Robert Dietz, Chief Economist of the National Association of Home Builders, joins Mark Zandi, Marisa DiNatale, and Cristian deRitis to discuss the outlook for mortgage rates, home sales, and construction activity. The team delves into the immigration and demographic trends affecting housing demand along with the 5 L's (Laws, Labor, Land, Lending, and Lumber) limiting homebuilding today. Rob's quoting of Tolstoy catches everyone off guard while the wide-ranging discussion made it difficult for the team to come up with a clever podcast title so we took a cue from Friends.
Robert Dietz, Chief Economist of the National Association of Home Builders, joins Mark Zandi, Marisa DiNatale, and Cristian deRitis to discuss the outlook for mortgage rates, home sales, and construction activity. The team delves into the immigration and demographic trends affecting housing demand along with the 5 L's (Laws, Labor, Land, Lending, and Lumber) limiting homebuilding today. Rob's quoting of Tolstoy catches everyone off guard while the wide-ranging discussion made it difficult for the team to come up with a clever podcast title so we took a cue from Friends.
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two friends and cohosts, Cris deRitis and Marisa DiNatale. Hi, guys.
Cris deRitis: Hi, Mark.
Marisa DiNatale: Morning Mark.
Mark Zandi: You guys getting snow up there in the Northeast? Oh, Marisa, you're not. I know you're-
Marisa DiNatale: I'm not getting snow in Southern California-
Mark Zandi: ... [inaudible 00:00:31] in Southern California.
Marisa DiNatale: ... no, not yet.
Mark Zandi: Yeah.
Marisa DiNatale: The climate is changing, but not that rapidly.
Mark Zandi: Right. Nice in Southern California, I assume.
Marisa DiNatale: It is. It's nice. It's about 60 degrees, maybe 55-
Mark Zandi: 50?
Marisa DiNatale: ... 60.
Mark Zandi: Yeah-
Marisa DiNatale: Yeah.
Mark Zandi: ... and sunshine?
Marisa DiNatale: No sunshine. Actually-
Mark Zandi: No sunshine.
Marisa DiNatale: ... it's pretty cloudy. Yeah.
Mark Zandi: [inaudible 00:00:50] Cris-
Marisa DiNatale: We had some [inaudible 00:00:51]-
Mark Zandi: ... that doesn't sound-
Cris deRitis: Oh-
Marisa DiNatale: ... we're supposed to get-
Mark Zandi: ... so nice to me.
Cris deRitis: ... oh, I'm so sorry.
Mark Zandi: How do [inaudible 00:00:54] 50 [inaudible 00:00:54]-
Cris deRitis: I'm so sorry.
Mark Zandi: ... yeah.
Marisa DiNatale: We are supposed to get rain for the weekend.
Mark Zandi: Well, that's a good thing, right?
Marisa DiNatale: It is. Yeah-
Mark Zandi: Yeah-
Marisa DiNatale: ... as we say here.
Mark Zandi: ... and Cris, I'm down in Florida, but you're up in Philly getting a lot of snow I understand.
Cris deRitis: We are. Second snow day this week, so if there's some chaos in the background, that's why.
Mark Zandi: Yeah, we were just talking about this. I thought school days were a thing of the past with virtual learning. I guess not, huh?
Cris deRitis: Snow days.
Mark Zandi: Yeah, snow days, right? I mean, they don't immediately get on the PC and do the virtual thing? That's not just automatic, I guess.
Cris deRitis: No, no, they're not corporations. They're-
Mark Zandi: Okay, okay.
Cris deRitis: ... they got bus schedules, everything is planned, so can't just change over so quickly.
Mark Zandi: Yeah, but I know there's some relief in Philadelphia to get snow because I think there was like two years of no snow or some-
Cris deRitis: That's right.
Mark Zandi: ... outrageous... yeah, so anyway. Okay. Well, we got an action-packed podcast, and this is going to be all about housing and we've got a great guest to help kind of figure out what's going on, and that's Robert or Rob Dietz from The National Association of Home Builders, Chief Economist. Hey, Rob. How are you?
Robert Dietz: Doing well. Good morning.
Mark Zandi: When I was emailing you last night, you were getting on a plane, coming back to D.C. Where were you?
Robert Dietz: I was in Kansas City this week. As part of my duties for NAHB, we try to get out in front of our local chapters, so I travel once or twice a week. I think next week I'm going to New Orleans and St. Louis.
Mark Zandi: Oh, so you travel a lot then?
Robert Dietz: Yeah, yeah, a lot.
Mark Zandi: Yeah. Yeah, and Kansas City had it thawed out. I watched a little bit of that Dolphins-Kansas City game. That was pretty brutal.
Robert Dietz: Actually, yeah, my wife and one of my twin boys actually attended that game in person. She's from-
Mark Zandi: Hmm.
Robert Dietz: ... the Kansas City area, so they flew back to D.C. I flew out there. It was a little bit warmer from what they experienced, but it's still been pretty cold.
Mark Zandi: Pretty cold. Well, I'm glad you're safe and sound and on the podcast, and maybe you could just tell us a little bit about yourself. How did you become Chief Economist. I've known many NAHB chief economists, going all the way back. I don't know if you remember Dave Seiders. You remember-
Robert Dietz: Oh yeah.
Mark Zandi: ... Dave?
Robert Dietz: Yep.
Mark Zandi: Yeah.
Robert Dietz: Dave was-
Mark Zandi: [inaudible 00:03:16]-
Robert Dietz: ... my first boss. Yeah, we've been lucky. We had a series of Daves. We had Dave Seiders, who multiple decades, and Mark, you worked with him a lot. Then, we had Dave Crowe. When I basically applied for this position, they said, "Well, your name's not Dave." I said, "Well, my middle name is Dave," so that kind of got me in the door a little bit there. No, I've been at NAHB now for 18 years. I joined in November 2005 as housing data, people will remember November 2005 was the peak for single-family start, so maybe I've been the bad luck element for the industry there.
Yeah, for the last eight years I've been the Chief Economist, and my wife and I are both economists. We both got our PhDs at the Ohio State University in the early 2000s and been lucky. I had a lot of good housing economist mentors. I literally got into housing economics when I was 19 years old, and my principal of economics professor at George Washington University, Professor Anthony
My middle name is Dave. So I kind of got me in the door a little bit there. But I've been at NAHB now for 18 years. I joined in November, 2005 as housing data. People will remember November, 2005 was the peak for single-family start. So maybe I've been the bad luck element for the industry there. But yeah, for the last eight years I've been the chief economist and my wife and I are both economists. We both got our PhDs at the Ohio State University in the early two thousands and been lucky. I had a lot of good housing economist mentors. I literally got into housing economics when I was 19 years old, and my principal of economics professor at George Washington University, professor Anthony Yezer, was the housing economist and chief-
Mark Zandi: Oh, is that right?
Robert Dietz: ... yeah. I thought I was going to do macro and maybe law school or something like that, and he kind of said, "No, you're interested in maps, you want to do housing economics." I've been really, really lucky in terms of being mentored by a lot of really good housing people.
Mark Zandi: Well, I remember the NAHB used to have this annual conference. I don't know if you still do, at your headquarters at HQ in D.C, which is a really nice HQ. Are you still there at the same HQ or-
Robert Dietz: Yeah, we're still there at 15th and M. We're-
Mark Zandi: Yeah, 15th and M. Yeah.
Robert Dietz: ... had a quarter of neighbors with Fannie Mae when they moved from Northwest D.C, although I guess news this week they may be giving up the lease of that new building-
Mark Zandi: Oh.
Robert Dietz: ... which opened in late 2019, so kind of a signal on the office market and less of the housing market. Yeah, we used to have an annual forecast conference. That was kind of a casualty of the Great Recession and the housing crunch. Now, we do a variety of virtual events and really our focus is trying to get in front of builders on the road. My biggest trip this year, last week was in Utah and I got stuck up highway for three hours when they closed it in front of me. There's a fair amount of travel in this job, but it's nice. You really do get to learn kind of the local commentary from the builders, the remodelers, bankers, realtors, to match the data that we all stare at every day.
Mark Zandi: I got a great story about one of those conferences. It was right before the whole world changed for the housing industry. It was like circa... It might've been 2005. Dave Seiders would've been the Chief Economist then. Yeah, and I had been doing these conferences for a number... not a lot of years, a number of years, but this one I was very lugubrious about the housing market. I mean, I was, "We got a big problem dead ahead," and Dave got so annoyed at me, I mean really annoyed because to some degree he in particular-
Robert Dietz: Sure.
Mark Zandi: ... was a bit of a cheerleader-
Robert Dietz: Sure.
Mark Zandi: ... [inaudible 00:06:37] and he got really mad at me in a nice kind of way. I was walking out of the conference feeling a little uneasy because he was definitely mad and he was a force. He was well-known in the industry and I just felt a little queasy about it. There's a hotel right across the street. I can't remember. It's nice hotel.
Robert Dietz: The Madison, yes.
Mark Zandi: The Madison, right, so I walk into the Madison thinking May I'll just get a cup of coffee and I'm not making this up.
Robert Dietz: All right.
Mark Zandi: I turn the corner in the hallway and I'm face to face... you'll never guess who. The Dalai Lama. I'm not kidding.
Marisa DiNatale: What?
Mark Zandi: I'm not kidding.
Marisa DiNatale: The Dalai Lama.
Robert Dietz: This is the oddest story.
Mark Zandi: I [inaudible 00:07:24]-
Robert Dietz: All right, all right.
Mark Zandi: ... I'm not making this up, and I'm looking at this guy, he's looking at me, and of course, his bodyguards were like, "What the hell just happened?" I'm going, "I know this guy. Who is this guy?" Before I could figure it out, the bodyguards ushered him away, ushered him away, and I go, "Okay, I must be okay if I just ran into the Dalai Lama."
Robert Dietz: Yeah, you got some karma there.
