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Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven News.
I'm the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot Com Slash podcast it is I guess kind of m and a Tuesday, Just Choice Hotels launches a hostile bid for Windom. You don't see this very often, so are you gonna exchange off for Gone? I don't know what's going on.
With the Wall Street Journal putting out the story?
Yep, Jody Lourie. She joins she's a credit analyst for Bloomberg Intelligence. Jody, can you explain what's happening here with Choice Hotels and Windom?
Sure, Paul, So, I think the Choice situation is one of the more interesting ones that we've been following. Just as a quick recap, since the spring, Choice has been trying to court Windom into merging and Wyndham has said no multiple times. October seventeenth, they made it public and Wyndham said absolutely not. And now they're they're doing the
nineteen eighty style hostile takeover. They're doing, you know, they're they're asking shareholders to feel free to exchange and get some cash or get stocked for the new company, and we'll see what happens.
If you look at Wyndham stock ticker symbol w H here, it's just down about five tenths of a percent, up all about eleven percent year to deep. The walk is through the thought prop of shareholders right now.
I mean, I think shareholders have to decide really what at the end of the day they want to get out of it. You know, if they think this is a good exit point, they'll they'll do it. If they really think that it's something that they'd rather just continue staying with Wyndham, they will.
I mean from the bondholder's perspective, the key is.
That for Choice, it's definitely a much less savory situation for bondholders because obviously they're going to take on debt in order to finance this, So they don't have enough cash on the Ballanjeet, nor do they generate enough cash flow to be able to pay for this. I mean, we're talking four or five could be up to seven or eight billion dollars if you know, in theory, if the whole entire offer gets accepted, you know, and they need to pay it in cash.
I don't think it would get to that point.
We've been saying about four billion dollars and we're talking about six times leverage at least.
Wow, that's higher than I'm sure you would like, and a lot of the bondholders would like, what's this, what's the rationale for Windom rebuffing Choice Hotels here?
So I think for it's a less slam dunk of a situation, not that it's necessarily some dunk for Choice, but they see themselves as having a better company to some extent, you know, at least from a margin perspective.
From a global reach, they definitely have different brands. You know, Choice.
Choice is a little bit more concentrated in the US, and so for Choices perspective, they're saying, Okay, how do we grow globally? Well, Windom's a natural step for Windom, They say, well, we don't really see that as as much of an attractive situation for US, just to be the biggest in the US and then also have some international presence not really as compelling.
What could be the potential regulatory issues that would be required for a potential combination like this?
Sure, and Brian Eger and Jenrie actually wrote something on antitrust a few months ago, which is a fantastic piece, basically talking about the fact that you know, the deal might not go through.
From that standpoint.
Choice has made comments that they've been talking with the FTC and sort of trying to put that to rest, saying, hey, listen, this could get blessed by the trust regulator. Gods, But I think the key concern here is when you deal with hotels, if you have a consolidation of hotels, It certainly could potentially affect the consumer, right, the end consumer has less choice in the matter, no pun intended.
Right, So I mean, just give us a what would this balance sheet look like if you were to kind of merge these two companies, because I'm just looking at it now, it looks like they're kind of three three and a half times that the ebitthought today. But what would it look like pro forman? Is that a problem?
Sure?
So, you know, we did a calculation a few weeks ago where you were talking about choice, just the inevitable potential that they could fall to high yield. And one of the things we looked at is from a leverage standpoint. If you look at Bloomberg's MDL screen, So if you look at what consensus estimates are for twenty twenty four to twenty five, on the high end, we have over six times. Low end mid five times, both of which are above what the raiders have as their you know,
their their threshold into high yield. And so that's you know, if we assume that four times that four billion dollars of debt that they could take on that could easily get them there. That would take quite a few years to repay, and I don't know if the regulators would be as or sorry the raiders would be as accepting of their story as they were with with Hyatt when Hyatt did the Apple Leisure acquisition.
How would this merger better position the potentially combined company to better compete with other larger lodging rivals, including Marriott as well as Hilton.
