--:-- [Theme music fades out]
--:-- John Bickley: This episode is brought to you by LifeLock. Between two-factor authentication, strong passwords, and a VPN, you try to be in control of how your info is protected. But many other places also have it, and they might not be as careful. That's why LifeLock monitors hundreds of millions of data points a second for threats. If your identity is stolen, they'll fix it. Guaranteed or your money back. Save up to 40% your first year. Visit LifeLock.com slash podcast for 40% off. Terms apply.
--:-- John Bickley: Amid the highest interest rates in decades and falling supply, home ownership is currently out of reach for millions of Americans. That reality comes as the economy has avoided recession but struggled under the weight of rising prices and stubborn inflation. In this episode, we talk with an expert about the economy and the future of the housing market.
--:-- Georgia Howe: I'm Daily Wire, Editor-in-Chief John Bickley with Georgia Howe. It's November 5th. We hope you enjoyed your extra hour of sleep last night. And this is a Sunday edition of Morning Wire.
--:-- John Bickley: Here to discuss the shaky state of the economy is Daily Wire senior editor Cabot Phillips. So Cabot, let's start with the housing market and then we'll get into the economy more broadly. Give us a quick overview first on the current housing market.
--:-- Cabot Phillips: Yeah, we've talked quite a bit on the show about rising interest rates and inflation. And it can be easy to sort of gloss over at a certain point, but it is important to remember just how quickly things have shifted and the enormous consequences of all that economic turmoil. Most people feel it every day at the gas pump or grocery store, but the housing market is really a sector of the economy that's the perfect microcosm of the impacts of those higher rates and inflation.
--:-- Cabot Phillips: According to new data from the Federal Reserve, right now your dollar goes half as far in the housing market as it did as recently as 2020. It almost sounds unbelievable, but let's stick into the numbers a bit. So in December of 2020, a median income household could afford to buy a home worth $730,000. Today, that number is, get this, $356,000. Wow. That means the average American family can now afford just half the house they could only three years ago.
--:-- Georgia Howe: Yeah, just a staggering drop in what people can afford.
--:-- Cabot Phillips: Yeah, we have never seen a drop like this in modern history. Put another way, the average American household now needs to earn $115,000 a year to afford a median-priced home. Back in 2020, the necessary income was $75,000 on average. So millions of middle-class families have essentially been priced out of this market.
--:-- Cabot Phillips: And the main culprit are those rising interest rates, which have exploded from 2.8% to 7.6% in the last two years. To make matters worse, at the same time, housing costs have also spiked. In 2020, the median sale price on a single-family home was $360,000. Today, it is $416,000. And that all comes as inflation has driven up the cost of living. Remember, the average household now spends over $700 more each month than they did two years ago.
--:-- Georgia Howe: That means that people have less money to spend on a monthly mortgage payment, which is also more expensive now than ever.
--:-- Cabot Phillips: In 2020, the average monthly payment on a new home was around $1,100. Sounds pretty nice. Since then, it has doubled to around $2,200. And those higher rates mean that much more of that monthly payment is not actually going towards building equity but towards interest.
--:-- Cabot Phillips: Breaking down the numbers a bit more if you bought a home with 10 down back in 2020 you pay around in interest over the lifetime of that loan. If you bought the same house today, you're looking at just under $700,000 in interest payments alone. So from $220,000 to $700,000.
--:-- Georgia Howe: Yeah, it's hard to even wrap your head around.
--:-- Cabot Phillips: Yeah, it really is. And that really is just the tip of the iceberg too. On top of all that, people are saving less than nearly any time in history. This year, the average personal savings rate, that's just the percent of monthly income people are stocking away, fell to 2.7%. For the last decade, that number was around 9%. That means the average family is having a much harder time saving up for a down payment on a home.
--:-- Cabot Phillips: So all that to say, everywhere you look, there's concerning evidence that paints a grim picture for the housing market.
--:-- Georgia Howe: Yeah, sure sounds like it.
--:-- Cabot Phillips: Now, those higher rates have kept many people from selling their homes. How is that impacting the market?
