Just as a way of introduction, you have a highly successful consulting firm that you founded autonomously named John Burns Real Estate Consulting. You're actually headquartered in Southern California, right?
John Burns: Yeah. I named that when it was just me, so things have changed a little bit. We need to rename that.
Mark Zandi: Well, it's a great name.
John Burns: Okay.
Mark Zandi: Yeah. But you now have... As I recall, in previous conversations, we've discussed that you have offices and folks all over the country because you closely monitor what's going on in all these new housing developments across the country. Is that right?
John Burns: Yeah. We've got more than a hundred people spread out across the country. We're so good at this work from home thing. Two of our employees, but one moved to New Zealand, then one moved to England more than a year ago and they're still with us.
Mark Zandi: Wow.
John Burns: You could say we're international, but that's really misleading.
Mark Zandi: Yeah. Well you were kind of leading edge on the whole remote work thing. Weren't you, I mean, because you had folks all over.
John Burns: Big time. Yeah. I mean, if I had to recruit only people that lived near me, we would not have nearly the talent that we currently do. We leaned hard into that. We've been on Zoom for years and when everyone got on Zoom, we couldn't have been happier.
Mark Zandi: Oh, that's interesting. You were on Zoom long before the pandemic.
John Burns: Oh, yeah.
Mark Zandi: Oh really? I didn't even know it existed before the pandemic. Oh, that's interesting.
John Burns: Yep.
Mark Zandi: Oh wow. Your productivity has been enhanced by everyone getting on Zoom.
John Burns: You have no idea.
Mark Zandi: No idea.
John Burns: We can have so many client meetings per day now. I mean, it's phenomenal. People say you don't really have those connections. We actually have a whole training deck. I actually gave a presentation on it to a bunch of CEOs on how to be connected remotely. Nobody believes me except my staff we've hired who said, "I feel more connected to this company than I did to people I saw in the office every day when I used to go into the office every day." So it can be done.
Mark Zandi: I feel the same way. I totally feel the same way. I feel more connected than I ever have because of Zoom and because it facilitates so many meetings and points of contact with people that you just wouldn't have had before. I just find it amazing. But glad to hear that's working for you.
Cris deRitis: I know so much more about your home day core, Mark. I feel real connection.
Mark Zandi: Oh, there, that's a good point, right? Yeah.
Cris deRitis: I'm looking at your background there.
Mark Zandi: You can't see because even though you're a Zoom maven, you're not on Zoom, but I'm in my not elsewhere classified room. Anything that I don't know where to put, it comes in this room.
John Burns: Mark, last time we Zoomed, you were on your patio and I got a good look at your yard and the whole thing. It was awesome.
Mark Zandi: Oh yeah. I wish I was out there right now, John, I'll tell you, but let's get down to business and talk about the housing market. How bad is it, John? It just feels bad, but tell me, how bad is it? How would you characterize the housing market at this point?
John Burns: It's declining pretty darn rapidly. This is going to sound a little horrible, but it's not that bad because if your home price went up 36% in two years, and then you had to give 5% of it back, it's not that bad.
Cris deRitis: I'll take that deal.
Mark Zandi: Yeah, I'll take that experience.
John Burns: All my home builder clients, all of them, have the strongest balance sheets they've ever had. They're kind of saying, "Well, I knew this one last and I've been preparing for it not to last. It actually lasted longer than I thought it was going to. If I have to give some back right now to keep moving forward, that's fine." In fact, I'll tell you, most of them are continuing to hire people right now rather than let people go.
Mark Zandi: Oh, now that's interesting.
John Burns: But we'll see. I mean, we'll talk about this later. If you start talking about a serious recession or double digit mortgage rates or something, that's another story. But right now, that's where their head's at.
Mark Zandi: Right. I guess most of your work is focused on the home builders and the whole complex of home building. Do you also focus on the demand side in terms of home sales and realtor activity, that kind of thing? When you say it's not that bad, maybe [inaudible 00:26:51]?
John Burns: For the mortgage, I know, right. This is tough for people in the mortgage industry.
Mark Zandi: Yeah.
John Burns: There's more resale agents than ever before, too. It's very competitive for them. I don't want to Pollyanna it for everybody. We also have a very large, it's become almost half our business now, the rental side and rents are going gangbusters. From a business standpoint, they're doing great. I know tenants don't like it, but that's the way this is playing out.
Mark Zandi: Right. This is ingle family rental. The single family rental is what you're talking about.
John Burns: Yeah, and apartments too.
Mark Zandi: Oh, and apartments. Yeah, sure. Absolutely. Rents are rising very rapidly. Right. Okay. Interesting. You're saying you can't paint with a broad brush here. It's not all darkness. That there are shades of gray and even some blue sky here for some parts of the housing complex.
John Burns: Yeah. I mean, the dark stuff is what you read in the press. I don't want to Pollyanna. Some of my clients' stocks are down 90% plus. We had tremendous price appreciate. In 2019, the market was getting a little frosty. Then we had the spring of 2020, which was horrible. Then we had seven quarters in a row of four to 5% price appreciation. It seems to me just about everybody was thinking, this is going to end at some point. This is going to end at some point and it has, but they were prepared. I think most business people were prepared for that and I even think the mortgage guys. I mean, they all knew that that's how this business works. It booms and it busts.