That is a great question, just so I think really at the end of the day, when you think about what's going on in this mid tier low tier, Marriott and Hilton are really expanding in big ways, both internationally as well as domestically, and they have been really just taking on three hundred four hundred new locations easily over the next year or so, and the brand new businesses that they have, and so they are blanketing the space
and trying to really aggressively enter it. On the flip side, Choice has been entering the upscale, and so we have been seeing that a little bit mid tier upscale. You know, they bought Ratus in Americas. That was a big win
for them in terms of that. But I think the industry as a whole is definitely getting a bit more competitive, particularly as we get to this post COVID time and consumers preferences has changed, Right, consumers are looking at airbnbs, but they're looking at these ability to be able to live in a more comfortable environment, have a kitchen if they want to have a little bit more affordability in terms of what they're doing. So I think we're seeing
this amalgamation of businesses across the board. No one's going to stay in that upper tier only. They're going to try to span the whole entire economic scale.
So stepping back, I mean I just booked a trip for Ireland in September of next year and there's only one slot left. I mean, it is out of control. So what generally speaking, I'm going back to the Homeland to see this. The peeps, yeah, they're psyched. I'm sure. Talk to us about the hotel business in general here, where are we now and kind of the recovery So, Paul, I.
Mean, I think for hotels.
So first of all, you bring up a good point that people are definitely international traveling much more this year into next year than they were last year. Right, people feel much more comfortable getting on the road going internationally and are doing so significantly while they can get you know, do it while you can and while you're living and healthy. So that said, I mean, I think for hotels, a lot of them were affected very quickly by the pandemic,
but recovered pretty quickly by the pandemic. Case in point, Marriott, Hilton, Hyatt, they all levered up with their revolvers and then.
Quickly paid them back.
Now, Hilton has stayed high yield rated because they haven't really made the commitment to want to be investment.
Grade, but Hyatt and Marriott have.
Gotten multiple notches of upgrade and have been in a much better spot. That said, there is some concern for the overall industry, particularly in the US, about financing. So these hotel companies are you know, they're just brands. They're managing these businesses, right, most of them are so asset light, I mean choices one hundred percent asset light. But Marriott and Hilton and Hyatt have moved that way and are about ninety or so you know in terms of assets
that they don't own but manage. That said, they are all sort of looking at ways to sort of grow their businesses, think about their businesses and think about their ballon sheets at the same time, but also trying to help out the the hotel owners, meaning those you know a mom and popper rite who owns a hotel decides to go with Marriott. Marriott then manages it. They have
to get financing. They do it from local banks and credit unions, and so earlier this year we definitely saw a little bit of a concern related to them getting financing. That is certainly eased, but it's in the back of people's minds.
Talk to us about how much the extended stay and economy lodging competition has heated up.
Yeah, so extended stay and economy lodging certainly areas of growth these days. Maybe less so as we head into next year the following year, but there is that narrative around the infrastructure bill and the fact that we'll have so many people working on projects and using these extended stays as that option.
There's different types of extended stays.
There's the one that are ten days or more, and then there's the ones that are more shorter term extended stays. A lot of people like to lump them in together. Choice and Windham like to talk about how their extended stay is different than what Marriott and helt in our building, but I think it's a matter of time before you have these larger companies sort of looking into those areas.
Jody, thanks so much for joining us. I always appreciate getting your thoughts there. Jody Louri. She's a credit analyst a Bloomberg Intelligence covering the lodging space, amongst others.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
We all learned a new term, which is supply chain, and how fragile the global supply chain is, and we had no idea what was going on. Thankfully, we started talking to somebody he really does and he was very very good to us during the whole pandemic, giving us kind of a real explanation what's going on the global supply chain. That person is Gene Soroka. He's the executive director of the Port of Los Angeles. He joins us
live here in the Bloomberg Interactive Brokers studio. Port of Los Angeles, the busiest container port in North America, so absolutely right on the front lines. Jane, thanks so much for joining us here. It seems like, well, let me ask you, are we back to quote unquote normal in terms of that global supply chain?
