A Closer Look At The Housing Market

chief economist over at Courtland, joining us out of Hot Lanta. Brad, Um, we've had some interesting well existing home sales yesterday, I think they were down two percent, which I've found quite interesting, and I've seen more and more stories that maybe these high prices are driving people away from um making purchases. How do you look at the housing market right now?

You agree with that statement. I mean, there's no question that we've seen a lot of price movement resulting from low mortgage rates over the last two years at this point, and then of course we have the supply eye conditions that are are often spoken about as well. They're contributing

to those pressures. Brad. One of the things we've heard from a lot of the home builders, Uh this quarter and in recent quarters, is they can't build as many houses as they want because it's maybe supply chain issues, um, labor, those types of issues. How big even of a challenge is that for the US in terms of trying to you know, build up our housing stock to get people into homes. Yeah, I think we definitely know that that's a challenge. Just quantifying that is really part of the

even bigger challenge that we're facing. But when we focus just on what's happened recently on and we're missing the bigger picture and the bigger pictures one where coming out of the Great Recession, we did a lot of things to inflate housing to help engender a recovery, and that in turn contributed to this undersupply situation that we're in today.

So part of what we're looking at is not so much a question of what's going to happen on the supply chain side, but what are going to be the ramifications of this out of control home price appreciation that

we've seen over the last eighteen months. Well, we had a story on the Bloomberg a couple of days ago that said one of the ramifications is exacerbated in equal inequality, you know, because if you're a young person and you can't come up with a down payment today and prices keep rising, you're not coming up with a down payment tomorrow either. And at the end of the day, you're going to be someone without a home. And we know that's a big store of wealth for people that do

own them. What would be your prescription, Brad, in order to get us out of this situation? I mean it's something that you know, governments have tried around the world throughout history to figure out for for so long, right, and we've never really come up with a good way to deal with higher price with prices that are two high. Yeah.

And also it depends on the school of economic thought one subscribes to, but many people with points of view that simply by intervening and markets at different times, you end up creating the condition for some kind of an

issue down the road. I think we could see that over the last twenty years in this country when we look at the effort that we're done to to increase the home ownership rate after the dot com ver session actually been beginning in the late nineties, in many ways contributing to the oversupply and the out of control home price appreciation that was the housing bubble experience, and then the very efforts to get us out of that, creating this undersupply situation that we're in today. I don't have

an answer. I'm just one economist. I'm not you know, a policy walk, as it were. But one thing I would look at is the alternatives in the rental space. If we look at what's happening in the housing starts, we can't see that multifamily housing starts are really taken off. Permitting has looked good to we know there's been this development in the single family for rent space. But to your point about what this means for people building equity

and building their own wealth over time, that's a different question. So, Brad, one of the things you know when we hear from the home builders is and and you know, folks that look at the real estate business, the housing that is being built isn't necessarily for the first time buyer um, and that's creating this inequality that Matt mentioned, or is adding to it. I guess, um. Yeah, obviously the margins are much better for these builders on the big McMansions

and so on. But is there anything that can be done to kind of you know, incent builders to build homes for the people that really need them. There's always policy actions that could be taken to do things like that. On the margin, we've heard different things being discussed at different times of the last five years. If it ranges from trying to use state powers to overcome local zoning

ordinances and things like this. But we'll also see the population respond, right, so people live at home longer to say about more money, they migrate to affordability, and there's certainly markets in the country. I point to Boise, Idaho

as an example. There's just a lot of activity going on is people who have moved to an area where they can price themselves back into the market when it comes down to the savings that they can you know, accrue in a more expensive area and then move to a more affordable one in order to deploy those savings in the housing market. I've heard so much about Boise the last few weeks it makes me kind of want to look into that's either Schuster Boisett maybe. I mean,

I don't recall hearing this much about Boise. Since I think legends of the Fall, I believe there was a scene in that movie where Brad Pitt goes back to Boise. But I gotta check that. I gotta check it out. Folks from the West Coast when they get priced out of the Bay are at Boise was like a place to go. So anyway, Brad Dilman, thank you so much

for joining us. Uh. Brad Delman, chief economist for Courtland, joining us on the phone from Atlanta again talking about the housing market and UH, for those that are looking to buy a house, very difficult times here, limited inventory, higher prices making it very difficult in the rental market also is no joke on a lot of these markets here.