--:-- Mitch Rochelle: Well, you're absolutely right. It's playing a massive role. Now, for obvious reasons, many homeowners are more than hesitant to give up their 3% rate to take on a new mortgage at 7%. That has led to an enormous dearth of houses coming on the market.
--:-- Georgia Howe: According to Goldman Sachs, housing inventory this year is lower than at any point in the last four decades.
--:-- Mitch Rochelle: For more context there, I spoke with Mitch Rochelle, a market expert and managing director of Madison Ventures Plus. The most broad way to look at housing is Econ 101. So for those of you listening who stayed awake freshman year, first or second semester, and you learned Econ 101, you took anything away from that class, you remember supply and demand. That is the only two words that are relevant in the housing market in America.
--:-- Mitch Rochelle: Whether I'm talking about apartments to live in or homes to buy or even homes to rent, we have way less supply than we do demand. And demand is measured by something called a household formation. That's statistically when children move out of their parents' homes. So as children move out of their parents' homes and they need a place to live other than their parents' house, there is insufficient supply of that.
--:-- Georgia Howe: So when you have low supply and high demand, you have rising prices.
--:-- Mitch Rochelle: That hasn't changed. So I don't fundamentally see housing prices coming down. I don't fundamentally see rents coming down unless we dramatically alter the amount of supply of housing that we have. And there's no plans to do that.
--:-- Mitch Rochelle: Now, it's worth noting, up until this fall, one saving grace had been new construction coming to market. When rates were low a few years ago, builders broke ground on a record number of homes looking to capitalize on the surging demand. Those new homes helped offset the low supply of existing homes. But now, as profit margins have contracted for builders, new construction is also, stop me if you've heard this, at its lowest point in years, meaning the housing supply is almost certain to sink even lower in the coming year, unfortunately.
--:-- Georgia Howe: Here's Rochelle with more on what's behind that low supply.
--:-- Mitch Rochelle: I often talk about the three L's, land, lumber, and labor. Those are the three key components to building a home, whether it's a single family home or an apartment building, land, lumber, and labor. Land prices are high and land that is entitled for the use of a single family home or an apartment is scarce because local governments and even state governments in some places have all of this anti-development legislation.
--:-- Mitch Rochelle: You and I are sitting in Nashville, thank God, because Nashville is a pro-growth place. But there are other parts of the country that have this NIMBY mentality, not in my backyard, so we're not adding to supply. Lumber to me is the catch for all of the materials that go into building a home. And we still in an elevated price environment. Yes the rate of inflation has slowed but a refrigerator is now 25 more in cost than it was two and a half years ago and that's not changing.
--:-- Georgia Howe: And then labor. Labor is scarce. It's hard to find. Skilled labor is even harder to find. It's largely unreliable, and it's way more expensive.
--:-- Mitch Rochelle: People talk about the UAW strike. Like when we're starting to pay people who make cars 25% more than we paid them under their last collective bargaining agreement, if you don't think that trickles through the skilled and unskilled labor pool, where somebody who is a builder or a carpenter, an electrician, they're wanting to get 25% more, you know they're going to want to get. So those three components are what are hurting additions to new supply.
--:-- Mitch Rochelle: The only way to fix it is to create incentives to promote more supply. Now, there have been some who have speculated that housing prices will take a massive dip once mortgage rates eventually do come down. Wells Fargo economists, for example, issued a warning this week that they believe a housing recession similar to what we experienced in the 80s is coming in the near future. But for his part, Rochelle disagrees.
--:-- Georgia Howe: The same people who wrote that piece for Wells Fargo probably wrote the piece saying that the commercial real estate market is going to crash. So I've been waiting for that to happen.
--:-- Mitch Rochelle: I think if you look at it on paper, you could see that there are macro trends that are pushing towards that, like less people are occupying offices. But when you dig deeper, you realize that demand still exceeds supply. So I don't see a crash in housing.
--:-- Mitch Rochelle: I'll give you one other nugget. The last time in my life, I'm older than you are, Cabot, the last time in my life when interest rates were really, really high was the 70s through 80s period. From 1975, six, when inflation first reared its ugly head to let's say 1989. So at the end of Ronald Reagan's second term, the average home price went up two and a half fold. So tell me how you can make the argument that higher mortgage prices are going to destroy the housing market. If in most recent rear view mirror, that the absolute opposite happened.