Mark Zandi: Yeah. So they're buckled in and prepared. It sounds like what you're saying. Yeah. Hey, did you... Cris is a great housing and mortgage guy as well. He came to us from Fannie Mae many years ago now, but obviously pays very close attention to housing and housing finance. Cris, how would you characterize the housing market at this point? I'm just curious how your thinking lines up with John's.
Cris deRitis: Yeah. I would agree with him. I think things have gone on longer than expected and folks in the business have been anticipating that they couldn't go on forever. Just we've been through this before. You want to be a little cautious or have some safety in the background. I think that's why you didn't see mortgage lenders going crazy with lending standards and really stretching. They didn't need to. I think there's been that discipline on that end and I think even on the construction side. The builders also didn't go as crazy as they potentially could have in the face of all the demand and took a more disciplined approach having been burned in the past. I also think that perspective is important. Things are down now, but relative to where they were in 2019, we're still looking pretty good. It's not like those sales have collapsed just yet. It's not a calamity or catastrophe that we're looking at here. It's more of an adjustment, anticipated a period of transition or adjustment. We knew this was coming.
Mark Zandi: Correct. A correction, not a crash. Yeah. Right. Okay. But a lot depends on a couple variables. One is mortgage rates. The other is the economy jobs. John, when you think about where housing is headed, do you have like a perspective on where mortgage rates should be, where they're going to... I mean, right now the 30 year fixed mortgage rate it's down a little bit from where it was just a few weeks ago. I think we're five and a quarter percent last time I looked. I think we were as high as almost 6% a couple of months ago. Of course, if you go back a little over a year ago before we really got going here and the pandemic started to fade, but I think third year fix was about 2.6, 2.7. I think that was the historical low. Do you have, in your mind, a sense of where mortgage rates will settle and where they're headed? You had this kind of sanguine, well relatively sanguine perspective it feels like. Are you also relatively saying about mortgage rates or how do you think about that?
John Burns: Well, mortgage rates, as you know, basically traded a premium over the 10 year treasury. You can go into your Bloomberg terminal and see what the futures are in the 10 year treasury. I'm not going to be smarter than the bond market. I just look at what the bond market is saying and it really depends-
Mark Zandi: By the way, Ryan tries every day to be smarter than the bond market.
John Burns: He's right half the time and wrong the other half.
Ryan Sweet: Exactly.
Mark Zandi: Yeah.
John Burns: Yeah. That's why I tell my clients, and they're not smarter either. So let's look at where the tenure treasury is and where it's protected to go. That's the most likely scenario. Mortgage rates traded 100, and that's because a pool of mortgages usually pays off after 10 years because somebody refinances after six months and somebody holds it for 30. The premium over that is usually 170 basis points. We do forecast what we think the premium's going to be because that will move up or down. It's up right now because it goes up when people are afraid of a recession, and I think there may be less liquidity in the mortgage market during a recession too. So people will ask for a premium on that. But this is the first cycle any of us have been through where the fed actually buys and sells mortgage securities by the trillions. Pal is manipulating the mortgage market in my view. You have to put that into your calculation.
We're forecasting the rates should be relatively flat because that's what the 10 year treasury is saying. Maybe even come down a little bit once we get through a recession, if we are having one. That's the scenario we're running with and that's what our clients are running with too.
Mark Zandi: Got it. So a prudent planner here, home buyer, home seller, home builder, realtor would be a 30 year fix. That's sort of where it is now, somewhere between five and five and a half percent. That's kind of what you think a prudent planner would count on?
John Burns: Yeah. That's what the bond market is signaling.
Mark Zandi: Yeah. Right. Okay. Ryan, it's very similar to our perspective, right?
Ryan Sweet: Yeah. Very similar, that have mortgage rates moving sideways and that's going to put a little bit of a floor under the housing market going forward. The other thing to keep in mind is that once we get through some of these ups and downs in the economy, there's 40 million millennials that are moving into their prime first time home buying age. That's going to be an enormous tailwind for housing going forward.
Mark Zandi: See, I had this feeling, I got to be the downer here. You guys are like all positive.
Ryan Sweet: That's going to be really hard for you to do.
Mark Zandi: I know.
Ryan Sweet: You're like uber pessimist or optimist.
Mark Zandi: Usually I'm on the other side of this thing. Now you're forcing me to take the other side. Interesting.
John Burns: Well, I'll be a downer on that millennial statement. I think that-
Mark Zandi: Okay, go for it.
John Burns: ... it's pretty much in the rear view mirror. I mean, the bulk of birth was in the early nineties. Those people are turning 30 right now. There's like a '89 to '94 window there, but the births are tailing off after that. Basically, one way I explain it to my clients, they kind of get it, you know that apartment boom we had 10 years ago? Well, that's a for sale boom now, but that only lasts for a little bit. Actually when you run the math, I think that 40 million number is right in, but it's not that much more than the decade before. It's not some huge, like I'm going to hang a very positive hat on the housing market because of this millennial thing. I think it's a slight boom that basically we're almost of the way through.
Mark Zandi: Interesting. Ryan, you should know John wrote a really good book. It's probably now three, four years ago, right, John, or maybe two, three on-
John Burns: Six years ago now.