So again looking for that market to stabilize. A lot of ECO data today, including the Leading Index for the month of August I came in and gain of zero point nine, a little bit better than expected of some good new zero. Let's break it down with Ottoman Azldrem. He is director of Economic Research and Global Research Chair at the Conference Board. Ottoman, what are the key drivers that we saw in the August Leading Index? Um, good morning. Yes, the ALI rose sharply and that those games were pretty

widespread among the ten different components uh in the index. Uh. You know whether you you're looking at UM orders or labor markets or housing markets, financial indicators pretty widespread, strong gains there. And how how sustainable do you think this is? Well? Uh, you know, the monthly games have picked up over the last three months, UM, and the index has really the trajectory has picked up compared to earlier in the year.

So that does suggest to some sustainable growth in the economy. Um. You know, the ALI is pointing to basically a strong expansion in the U s economy in a way, UM, to the underlying fundamentals are fairly strong. It's kind of normalizing growth. UM. But the way ahead there could be some headwinds and there could be some turbulence. So automania. You know. How does you know this delta variant continues to really be a difficult challenge around the world, certainly

here in the US, particularly in certain parts. How does that factor in? I mean it kind of suggests. Does your data suggest that people are kind of looking beyond that? Well, um, the data does reflect that to some extent. Uh. The delta does put a damper on UH sort of the expected UH switch to more services and more in service in person services in the economy. That does derail that outlook a little bit, and it does show up in

the labor markets and employment insurance numbers. It also shows up in know what consumers are expecting about business conditions, uh, you know, in six months, in twelve months, um so. UM, you know, the the resurgence of the delta does put some concern, especially for those consumer services categories. UM So what about the inflationary hit? I mean, is this just not as much of um a headwind as maybe we

had thought it would be. We think that you know, inflation will likely stay more transitory or transient, um, although it will prices will be you know high for a while yet before starting to come down at the end of the year. Um. There's possibly an adjustments going on people getting used to uh those higher prices. But that is also another area that we're watching in terms of

risks to this business cycle. Expanse should outman. You know, when Matt and I talked to corporate executives, we hear pretty much across most industries that supply chain challenges are big, big crimp in the reopening of their businesses and uh short and kind of crimping their margins and so on. How does that factor into kind of the data you

look at. Yeah, that's another area that we're watching closely, and we're hearing from our members at the conference board about these UH demand and supply mismatches that are showing up in supply chain disruptions. UM and UM. I think, um, you know, another area that highlights UH those disruptions is the new orders data. And I think some of that holatility that we're seeing there is partly due to those supply chain issues. UM. You know that I think again

will likely be more temporary than permanent. As the economy around the world, you know, reopens, these issues will get sorted out, but there are some UH frictions that are creating these volatilities in the outlook. Again, you have to expect the supply chain issues, well, even if they're temporary, still last quite a while. I mean, we talked about a six month period and I don't hear from CEOs of at least big automakers that they expect this to

be resolved in six months. Certainly, you know, And and some of this is happening in the context of longer, longer term changes, structural changes and supply chains that have been underway, you know, after the you know last great recession that we saw, so that triggered some of those changes. And the context is one of these UM major UH reorganization I guess in supply chains and these demands, supply

mismatches and disruptions are certainly not helping UH. And as you mentioned, you know some some UH sectors are much more vulnerable to those than others. All right, Ottoman, thanks very much, Ottoman. Azzle drom there, director of Economic Research and the Global Research Chair for the Conference board. E s G. Environmental, Social and Governance has certainly become a very big topic in investing, both equity side and fixed

income side. Let's bringing an expert there on the credit part of it, Robert Lamb, co head of Credit at Man new Merrick. Rob thanks much for joining us here. I love to just step backt view and say, what is E s G investing to you and how does it factor into your credit strategies? Yeah, great question. UM,