Marisa DiNatale: Yeah, did you take that as-
Mark Zandi: [inaudible 00:07:54] take that as to be [inaudible 00:07:54]-
Marisa DiNatale: ... some sort of karmic sign?
Mark Zandi: ... no problem, the world's on my side. The world's on my side.
Robert Dietz: Well, yeah, you're forecast-
Mark Zandi: Isn't that bizarre?
Robert Dietz: ... called correct. Yeah, absolutely.
Mark Zandi: That is so bizarre. It's so bizarre. I thinking, "Maybe I'm making that up. How could that possibly happen?" It's really weird. It's so weird. Anyway, let's talk about housing, and this is a great day to talk about housing. This is Friday, January the 19th, and we just got the report from The National Association of Realtors on existing home sales for the month of December, and boy, were they bad. I think they fell again in the month from a very low November. I think, correct me if I'm wrong guys, but I think for the year, if you look at all home sales, it's like maybe just over 3 million, and that's about as low as it's been in, I don't know, 25, 30 years, something. I mean [inaudible 00:08:43]-
Robert Dietz: I think it was [inaudible 00:08:43]-
Mark Zandi: ... 4 million, right?
Robert Dietz: ... lowest since 1985.
Mark Zandi: Was it 4 million?
Cris deRitis: Just over 4 million, right?
Mark Zandi: Oh, just over 4 million.
Cris deRitis: For the full year, yeah.
Mark Zandi: Yeah, for the full year, and for December, was that just above... What was that number? Was that-
Cris deRitis: That was-
Mark Zandi: ... it was-
Marisa DiNatale: 3.8.
Cris deRitis: 378.
Marisa DiNatale: Yeah.
Mark Zandi: Oh, 3.8, okay, okay. Yeah, that's just amazing. It's lower than in the teeth of the pandemic. Shutdowns are pretty close. You have to go back to the height of the financial crisis to see those kinds of numbers. The market has really, at least in terms of home sales, taking it on the chin.
Robert Dietz: Yeah-
Mark Zandi: Yeah.
Robert Dietz: ... from the demand side and the supply side, that the last year and a half have been pricing out on demand, and of course, then supply is constrained by the mortgage rate lock-in effect.
Mark Zandi: Oh yeah. Yeah, right. Exactly, and is that to what you ascribe what's going on here? It's the lock-in effect? Is that primarily what's going on? Maybe you can-
Robert Dietz: [inaudible 00:09:38].
Mark Zandi: ... just explain that in terms of what's going on.
Robert Dietz: Yeah, undoubtedly the market is supply-constrained because at the same time while the volume levels are down, the pricing is up. I think it was up 4% year over year on the data they released this morning. I tend to think of it as a short-term effect and a long-term effect, that the short-run effect is undoubtedly the mortgage rate lock-in effect. If you're a homeowner and you've got a 2.5 or a 3% 30-year fixed-rate mortgage, you're going to be a little less likely to put your home on the market and go out and get a 6.6% 30-year fixed-rate mortgage.
As rates settle in lower, and that is our forecast, that gap will close and some of that inventory will unlock. 2024 should be see rising inventory levels, but I think in a lot of the business press commentary, we also miss the long run factor, which is that the housing stock is too small relative to the population and the characteristics of households. That really is due to what we've indicated is basically almost a decade-long period of underbuilding. High home prices despite high interest rates, that seems to be pretty consistent with the story of an insufficient housing stock.
Mark Zandi: Yeah, and I think just to put a finder point on it, I think the average coupon or the average interest rate on mortgages that are outstanding, I think there's like 50 million or so mortgages out there, is 3.5%. I think you said... Did you say that, 3.5%?
Robert Dietz: Yeah, I just used that as an example-
Mark Zandi: Yeah.
Robert Dietz: ... but something like [inaudible 00:11:18].
Mark Zandi: I [inaudible 00:11:18] that's the number. Yeah.
Robert Dietz: 90% of existing mortgages have a rate less than 6%, so well below current market rates.
Mark Zandi: Yeah. Hey, Cris, that's a very compelling reason for why we're not seeing homes transact, the home sales are on the floor. Any other reason that you can think of why? Is there anything else going on? Is it simply that that's driving these very weak sales?
Cris deRitis: Yeah, I would think so.
Mark Zandi: Yeah, it's the-
Cris deRitis: It's the supply. It's unusually low level of supply, and that's really the barrier. That's what's driving the market and keeping the house prices up. That's the telltale sign that it is supply, not the demand.
Robert Dietz: Can I give you kind of an interesting divergence for this year?
Cris deRitis: Yeah.
Robert Dietz: We were talking about existing home volume now in multi-decade lows.
Cris deRitis: Yeah.
Robert Dietz: New home sales-
Cris deRitis: Right.
Robert Dietz: ... post an increase in 2023. Now, why is that? Despite all the headwinds, and we can talk about all the supply side factors, but it's because new construction's trying to fill the gap. If you look at total inventory levels, I don't have the data from this morning, but in recent months, new home inventory has been about a third of total inventory in the market. Typically it's about 12%, so it's not an automatic process. The development process for land can take two to three years. Home building could be a six-to-eight-month process, but because of that restricted supply on the resale side, new construction is attempting to fill part of that gap.
Mark Zandi: Yeah, and my kind of simplistic way of looking at the data where say we're at 4 million existing sales, typically it's closer to 6, so there's a shortfall of about 2 million relative to typical home sales level. It goes up and down and all around, obviously, based on conditions, but based on the mobility of the population cutting through the business cycle, that's kind of the number you get. With new home sales, we're at 600K roughly speaking, and kind of typical would be 750K. It's down, but it's not down nearly as much as-
Robert Dietz: Right.
Mark Zandi: ... the existing market. My thought or my explanation for what's going on in the new home market was also that builders have effectively cut price. In the existing market, as you pointed out, no one's cutting price.
Prices are still rising in most of the country, but for the builders, they are effectively cutting price in lots of different ways. The so-called "interest rate buydown," 3-2-1 buydown seems to be the most popular way of doing it. If you talk to a builder, and I know you do all the time, but when I talk to them, they say, "If you translate these incentives, it's about 10% of the price of a home," and that's helped them support the market. Is that consistent with your view?
Robert Dietz: Roughly. I think that may be a fairly good representation of particularly larger builders that have deeper-
Mark Zandi: Larger builders, yeah.
Robert Dietz: ... that's right, and that market share, if you're talking about like say the top 100 builders, and there are 50,000 home building companies in the country.
Mark Zandi: Really?
Robert Dietz: The top... Yeah, and it used to be 90,000 back before the Great Recession, but yeah, you're talking about 40% of the market and mortgage rate buydowns seem to be the most effective and the most utilized. I think if we look at the census data on new home prices, it's down about 6% year over year. I think the last thing builders want to do in the steps of incentives is an outright price cut, particularly in an environment where building material costs continue to edge higher, although that has slowed as well, which is probably a good sign for inflation moving forward. I think that the trick actually, the challenge for builders moving forward over the next year, year and a half is as interest rates settle in a little bit lower, how they begin to deal with buyers who expect price cuts or mortgage rate buydowns and begin to say, "You know what? That was really compressing some margins." Now, we're moving to a more normalized market. We're not there yet, but I think that's likely to happen.
Mark Zandi: Excuse me. Now, to get home sales back up, we need an improvement in affordability, and that can happen in three possible ways.
Robert Dietz: Right.
Mark Zandi: One is lower rates, two is higher incomes, three is lower house prices. Prices don't seem to be coming in. Incomes are rising. Fortunately, it looks like we've avoided a recession, but the key here, I think, is mortgage rates. You mentioned in your forecast that you have mortgage rates coming in. The 30-year fixed peaked at around 8% back a couple, three months ago. We're now down, as you said, 6.6. Where do you think rates are headed here?
Robert Dietz: Yeah, we've gone back and forth on this every month when we update our forecast. Right now, I think we'll likely see maybe at the average for the fourth quarter 6.3, 6.2%. We're more conservative than some other forecasts, and from [inaudible 00:16:45] the 10-year Treasury rate and sort of say, "Okay, here's where we think the 10-year Treasury rate's going given expectations of monetary policy and economic growth." Something that has changed in the last two or three years is that the spread between the 30-year fixed-rate mortgage and the 10-year Treasury has really expanded. Like you were saying back in the fall when we were touching 8% rates on the Freddie Mac survey, the spread was about 300 basis points. The average for the decade following the financial crisis was about 160 to 180 basis points. You kind of have to make an assumption of what's going to happen to that excess spread.
If you're looking at a forecaster who's saying, "We're going to see sub-6% rates by the end of the year," which I think is too optimistic, they're probably making an indication, I think, that spread is going to come down pretty quickly. There's a lot of guesses on why that spread has expanded. I think a lot of it likely has to do with quantitative tightening and the Federal Reserve's allowing the mortgage-backed securities, the 2.7 trillion of MBS that they built up in their balance sheet, letting that roll off, and then some uncertainty with the housing market itself.
Mark Zandi: You froze just for... Right when you got tot he bottom line where you thought mortgage rates were going to go, so we're at 6.6, so let me ask it this way. A year from now, and obviously forecasting anything is hard, forecasting interest rates is very intrepid. With that as a stipulation in your base case most likely scenario, where do you think mortgage rates are going to be by this time next year?
Robert Dietz: Oh, so this time next year we're looking at close to 6%.
Mark Zandi: Close to 6?
Robert Dietz: Yeah.
Mark Zandi: Right.
Robert Dietz: Yeah, what we've been discussing is the fourth quarter of this year, 6.3, 6.2, and then move it closer to 6 by the time we start 2025.
Mark Zandi: Let me ask you this. In the long run, abstracting from the vagaries of everything-
Robert Dietz: Right.