Mark Zandi: Oh goodness. Okay. I didn't realize, on demographics in its role broadly, but in terms of the housing market in particular. Do you-
John Burns: Can I be a bear on this again? We said we needed about one, 1.37 million housing units built per year over the next decade. We said that in 2016 and people were like, that's ridiculous. We need way more than that. We did 1.35 for the first five years of that. People just need to run the math. When you run the math, now we were oversupplied at the time. Now we're under-supplied. Now we're more in the 1.55 total camp we need, including manufactured homes, by the way. We're pulling more permits to that right now. We still have this pent up under-supply issue from the last few years, but there's some negative people out there who are right, that are saying, well, this 1.7, 1.8 is not sustainable.
Probably the most important thing that people don't think about there is the building products companies are only going to add new plants and new capacity if they think, hey, two million a year is the new norm. They're not doing it because they can see the demographics in this country. They say, we've already got enough capacity. We're having a supply chain issue right now, but that's been a pain point for the home builders during all this because the supply is that... But the people that build the materials don't believe some of the bullish statements, and I agree with them.
Mark Zandi: Okay.
Ryan Sweet: Cris, look at Mark's face.
Mark Zandi: Yeah, this is very interesting.
Ryan Sweet: He's crunching. He's realizing his housing starts forecast is completely off.
Mark Zandi: No, no.
Cris deRitis: Oh, he made a big change this month.
Ryan Sweet: Yes.
Mark Zandi: Oh wait, wait, wait, wait, wait, wait, wait. This is very interesting because John you're right in the middle of an ongoing debate or having in our own forecast. I wanted to go here a little later in the conversation, but maybe we're here. We should do it. We'll come back to the near term outlook for housing because I did also want to talk to you a little bit about where you think the economy's headed in jobs because in addition to mortgage rates, that's critical to determining where things are going in near term. But let's stick with the conversation around supply. Just so I understand, abstracting from the business cycle over the next, let's say, five years, maybe over the next 10, you pick the horizon, how many single family, multi-family family and manufactured homes do we need to put up, do you think, given the demographics?
John Burns: 15 and a half million over the next 10 years.
Mark Zandi: That would be 1.5 million per annum.
Cris deRitis: 1.6. yeah.
Mark Zandi: 1.6.
John Burns: Yeah. Some years will be a lot more, some will be a lot less because of the economic cycle, but that's what we need demographically.
Mark Zandi: Okay. Cris, are we that different? We're not that different from that, are we? We're pretty close to that.
Cris deRitis: Now we're not.
Mark Zandi: No, we're not. Okay.
Cris deRitis: No, no. No.
Ryan Sweet: Now, now.
Cris deRitis: Now, this month.
Mark Zandi: Oh, now we are. Okay.
Cris deRitis: As of our change, we're not. We're quite close to that. Prior to this month we were on the high end, but we made a change.
Mark Zandi: Okay. Okay. At some point here in the not too distant future in the next five years, it feels like it's got to be again abstracting from the business cycle. We've got to have much more construction than that, don't we John, because, and this is how my thinking around this works, the vacancy rate across the housing stock for rent for ownership is pretty close to a record low, but as low as it's ever been. We got data all the way back into the fifties, I think.
Cris deRitis: Sixties.
Mark Zandi: Oh, sixties. Right. I think the home ownership vacancy rate actually is at a record low. The rental vacancy rate is not quite. That is manifested in high house price growth, strong house price growth and very, as you pointed out earlier, strong rent growth. That's not sustainable, so we need to see rent growth, house price growth come in to something that's more consistent with incomes and construction costs. That requires a higher vacancy rate. At some point in the not too distant future, we need construction that's going to be above 1.5, 1.6 million to get that vacancy rate back up to something, what I would call, an economist would call the natural vacancy rate. Is that how you think about it or are you landing in a similar place or how do you think about that?
John Burns: That is how I'm thinking about it. But the low vacancy, the under-supply you're talking about, our estimate of that is 1.7 million units. That's in my 15.5. If we didn't have that, we would be forecasting 13 and some change, which is what we were doing in 2016 because we believed at that time we were oversupplied because the vacancy was the exact opposite of what you were just talking about. In 2016, it was actually quite high.
Mark Zandi: Okay. Well you said you think-
John Burns: We've read the math.
Mark Zandi: ... the under supply is 1.7 million? Is that what you just said?
John Burns: Yeah. We think if you look at the demographic demand for shelter, we should have 1.7 million more housing yields built right now.
Mark Zandi: Okay. We're like twins. I mean, aren't we, Cris, intellectual twins here? I mean, that's exactly what we're saying. Well, not exactly. We're saying 1.6 million.
Cris deRitis: We're in that, but a lot depends on what your assumptions are for house informations and headship rates, but we're in that ballpark certainly. Right. There are other estimates out there of three, three million, seven million shortage and that just seems way overstated.
Mark Zandi: Yeah. Okay.
John Burns: Can I bash those?
Mark Zandi: Feel free.
Cris deRitis: Please. Please.
John Burns: They're all very simplistic analysis but nobody ever says exactly what Mark just said about the vacancy rate. People point to, well 2000s, we built this. Well, 2000s, we overbuilt the market. So they're very simplistic analysis that's very easy to fall on the trap of thinking we're under-built by five or six million. Most people I think have heard the argument from me and Mark and others now and are dropping their numbers back down closer to us.
Mark Zandi: Oh, is that right? I didn't notice that. People are coming in.
John Burns: Yeah. I've seen a lot of people. I won't name names, but there was one who was one of the first ones out there who was saying we're under-supplied by five million and they're now down around two.