Yeah, Happy holidays, just and Paul. Great to be back in New York. Generally speaking, Yes, All the vital statistics in Los Angeles, just use that as a barometer of the nation's supply chain look great. Cargo is flowing smoothly, and there is capacity available as the market picks up, which we project at will again in twenty twenty four. Overall global trade is down about five percent. Here in
the US, imports are down about eighteen percent. So some of the entanglements we witness during the pandemic have been worked out. A lot of thought went into it, but also eased by that lower volume gives us a chance to kind of catch our breath and fix some of the things that needed work.
What does holidays shipping look like right now? And what does that tell us about the direction of the economy.
Yeah, compared to years pastes even in recent memory, inventory levels across the nation look good. In store fulfillment. Fulfillment centers themselves also look good as far as getting the products that we want when we order them or go
to the store. At the Port of Los Angeles, we've seen four consecutive months of year on year gains, steady improvement trying to fuel that US economy and what we hear from the retailers, we had a good Thanksgiving weekend from Black Friday through Cyber Monday, about an eight percent uptick, and those experts are calling for about a three to four percent gain in overall holiday sales when everything is said and done.
So we hear on Global Wall Street have been hearing about a recession for eighteen months that hasn't really shown up. What do you see in your data? What do your customers tell you?
We don't And if you keep talking about it, you probably talk yourself into it, as you both have seen for a long time. But by technical standards and the definition, we had a recession last year Q one and Q two with GDP declines in that first and second quarter. Since then, the numbers are all over the board, unlike what we've witnessed in recent memory. But the jobs report
easing inflation. We think that interest rates have peaked now and with eight point seven million jobs open around the country, although off their highs, still a lot for that US economy to fuel in servicing those of us who are buying and going out for experiential plans with our family and friends.
What lingering issues still haven't been resolved yet from COVID when it does come to those supply chains.
The interconnectivity, the dependencies that we all have on each other in our business jes, there are about twelve nodes in the supply chain that have an impact of what we do with the ports, yet we're so visible, So drawing people together for better collaboration absolutely key. We cannot work in silos. Second, this information sharing concept that we pioneer at almost a decade ago has to become mainstream.
And if you're going to share information to make sure that those handoffs are succinct, you've got to protect that data through cybersecurity and resiliency.
All right.
Map go, which was just critical during the pandemic. We're talking about the supply chain. You can filter it to see the ships at port all around the world, including Los Angeles and Long Beach. You guys look pretty good there. I mean, it's a wholly different story than what it was. You know, at the peak of the supply chain issue. Talk to us about that. When stuff gets on the gets into your port, I kind of forgotten you, you explained to us before it's got to get loaded, unloaded, put
on a transport. How is that whole supply chain working, getting stuff once it's off one of those big ships out to America.
Yeah, better, Paul, but still a lot of work to do. And if you've seen one port, you've seen one port. We're a gateway. We unload that entire vessel when it comes in, load it back up to head to Asia. Our productivity at twelve thousand container units loaded on and off a vessel at Los Angeles is the best in the business today. But that cargo has to move off that terminal tarmac, and with the benefit of history, that's what slowed us down the most. During COVID, cargo was
sitting at the port. Some used it as a warehouse because they were buying their goods just in case, not necessarily just in time. But all the vitals today look great. If we can get that cargo off the property in two to four days by rail and truck, then you're really starting to see the capacity gains that we all look.
For when it comes to inflation, everyone talks about obviously goods versus services. Do you have a gauge whenever it comes to shipping to tell us what exactly that looks like when it comes to the difference between those two and how that obviously impacts inflation.
Yeah, big topic today just supply versus demand to capacity. Right now, we've got the liner shipping companies who are based in Asia and Europe bringing in new capacity, larger ships, more fuel efficient, more clean for the environment, and those purchases were made with a cycle time of about three and a half four years. We're starting to see that tonnage come in as global trade has moderated and in some cases declined. So you've got excess capacity, lower demand.
Prices are in the favor of the American importer and exporter this coming year.
So, Gene, you guys at your port have a great view on China. So much of that trade comes into your port from China. It's route. What's your view? What are you seeing from China in the activity coming out of China in terms of trade.