--:-- Georgia Howe: So when it comes to the housing market, everyone wants to know when those higher rates will come down. As Rochelle sees it, even if rates do come down, though, it does not mean that homes will become more affordable.
--:-- Mitch Rochelle: I see interest rates coming down. But if you're in the market to buy a home and you're listening to the sound of our voice and you're thinking, I'm going to wait until interest rates come down, it's probably more likely that the price of that home will go up at a greater rate than interest rates will go down. Will we see a 6% 30-year fixed rate mortgage in the next 12 to 18 months? Sure, pull the tape if I'm wrong, but absolutely, I could see that happening. But do I see home prices falling by a similar amount in the next 18 months? Absolutely not.
--:-- Mitch Rochelle: All right, so let's go big picture. What are we seeing from the economy more broadly?
--:-- Georgia Howe: Yeah, it's interesting. So from a data standpoint, the numbers actually appear fairly strong. There was solid GDP growth last quarter. Consumer spending is still incredibly high. Inflation is slowing down, et cetera. But the reality for most households is very different. Those figures all sound nice, but the average family certainly does not feel like the economy is in a strong spot.
--:-- Mitch Rochelle: So there is a sort of smoke and mirrors trick going on with our economy.
--:-- Mitch Rochelle: All of the data seems to be improving right. We have jobs continuing to be creative. The pace of inflation is slowing to good symbols of health. The Fed decision the other day to keep interest rates at the level that they are is a good sign. That suggests that the Fed, who claims to be data dependent, isn't going to continue to hike rates in an effort to slow down inflation. The problem is interest rates are stubbornly high right now. Inflation doesn't seem to be as stubborn. And the reason why you increase interest rates is to slow down the economy. So let's just pause for a second to think. The goal is to slow down the economy. Guess what's not happening? The economy isn't slowing down, right?
--:-- Georgia Howe: So we saw gross domestic product grow at a pretty fast pace in a high interest rate environment. And I think that that's the part that troubles everybody.
--:-- Mitch Rochelle: We still have a healthy job market. We still have a growing economy. And all of that is being done with borrowed money. So the consumer who drives our economy is borrowing money to consume and our federal government that grows the economy by government spending is borrowing money. So right now, big picture, if you're a politician, you could say the economy's healthy. But what we're ignoring is at what cost and when will this turn around? When are we going to have this recession that everybody's talking about?
--:-- Mitch Rochelle: I guess at some point, but every human being, myself included, who predicted what quarter it would happen have all been wrong. And the reason why we were all wrong is we underestimated the propensity of the consumer to continue to load up credit card debt and continue to push the economy forward.
--:-- Georgia Howe: As he puts it, Americans spending money at a frenetic pace would typically be viewed as a positive sign for the economy. But in this case, he says it's negative because they're simply spending money they don't have.
--:-- Mitch Rochelle: If the government is willing to continue to borrow money, and just to put perspective on that, we're approaching the cost of servicing federal debt to be $1 trillion a year, $1 trillion a year. So we're going to have to borrow money to borrow money. Well, if the government were your parents and they were sort of teaching children how to be responsible, they're doing a really poor job teaching our society how to be responsible. So no surprise that consumers are putting more stuff on credit cards and borrowing money to pay interest on credit cards. So at some point that has to break.
--:-- Mitch Rochelle: But I'll just give you a data point. The average monthly car payment in the United States right now is $750. That's basically double the pre-COVID average car payment in America. So at what point can Americans continue to pay $750 for cars before they stop buying cars? What the Fed tries to do by raising interest rates is to destroy demand. Demand destruction is the goal, and they've yet to do that with higher rates. So at what point do people just say, I can't do it anymore? I don't know, but the propensity to load up on debt is staggering.
--:-- Georgia Howe: Well, let's hope those aren't as severe as many people fear. Cabot, thanks for reporting.
--:-- Cabot Phillips: Anytime.
--:-- Georgia Howe: That was Daily Wire senior editor Cabot Phillips, and this has been a Sunday edition of Morning Wire.