Mark Zandi: ... what should the 30-year fixed-rate mortgage be? If you're kind of a prudent planner in the housing ecosystem or you're a potential buyer down the road, what kind is a normalized mortgage rate in your mind?
Robert Dietz: Talking about normalized variables in the post-financial crisis housing market's always dangerous, but I think we're probably headed down to about 5.5, maybe a little bit lower than 5.5 on the 30-year fixed-rate mortgage. That's important because if builders or buyers are thinking that we're going to see 3.5% again, they're kidding themselves. That can play an important role in terms of those buyers that were priced out of the market and are sitting on the sidelines. If they're waiting to get their neighbors' 3% rate, they're going to be waiting a really long time.
Mark Zandi: Hey, Cris, I think we have rates coming in. If you told me we're closer to 6% on the 30-year fixed a year from now, that sounds about right.
Cris deRitis: Yep.
Mark Zandi: I think we have rates in the long run normalized settling in between 5.5 and 6-
Cris deRitis: 5.75.
Mark Zandi: ... and that would be... Is that right, 5.75?
Cris deRitis: Yep.
Mark Zandi: Okay. Do you want to just decompose that and describe why we think that spread that Rob talked about is going to compress?
Cris deRitis: Sure. I think you already alluded to some of the reasons. You have the Fed, which was a big buyer of mortgage-backed securities during the pandemic, no longer purchasing, so you have a fairly substantial investor no longer in the market. Who's going to replace them? You also have a number of foreign central banks that also were big buyers also retreating. They've got their own issues, so they're not necessarily participating. That alone, at least in the short term, that would see spreads widening out in order to clear the market. We have to attract investors back in.
I think over time we will see more investors coming in. We also see that the mortgage-backed security market will be a bit smaller. We're not originating as much, so things will normalize along that dimension. There's that uncertainty in the future. I think interest rate uncertainty certainly is playing a role in widening the spread, as Rob mentioned. I think there's a lot of MBS, mortgage-backed security investors, also trying to understand what the prepayment risk is going forward. You're originating these loans today, somewhat even close to 8% not too long ago.
While if rates really do down as we expect them to, you're going to start to see refinancing pick up of that paper. There, too, the life of those loans is going to be relatively short and the investors have to charge up for that as well. We're in this odd position here, but over time, I would expect to see that spread narrow. I'm not convinced it goes all the way back to the historical level because I don't know. That lack of demand out there is a pretty big shoe to fill when it comes to the Fed, but I think we will see the spread narrowing as things as we get the all-clear signal in the economy overall.
Robert Dietz: Do you-
Mark Zandi: [inaudible 00:22:20]-
Robert Dietz: ... think it would be reasonable to see the spread go down to 200 basis points rather than 180 or 170?
Cris deRitis: Yeah, that's been my 200-
Robert Dietz: Yeah [inaudible 00:22:28].
Cris deRitis: ... certainly, but it could be a little bit less than that, maybe 180, 190, somewhere in there, but-
Robert Dietz: Right.
Cris deRitis: ... yeah-
Mark Zandi: The only-
Cris deRitis: ... but who knows? There's a lot of factors here, as you mentioned.
Mark Zandi: ... I think all those factors make sense, but the simplistic way I think about it is that the key here is the yield curve, the shape of the yield curve, right?
Robert Dietz: Sure-
Mark Zandi: Right now-
Robert Dietz: ... sure.
Mark Zandi: ... the curve is inverted. Short rates are higher than long rates, so that's an expectation that in the future rates are going to go lower. No one really knows where, and that's the prepayment risk that you talk about, that investors are nervous about how low rates will go and will they get bought out of these mortgages at these higher rates. Once the yield curve becomes more positively sloped, and it feels like we're heading in that direction, the Fed's going to start cutting interest rates. The short rates are going to start to come down, and it becomes more normally shaped, then I think investors kind of feel a little bit more comfortable. The concerns around prepayment risks start to abate a little bit, and that's when that spread starts to come in a more meaningful way. Does that resonate, Rob? Does that make sense?
Robert Dietz: Yeah, and then it sort of asks the question about, where's the anchor rate or the equilibrium rate for the ten-year Treasury?
Mark Zandi: Yeah.
Robert Dietz: That should look like the nominal GDP growth rate I'd think.
Mark Zandi: Aah, you're speaking-
Robert Dietz: Is that right?
Mark Zandi: ... my language.
Robert Dietz: Okay.
Mark Zandi: That's exactly the way I think about it.
Robert Dietz: Okay, yeah.
Mark Zandi: Yeah, exactly right [inaudible 00:23:50]-
Robert Dietz: No, I get asked that. That actually, other than who's going to win the presidential election, the most popular question I [inaudible 00:23:55]-
Mark Zandi: Yes, exactly.
Robert Dietz: Where does the 10-year Treasury rate level off? I've just been saying, "Okay, well, you're asking what's the nominal growth rate for the US economy," and that's pick your favorite forecast or whatever they think the equilibrium nominal growth rate is.
Mark Zandi: I'm your favorite forecaster, right?
Robert Dietz: Okay.
Mark Zandi: Okay.
Robert Dietz: Okay.
Mark Zandi: 4%, 4%.
Robert Dietz: Yeah, we were going to do-
Mark Zandi: Yeah, yeah, yeah.
Robert Dietz: ... we've been saying 4%. Yeah.
Mark Zandi: 4%, okay.
Robert Dietz: Yeah.
Mark Zandi: Yeah, very good. Good, but here's the thing, okay, if mortgage rates go from 6.6, let's optimistically to 5.6, let's just say.
Robert Dietz: Right.
Mark Zandi: It's down a hundred basis points, and we avoid a recession and house prices keep rising. The numbers don't square, and affordability isn't restored with those kinds of numbers. What does that mean? What does that imply? Does that mean we're in a world of very low home sales, mortgage originations for a long time to come?
Robert Dietz: Well, so you listed four ways that we can sort of address the affordability crunch. Can I give you a fifth one? I'm not going to-
Mark Zandi: Yeah.
Robert Dietz: ... shock anyone here listening.
Mark Zandi: I gave you three. What's the four and five?
Robert Dietz: I thought you-
Mark Zandi: [inaudible 00:25:07] were-
Robert Dietz: ... listed four off, but-
Mark Zandi: ... incomes-
Robert Dietz: ... incomes-
Mark Zandi: ... prices-
Robert Dietz: ... prices-
Mark Zandi: ... rates.
Robert Dietz: ... oh, okay. I was going to give you four and my [inaudible 00:25:14]-
Mark Zandi: I gave you four.
Cris deRitis: Yeah.
Mark Zandi: Yeah.
Robert Dietz: All right. Here's the fourth one. I'm not going to shock you. As the Chief Economist of the National Association of Home Builders, we need to-
Mark Zandi: Oh, whoa.
Robert Dietz: ... build more.
Mark Zandi: Yeah.
Robert Dietz: We need to increase the supply, so-
Mark Zandi: That's through-
Robert Dietz: ... and that's [inaudible 00:25:27]-
Mark Zandi: ... price. That works through price, though, doesn't it?
Robert Dietz: It does. That's right.
Mark Zandi: Yeah, yeah.
Robert Dietz: Price is the outcome variable for all of this, but I-
Mark Zandi: Yeah.
Robert Dietz: ... think what it suggests is that '24, 2025, and 2026, we will see an increase in supply. Some of this is kind of building in the system. There's certainly some challenges. Do we have enough workers? Do we have enough lots? What's the lumber market going to do? We've already seen lumber futures pricing begin to increase, but yeah, I think the economics here is such that we don't have sufficient supply and inventory's limited. We're likely to continue to see some nominal price growth.
Mark Zandi: Yeah. Okay, so that makes perfect sense to me. We need more physical supply. We need more units ultimately. That's the only fundamental solution to the kind of box we're in here. At these prices, you would think that you get pretty good returns if you're a builder. Your return on equity, your return on capital should be pretty good, so there's a lot of incentive to build at the end of the day you would think, right? So-
Robert Dietz: There is, but yeah, it's important to keep in mind the question is whether you can build, and that's often-
Mark Zandi: ... yeah.
Robert Dietz: ... related to, is the zoning sufficient? For the private builders, and here we're talking about 60% of single-family construction, can they get access to financing? I think we typically think of the market in terms of the big publicly traded national builders, but for that 60% of the market, they've got to go get what we call AD&C loans, acquisition, development, and construction loans. The interest rates on those loans is set effectively by the prime rate, so short-term rates. The average annualized effective interest rate on a development or construction loan in the United States right now is 13%.
Mark Zandi: Hmm.
Robert Dietz: That is going to cause a constriction in the land and the lot development.
Mark Zandi: Can I ask, where do you get that data? Where do you get that?
Robert Dietz: That's from our... yeah, we-
Mark Zandi: Your survey?
Robert Dietz: ... [inaudible 00:27:35] we quarterly survey-
Mark Zandi: Quarterly survey, okay.
Robert Dietz: ... the land developers, yeah.
Mark Zandi: Oh.
Robert Dietz: It's availability of financing, cost of financing, and then policy around land and lot development. Right now, we've seen a little bit of an increase in lot supplies. I think that will reverse itself and lot supply availability will decline by the end of '24 as single-family home building picks up. The result is that we've got, I think, a fairly moderate increase for next year for single-family home building, about a 5% gain. Then, the ability to build in '25 is really going to be dependent on how many lots that we can bring into the system.
Mark Zandi: Yeah, let me take it a step back. We're saying we've got this affordability issue. We're going to get a little bit of relief from lower rates. We'll get a little bit of relief from higher incomes presumably, continued non-recessionary economy, more jobs, higher continued wage growth. We still need to see relief on the price side, and the way that's going to happen is in part we're going to see more new building. That goes to another issue, and that's this so-called "affordable housing shortage," that-
Robert Dietz: Yeah.
Mark Zandi: ... we've had this kind of shortfall in home building really going all the way back to the financial crisis. There's a lot of estimates as to the size of the shortfall. How many homes are we down?