Yeah, on the business side, many of the folks that we deal with are talking about a China plus one strategy, not putting all your eggs in one basket. The geopolitical issues scare a lot of people and make them nervous, but also just good business practice, says I got to be able to move my sourcing out a little bit, similar to when I lived in China during SARS twenty years ago, a lot of the same discussion. So we
are seeing growth in Southeast and South Asia. The Port of Los Angeles year end twenty twenty two, about fifty seven percent of all of its cargo emanated from her was destined to China. We'll close this year at about fifty three percent of our business with China, so it's moved down a little bit, but has not fallen off a cliff like some had imagined.
What about Europe?
Europe very small percentage. Our theater is the Transpacific. Second market is the West coast of South America. With respect to perishable fruits and vegetables, that's really our strong point. About three to four percent of all the products that we move in and out emanate from Europe. More natural trade lane is across the Atlantic to the East Coast and Gulf Coast ports of the US.
So when the West Coast ports were having some challenges with pro productivities. I remember you coming in here saying some shippers were even going to take the extra costing maybe go through the Panama Canal and go to the eastern ports, like you know, Savannah or New York or whatever, New Orleans A. Have you got that business back, because we were just mentioning off air. I just saw a photo of a gazillion ships trying to get in and out of the Panama Canal because it's low water level.
So that's not an option anymore, is it really?
Now?
Issues are popping up left and right, and now we're just a little more attuned to them in the supply chain with so many eyes on the system. We completed a thirteen month contract negotiation with our dock workers back in the summertime. Since that contract was ratified, we've seen about four and a half to five points of market share come back to the West coast of the US.
There is good events from importers that they're moving a little bit more cargo via the West Coast because the transit uncertainty going through the canal with its low water levels right now is a little bit too much of a risk. Even though you can buy yourself up in the queue A little bit. That doesn't apply to everybody going through there, and coming up election year, a lot of folks will be looking at that policy and perspective. And the dock workers on the East and Gulf Coast
will be negotiating their contract coming up this summertime. So a lot to keep in view, right.
Especially when it comes to those contract negotiations. Do you see any sort of sticking points that could cause any sort of concerns and potentially what that can affect when it comes to obviously the port and what that means for shipping.
Well across America, we saw a summer of discontent Jess, and a lot of final negotiations and contracting in the favor of labor and the employee. I don't see that any different on the East Coast. It's folks that work through the pandemic day and night, fearless of health and safety issues, trying to keep the American economy moving, and their payday is due.
Yep, thirty seconds. What brings you to New York Other than New York?
A couple of industry events wanted to talk with you all and kind of give you a layout here of what we're looking like towards the end of the year, the holiday season, and I'm optimistic about twenty twenty four. We've got a relatively early lunar New Year February tenth, and I see the calendar of supply chain falling a little bit more normally next year with an uptick in cargo through the port of La.
Jeane Sroka, thank you so much for joining us. We really appreciate you coming in today and during really the last several years when everybody was trying to get a handle on what the supply chain issues, what the issues were, and how they were going to play out. Jeans Chorroka, Executive Director, Report of Los Angeles.
You're listening to the tape Kent's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa, play Bloomberg eleven thirty.
So, Jess, when I bought the Jersey Shore compound earlier this year, I mortgage rate six percent.
I feel like a knucklehead. But now they got to over eight pretty good. Now, yeah, I'm like, I'm a real estate mogul. They're back down to seven point three to two percent. That's the h the bankrate dot Com thirty year fixed.
So turning down a little bit better about I don't know what's happening out there, because nothing's moving out there because nobody's gonna get out of their three percent mortgage and go take on a seven point three percent mortgage. Let's talk to somebody who does this stuff for a living, a professional. Cory Sas Hour principal broker Compas joins us here in a Bloomberg Interactive Broker studio, suspicious last name.
I'm just gonna assume there's nerve relation for the best sold for the best that she doesn't talk, you know, emerging markets, Corey. So there's just nobody's selling their house. I mean, what do you say to us, somebody that you're trying to get drum up some business here because they're sitting on a mortgage that's three or four percent and if they go anywhere then I have to pay so much more. How does that? How's that market playing out?
Absolutely so, a lot of those guys are going into rentals, and that's kind of what they're doing. There's a lot of rentals out there. The rental price says have definitely come down because more people are developing rentals. So what we're doing is we're going into listing presentations and we're talking to them and they're worried that their house is at its height right now, that the most money they're going to get is right now.
