Jonathan Miller on High Mortgage Rates

Episode Summary

Executive Summary: Jonathan Miller argues U.S. housing is defined less by collapsing demand than by a severe inventory shortage, sticky sellers, and higher mortgage rates that have frozen supply. He explains how pandemic shifts, migration, climate risk, and office-market distress are reshaping pricing, while warning that appraisals, data quality, and industry incentives still lag market reality.

Main Topics: Current residential housing market: rates, inventory, and pricing (Priority: 5/5): Miller says higher mortgage rates have slowed sales, but prices have not fallen much because inventory remains unusually tight; sellers are slow to adjust and buyers face limited choices. Pandemic-driven changes in housing behavior (Priority: 5/5): The pandemic weakened the commute-home tether, increased demand for suburbs and second homes, and changed how people think about where to live and work. New York City and office-to-residential disruption (Priority: 4/5): He argues Manhattan is not dead, but office vacancy, weak Class B/C assets, and difficult conversion economics will force a long reallocation of office properties to stronger hands. Florida, Sun Belt migration, and affordability (Priority: 4/5): Migration to Florida and other Sun Belt markets is real but has matured into a higher-end, year-round living market with more congestion, taxes, and infrastructure strain. Appraisal industry reform and bias concerns (Priority: 5/5): Miller criticizes the Appraisal Foundation and argues the industry has failed on transparency, diversity, and modernization, while acknowledging the need to address bias credibly. Climate risk, insurance, and flood-zone economics (Priority: 4/5): He warns that flooding, wildfire, and insurance costs are increasingly shaping property values and may make some locations less viable over time. Luxury real estate and billionaire-scale outliers (Priority: 3/5): Ultra-luxury sales are a separate market with few buyers, highly building-specific pricing, and little relation to ordinary housing trends.

Key Arguments: Higher mortgage rates have reduced transaction volume, but prices have stayed firmer than expected because existing homeowners are locked into low rates and are reluctant to sell. Inventory is the dominant variable in today’s market; without more listings, prices cannot correct sharply even when demand softens. Seller behavior lags market changes by one to two years, so many listings are still priced as if the 2021 boom continues. The pandemic permanently altered housing preferences by reducing the importance of commute distance and increasing tolerance for remote or hybrid work. New York City’s death was overstated; Manhattan saw net inbound migration in 2022, but office market weakness will lead to a slow transfer of assets from weak to strong owners. Florida’s boom is not just temporary hype; it reflects migration, work-from-home restructuring, and a shift toward broader, higher-end year-round demand. Appraisal practices and the Appraisal Foundation have not adequately modernized; the industry remains too opaque and too homogeneous, leaving room for bias and poor governance. Climate risk is now an economic variable: flood insurance, wildfires, and extreme heat raise ownership costs and can depress property values in vulnerable regions. Luxury markets should be viewed as markets of outliers; a handful of ultra-wealthy buyers and building-specific factors can drive outcomes that do not generalize to the broader market.

Data Points: 30-year fixed mortgage rate: About 7.5% - Current mortgage rate level discussed as more than double the level from a little over a year earlier. Low point for 30-year fixed mortgage rate: 2.75% - Rate level two years prior, used to show how sharply financing costs have risen. Year-over-year sales changes: Down 20% to 40% - Typical decline in transaction volume across markets compared with the prior year. Comparison to pre-pandemic normal: Down 20% to 30% - Current sales levels versus second quarter 2019 across many markets. Inventory in Florida markets: More than 60% less than pre-pandemic - Illustrates how tight supply remains despite slower sales. Manhattan cash transaction share: About 65% - Second-quarter Manhattan transactions, the highest cash share in history. Manhattan unsold condo supply: Fell from 8.3 years to just over 3 years - Shows post-pandemic tightening in high-end Manhattan supply. Market share of bidding wars in suburbs: About 45% of transactions - Westchester, Nassau County, and Fairfield County closings in the completed quarter that went over asking. U.S. homeowners with mortgage rates at or below 4%: 61% - Explains why many owners are effectively locked into their current homes. New home inventory mix in some submarkets: Up to 50% new construction - In places where existing inventory collapsed, new builds dominate available supply. U.S. homeowners without a mortgage: About 35% - Potential inventory that is not constrained by mortgage-rate lock-in. Florida population growth since the pandemic: About 7% - Used to show the scale of migration into Florida. Appraisal industry diversity ranking: 400th out of 400 - BLS-tracked industry diversity measure cited to argue the field is exceptionally homogeneous. Ultra-luxury sales threshold tracked: $50 million+ - Miller tracks national sales at or above this level as a proxy for the top end of the market. Annual ultra-luxury sales count in 2021: Low 40s; about 43 sales - Record year for $50 million-plus closings. Annual ultra-luxury sales count in 2022: Mid-30s - Shows cooling from the 2021 peak. Current-year projected ultra-luxury sales: Mid-20s - Indicates normalization after the pandemic surge. New York City budget dependence on real estate: Over 50% of revenues - Highlights why real estate performance matters so much to the city.

Pivotal Quotes: "The challenge is that when we're looking at valuation of a property, we're looking more than price. Price is sort of the caboose at the end of the train." — Jonathan Miller: Explaining that transaction trends and inventory are better leading indicators than headline prices. "The market peaked in October 2007. So you still had a full year or two after housing topped before it started to show, and really the heavy stuff didn't start until the answer to that question is always: consumers, when they're uncertain, they pause." — Jonathan Miller: Discussing how transaction volume often leads visible price declines and economic stress. "The idea that a rapid slowdown in sales, that's the first, you know, sales generally, depending on the markets, are down 20 to 40 percent year over year." — Jonathan Miller: Summarizing the current housing slowdown and distinguishing it from a price crash.

Implications: Listeners should expect a housing market shaped by scarce supply, not a broad price collapse. The bigger story is restructuring: office buildings, migration patterns, appraisal reform, and climate risk will increasingly determine where value grows or erodes.