Robert Dietz: Right.
Mark Zandi: We've got an estimate. I won't tell you what it is because I'm curious-
Robert Dietz: Okay.
Mark Zandi: ... what your estimate is and how you-
Robert Dietz: Yeah.
Mark Zandi: ... get to it.
Robert Dietz: Yeah.
Mark Zandi: Just to give folks some context with regard to how big a deal this is, I mean, how short are we?
Robert Dietz: We adopt, I think, a fairly conservative methodology. There's a lot of numbers out there, some as high as 8 million. We asked-
Mark Zandi: That's right [inaudible 00:29:31].
Robert Dietz: ... the housing shortage at about 1.5 million-
Mark Zandi: Aah-
Robert Dietz: ... and [inaudible 00:29:36]-
Mark Zandi: ... [inaudible 00:29:36] you're speaking... You're like... We're in mind meld. A mind-
Robert Dietz: ... oh, that's really funny. Okay-
Mark Zandi: ... yeah.
Robert Dietz: ... that's good because usually when I give that estimate, people go, "That's way too small-
Mark Zandi: Yeah, yeah.
Robert Dietz: ... "given the numbers that we've seen out there." Let me give you our methodology.
Mark Zandi: Yeah.
Robert Dietz: We take the American Community Survey, so the kind of the deep geographic survey the Census Bureau runs. We look at vacancy rates at the metro level. We try to age them up to what we think they look like because there's a bit of a data lag, and then we basically perform a magical calculation and say, "If overnight you could add a certain amount of housing stock to return the vacancy rates to their long-term averages, how much is that housing stock addition?" It works out to about a million and a half. Now, we're sort of... It's a mix of single-family and multifamily, and what it represents is about one year's worth of home production. That's what we think the shortage is, and we do believe that between 2025 and 2030 we will reduce that housing deficit maybe by about a hundred thousand homes a year.
Now, an important footnote to this, which is I think some of the larger estimates, 3 to 4 million, I think part of the difference in those calculations is what we're counting as housing supply. I'll give you the big one that I think results in the difference, which is over the last five to seven years, particularly over the last few years, we've seen an increase in the supply of ADUs, accessory dwelling units. Freddie Mac estimates that they're about a million and a half of them.
Now, they're not a perfect substitute for an apartment or certainly an entry-level single-family home, but they are holding a household. If you build the attic or the shed out back that's acting as an apartment, you're turning an owner-occupied home effectively into a duplex with a rental unit. Well, if we've added about a million and a half of those, you take that right out of the housing shortfall. There's some other elements like that, but I think we're looking at a shortfall of about a million and a half units, and it's a multi-year process once we get the industry really kind of operating to reduce that number.
Mark Zandi: First, we're at 1.7, aren't we? The last I looked. Is that right?
Robert Dietz: That's right.
Mark Zandi: So-
Robert Dietz: Yeah.
Mark Zandi: ... I think we use a very similar methodology that Rob described.
Cris deRitis: We do. We use the vacancy rates as well. We get pretty close, but then we do add in... We make an estimate of suppressed household formations, so folks who didn't... They're living at home, they're living with roommates, there's just no option for them to rent or buy. If we look at household formations over the last few years and we try to calculate how many of those kind of inherent or latent household formations there are, and that works out to about an extra, what, 3, 400,000 or so.
Mark Zandi: Yeah. The other thing [inaudible 00:32:33]-
Robert Dietz: That's funny because what we do on that is we assume that those households are basically locked in for social reasons, so it's a more conservative-
Mark Zandi: Yeah.
Robert Dietz: ... approach because we have to advise people who have to go borrow money to buy land.
Cris deRitis: Fair enough. Fair enough. Yeah, it's an estimate and not sure what will happen to those folks. To your point, they very well could just get locked into that-
Robert Dietz: Right.
Cris deRitis: ... arrangement, especially as they continue to age-
Robert Dietz: Yeah.
Cris deRitis: ... but some of them-
Mark Zandi: It sounds-
Cris deRitis: ... we assume will be coming back.
Mark Zandi: ... it sounds like, Rob, that you're saying that the underlying rate of supply that would equal underlying demand for new housing is about 1.5, 1.6 million units per ann.
Robert Dietz: Right.
Mark Zandi: Yeah. Okay. We're very similar-
Robert Dietz: Yeah.
Mark Zandi: ... but did you happen to catch the Congressional Budget Office released a report yesterday on the nation's demographic outlook? Did you see that?
Robert Dietz: Oh, not yet.
Mark Zandi: Oh gosh. You need to go look.
Robert Dietz: Okay, excellent.
Mark Zandi: You need to go look. They are now estimating that we're getting much more foreign immigration into the country, which is intuitive given what's going on-
Robert Dietz: Right.
Mark Zandi: ... than originally estimated. It's not a million immigrants ever year. Last year in 2023, I think they're estimating 2.5 to 3 million immigrants.
Robert Dietz: Oh, wow.
Mark Zandi: Yeah, I'm not kidding, and then they have a forecast and the forecast has immigration over the next couple three years, normalizing back to a million, but I'm not so sure about that. I mean, maybe, but maybe not. That's a lot of people and they got to live somewhere, right? So-
Robert Dietz: Yeah, and-
Mark Zandi: ... 1.5, 1.6 million may not be the number, but-
Robert Dietz: ... you're exactly right, and in fact, actually reminds me when we were looking at our demographic profile of the U.S., typically in front of audiences talk about how the Millennials were so much larger than Gen Z. What I've seen at the age range is in the early 20s, so kind of members of Gen Z, there's more of them in our current updates of that demographic table. I wonder if some of that is immigration-
Mark Zandi: Yeah-
Robert Dietz: ... [inaudible 00:34:43].
Mark Zandi: ... right. Here's the other thing I wanted to point out. That 1.5, 1.7 million, it's probably even more than that in the affordable part of the market because the high end of the rental market is oversupplied. We've got all these big apartment towers going up, luxury towers going up in bigger... like in D.C. and in Philly, Chicago. I don't know if in San Francisco, but [inaudible 00:35:09]-
Robert Dietz: Nashville-
Mark Zandi: ... L.A.
Robert Dietz: ... [inaudible 00:35:11].
Cris deRitis: Nashville, yeah.
Mark Zandi: Nashville, yeah, and that's oversupply. That's where we're seeing a lot of a higher vacancy and decline rent. The affordable part of the rental market, the shortfall will be even more serious than that.
Robert Dietz: Yeah, I think the problem is definitely concentrated in that lower end of the market as one builder who builds in the affordable arena as well as in market rate said is that, "The challenge for builders is that we're being asked to build 20-year-old properties," and new construction by definition is new construction. The filtering process has been broken by insufficient supply. From a policy perspective, it's why the low income housing tax credit and the tax exempt bond programs are so important because that really is the only way that we get new supply that's income-targeted to the people who need it the most.
Then, on the for sale side, it's kind of the same challenge. The kind of housing that we need the most, entry level, small lot, small square footage, it's the most difficult to build because of zoning reasons, per unit costs, things that make the market shift to that higher end. Yeah, definitely there's the challenges in that entry-level space both for rent and for sale.
Mark Zandi: Yeah. I'm going to come back to... I want to play the stats game and then I want to come back to why this shortfall has occurred. You've already alluded to many of the reasons, but go through them in a more systematic way, and then talk about the policy response. What could policymakers do to help? You said a hundred K. We're going to whittle down this shortfall, and a hundred K per annum, that means I'm going to be retired, long retired, I may be in the grave by that time we get enough housing units. That doesn't feel-
Robert Dietz: Yeah.
Mark Zandi: ... unless we... That's assuming no policy response, that kind of thing.
Robert Dietz: No big dramatic policy focus. It's going to take some time.
Mark Zandi: Yeah. It took us 10, 15 years to get into this box. I guess logic would dictate with a little bit of luck, it would still be 10, 15 years to get out, but anyway, before we go to the stats game, hey, Marisa, I've locked you out of the conversation only because I've got all these housers over here, you know [inaudible 00:37:34]-
Marisa DiNatale: I understand. Yeah.
Mark Zandi: They're like deep-
Marisa DiNatale: It's their thing.
Mark Zandi: ... stuff. This is their thing.
Marisa DiNatale: I get it.
Mark Zandi: Yeah, but any comment on the conversation up to this point in time that you want to make?
Marisa DiNatale: Yeah, I had just some running commentary as you guys were talking. One, back to the beginning of the conversation about home sales reaching a 20, 30-year low. I don't know if you saw the mortgage apps data for the past few weeks. It's really, really popped up in response to lower interest rates. It's up, down, all around. It's a weekly survey and it's very sensitive to interest rates, but it seems to suggest some demand at least coming in to 2024 on the home sales side. Rob knows, I'm sure, that NAHB Builder Sentiment Survey looked a bit better, too, for the year, so perhaps-
Robert Dietz: Finally.
Marisa DiNatale: ... we get some more supply this year.
Robert Dietz: Right.
Mark Zandi: Can I do-
Marisa DiNatale: [inaudible 00:38:33]-
Cris deRitis: Yeah.
Mark Zandi: ... just one quick comment on that, Marisa?
Marisa DiNatale: Yeah.
Mark Zandi: I think it's an important point. I'm curious what the other guys say, and we'll come back, Marisa. Sorry.
Marisa DiNatale: Yeah, that's okay.
Mark Zandi: On the mortgage rate, it feels like buyers are becoming increasingly conditioned to think that it isn't going back to 3.5 on a fixed mortgage rate. It's 5.5 to 6, and so once mortgage rates start getting closer to 6, it feels like life comes back into the market. You agree with that, Rob? I see you shaking your head.
Robert Dietz: Absolutely. Yeah, I hear that on the road all the time. Yeah, people sort of say, "Well, is there a magic number?" Well, there's no magic number, but if we could see market rates get to about 5.9%, the feeling is there's a lot of demand that will be priced back in.
Mark Zandi: You mean if it has a five handle as opposed to a six handle?
Robert Dietz: A five handle. That's exactly-
Mark Zandi: [inaudible 00:39:19].
Robert Dietz: ... right. Yeah.
Mark Zandi: I think that's right. Sorry, Marisa, go ahead. We'll-
Marisa DiNatale: No, that's okay.
Mark Zandi: ... yeah.
Marisa DiNatale: Then, for just question for Rob, I think when I go out and I talk to clients and we talk about the housing market, probably the most common question I get is this question of, "Why don't builders just build more? It seems like there's a financial incentive there given the lack of demand." You mentioned the expensive cost of financing or the lack of financing for a lot of builders, especially smaller builders. I think number two, you would say zoning laws in certain parts of the country just make it more difficult to build. I'm wondering what you're seeing on the cost side of building just in terms of labor and materials, so...
Mark Zandi: Can I stop, though? I want to come back-
Marisa DiNatale: Mm-hmm.
Mark Zandi: ... to that. I want to come back to that. I want-
Marisa DiNatale: Okay.
Mark Zandi: ... to play the stats game, and then I want to come back to why the shortfall and that's where you're going, seem to be going-
Robert Dietz: That sounds good. Yeah, that's a really good question. Yeah.
Mark Zandi: ... in [inaudible 00:40:18] but that's a really good... Yeah, but let's do the stats game first before we do that. Just to remind the listener, the stat game is we each put forward a statistic. The rest of the group tries to determine what that is through questions, deductive reasoning, clues. The best stat is one that's not so easy we get it immediately, one that's not so hard that we never get it, and one that if it's apropos to the topic at hand, all the better. We always begin with Marisa. That's tradition. Sorry, Rob. You'll see how this is done. She's just way too good at this game.
Robert Dietz: Awesome.
Mark Zandi: Go ahead, Marisa. You're up first.
Marisa DiNatale: Okay. My statistic is 8%.
Mark Zandi: It's not what the 30-year fixed-rate mortgage was two months ago.
Marisa DiNatale: No.
Robert Dietz: That's exactly what I was going to say.
Mark Zandi: That's what I was thinking.
Robert Dietz: 8% was worrying me there.
Mark Zandi: It's housing-related? Marisa?
Marisa DiNatale: It is housing-related, yes.
Mark Zandi: Is it come from the home sales report that just came out this morning? The existing-
Marisa DiNatale: No.
Mark Zandi: ... home sales? No.
Cris deRitis: Construction permits and starts something.
Marisa DiNatale: Yes-
Cris deRitis: Oh, is it-
Marisa DiNatale: ... it comes from that report.
Mark Zandi: Oh.
Cris deRitis: 8%
Robert Dietz: Was that the gain in single-family starts?
Marisa DiNatale: Close, but no.
Mark Zandi: Completions, increase in completions?
Marisa DiNatale: No.
Mark Zandi: No.
Marisa DiNatale: It might be, actually, I think it is the increase in completions, too, or it's close to it, but that's not what I'm thinking of.
Mark Zandi: This is a percentage-
Cris deRitis: Thanks for the partial credit.
Mark Zandi: ... of the increase of something.
Marisa DiNatale: What was that, Mark?
Cris deRitis: The partial credit.
Mark Zandi: This is a percent change-
Cris deRitis: Yes.
Mark Zandi: ... in some statistic in that-
Marisa DiNatale: That's right.
Mark Zandi: ... report. Okay.
Marisa DiNatale: Yes.
Mark Zandi: Rob, you said overall starts?
Robert Dietz: I was thinking the monthly change in single-family starts.
Mark Zandi: Single-family starts because multifamily was down a little bit, I think, and permits. Permit? Yeah? No.
Cris deRitis: No.
Mark Zandi: Marisa, not permits?
Marisa DiNatale: It's the change in multifamily starts over the month-
Robert Dietz: Oh.
Marisa DiNatale: ... so both-
Mark Zandi: Oh, it increased.
Marisa DiNatale: ... the family starts, yes.
Robert Dietz: Oh, I had it backwards. Yes.
Marisa DiNatale: Yeah.
Mark Zandi: Oh, but it did increase.
Marisa DiNatale: Yeah-
Robert Dietz: Single-family [inaudible 00:42:21]-
Mark Zandi: I thought they declined.
Marisa DiNatale: [inaudible 00:42:24]-
Robert Dietz: [inaudible 00:42:24].
Marisa DiNatale: ... single-family starts were down almost 9-
Robert Dietz: [inaudible 00:42:27]-
Marisa DiNatale: ... percent over the month. Multifamily starts were up 8%-
Robert Dietz: ... oh, and that is a [inaudible 00:42:32]-
Marisa DiNatale: ... and multifamily starts have been... Sorry, Rob?
Robert Dietz: ... I was just going to say the strength in multifamily has been a real surprise. You talk to apartment builders and they just keep saying, "Where's the financing coming?", so much so that some people actually questioned the data. I think the data are right.
Marisa DiNatale: [inaudible 00:42:48].
Robert Dietz: I think we've seen a shift in where apartments are being built and who's building them, different financing models, but that 8% number is really kind of a striking one.
Mark Zandi: We're at 400K. Is that what it was? Annualized starts in multifamily?
Marisa DiNatale: Yeah. 433,000. Yeah. Yeah-
Mark Zandi: Right.
Marisa DiNatale: ... so multifamily starts, they're down about 8% if you look year over year, but they've been basically rising since the middle of 2023. They had fallen quite low, so they're on the upswing. Well, single-family starts are still kind of depressed, so if you look at where they are relative to history, they're down to late 2020 levels. They've really been going nowhere since the end of the pandemic in 2020.
Mark Zandi: Rob, my explanation for why multifamily starts have held up is just a lag. It just takes... These financing deals take a long time to kind of come to fruition to get going, to come to fruition. These numbers are still reflective of credit conditions before the banking crisis, and as we move into this year, at some point it's going to feel... things are going to come off really pretty quickly because of the tightening and underwriting that occurred after the March banking crisis last year. Does that resonate with you at all?
Robert Dietz: Yeah. Our forecast for '24 is a pretty notable drop in multifamily starts. When we've looked at the geography of where multifamily permits were pulled over the last year, there was a decline in the central business districts and a rise in exurban, small cities, and even rural areas. The market share just shifted out, and so the builder who's building in those markets is less likely to participate in maybe some of the big private data surveyors, but is being picked up by census. We think there's been a shift of who's building multifamily as well, and by the way, that shift means more two- and three-story wood frame multifamily and a little smaller set of the steel and concrete.
Mark Zandi: Hmm. Yeah, that makes sense, and the other thing to note is completions still remain very elevated because that's a reflection of the starts that-
Marisa DiNatale: Mm-hmm.
Mark Zandi: ... that have been happening for the last year or so. A lot of those got bottled up in the pipeline because of the pandemic and the impact on supply, building materials and appliances and labor and that kind of thing, so [inaudible 00:45:18]-
Robert Dietz: It's an incredible number and-
Mark Zandi: ... completion...
Robert Dietz: ... yeah, I was just... The incredible number of multifamilies, 1 million apartments under construction-
Mark Zandi: Yeah.
Cris deRitis: Yeah.
Mark Zandi: Right.
Robert Dietz: ... is barely near the total we last saw in 1973.
Mark Zandi: Right, right. Okay. Okay, good. Rob, you want to go next?
Robert Dietz: Yeah, I'll give you one. I'm new to this game, but it is something we talked about earlier in the call, so 19%.
Mark Zandi: [inaudible 00:45:43]-
Cris deRitis: Oh, a percent of cash-only buyers? No.
Robert Dietz: Not a sales transaction.
Cris deRitis: Okay.
Mark Zandi: Is it related to construction?
Robert Dietz: It's related to the demand for construction.
Mark Zandi: Is it 19% of some demographic?
Robert Dietz: Yes.
Mark Zandi: Okay, or purchase homes, is it...
Cris deRitis: Or-
Marisa DiNatale: Oh, first-time buyers?
Robert Dietz: Close to that. Let's think potential buyers who aren't potential first-time home buyers.
Cris deRitis: Potential buyers. Hmm.
Marisa DiNatale: Is it-
Cris deRitis: [inaudible 00:46:21].
Marisa DiNatale: ... some age group?
Robert Dietz: Yes-
Marisa DiNatale: [inaudible 00:46:23]-
Cris deRitis: [inaudible 00:46:23].
Robert Dietz: ... 25-to-34-year-olds who could be potential home buyers, but who are not.
Marisa DiNatale: Okay.
Mark Zandi: Oh, that's-
Marisa DiNatale: 19%-
Mark Zandi: ... living at home-
Marisa DiNatale: ... of-
Robert Dietz: We did talk about it earlier-
Mark Zandi: Living at-
Marisa DiNatale: ... [inaudible 00:46:34]-
Mark Zandi: ... home with-
Robert Dietz: ... talking about the differences in the housing deficit.
Mark Zandi: Oh. Okay, so of 25-to-34-year-olds, 19% of those folks-
Cris deRitis: Their parents-
Mark Zandi: ... have the financial wherewithal to be-
Robert Dietz: Cris got it.
Mark Zandi: Oh, what was it?
Cris deRitis: Live with parents.
Robert Dietz: [inaudible 00:46:52] yeah, 25-
Mark Zandi: [inaudible 00:46:52]-
Robert Dietz: ... to 34-year-olds.
Marisa DiNatale: Oh.
Robert Dietz: That number peaked a few years ago at about 22%. It did move down during COVID, so we did get some unlocking as household formation stepped up, but it is roughly twice the rate that we had two decades ago, so 19% of 25-to-34-year-olds live with their parents.
Mark Zandi: Right.
Mark Zandi: Wow, that's high.
Robert Dietz: Yeah, it was one out of 10 back closer to the year 2000, so if we think about the long run demographic effect of underbuilding, both in the for rent and the for sale market, it's this increase in failure to launch or the tenant who lives on the parent's couch that's really seen the impact there. Then, of course, that has big impacts on everything else that we track from a macro perspective in terms of declining marriage rates, the declining fertility rates, what impact that's going to have on Social security and Medicare revenue sources. I think if you connect the circle on this in terms of housing and then impact on demographics, that number really is the key one.
Mark Zandi: Do you have any data on the income level of the families that these folks, these kids are living with?
Robert Dietz: No. In fact, that's something that we've talked about doing. A colleague on my team, Natalia Siniavskaia, who I went to graduate school with and known for 20-plus years, she looks at this data once a year, and that's something we should check out using [inaudible 00:48:23].
Mark Zandi: Just... yeah, just anecdotally, because I have a large family, so I see everything, some of these kids may be there because it's by choice and they're not leaving.
Robert Dietz: Right.
Mark Zandi: They're just going to inherit that home. That's not... No one said that, but that's exactly what's going to happen, you know?
Robert Dietz: I-
Marisa DiNatale: It's a waiting game.
Mark Zandi: Yeah, it's just I like where I live, I'm very comfortable, and these are nice homes. These are pretty affluent-
Robert Dietz: Yeah.
Mark Zandi: ... folks, and no reason to launch. It's not a failure to launch. It's just no interest in launching.
Robert Dietz: Fair enough-
Mark Zandi: Yeah.
Robert Dietz: ... and that gets back to what we were talking earlier, the housing deficit. Are those young people, can that be unlocked? Some cases don't because of social changes, maybe the waiting game, but in other cases, I do think it is people who are looking to make sure they can pay down student loans or looking for that right entry-level apartment.
Mark Zandi: Right. Great [inaudible 00:49:27]-
Cris deRitis: I think child care and elder care also play a role here, right here.
Robert Dietz: Absolutely.
Cris deRitis: That multi-generational household, it's just more economical.
Mark Zandi: That's a great point. That's part of it too, right? It's definitely-
Robert Dietz: Yep [inaudible 00:49:40].
Mark Zandi: ... part of it. Yeah, definitely part of it [inaudible 00:49:42]-
Robert Dietz: We have a lot of builders that talk about building for multi-generational families, particularly in certain immigrant communities as well.
Mark Zandi: Yeah. Okay, Cris, you're up. What's your stat?
Cris deRitis: 3.3 million.
Mark Zandi: Housing-related?
Cris deRitis: It impacts housing. I would say it's-
Mark Zandi: Immigration?
Cris deRitis: ... the most important-
Mark Zandi: That sounds like the immigration number.
Cris deRitis: ... it is. Very good.
Mark Zandi: Aah.
Robert Dietz: Yeah.
Mark Zandi: Ding, ding, ding, ding.
Robert Dietz: Wow. In one.
Mark Zandi: That's 3.3 million.
Cris deRitis: That's the-
Mark Zandi: [inaudible 00:50:10].
Cris deRitis: ... CBO's estimate-
Mark Zandi: CBO's estimate.
Cris deRitis: ... of immigration last year in 2023, and their estimate for net immigration this year in 2024.
Mark Zandi: Yeah.
Cris deRitis: Then, they have it going down to 2.6 and eventually coming into-
Mark Zandi: Do you believe that forecast? 2.6 back to a million? I don't know what else they're assuming. They're-
Cris deRitis: A wall maybe. Right? They have to be assuming something about policy.
Mark Zandi: Yeah, right.
Cris deRitis: Something about policy going forward here. Average over the last decade was 900,000 per year.
Mark Zandi: Right.
Cris deRitis: Just to give you the context, so...
Mark Zandi: I think we're completely missing the number of homes. Increasingly, we're going to need a lot more homes, a lot more homes.
Cris deRitis: Yeah.
Mark Zandi: Here's the other thing-
Cris deRitis: [inaudible 00:50:53]-
Mark Zandi: ... Cris-
Cris deRitis: ... to sustain, yeah.
Mark Zandi: ... based on the work you did that you got to point out to people, assuming immigration does at some point normalize, and it will, it will normalize, when you look at 10, 15 years from now, what then is the demand for new housing based on new household formation? That's to you, Cris.
Cris deRitis: Oh, it's negative, right? We start to... Or it's just keeping up with replacement, right? You do have natural-
Mark Zandi: Sure.
Cris deRitis: ... disasters, loss of housing stock, but yeah, if you look out... Now, maybe this is more 30, 40 years in, for sure.
Mark Zandi: 30, 40 years, yeah.
Cris deRitis: Right, but if you assume that immigration does normalize, actually comes in a bit at that point, and you have the fertility rates-
Mark Zandi: Yep.
Cris deRitis: ... coming down. You can say what you want about mortality rates, I guess. Yeah, the long long-term outlook is certainly that we're not going to need a million-plus homes built per year. It's going to be far less. We might be moving more to more... By that point, maybe there're more restoration, more renovation that goes on, but yeah, these Greenfield lots, it's going to be a different building environment, at least in my view. I don't know, Rob, if you have a different-
Robert Dietz: Yeah, no, we think that begins to affect the multifamily market the next 10 to 15 years. If you just look at the demographic tables, I do think we're going to see a big shift in what home construction is because of those factors that begin to take hold in the 2030s. One sort of leading element of that right now is the share of single-family homes that are built as teardowns. You see in any big Northeast city, the suburbs, those inner suburbs, great lots, great commuting locations, but older housing stock. Teardown construction right now by our surveys is about 10% of single-family home building. I think over the next five to seven years, that share goes up to about 15%, so 500-basis-point gain. That's a shift in who builds, too, because that kind of construction is more likely to be undertaken by smaller private builders.
Cris deRitis: Are you seeing an increase in teardowns to put up more units?
Robert Dietz: Okay-
Cris deRitis: Tear down a single-family and make a...
Robert Dietz: Yeah. Not enough, but yes, so in some communities you do have subdivision of a lot by right, so you can create two units or you can build a duplex. A good example of that, like in Nashville, in certain neighborhoods, they're building two quasi-townhouses. They're not single-family attached, but they might as well be on a prior lot that contained one home. It actually is increasing the stock, but in a lot of areas, the zoning just doesn't permit that, and so what you're seeing is a larger, more energy-efficient, more resilient home replacing an older home.
Cris deRitis: Hmm, and I'm seeing even with the areas that are adopting looser zoning or reformed their zoning, it's not an instant solution, right? It's-
Robert Dietz: Yeah.
Cris deRitis: ... they're not going to see people really jump on that opportunity until the economics really work for them, so-
Robert Dietz: That's right.
Mark Zandi: Okay. I'm going to give you my statistic. I'm mixing it up a little bit. This is just a big clue, not housing-related.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah, just to mix it up because it's another really interesting stat that came out this week. $371. $371.
Cris deRitis: Retail sales-related?
Mark Zandi: Nope,
Cris deRitis: No, that came out this week.
Mark Zandi: That did come out this week. Great number, by the way. Christmas sales were-
Cris deRitis: Strong. Yeah.
Mark Zandi: ... pretty darn good.
Marisa DiNatale: Is it shipping cost or commodity-related?
Mark Zandi: No, no, mm-mm, no.
Cris deRitis: Inflation-
Marisa DiNatale: Inflation-
Cris deRitis: .... related?
Mark Zandi: No. I mean indirectly. Think the American consumer, think what drives the American consumer.
Robert Dietz: Oh, income?
Mark Zandi: Yeah, it's on there.
Marisa DiNatale: Oh, is it the median weekly earnings?
Mark Zandi: Median weekly earnings. That $371 is the real median weekly earnings of wage and salary workers. It's deflated by the CPI, so it's an 82, $84, so it kind of missed it. The level isn't so important. I just used that as a way to play the game, but what's important is that it is now firmly rising. This is after inflation, median in the middle of the distribution of workers, their wages, their earnings on a weekly basis are now rising strongly, over the past year, 2.2%. That's strong and it's now above what it was pre-pandemic. My sense is that given the data we're seeing coming into this year, by the second or third quarter, real median weekly earnings are going to be back on-trend, meaning if I go back prior to the pandemic, look at the growth rate in that data, extrapolate that out till now to the early part of 2024, we're going to be back on-trend here in the not-too-distant future.
Despite everything, despite the pandemic, despite the Russian war, despite all the inflation, everything else that's going on, here we are back on track compared to... Now, you could say, "Well, why do we think the pre-pandemic trend was a good thing?" It wasn't bad. It was okay. In the grand historical scheme of things, it was pretty good. We had been through a number of decades of basically flat real incomes, median incomes because of the skewing of the income distribution, but that's my Lume Cube. I just ran out of juice, so the world's not getting any darker. It's just my room just got darker, but I take a lot of encouragement in that. I do think the economy is performing well. It's starting to show up in people's real incomes, and I think people will recognize it here going forward. What do you think? Good statistic?
Robert Dietz: Yeah.
Mark Zandi: Marisa? Okay, good.
Marisa DiNatale: Yeah.
Mark Zandi: [inaudible 00:57:08].
Marisa DiNatale: Yeah.
Mark Zandi: What? You're smiling.
Marisa DiNatale: Oh, I was considering that as my statistic.
Mark Zandi: Oh, is that were you? Okay.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Okay, very good.
Robert Dietz: Mark, do you see a big pickup in productivity growth? Or you think productivity growth is going to be fairly constant as we move forward over the next five years? A lot of talk about AI and other elements. That seems like the driver for wage growth and equilibrium.
Mark Zandi: Rob, I'm optimistic. Maybe I'm reading too much into the data, but it feels like productivity growth has picked up now. Productivity growth will ebb and it will flow, so this could be just a head fake, this recent acceleration, but it feels like it might be resting on more fundamental factors. I don't think it's AI. That's definitely not playing a role yet. I think it will probably second half of the decade, but not now.