They're afraid that it's going to get less.
Do you think that's that's a fair way to think about it.
I think in the next few years.
I don't think right away we are in a massive underbuilding situation. There's not enough homes for the people that need it. So I think it depends on your location real estate. If I've learned anything in my many years, and it is super hyper local, so every market is different.
You know, I'm really speaking more Tri State area.
But we say, all right, they're ready to go, they can't do the stairs anymore, or they kind of want to get out. They want to make their money somewhere else. So we're putting them into rentals while they figure out what the right lifestyle is. Are they going to write size? Do they want a different house, they want to go
near their kids. Do they want to go somewhere warm or do they want to go somewherehere the tax rates are more favorable, So they need to kind of figure out their life and a rental is the best option for them to do that. And you know, they'll do six month rentals, a year rental, and they have a good idea a year where they really want to go.
Talk to us more about the low inventory that you were alluding to you, because that was an issue well before the pandemic coming out of the Great Financial Crisis, but obviously was exacerbated by the pandemic. What kind of regions have more issues when it comes to low inventory or is it more broad based around the country where it's a problem.
Yeah, so I don't think it's broad based. I think there are some areas that inventory. I think in the Tri State area, our inventory is really really tight. We sold twenty five percent less as a county. And that's not because the demand was lower up in Westchester. And that's not because the demand was lower. It's really because there wasn't enough houses to go around, so there was
bidding wars everywhere. The prices have definitely gone up, and they've maintained that prices that are price Homes that are priced right are going way above asking, hundreds of thousands over asking. If they're overpriced, they're sitting people. Do not overprice your house. Price it right, you will get a bidding war. It happens every time. But if it's overpriced, it sits. So it's still happening. Contingencies in our area
are still being waved. People are very used to the no mortgage contingency anymore, and appraisal contingencies are going away because now we have two years of strong data of home sales that are higher priced.
In the beginning of the pandemic, it was harder.
Homes weren't appraisings because yeah, because you know, we didn't have any data. It was so much lower than it was six months ago. Now houses are really appraising, so people are willing to wave those contingencies, telling my guys get in now. When the rates start going down, there's going to be even more demand and you can refinance as time goes on, a lot of the lenders are now offering one free refinance within the year that you
lock into a rate. So if rates do go down a half a point, you can refinance without all the extra costs.
So is there a rate I mean, when you sit around with your real estate buddies talking about the biz, is there a rate on the mortgage that you think will magically cause sellers to say, okay, now I'll put my house on the market if it's I don't know if that rate. Again, we're still north of seven percent on the thirty year fixes that six percent? Is that five percent right the catalyst rate?
Yes?
Right, absolutely, yeah, I think it's like five and a half. Okay, I think that's kind of the magic number. The seven year arms are at six percent now or even a little bit lower. You can get it if you can put money into a bank. You know, they give you like a favorable discount. So there's a lot of lenders out there, there's a lot of people. It's a very competitive marketplace right now. You can definitely get a better rate than what you're hearing on like the national average.
And it's very county based, so some counties have lower rates than others. But I think five and a half is like the right number where you're going to see kind of the floodgates open up.
But people still have to move.
People are getting married, people's homes are you know, families are expanding, people have job changes, so there is still always going to be an influx and flow.
But my advice would always be to geta county.
It's such a great place to live. It always has been a great place to live in a metro New York area. Did you see a meaningful during a pandemic. I'm just going down to Florida. I'm done, I'm done with west Chester, I'm done with Connecticut.
Yeah.
Absolutely, anybody's who jobs who can take them where they didn't have to be in the office, or they had more flexibility. People were going for a better quality of life, warmer weather, lower you know, taxes. Yeah, a lot of people, everybody was going down to Florida. We've had a ton of people come back though the real world to set in you know, New York is where it's at.
Sorry, I was curious about how have they shifted then, from a lot of people and a lot of peak of COVID to now.
Yeah, a lot of people have come back in our area, and a lot of people kind of made poor pandemic choices and now they're kind of fixing that. So they're changing, They're not necessarily happy. They were going wherever they could get a house.