I look at it from this perspective. You know, percent of all US high old mandates are managed by traditional discretionary managers UM, and to me that means that the majority of credit investors in the market are using a very similar investment process. So when the market structure is so skewed, it actually creates inefficiencies, and I believe real opportunities to harness those inefficiencies as well. Currently, I actually don't believe that credit investors are using enough data in

their investment process. So the reason for this is because that some data sets and quantitative techniques are frankly just

out of reach for many traditional discretionary investors. So, taking a step back, as your question highlighted, UM, when I think about the rise of systematic credit strategies where our value proposition is to use a fully systematic, quantitatively driven investment process that can really leverage the explosion of alternative data that we've seen over the last number of years, I think that actually goes hand in hand and it's

quite complementary to how we're approaching E s G as well. Um, and E s G has certainly seen an equally eye opening increase in data availability and of course along with that data complexity. But what is it? What is E

s G? Do we just assume, at least for the first few generations that this is really greenwashing for the most part, I mean nice terms and a lot of talk, but I mean surely you're not making money on doing things that are that are truly UM, environmentally sustainable and sacrificing,

you know, an advantage for good social and governance. Yeah, it's a it's a good point, and I certainly hope that UM the majority of what the market is presenting and what we're presenting is not interpreted it as greenwashing, although I think UM as an industry as a whole, we have to be very careful about that concept because it does happen, and I think that there's real tangible good that's being happened being done in E s G

research and strategies. It's really adding transparency and accountability to the companies. UM. But greenwashing as a concept, right, kind of that surface level marketing of of E s G UM can really be harmful to the adoption of E s G within credit and within all asset classes. So UM that has the potential to reverse a lot of the good that's been happening UM with this increased focus in in E s G. And to your other question, UM, uh you are asking about you know what is E

s G and UM is it? Is it kind of a source of alpha or source of returns that that investors should be considering UM. I think as as a high level E s G is a a focus as as you highlight environmental, social, and governance aspects UM that spans a huge number of sub bodels actually UM and a huge number of aspects UM to be able to capture and evaluate a company within within those uh those parameters.

So it's a highly debated topic whether E s G is an alpha source and I think the views really span the spectrum UM, and from my perspective, I kind of look at it from a number of different angles, right, I mean the primary question that you have, what are some businesses that you invest in that make money? A lot of my businesses make money. In fact, let's talk

about them. I mean, I just I want to get to the to the heart of it, you know, So give us an example, so, you know, give us some examples rob that you know, you know, the E s G investors hold out as this, these are wins by doing E s G investing, employing this into our investment strategy, we've generated superior returns. Yeah. So I think some of the more unique aspects of E s G UM include things like what a company is doing in terms of

their diversity policies. What are companies doing in terms of lowering their incidents rates and infractions? Right? Um? What are they doing in terms of helping and kind of improving the labor policies for their employees? Now, those are concepts that are relatively new to the market. If we were talking about this to three years ago, you know a lot of people would or maybe even further than that, maybe five years ago, a lot of people wouldn't even

be considering that when evaluating a company. Now that it's on the table, and now that it's such a prevalent factor, it can really be a driver of returns. So when you evaluate that you know, that coal company, or that energy company or even that technology company. Um, you're going to want to consider kind of what are those diversity policies and what are those factors? And I don't believe the market is fully priced that in right now. So

that's yeah. One of the things Robb but I don't understand is what or who determines whether a company is e s G compliant, Like does does the SEC say, okay, this security this bond is s G compliant. Um? You know, regular regulatory bodies bodies can certainly UM step in in a small aspect of of kind of the E s G segment UM. As an example, you know, green bonds has been a relatively small segment UM. Not all projects or sorry, not all bonds can be a green bond, even if it's coming from an E s G UH

focus company. It has to be earmarked for a specific UM for a specific project and use of capital UM. But for the most part, I think there are independent firms UM that are doing a really good job at evaluating kind of the E s G qualities of companies. Kind of similar in in my opinion, parallel to rating agencies. Rating agencies kind of have an independent view of UM

the credit risk. Maybe you're better off, maybe you have an edge if there isn't a one body saying this is e s G and this isn't if you can spot it before your competitors do. In any case, very interesting stuff. Robert Lamb, co head of credit at man Numeric. Wow, Wow, wow, Wow with you dude. Tenure yield is all of a sudden above one forty yep, yep, what on earth is going on. Let's get over to Chrift Gaffney right now.