Mark Zandi: Okay. Okay. Interesting. But that does mean or imply that at some point, not this year, not next year because of the, what, higher mortgage rates and the adjustment and the weaker economy and so forth and so on. But at some point in the not too distant future, kind of mid decade, it feels like we should be seeing years of 1.7, 1.8 million kind of housing starts, John.
John Burns: Yes. I think we're going to see that this year. Yeah.
Mark Zandi: Oh, this year. Oh, okay. Really?
John Burns: Well, what are we running at right now when you throw in there [inaudible 00:42:40]?
Mark Zandi: We're at 1.6, 1.55 last month. We were at 1.8 in April and we've come way down because builders seem to be freezing up here, but if you believe the data, the census data.
John Burns: Yeah, no, the last months have come down, but I think we were on pace to do above 1.55 this year. There's so much already under construction that's going to get finished. I don't know our exact numbers, but I think we're going to exceed that. Then after that, it's going to come down because, and this is where I think we really have a competitive advantage, is our home builder clients are telling us, "Here's how much we're going to build. Here's our business." It's all about they build it only if it's the right financial decision for them. It's going to be an interesting conundrum next year because they've already bought the land to have more open communities. They have more actively selling communities next year than they do right now. But the sales pace per community, which has been running close to three, is probably going to get down around two. It'll probably be less construction next year at the of the day.
Mark Zandi: Right. Okay. Okay. Interesting. The numbers we've been banding about have been really housing starts not housing completions. It feels like we could get a lot more completions than starts because we've got this boatload of homes that are in the pipeline going towards completion kind of mucked up because of the supply chain issues. You're saying those completions are going to get across the finish line here over the next maybe year or so, so we get more.
John Burns: Yeah.
Mark Zandi: Yeah. Right. Oh, okay. Okay. Interesting. Cris, it feels like our forecasts are now we have marked down. You're right. We have marked down our forecast a bit, but it feels like our forecasts now are very consistent with John's. Would you say? It feels like it.
Cris deRitis: Yeah. It's certainly much more consistent now.
Mark Zandi: Okay. All right.
Cris deRitis: Where did things really get interesting, I don't know if you want to go here, but if you look out beyond 2030-
Mark Zandi: Well let's do-
Cris deRitis: ... demographics are really-
Mark Zandi: Yeah, go ahead. Yeah. What do the numbers look like? You've actually noodled it out 10 years, 15 years from now. What do the numbers look like way out there?
Cris deRitis: Yeah. There's a continuous decline because our household formations keep shrinking, right. We're getting past this bubble in terms of the millennials, as John mentioned. The subsequent generations are smaller. At the same time, you're going to have the baby boomers who are hanging on to their properties today, even with second homes, third homes moving on. That's going to free up some more supply. Based on our projections, that construction industry is continuing to decline over time in terms of total output per year, the only wild car there might be climate change or losses of properties if we're hit by more storms or something along those lines.
John Burns: Or immigration policy.
Cris deRitis: Or immigration. Well, yeah. We're assuming.
John Burns: You're totally right. I mean, you just hit the one thing everybody misses is the oldest baby boomer is, what, 76 right now. That birth surge we saw in the late forties and early fifties is going to start providing some resale supply to the market for the first time ever.
Cris deRitis: Right.
John Burns: We've been having these demographics where we had like four million people graduating from college or high school every year and two million people passing away, to going to like 4.3 million people graduating from high school or college and four million people passing away. That's not a lot of growth.
Mark Zandi: Yeah. Cris, remind me, if you look 10, 15 years out, what are we saying the underlying pace of housing construction should be starts? Are we down to a million or less per annum?
Cris deRitis: I think it's less.
Mark Zandi: It's less.
Cris deRitis: By that point. Yeah.
Mark Zandi: Right. Okay. Yeah. John, you're coming to the same place, right? When you look out, given the demographics that you so carefully look at, it feels like unless immigration changes to a dramatic degree, we're going to be looking at much lower levels of housing construction out there, 10, 15 years from now.
John Burns: Yeah. I think you're right. I have not done the math past 20, 30. Below a million sounds really low, but maybe you're right. I need to go run that math.
Mark Zandi: Yeah. Okay. We can share that with you. We got a very elaborate spreadsheet now, which is actually pretty cool. It's been very informative. I know Cris is writing a paper on this right now. Okay. Very good. One other thing on the affordable housing, well the shortage, the 1.7 million, do you think there's any role here for policy? Should policy makers be doing anything? If you're a king for a day or a week, would you change anything with regard to housing policy to incent more construction or not? You just leave it up to the market to figure this out.
John Burns: Well, we're definitely not a policy shop and I'm not a policy guy, but I'll tell you. What's what seems to be working is some of the job creation outside metro areas. I don't know what federal policy can do to stop nimbyism. Maybe you can figure that one out, but if you look like just in the last few months, Mazda and Toyota are going outside of Huntsville and Kia and Hyundai are going down to Southeast Georgia. Volkswagen's going to Chattanooga, to areas where there's not a lot going on. They're going to create jobs and they're going to create housing. Maybe it sounded like there was some stimulus for EV cars and other things in this latest-
Mark Zandi: There was. Yeah.
John Burns: ... policy that would support these companies doing this. This is going to provide areas where there's no resistance to development to allow economic growth and affordable housing.
Mark Zandi: Right.
John Burns: In Asia, they build new cities. They go to the middle of nowhere and they put up a city with half million homes. It feels a little bit similar here.