Robert Dietz: Yep.
Mark Zandi: Remote work, the evidence there suggests that it probably not helping. I think it will ultimately, but that's a reasonable debate, but I don't think that's playing a big role at this point. I think the thing that's driving it, and I say this more without deep research, just my intuition and looking at some of the data, is all the quits that occurred back a year, two, three ago. Remember the mass exodus from jobs and people move to jobs that they're better suited to in terms of their education and skill. They're much happier if you look at the surveys. The conference board runs this cool survey about how, "how do you feel about your job?" People feel really good about their job because they quit and got a better one, higher paying one.
I think there was a bit of a learning curve. Once you quit one job, go to another, it takes a little bit of time to figure out your new job, but I think that people are figuring that out, and that should result in some productivity growth. By the way, this brings up a good question about the construction industry maybe you can shed some light on. If you look at productivity growth in the construction trades, it's been pretty abysmal. In fact, there was a recent paper-
Robert Dietz: Yeah.
Mark Zandi: ... Austan Goolsby, who's now the President of the Chicago Fed, he's a Professor at the University of Chicago, had a paper out about a year ago or two talking about the shortfall in productivity growth in the construction trades, which gets back to we need more homes. It'd be really nice if we had a construction industry that was much more productive and productivity was improving. What's going on there? Is that real? Is that productivity shortfall real? What's driving that?
Robert Dietz: It really is. On sort of a rough measure that we do since 1993, so over the last 30 years, productivity growth in residential construction's up like 13% compared to almost 50% for the U.S. economy total workers. Austan's paper, Raven Molloy at the Fed, I know Ed Glaeser and some of his students are looking at this. It's real. The question is, why has productivity growth lagged in the sector? There's a lot of different explanations. I think some we can probably discount. I've seen some academics suggest maybe it's monopoly power. That seems implausible in an industry that's got 50,000 firms. Just the nuts and bolts of literally how we build homes really haven't changed a lot. There's a lot of off, or sorry, on-site construction, 97% of homes are built on-site, 3% are built modular and manufactured, but that share was 8% 20 years ago. That share has actually gone down a lot, even though people are certainly talking about it a lot more.
I think, and I'll throw this out there, I know people may disagree with me on this, but I think if you look at the growth and regulatory burdens and barriers, things like zoning, just the general incremental elements that we add to what takes to build a home compared to 30 years ago, and that does yield a higher functioning home at the end of the process, but it's more expensive. It's just more expensive to build today, both land development and construction, and that has likely restrained home building as well. It is one of those important factors along with zoning and financing issues that I think has gotten us into this housing deficit.
Mark Zandi: Hmm. Interesting, so that doesn't augur well going forward, though, because regulation's not going away [inaudible 01:01:34].
Robert Dietz: No, and moreover, the industry is putting a lot of time and effort and I mean everyone, suppliers, industry associations, builders into recruit, train, and retain workers, bringing workers into the sector and reaching out to trade schools and community colleges. We estimate that we probably need to be adding about 700,000 workers on a gross basis just to kind of tread water with the industry's workforce. From the productivity perspective, productivity is likely to go down before it goes up, and the reason why is we've got a big wave of retirements coming. That means older, high-skilled workers leaving, younger workers is going to take some time for them to get up to speed, and so productivity is likely not to show a big gain in these data, at least in the short run.
Mark Zandi: Okay, so this is a nice segue into back to where we were prior to the stats game, and that is, what has driven this shortfall in housing and particularly affordable housing> What are the factors? You mentioned a few, but maybe you could just go through that a little bit and give us a sense of that.
Robert Dietz: Yeah, this gets to Marisa's, the big question here, which is we've been saying since 2014, 2015, and it was more of a warning back then, but we identify a set of factors that we think are responsible. I've sort of called them, I hope it's not too cute, but called them the Five L's, that we lack labor, we lack lots to build on, lending. We talked about financing to builders and developers. We've had issues with the lumber and building material availability. That was particularly COVID era, and then the last one is that kind of broad category of laws and regulatory issues, things like zoning rules, incremental gains and building code requirements.
I've seen some pretty insidious forms of exclusionary zoning pick up around the country. I was in one market recently to remodel the exterior of a home. You had to repaint the home in a certain kind of expensive paint, and when I asked a community official why that rule was in place, he said, "Well, to maintain community character." My reply to him was, "Are we talking the homes or people?" He didn't-
Mark Zandi: Hmm. Ooh.
Robert Dietz: ... appreciate that response, but you add all those things together, labor, lots, the financing, it's just been a supply-constrained environment for home building since we worked off the glut of inventory that came out from the Great Financial Crisis. As you said earlier, it took years to get us into this situation. It's likely to take years to get us out because there's no single, simple, scalable solution. If any analyst is saying, "If we fix X we're going to get a big supply response," they're kidding themselves. It's going to take efforts on all those different factors to build up the supply channel to get more for rent and for sale housing on the market.
Mark Zandi: The Five L's, kind of at the number one L, would you put that at exclusionary zoning? Or would you put it financing? What would be the top L?
Robert Dietz: Yeah, if you ask builders, it depends on the market, so if you're in a high growth market like Texas, they're going to tell you it's labor undoubtedly. They're going to say, "The availability of skilled labor is the top challenge. That prevents us from scaling up the amount of home building that we do." In more medium regulated and highly regulated markets, they're going to say it's laws and regulatory requirements, particularly zoning in terms of getting land into the system, but also just the general growth in regulatory costs.
We do a survey once every five years of land developers and builders and try to estimate what's the share of the final home sale price of a newly built single-family home that's made up in these regulatory costs. We estimate it's about 24%, and that's consistent with some academic research that's come out over the last few decades as well. It's an important part of the construction process, but labor and these legal and regulatory burdens that affect lot development I think I would put at the top.
Mark Zandi: The one thing I don't understand about that, the laws, the regulation, particularly exclusionary zoning, has that really changed since before the financial crisis? It's always been that way, I mean-
Robert Dietz: Yeah, it's always-
Mark Zandi: ... [inaudible 01:06:02].
Robert Dietz: ... been in our service-
Mark Zandi: Has it gotten worse in any [inaudible 01:06:04]-
Robert Dietz: ... yeah. The cost of the actual-
Mark Zandi: ... yes.
Robert Dietz: ... per home cost has been rising faster than inflation. Now, it's a survey we only do once every five years and it is a survey of builders, so they're always going to complain, obviously, about how difficult it is to building, but in my [inaudible 01:06:20]-
Mark Zandi: Cris, he's always complaining.
Robert Dietz: ... yeah, right, and the supply side's always a tough one, but just the ticky-tack growth of cost and it's a challenging environment where if you'll be talking about a policy issue and they'll say, "Well, this is only a thousand," or, "It's only $3,000." This is a great example of a death by a thousand cuts. It is the full set of all these things as they build up over time. Again, exterior requirements, green space requirements, that's one that's definitely gotten worse over time. How much of the land that you go out and purchase can you actually build on was green space requirements have expanded. That restricts the amount of housing supply.
There are certainly markets that are moving in the right direction. The reason that Dallas and Houston last year built 40% more single-family housing than the entire State of California is you can build with more density. In California, the impact and permit fees in California could be a hundred or $200,000 before you even put a shovel in the ground, so you see clear geographic effects as well, but yeah, over time it has gotten worse.
Mark Zandi: My goal is to have one zinger for Cris every podcast, and I just sneak it in. It's like Alfred Hitchcock getting into his movie. I just had to have one zinger, you know [inaudible 01:07:38]-
Cris deRitis: I think you're exceeding expectations there.
Mark Zandi: ... I [inaudible 01:07:40]-
Marisa DiNatale: You're up to like three.
Mark Zandi: ... no, I had one zinger. There was only one zinger today. There was only one zinger. Cris, feel free to fire back. I might get mad at you, but go ahead. Give it a shot. I'm only kidding. I'm only kidding. Okay, so let's... We're coming closer to the end of the podcast, and I do want to end with, well, okay, what do we do? What should be done here? I hear you on the exclusionary zoning regulation, but let's just put that to the side. That's a really tough one because that's determined at local levels and it's very difficult for federal policymakers to have any influence. They can do some things. They could say, "I'm not going to give you transportation dollars unless you change your exclusionary zoning," but that kind of a stick is politically very difficult to execute on, so let's put that, too, aside. You mentioned LIHTC, maybe we should go there first, but you tell me. What should we be doing here on the policy side, on the federal policy side?
Robert Dietz: Continue to protect, even expand. I think in the budget proposal that's pending right now, there's an expansion for LIHTC housing. That's really important on the for rent side. Workforce development, there was some political debate about zeroing out Job Corps funding, which is part of getting those kinds of skilled trained worker training programs in place. We need to step up our funding in those kinds of efforts to make sure that the jobs that are in demand right now, the jobs that have large number of job openings can be filled.
I would say that the federal government can play a role in terms of the zoning issue, maybe carrots and sticks in terms of trying to incentivize state and local governments to do the economical right thing in terms of trying to get more land in the system. I think you're right. There is some reason to be conservative or at least pessimistic about this that NIMBYism is always going to be an issue, although we are seeing the rise of YIMBY, yes in my backward movements. Unfortunately, though, we've also got the rise in what we call the BANANAs, which are the build absolutely nothing anywhere near anything.
Mark Zandi: Oh, I hadn't heard that.
Robert Dietz: Oh-
Mark Zandi: [inaudible 01:10:01]-
Robert Dietz: ... it's any kind of... yep.
Mark Zandi: ... [inaudible 01:10:01].