He's president of world markets at t I A a bank, And um, you know I saw someone writing today, Chris that the move in Evergrand was a delayed response to report yesterday. I don't buy delayed responses in markets, So this isn't likely a delayed response to Jerome Pale's perceived

hawkishness yesterday. But what is happening in rates? Yeah, we're seeing the curves steep, and I think it's uh just to move by uh, certainly by bond investors believing that you know, the the economic rebound is going to continue and and uh um you know, a realization that growth is going to increase and and rate uh you know, inflation is going to run a little hotter than maybe in a little quicker than previously thought. Yeah. And so Chris, I guess you know, for these equity markets, by the

dip folks, they're right again. I guess yeah, And and uh, you know I I kind of agree with them. I mean, the financial conditions for equity investors look very good right now going forward, you know, whether you have a shorter or medium term view. Um, you know, consumers balance sheets are are very healthy. Still, uh, company balance sheets are healthy. Um, that should lead to higher earnings and and those higher earnings,

of course, is what supports equity prices. Now there there's certainly some risks in the market, and uh, you know, evergram presents kind of a new risk out there. Um, we've got the delta COVID, you know, variant UM. But I think the the economic environment still is very kay oh oh oh are we losing you, Chris? I'm here? Are you there? Okay, Yeah, we're just it's like if you're on a wire phone at your house and you're too far away from the base, and it's that's what

it sounds like. UM. Alright, so we're seeing raids take off, We're seeing UM stocks take off. What are you concerned about anything right now? Are their headwinds that make you want to, you know, check yourself little here? Yeah, I mean there's still concerns and and I guess the main concern is really in the lack of UM. You know, the price pressure is being put on on on the margins. And when I say that, uh company margins, UM are

gonna get squeezed. We're seeing and put prices uh increase pretty much across the board and uh, um, you know, they they're not going to be able to probably pass all of those increases onto their uh to the ultimate consumers. So I do expect to see some margins with Another thing that concerning is, of course, um you know, the lack of labor participation UM in the US economy. Um

you know, is this a tight labor market. It certainly seems like it's tight in some instances, but um, you know, the company's lack of hiring, lack of being able to hire workers is certainly going to um weigh on on on the earnings, especially for the service sector where they just don't have enough people to take care of the business that they have coming in. So uh, that certainly

should weigh on uh some of those company earnings. But again I think those are you know, it's it's it's something that will work them their way through the system. And Chris, let's let's talk about valuation in these equity markets here. You know, as a former equity analyst, I was trained to look at valuation, whether it's pe or ev to but uh, and it just feels like this market. Yes, we've had some good earnings growth over the last few quarters,

but evaluations feel a little stretched. Should we be concerned or how Yeah, no, I I totally agree that valuations are probably stretched here in the US. UM. But it gets back to you know, with the interest rates where they are. UM. You know, low interest rates, ultra low interest rates support higher price earnings. UM. You know, are we at an earnings peak? Um? You know that's another question our earnings and it can be going to be able to continue to grow. I think in this environment, um,

we we can see higher earnings. So while they are stretched, UM, it's not a major concern. I I don't think, and in fact, I think we have further to go um on on the on the earnings, especially especially if the FED continues to keep rates at these ultra low levels. By the way, is the dead ceiling something that matters to you? Does that good question? Has that a problem?

You think? It's not? Um, you know they Uh, it's it's there'll be some gamemanship on both sides, but uh, we won't default on the US that and uh you know that that feeling will be raised. UM. I think really Evergrand is a similar situation. China is not going to let um you know Evergrand failure impact uh their overall economy. So UM, I think in both situations, UH, it'll work its way through the system. Um. Yeah, it's it's uh um, you know, a highlights h that the

amount of that. That's the one thing it does do is it highlights just how much that is out there, and so that is a concern. All right. Hey, Chris, thanks so much for joining us. Really appreciated Chris Gaffney, president of World Markets at t I A A Bank, giving us his thoughts on these markets. He is in the buy the dip camp and he has been correct. This is Bloomberg. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts

or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three. Put on fal Swohey, I'm on Twitter at P T. Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio.