Higher Rates and House Price Angst

Episode Summary

Executive Summary: The episode centered on the Fed’s first rate hike in three years and its hawkish pivot against inflation, then moved into a deep discussion with housing experts Ivy Zellman and Dennis McGill about mortgage rates, supply constraints, affordability, investor demand, and the outlook for home prices. The guests argued that rising rates will pressure demand, but severe supply bottlenecks and strong price momentum may delay or localize any correction.

Main Topics: Fed’s March policy shift and hawkish outlook (Priority: 5/5): Chris summarized the FOMC’s 25 bp hike, the signal for continued tightening, balance-sheet runoff, and sharply higher inflation forecasts alongside a lower GDP outlook. Mortgage rates, MBS spreads, and Fed balance-sheet runoff (Priority: 5/5): The guests discussed why mortgage rates are rising not just from Treasury yields but also from widening mortgage spreads tied to the Fed exiting the MBS market. Housing demand versus housing supply (Priority: 5/5): The conversation emphasized that higher rates are weakening demand, but builders are still constrained by labor, materials, land development, and municipal staffing, limiting actual supply response. Home price outlook and regional divergence (Priority: 5/5): Mark, Chris, Ivy, and Dennis debated whether U.S. home prices will flatten, rise modestly, or turn negative, with agreement that some overheated markets could see sharper corrections than the nation overall. Investor activity and affordability (Priority: 4/5): They explored why institutional and private investors continue buying despite compressed cash yields, with the explanation centered on rent growth assumptions, capital gains, migration patterns, and housing scarcity narratives. Mobility lock-in and underwriting changes (Priority: 4/5): A large share of homeowners now sit below 4% mortgage rates, reducing mobility; at the same time lenders are loosening some underwriting and increasing use of buydowns and other incentives. Ivy Zellman’s firm and research approach (Priority: 3/5): Ivy described her career path, the formation and growth of Zellman Associates, and the firm’s proprietary boots-on-the-ground surveys and industry relationships that inform its contrarian housing views.

Key Arguments: The Fed’s March meeting was more hawkish than in December, with policymakers prioritizing inflation even at the cost of slower growth. Market expectations largely matched the Fed’s message, so the immediate market reaction was limited despite the aggressive tone. Mortgage rates are rising because Treasury yields are up and MBS spreads are widening as the Fed stops buying and may eventually sell mortgage-backed securities. A major share of homeowners are locked into sub-4% mortgages, which reduces mobility and makes existing homeowners less likely to transact. Builder confidence and expected sales have softened, but actual demand is hard to measure because builders are limiting sales and holding product off market. Supply is constrained not only by materials and labor but also by land development bottlenecks and local staffing shortages, so completions lag demand. Housing wealth gains, migration to lower-cost states, and cash investors are helping sustain demand even as rates rise. Institutional investors are underwriting to future rent growth and capital appreciation, but returns look more fragile as affordability worsens and supply rises. National price declines are possible, but any correction is likely to be uneven, with hotter markets and high-supply regions more vulnerable than the U.S. overall. The guests expect 2023 to be much weaker than 2022, with upside momentum now but downside risk building as higher rates and new supply work through the market.

Data Points: Fed funds target hike: 25 basis points - FOMC raised the target range to 0.25%–0.50%, the first hike in three years. Fed funds target range: 0.25% to 0.50% - Post-meeting target range announced by the Fed. Projected Fed funds rate by end of 2022: 1.9% median - Dot plot implied roughly six more hikes after March. 2022 GDP forecast: 2.8% - Fed cut its 2022 GDP forecast from 4.0% at the December meeting. 2022 PCE inflation forecast: 4.3% - Fed raised inflation expectations substantially from December. 2023 PCE inflation forecast: 2.7% - Fed still saw elevated inflation next year. Mortgage rate share below 4%: 70% - Chris’s statistic; Ivy said this lock-in effect has risen from 39% at end-2018. Homeowners below 4% mortgage rate in end-2018: 39% - Comparison point for the lock-in effect. Primary homebuyer payment increase: About 30% year over year - Ivy said the monthly payment for an entry-level buyer has risen sharply. Primary mortgage rate: A little over 4% - Discussed as having risen roughly one percentage point from late 2021/early 2022. Primary/secondary mortgage spread: About 206 bps - Mark and the guests discussed widening spreads versus the 10-year Treasury. Primary/secondary spread earlier in year: About 150 bps - Used as the starting point for spread widening. Expected NAHB March builder expected sales index: 70 - Chris’s statistic; down from 80 in February and the lowest since June 2020. NAHB expected sales index prior month: 80 - February reading before the March decline. Increase in units under construction/backlog: 294,000 - Chris’s second statistic; increase added over the last year. Finished lot prices: Up 35% year over year - Ivy cited land as a major cost driver in housing. Housing wealth increase: $5 trillion - Statistic tied to pandemic-era wealth gains. Housing wealth increase with mortgages only: $3.2 trillion - Related measure excluding owners without mortgages. Mortgages below 4% versus 2018: 70% vs 39% - Illustrates how the rate-lock-in effect intensified. Multifamily rent growth on new leases: 16% - Ivy cited a portfolio operator seeing extraordinary rent growth. Multifamily rent growth on renewals: 12% - Same operator’s renewal growth example. Historical good annual rent growth: 2% to 4% - Ivy contrasted pre-COVID norms with current levels. Cycle time extension: About 2 months longer than historical - Dennis said home completion times are meaningfully extended. Public builders’ share of new home market: About 45% - Used to describe how much of the market is affected by builder constraints. Proprietary survey coverage of new home sales: About 15%+ - Dennis referenced Zellman’s survey footprint. Investor share of sales: Roughly 25% - Mark cited transaction data showing a high and rising investor share. House price forecast for 2022: Up 4% (last Zellman quarterly update) - Existing home price forecast mentioned by Ivy. House price forecast for 2023: Modestly negative / low single digits down - Dennis said prior forecast was modestly negative for existing homes; later discussion suggested possible -2% nationally. Builder/industry meeting size: About 30 executives - Ivy described a Phoenix roundtable. Single-family/multifamily supply backlog context: Highest since 2006 - Used to argue the market is very tight on supply. Home price appreciation since 2019: About 25% to 30% - Mark argued even a negative 2023 would leave large cumulative gains.

Pivotal Quotes: "they signaled essentially that they're all in fighting inflation, that they're even willing to sacrifice growth to fight inflation" — Chris Dorites: Summary of the Fed’s post-meeting stance. "you have so many cross currents. I'm not ready to commit to a very aggressive policy." — Chris Dorites: His view that the Fed’s dot plot may overstate actual 2022 hikes. "we really are not dependent just on data and economic models, but just live human beings" — Ivy Zellman: She described Zellman’s proprietary research process and boots-on-the-ground approach.

Implications: Listeners should expect higher mortgage rates, weaker affordability, and slower housing activity, but not necessarily an immediate national crash. The biggest risk is a delayed, uneven correction as supply finally reaches market and rate-lock effects fade.