Mark Zandi: Right. Oh, that's interesting. You're saying the market forces may actually iron this out reasonably gracefully, just because of the move towards sort of exurban rural areas that's ongoing. I guess remote work might, and maybe this is what you're saying, facilitate that as well that people can move to [inaudible 00:49:18].
John Burns: It could, but those areas need infrastructure and other things. I mean, policies that would provide those sorts of things would certainly help.
Mark Zandi: Right, right. Yep. Absolutely. Okay. All right. Cris, Ryan, anything else on this that we should bring up with John in terms of the affordable housing shortage and housing activity? Anything else you want to bring up here? Do we cover it, Cris?
Cris deRitis: Yeah, no.
Mark Zandi: We got it. Okay. Fine.
Cris deRitis: We got in full agreement with John.
Mark Zandi: Okay. Let's double back because we went from the short term to the long term. I want to go complete the conversation around the short term. We talked about mortgage rates and we kind of settled on five to five and a half percent for a 30 year fixed. John, when you talked to your clients, they must be asking you about the economy, about jobs, because that's the other big component here in terms of housing demand and housing activity. What do you say? How are you thinking about that in your look forward on prospects from the housing market?
John Burns: First of all, I'll say we devour all the Moody's information on that.
Mark Zandi: Okay. Very good. I like that.
John Burns: I actually think you are the best ones out there at doing that. So thank you for that.
Mark Zandi: Oh, really? John, you're not sucking up, are you?
John Burns: Well, you want to me to diss you a little bit. The competition is not very good.
Mark Zandi: Let's dwell on that statement for a little bit.
John Burns: Well, you've always looked at it by sector and then rolled it down to the metro area, at least that's what we see.
Mark Zandi: Yeah.
John Burns: I think that's the right way to look at it. The tech sector, with all those companies that grew 400% in five years, they're getting hammered right now. The mortgage industry is getting hammered right now, but I'm starting to come to the conclusion and anybody who's made a lot of growth bets, any company and hired a lot of people and taken on a lot of debt, that's what I'm concerned about because of last recession of site. 11 of the prior 12 recessions were all fueled by excessive debt somewhere in them. That's where I try to focus on, okay, who's over levered. I see a ton of companies now whose debt is up, but they've hit the bond market and it's not due for five years. By the way, it's at four and a half percent. It might be trading at nine right now, but their coupon's only four and a half. So they're fine. But then what concerns me is what I don't know.
The CEOs of the three biggest investment banks, JP Morgan, Goldman Sachs and Morgan Stanley have all come out with huge bearish comments about there's a hurricane on the way. Even overriding their economist, there's greater than a 50% chance of a recession. Those guys are seeing something that I'm not seeing and that's what scares me. We're telling everyone be really cautious here because of what David Solomon at Goldman Sachs is saying and Jamie Diamond and James Gorman. They're smart people.
Mark Zandi: Yeah. Absolutely. It is interesting though, and I follow the economic shops of all those Wall Street firms, none of them have a recession in their forecast. None of them. I don't think. I'm sure JP Morgan doesn't. Goldman doesn't.
John Burns: Well ask them if they're looking at their own loan book, which they're probably not even allowed to.
Mark Zandi: Oh, the economists you mean?
John Burns: Yeah.
Mark Zandi: Oh, okay.
John Burns: What are the levered loans that they've been selling to insurance companies?
Mark Zandi: Yeah. Yeah. Interesting. This has been bugging me, John, that we're going to talk ourselves into a recession. That when folks like Jamie Diamond, I'm not sure if people pay attention to Elon Musk and what he says, but he's saying roughly the same thing, the hurricane is coming. It just makes people nervous and it becomes self-fulfilling almost.
John Burns: Why would he say that when he is trying to convince you to buy his shares?
Mark Zandi: Well, I don't want to speculate. I've got thoughts on that, but I don't think I should speculate, not in the podcast.
John Burns: Okay.
Mark Zandi: Yeah. But that's a good good. That's a good question. So it makes you nervous.
John Burns: What you just said I think is-
Mark Zandi: You're saying recession risks are high because these people who clearly have information on what's going on deep in the financial system and economy are speaking very darkly and therefore have to be cautious about what's going on here.
John Burns: Yeah. I worry about what I don't know. In the last cycle, I got lucky and had John Paulson and Steve Eisman as clients and they were telling me going on in the mortgage security financial world. I had no idea. Thank God they clued me in.
Mark Zandi: Oh, well-
John Burns: Well, I keep asking people if there's something like that out there and I haven't heard of anything.
Mark Zandi: Yeah. Are you-
John Burns: We're not forecasting a huge negative recession. I'm just telling you risk on because of what these other guys are saying.
Mark Zandi: Got it.
John Burns: One other thing I'll tell you I did see in my business. We had years of really low interest rates. So the thirst for yield by bond funds was insane. I mean, how do you get some seven or 8% interest? I mean, your pension funds need, what, seven or 8% per year. How do you do that? You have to take a lot of risk. You have to buy the first loss piece and some tranche of high yield debt that probably wasn't even rated by Moody's right. That's what keeps me up at night is that stuff.
Mark Zandi: Right. Right. Right. The unknown unknowns, I guess, that you would call them. Interesting. Hey, Ryan, you're listening to that. What is your sense of that? I mean, what do you think when you hear John say that about these dark comments coming from senior leaders in the financial system?
