Full Transcript is Below:
– If you’re in the real estate business in any capacity, be it an agent, a lender, a title company, any link in the chain, one question you’ve been asking yourself for months now is when will inventory loosen up? I decided to bring in an expert to answer that very question. I’m Greg Sher from NFM TV. We’re really pleased to be joined by Mike Fratantoni. He’s the Chief Economist, Senior Vice President of Research and Industry Technology at the Mortgage Bankers Association. Mike, thanks for being with us on NFM TV.
– Thanks for having me. Great to be here.
– What’s the answer to the question? What are you seeing, and what is going to be the catalyst to get more inventory back on the market?
– Well, first, totally agree that that is the big question today. We have about two and a half months of existing home inventory in terms of month’s supply right now, a little more than four months of new home inventory. All in it’s just a little more than 1.2 million homes nationally, just by reference, there are 1.4 million realtors in the country, right? That’s a bit of a mismatch. Some are double-teaming some of those properties. To get more inventory on the market, we need two things. We need builders to pick up their pace of construction. It’s happening. There’s about 1.7 million building permits right now. Starts are running below that because builders are facing all kinds of supply chain constraints. You hear about the price of lumber. You hear about the price of other inputs here about the lack of appliances to put new construction, all of that raising costs, slowing the pace of builder activity. That’s the first step is to get more new units on the market, once those are there, the log jam gets unclogged. People can move up to that larger home they were looking for, that frees up inventory for the entry-level of the market. So I think we’ll get a virtuous cycle going here soon. Hasn’t happened yet. Hopefully that’ll happen in the next six to 12 months.
– Six to 12 months. That’s a big number. I was hoping you’d say six to 12 days. There’s going to be a lot of pain between now and then if that’s the case, but you mentioned two and a half months of inventory, what is the standard? Just so we can compare it.
– So typically you’d look to six months of supply and again, we’re at two and a half months.
– Well, we mentioned the first big question. I think the second biggest question is that big, dirty word. It’s inflation. Is it here to stay? Is it transitory? It really depends on who you ask. And now I’m asking you.
– So again, that is the second big debate right now. Chair Powell testified before Congress this week, was actually just watching him and his Senate testimony. He is holding fast to the idea that this is a transitory blip, that some of the supply chain issues that I mentioned are temporarily putting upward pressure on prices. I have to admit, I think I’m on the other side of this debate. I think these higher prices and inflation pressures are likely to stick around. You’re seeing the job market really straining in various places to get workers back on the job. And that’s going to put wage pressure up and they’re gonna pass along those higher wages in the form of higher prices. And then precisely to our first question, the real estate market, I think is going to result in some persistent inflation over time. We’re seeing today, you know, 15% growth in home prices on a year-over-year basis. Those are not reflected yet in the rents that become a substantial part of the inflation number. But in the months ahead, they’re going to start working their way in, you know, we’re not going to see 15% growth in rent, but we’re going to see four or 5% growth in rent. And that’s going to stick around for years. Again, due to this mismatch between supply and demand. If you look at the consumer price index, 40% of that is composed of rent.
– The behavior of the bond market in recent weeks would suggest that inflation is going to be only here for a little while because it looked like we were headed for a 200 handle. Then we went under 150 and we’ve kind of been nestled in in that range and below. So what does the bond market think they know that we don’t know, or that you don’t know based on your answer?
– Yeah, so, you know, I have the luxury in my forecast of showing a 10-year yield or a 30-year mortgage rate at a quarterly frequency, right? And we usually show that the closing yield on those rates for each quarter of the year. And so we have it going from we’re 135 this morning for a 10-year to 2% by the end of the year. Now, how you get from here to there, lots of different wiggles along that path. So we think the trends are in place for that upward movement in rates. But today, you know, this couple of week period, I think it’s more technical factors that you have a lot of investors thinking very similarly to I am that the trend over the course of the next six months is up. There’s some short covering and some reaction to Chair Powell’s immediate remarks, but you know, I’m pretty confident that over the course of this six months longer term rates are gonna move up on average, that doesn’t say that, you know, days or weeks, we might see these trends down.
– One big variable that could shake up your assertion, that we could be at a 200 handle by the end of the year is a variant. And that is the Delta variant, right now it’s spreading, the numbers are not looking great around the country right now, a lot of people are choosing not to get the vaccine. And is that something that you’re fearful of, that that could just completely shake things up?
– So totally agree. And you know, I have my role as a forecaster and so I get to put out what’s my thinking in terms of the most likely path for the economy. And I think that most likely path is going to a 2% tenure by the end of the year. But I also have a history in my career as being in risk management and risk management, you think about alternative scenarios. So one alternative to exactly your point. If the pandemic, the Delta variant starts getting worse again, yeah, that’s, that’s the reason for rates staying lower for longer. And so maybe we stay at 150 through the rest of the year, if this really does get worse. You got to think about the other side too, though, right? We were just talking about inflation. If inflation expectations begin to move higher as a result of the rent issues I was talking about, you know, persistent supply chain constraint issues, think about not a 2%, you know, two and a half or higher, you know, in the near term. So if I’m running a business or if I’m a lender, I would think about all three of those scenarios, you know, most likely a little bit higher from here, certainly risk on either side.
– So when my son, one of them, or both of them approaches me and says, dad, should I be accumulating Bitcoin? Is cryptocurrency something that’s here to stay? What say you, Mike Fratantoni?
– Well, this is at the edge of my expertise here. So these are more personal views than, than really things that I feel strongly about. But I don’t see a lot of value there, you know, but what we teach in in economics is that, you know, money should be, you know, have transaction value, should be a good store of wealth and should be readily accepted as a medium of exchange. I don’t see Bitcoin being a good store of value, just given the volatility that it has from day to day. And as now Treasury Secretary Yellen has said, it sure looks like one of the primary uses of it is for folks on the other side of the law to collect money. So I’m not a huge fan, but I may be showing my age there.
– Well, Mike, this has been amazing. We really appreciate you spending some time with us on NFM TV. Maybe we can check back in with you in six months or so.
– Happy to do that. Good to be with you, Greg.
– Appreciate your time, Mike Fratantoni from the MBA. I’m Greg Sher from NFM TV. We’ll see you again next time.