Robert Dietz: We view the NIMBYists as maybe gettable. The BANANAs are a lost cause. They don't want change period, so that's out there. Yeah, workforce development we've talked about, and this is easier said than done, but I think it would be interesting to think about. We have a secondary market backed by Fannie and Freddie to support mortgages. What would a secondary market for builder and developer loans look like? I mentioned that 13 to 14% in effective interest rates. If we pooled and created a standard box of builder and developer loans, could we pus that interest rate lower? That's something Mark Calabria had talked about when he was the Head of The Federal Housing Finance Agency. It's something NAHB has been talking about for quite some time. Easier said than done, but I think it should be seriously looked at if we're serious about supply side items.
Then, lumber and building materials, look, we still have a tariff on Canadian lumber. That's about a third of our lumber consumed comes from Canada. It's not a tariff that's governed by USMCA or the NAFTA regime. It surprised a lot of people, but the Canadian lumber trade is completely outside of those rules. It's set by the Commerce Department, so it's not really a political toggle, but we need the U.S. government and the Canadian government to achieve a new softwood lumber agreement and get some stability in that market and then also facilitate additional production of lumber here in the United States, particularly as single-family home building increases in '24 and '25.
Mark Zandi: Yeah, so I think it feels like the most straightforward thing to do most quickly would be to increase LIHTC, low-income housing tax credits. It's a very tried-and-true program, been around since the '86 tax reform law. There's a whole infrastructure for implementing it. Pretty clear what levers you need to pull to juice it up and builders can get going right away. It's for the affordable-
Robert Dietz: Absolutely.
Mark Zandi: ... part of the rental market. As you said, that is in the tax legislation to juice up LIHTC is part of the provisions in this current tax legislation. We got a fighting chance, I think, to get-
Robert Dietz: Yep.
Mark Zandi: ... [inaudible 01:12:14].
Robert Dietz: Bipartisan support, so Republicans and Democrats, it's a program that's been in the code since 1986, and it works for that affordable rental market because it's supply side-focused. It provides equity to allow building that kind of property. It doesn't address the for sale entry-level market, and we're going to need different tools for those.
Mark Zandi: I got two other ideas I want to pass by you, but before I do that, let me turn to Cris. Cris, is there anything that... other ideas that you might want to bounce off or Rob that might be helpful in addressing this affordable housing shortage?
Cris deRitis: I guess I completely agree with what he's saying in terms of the priorities here. You mentioned the modular housing. That kind of piqued my interest there. Do you think that's something that certainly could be used to-
Mark Zandi: [inaudible 01:13:02].
Cris deRitis: ... the cost here and-
Robert Dietz: The history with modular and panelized, and this is different than manufactured housing, manufactured housing is about a hundred thousand units a year. That's what we used to call mobile homes. They're-
Cris deRitis: Right.
Robert Dietz: ... higher quality today, more resilient, but modular and panelized is more factory built off-site construction. As I said earlier, the share according to the Census Bureau is about 3%. We've got some industry stats that says it may be as high as 6 or 7. The challenge there is that often it comes in higher than forecast in terms of the cost. It can take longer. To quote Tolstoy, I think it's Anna Karenina that every happy family is the same, but every unhappy family is different in its own way. The same is true with construction projects, and so adopting modular to start-
Mark Zandi: Did you see that? An economist that's quoting Tolstoy. That's pretty impressive.
Robert Dietz: That was a pretty bad quote. I think I [inaudible 01:14:02]-
Mark Zandi: No, no, no, no. I thought that was-
Robert Dietz: ... [inaudible 01:14:02].
Mark Zandi: ... that was beautifully done.
Marisa DiNatale: That's the first-
Robert Dietz: Yeah.
Marisa DiNatale: ... time this has been done on the podcast [inaudible 01:14:07].
Mark Zandi: First time, yeah.
Cris deRitis: Yeah.
Robert Dietz: My three years of taking Russian, yeah, but with construction projects, they're all unique, the lot, the building code requirements, the local code requirements, and so the idea of modular is that you can capture economies of scale. Well, that may be true in Ireland or Sweden where the modular shares can be more than 50% of homes built. It's a lot more difficult in the United States where you have 4,000 different building codes, so capturing the economies of scale is difficult.
Now, that makes it sound like I'm discounting its ability. I think we're going to see the share of that. I think it's going to help, but we shouldn't bet all the chips on it. The shares should go back up to about 10%, but it's not going to be 20 or 30%. It's not the end-all be-all. This is my big theme, which is we need to move the ball on all these fronts simultaneously. There's just simply no single solution here.
Mark Zandi: Two other quick ideas, just the lightning round. One, you mentioned a secondary market for AD&C loans. Why not a secondary market for chattel loans, the loans that back purchases of manufactured housing?
Robert Dietz: I think that's a good idea as well. Anything that we can do to build out that entry-level space I think is important.
Mark Zandi: Okay, so that's going to be on the list of things. Next time we have him on the podcast, that'll be, "Oh, okay. Great." Here's the real push, and I was emailing you about this a month or so ago. What about LIHTC for single-family for home ownership? LIHTC can be used for single-family rental, but nobody does because there's a lot of complexity to that. LIHTC for single-family home ownership, what do you think of that idea?
Robert Dietz: Yeah, this was an idea that actually there was some legislation proposed back in the early 2000s. I worked at the Congressional Joint Committee on Taxation on the Hill before coming to NAHB, and I've never seen these proposals around. It probably would have been a better way than some of the down payment assistance programs. The challenge is that the program, LIHTC, is complex. It is probably better situated for the multifamily universe where there's more scale.
Single-family, it's a lot of smaller builders and there's kind of an open question of whether the logistics of it would work, but I think it's an interesting idea because it would provide equity to builders to build that home. Then, it could be out on the market for purchase, and then you could target it for certain geographic areas or income categories. If we're thinking about fiscal policy plan or role, I think that's going to be part of the discussion. Just need to figure out how to make it accessible for that smaller builder that's building about 60% of the new homes.
Mark Zandi: The publicly traded guys, they do 40% of the building?
Robert Dietz: Top 100, yeah, typically is going to be about 40 to 50% of this.
Mark Zandi: I hear you, and it would be nice to tailor it to the smaller guy but even if you got something that these big top hundred that they should be able to have the expertise to be able to do it, no?
Robert Dietz: That's part of the solution, but I really do think we got to make sure that it's available to all builders-
Mark Zandi: To everybody-
Robert Dietz: ... because then-
Mark Zandi: ... [inaudible 01:17:17].
Robert Dietz: ... we can have important industry shifts that we can talk about separately.
Mark Zandi: Yeah. I guess politically that would also help out, too. I mean-
Robert Dietz: Absolutely. Yeah, because big builders are not in every single market. They're obviously in the biggest markets, but then you've got a program that's not going to serve those secondary tertiary rural markets. I think then you've got a political problem. You're exactly right.
Mark Zandi: You know, that-
Marisa DiNatale: Yeah.
Mark Zandi: ... brings up a point. I thought that was my idea. Light tech for single-family home ownership, but there's no new ideas. There's just definitely no new ideas. Anyway, okay. Well, very good. Anything else, guys, we want to ask Rob and Maria? Anything else you want to ask Rob, or any other points you want to make before we call it a podcast?
Marisa DiNatale: Can I ask one more question? Back to-
Mark Zandi: Yeah.
Marisa DiNatale: ... demographics and supply of housing?
Mark Zandi: Yeah, sure.
Marisa DiNatale: This is for Robin and Cris, too. When we're talking about housing potentially being oversupplied when you look several years down the road, does that have to do with this shift of the houses that Baby Boomers are in transferring to their children? How big is that effect going to be that we're going to have this potentially massive inheritance shift of single-family homes to a younger generation? Where does that factor into these calculations?
Robert Dietz: Yeah, this is sometimes referred to as the Silver Tsunami. I think it's somewhat overstated. I mean, it's funny, I think back to the late '90s, some of the first academic papers as a graduate student that I remember analyzing were predicting this was going to happen with the Boomers. I think this plays out, but it plays out in a much slower, more orderly process than the idea of all these homes hitting the market at the same time. I think the big thing is what I think Cris was indicating earlier, which is the falloff in household formations-
Marisa DiNatale: Mm-hmm.
Robert Dietz: ... which is going to occur. It just means that over time the demand for new construction is going to evolve, it's going to reduce its level of output, and it's going to shift more to that kind of teardown rehab-type component.
Mark Zandi: Cris, anything you want to add?
Cris deRitis: Yeah, just add, I think one important consideration is the distribution of housing and where it's located. To your point, Marisa, yeah, there'll be some of this wealth transfer that goes on. There'll be some inheritances of properties. They may be in places that people don't want to live or can't live in the future, so that's kind of an offsetting effect here. We might actually see more building going on in the 2030s, '40s, '50s because certain parts of Florida or other parts of the country may not be inhabitable or people just prefer not to live there. You could see some construction going on because the amount of property that is deemed lost in some way from hurricanes or other events could cause some of those shifts to occur, and also the preferences. You could have folks preferring to move to other areas as well.
Robert Dietz: There's a generational element here, which is if you look at the home ownership rates, they've been going up for those older Americans, so the idea of downsizing or moving into long-term care facilities or things like that, that has declined. I think we're going to see a lot more aging in place take place, which is a boon for the remodeling market because it means reshaping the existing stock for essentially a new set of demands for housing.
Cris deRitis: It's good investment, right? I mean-
Robert Dietz: Absolutely.
Cris deRitis: ... people are getting a pretty good return on those homes, so...
Mark Zandi: Okay. Well, very good. Rob, this was great. Very informative and thoughtful and covered a lot of ground and really appreciate it. Hopefully we'll get you back here.
Robert Dietz: That'd be great.
Mark Zandi: Yeah, that'd be really nice-
Robert Dietz: Yeah, it'd be fun.
Mark Zandi: ... to have you back. Yeah, well, thank you so much. Okay. All right. Dear listener, I hope you enjoyed the podcast, and we'll talk to you next week. Take care now.