Ryan Sweet: I agree with him. The one thing that makes me nervous as well is that the economic data saying that we're not barreling towards a recession. But when you have these bank CEOs coming out, and to his point about the corporate bond market, I mean, it's the junk of the junk that really could cause some problems down the road.
Mark Zandi: Right. Okay.
Ryan Sweet: Again, some things-
Mark Zandi: I mean, you follow the corporate debt market closely, but you're not seeing anything, right?
Ryan Sweet: No.
Mark Zandi: You follow it very closely. You're following it for issuance and by rating.
Ryan Sweet: Spreads. Yep. Everything-
Mark Zandi: You're not seeing it.
Ryan Sweet: In aggregate, everything looks fine, but you don't know if there's something bubbling beneath the surface that we may not have data on, in that maybe this is what the bank CEOs are getting worried about because John's, his point's spot on.
John Burns: I'm not worried about good companies. Yeah. I mean, good companies have good debt. Actually, I mean, good companies with solid balance sheet, their debt is trading at a 10% yield right now. There's a pretty good yield.
Ryan Sweet: There's nothing to worry about the investment plan.
John Burns: I'm more worried about the other stuff. I have client who is lending against people's crypto balances, okay, as a small percentage of their portfolio to get some yield. That's the stuff out there that I worried about.
Ryan Sweet: That would make me worried.
Mark Zandi: What's that?
Ryan Sweet: That makes me worried.
Mark Zandi: Right, right. Yeah. That makes you worried.
John Burns: Well, how many companies are lending to hedge funds whose portfolios are down, whose assets are down 30%? Where's that debt? That doesn't trade where you and I can look at it.
Mark Zandi: Right.
John Burns: I don't want to be super bearish here, but I'm focused on-
Mark Zandi: Yeah, I hear you.
John Burns: ... what keeps me up at night. I'm not saying this is what's going to happen.
Mark Zandi: Yeah. Okay. That makes sense. You're saying, okay, Mark, I buy into your baseline no recession. It's going to be uncomfortable kind of an economy, tricky slow growth on the border of recession, but no recession. But having said that, the risks are definitively on the downside and if something is keeping me up at night, it's all these things that could be going off the rails in the financial system that are very opaque. We don't know and that makes me worried. That's what you're saying.
John Burns: Yeah.
Mark Zandi: Yeah. That makes sense. Yeah. Right. Okay. Fair enough. I'm not going to try to cheer you up. Yeah. I think that's very reasonable. Let me ask you, let's go back to the housing market. One other thing that we talked a little bit about, but I just want to talk about it a little bit more, is about rank growth. As you pointed out, rank growth has been extraordinarily strong, double digit year over year now for more than a year, pretty much everywhere coast to coast, strongest in the south and the west, as you would expect, given all the remote work and people moving in, but it's everywhere here. In Philly, you go look at the data, we never see double digit rank growth in Philly, and we're seeing double digit rank growth in Philly. So it's everywhere.
How does that get resolved? I mean, is it that builders do continue? This is one reason why they're not going to really pull back on their building during this week period. That we are going to see a lot more construction going forward. We're going to get that supply and get that rank growth down. How's that going to play out?
John Burns: Well, it's the same thirst for yield that also is an inflation hedge has caused a ton of capital to come into apartment construction and single family rental home construction for rent because there's a huge desire for that. If we have a lot of inflation, then the tenant's income's going to go up so I can raise rents. If the cost of the building is going to go up, there's some inflation hedge there too. Rising mortgage rates creates more rental demand because it takes it away from home ownership. The inflation statistics here where we have a guy, Eric Finnegan who monitors all the inflation stuff for us, the rental component of that is super lagging. You know that the next year, the rental component of inflation is going to be higher than it is right now because those rent increases have already heard it.
It's fascinating. I'll just say with some humility here, we got that totally wrong. I mean, we did not see double digit rent growth coming in any way, shape or form. What we missed, I learned, was a decoupling of households in COVID, which was people went from having one or two or three roommates down to living by themselves because they could move somewhere more affordable. They didn't want to be hanging out with people and getting sick and they needed better bandwidth on their WiFi.
Avalon Bay had a great statistic on this, but the public companies have more economic data now than the federal government. Avalon Bay disclosed that they went from having this huge apartment rate, went from having 1.8 tenants, 1.8 people per apartment to 1.6 people per apartment in a one year period. That's massive-
Mark Zandi: That's interesting.
John Burns: ... household formation.
Mark Zandi: Yeah. That's fascinating. You're saying because of COVID and some fears of being in close quarters and as you also pointed out bandwidth, because people needed to work remotely, we saw this breaking apart of households and more households formed and it was all rental. Most of it was rental. Therefore, that increase in demand was key to juicing up the rec growth that we're observing now.
John Burns: I'll quote some real page data on this that was amazing. For 20 years, we never saw more than 300,000 increase in the number of apartments being leased. This is in the institutional quality apartments. In 2020, it hit almost 700,000. They have this data apartment by apartment. That's not the entire country. It's a subset, but that's what happened. When that happens, rents go through the roof.
Mark Zandi: Right, right. How does this get resolved going forward? I mean, double zero rank growth is not sustainable because people can't afford double digit rent growth. You're going to see some demand destruction. Households now can't afford because they just literally can't afford the rent, I assume. Now you saying that, plus this increased in supply that we were talking about earlier, will ultimately quell the very strong rent growth. Is that kind of your thinking?
John Burns: It's not sustainable for sure, but the other piece of the data that they had, which was fascinating and our consulting team has seen it too, is rents were up 13% year over year but the incomes of people that were applying for those apartments. It's not necessarily the same people as a year before who are up 13% too. You can look at every single public company who discloses their rent to income ratios, they haven't moved. The narrative would normally be exactly what you said, Mark, wages didn't go up 13%. People got to be stretching. What happened was I believe people relocated and they took their $100,000 income with them to an area where most people make 80 grand and rented a nice apartment there. It was a fascinating pivot I never saw in a million years. But our consulting team did 900 feasibility studies last year, half of them on rental. That's what they're seeing too is these rents are up dramatically, but these people are qualifying just as easily as they did the year before and the year before that. It's crazy.
Mark Zandi: Oh, that's fascinating. To some degree, it's also played out in the home ownership market too. People left big urban centers, New York, L.A, moved to cheaper areas and that juiced up house prices. Now, as you're saying, in those areas they moved to, the same kind of dynamic is playing out in the rental market.
John Burns: The poster child for that is Austin, Texas where I think it's like 40% price appreciation or something last year. It was just insane. But one group did an analysis that actually matched people that moved and found that they sold their home in the Bay Area and bought a home that was 30% larger on a larger lot for 30% less than the home they sold. There's a company that dominates the mortgage rate lock business who calculates the debt to income ratio on all the people that get mortgage rate locks. Despite that price appreciation, Austin, Texas had one of the lowest debt to income ratios in the country. I was stunned. Now what I think what's happening right now is that migration is stopped and you're going to be stuck selling homes to school teachers in Austin. I think it's going to be really bad in Austin, but that's what happened for those two years.
Mark Zandi: Oh, fascinating. Cris, what do you think of that narrative, that perspective?
Cris deRitis: Yeah. It's interesting. I'm trying to figure out, well, those people come from somewhere. So those markets must be negatively impact, but we would really see that either. There was some softening in San Francisco, but-
Mark Zandi: Softer.
Cris deRitis: Softer.
Mark Zandi: The rank rate in San Francisco is lower than anywhere else, but it's still high single digit.
Cris deRitis: Yeah. Trying to square the circle, or the other thought I have is, is this a one time move? Going forward, we won't get a repeat of this.
Mark Zandi: That's what John's saying, actually, I think.
Cris deRitis: Yeah.
John Burns: Yeah, yeah. I'll square it for you. Yeah. So if San Francisco renters hadn't gone from, I'll just pick the national average, 1.8 to 1.6 per apartment, rents would've fallen. But there was some household formation in San Francisco too because people were definitely decoupling in San Francisco.
Mark Zandi: Oh, I see.
Cris deRitis: Offsetting. Okay.
Mark Zandi: That is fascinating. That's really interesting, but you are thinking that that's a one time shift related to the pandemic and remote work and all these movements. As that abates, then this should come out of rent. Rent growth should moderate.
John Burns: Yeah. I mean, this trend can't go on forever.
Mark Zandi: Yeah. Oh, that's fascinating. That's very interesting. All right. Okay. One other question then because there's so many riddle in the housing market and you're answering all of them in a very interesting way. Investors. I mean the data show that big investors, institutional investors have really stepped it up in the single family market, the buy to rent kind of model. Some build to rent, but a lot of buy to rent, particularly in the south and in the west, the mountain west, you've seen a lot of this activity. I guess two questions or I've got a bunch of questions, but first two questions up front. One, did I characterize that correctly? Do you think that the way I just stated things as the way you would state it? Second, how do you think about that? I mean, is this a good thing, a bad thing? Is that even appropriate to ask? How do you think about all the investor demand in the marketplace?
John Burns: Yeah. I mean, it's probably a mix of some good and some bad. We've actually gone through the pain of geo coding every single house these guys own, and we've matched to their public disclose number so we know. The companies that own a thousand or more homes nationally, so let's call those the big companies, still own less than 3% of the homes in America. But they've gone from 10 years ago, they're buying like 0%. Now they're buying... So 6% of all the homes in America recently have been purchased by them. You're right. They've gone from zero to two to four to six. It's gone up dramatically. It's very concentrated in certain areas. I think that's what causes all the headlines because there's some zip codes where there are 40%. I would put those in two buckets.
They started growing like crazy in 2012 in the mortgage crisis. They started buying homes wherever there was distress. They have heavy concentrations of ownership in zip codes where there was a lot of subprime lending. Then what they're doing now though, since that game is over, is they have something that all of them refer to that's called a buy box, where I'm looking for a home, basically around the median price in an area that has a decent rent to that home price ratio. They're all kind of looking in the same zip codes because everybody's in the same buy box. There's a lot of activity in those areas and it does not add up to a huge percentage of, well I said, 6% nationally. But in some, in those areas, which Charlotte, North Carolina is the poster for that. You've seen that featured in some of the newspapers. It is an issue. If you're somebody who's trying to buy a home for your family, it's tough.
The flip side of that is, and these guys get no credit for this, but I'll talk about the apartment market is a parallel here. 40 years ago, 50 years ago, there was no big institutional apartment market with garden apartments and professional lease. There was all mom and pop landlords. Nobody's bashing those companies because what they did over time is they created really nice communities. They charge a lot of money for it. It's a discretionary choice to live in one of those nice communities, but they really take care of things. Things break and they fix it. The same thing is going on in single family rental housing. Yeah. In fact, you should do this, Mark, on your speeches. I do this a lot lately. I ask the room to raise your hand if you've ever rented a home before ever. Almost always like half of the people raise their hand.
Mark Zandi: Oh, is that right?
John Burns: But there's this notion... Yeah, at some point. I mean, have any of you rented a home before?
Mark Zandi: I've never rented a home. A single family home? No. An apartment, but no single. Yeah, yeah. Cris, have you or Ryan? Have you guys?
Ryan Sweet: Mm-mm.
Cris deRitis: I have.
Mark Zandi: No. You have?
Cris deRitis: I've been both sides, all sides. I've been a renter, a landlord.
John Burns: So there's four... Okay. Then we'll pick on you for a minute for being one of the landlords.
Mark Zandi: He's the crypto king now. Yeah. He owns a lot of crypto, John.
John Burns: All right. So good example. Two out of the four of us. I rented a home after I graduated from college with four roommates. It was two of the best years I ever had in my life. There is a stage in life where a lot of people rent a home.
Mark Zandi: Yeah. Okay. Good point. Good point.
John Burns: Their fear is if you have kids, your number one fear is that my landlord's going to sell the house and I'm going to have to move. But if your landlord is a rit, first of all, there's a tax penalty if they sell the house. So they're not going to sell the house. That fear is gone. I'll pick hurricane Katrina, for example. When that hit Houston, I mean, if I was your landlord in Houston, you were done. Nobody was there to help you. American Homes 4 Rent the next day had trucks coming in from Alabama and all these other places to help clean up the house and get the tenants back in. They didn't wait for the insurance money to fix the place because they had the capital and they did it. There's some positives to being a tenant with these people that gets like no press. I mean, there's some positives and negatives to this, just like most policies seem to have positives and negatives just [inaudible 01:12:39].
Mark Zandi: Well that's fascinating. You think many people have, at some point in their life, rented a single family home. That's interesting.
John Burns: Well, start asking people.
Mark Zandi: Yeah, yeah, yeah. I will.
John Burns: People get relocated to Atlanta. You know what, let's rent for a year to see if we like it, see if I like my new job, check out. People get divorced and okay, well, in the meantime we're selling our house and I need to build back up and we're going to split custody with the kids. I need a house.
Mark Zandi: Yeah. I guess the thing that there's a lot of good, but there's one bad that I think it's bad. I'm curious. I know we're running out of time. Maybe one here is home ownership because obviously if the institution owns the home, it's going to be difficult for an American family to own the home. Home ownership, which has gone up and down in all around, but really gone nowhere in two generations feels like this isn't going to help out here. That's going to hurt home ownership. Do you think I have that right? Should I be worried about that at all?
John Burns: Well, as I mentioned, they're not doing this in like every neighborhood in America. So sure if they outfit somebody who wants to buy a homeowner in a certain zip code, that doesn't seem to help, but home ownership hasn't plunged because of it at least according to my math. When we wrote this book, we went back and studied it for years. There was this notion that the millennials were never going to become homeowners. I mean, they're all buying homes like crazy. Like you were saying earlier right now, every generation seems to get to an 80% home ownership rate by the age of 60.
Mark Zandi: Oh, that's interesting.
John Burns: I believe that's what's going to happen and you may have to buy a smaller home. You may have to go five miles further from work. You may have to relocate to a different area, which now work from home a lot of people can. Even lower paid telemarketing jobs can go from anywhere. I think people are going to figure it out. I don't disagree with you, but I don't think it's the end of home ownership in America.
Mark Zandi: It's very refreshing talking-
John Burns: One other thing I want to mention though, well 70% of those tenants, because we surveyed them, want to become homeowners at some point. Just not right now.
Mark Zandi: Right. Good point. Right. John-
John Burns: It's mountain climbing thing.
Mark Zandi: John, I have to say, it's refreshing talking to you. You're the first person I've talked to in a long time where I'm having to talk you down. You feel so good. I will say, you definitely have fought it for another book. If it's been six years, you got to write another book. I mean, I got the title for you.
John Burns: Oh my God. That was so much work, Mark. I'm not sure if I'm going to do that again.
Mark Zandi: No. Let's write it together, John. I got a good one for you. Here's the title, riddle me this in the housing market. We just do one of these things. Each chapter is one of these riddles and we write about it. What do you think? Now-
John Burns: I'll hit you up with [inaudible 01:15:40] market scripted all the work.
Mark Zandi: You know what, this is your problem, John. This is the problem. Wait, let me tell your problem. I'm tell you your problem, John. The problem is you're looking out at the Pacific ocean right now and having way too good at time. That's the problem. You got to come live in the Northeast a little bit, a little bit of hardship and then you'll start writing a book. I'm just saying. No reaction.
John Burns: Come visit me in February.
Mark Zandi: John, it's so good to have you on. It was a real pleasure and go back to the fun and sun. I really want to thank you for the time you spent with us and hope to have you back on again. Please take care.
John Burns: Yeah. Will do. I enjoyed it a lot and as always, I learned quite a bit. So thanks, Mark.
Mark Zandi: Oh, you're kind to say. With that, dear listener, we're going to call this a podcast. Till next week, take care now. Bye-bye.