One thing I'm curious about, because Paul brings us up about in office, how much has that changed when people are coming back who may have left, who were called back to come in.
Yes, it definitely changes a lot, and it changes how north people are willing to go. So you know, we had people that'd be willing to commute an hour, an hour and forty five minutes. Now they want to go back to the towns that are maybe thirty minutes on the train. So those I think there's actually, if I had a higher priced home in the more northern towns, I would be more concerned about my value than I
would if I was in a more southern town. Given the fact that most companies are making people come in forties.
That sounds like a more normalized metro New York kind of market.
Exactly.
All right. So but again you're up there in Westchester, one of the it's always been in great demand here. You know, if I put a house on the market, reasonably priced, how fast will it solve?
Do you think within a week?
Really?
Yeah, Wow, we'll put it on the market. You know, we'll do a coming soon on a Monday. We'll make it live on Thursday. We just did this last week. We had thirty offers and when two hundred and fifty over ask no contingencies and it went to contract within twenty four hours.
Accepted offer.
All it depends on the price plank, right, So I think it's first time home buyers. It's people trying to look to move up because they kind of grew out of their house or there maybe in an area that they, you know, want to be in a different area, better commutable area.
I think the drive the.
First time home buyers are the drivers of the buying market. And then the sellers are the downsizers or we call them right sizers. You know, they're not necessarily down sizing their house. They're just going to a house that makes more sense for their current lifestyle.
So, if you're a potential buyer and we only have about thirty seconds left, what do you think are the top things they really need to be aware of right now?
They need to get a pre approval.
If they can get it under it in I think that would be amazing, so they know exactly how much they can spend, and they should go see every house that's out there, because they may not know what they like until they see enough things.
They need to be ready to rock when it's time.
That sounds like a season real estate right ready to go? Think So, Yeah, I sold my the Summit place right at the beginning of a pandemic, and the salesperson the industry didn't really have a firm grip on where the market was. Yeah, so I took their number, I put twenty percent on top of it, and I still got out, still really came in over the top of that. It was crazy. Now I think there's a lot of comps and people have a better sense of what's going on.
Cory Sasaur, principal broker Compass up there in West Cheshire, talking about a market. It's still very robust out there, and I can tell you the same thing in Jersey. So again, good time to sell.
You're listening to Take Cats are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa play Bloomberg eleven thirty.
Brad Case joins us. Chief economists and director of Research at Middleburg Communities joins us here in our Bloomberg Interactive Brokers studio. Brad, you were just saying off Era that you guys at Middleburg Communities have sold most of your communities, most of your assets, most of your inventory. To tell us about that decision.
Yeah, we're very active developers of rental housing communities. We've and we've been in that situation, you know, we've been around doing that for seventeen years something like that. But twenty twenty one and early twenty twenty two was kind of a golden moment to be selling assets. So we sold literally everything we owned, and we are still actively developing. We've got about a dozen under construction of the moment,
or at least I think under construction. But yeah, we sold at the top of the market.
That was nice.
That was I mean, I thought I sold at the top of hey, But that is I mean, that's unusual, isn't No.
And honestly, it is a little bit unusual because developers love their buildings and a lot of them just don't want to sell even if the prices are great. So one of the things that I really like about this company is that they're in it to make money.
They're not in it to show off their trophies.
So what's the typical community for middle bird communities? What's the typical type of development?
So we call the middle market class A. They're not luxury, they're not high rise, they're not like located on the beach. They are in sort of suburban areas of major cities in the southeastern part of the country. It'll be like eight buildings with two hundred and fifty rental housing units, and some of them are multi families, some of them are single family. You know, build to rent where it's
not scattered site. You're not owning a house, you're you were renting a house within a community with the same sorts.
Of You had a piece that you sent to us talking about how if you look back over the past fifty years of data that you were crunching, renting is usually better investment than when it comes to buying. But isn't there an investment case when it comes to buying.
Oh, absolutely there is, But people tend to forget that if you buy, you are taking a big chunk of money and paying it to some money for a down payment, and that's money that you could otherwise be investing in the stock market. And so when you rent, you don't have to give up that big pile of money in the market in the beginning. So you can rent a place and take that big down payment and instead put it in the stock market, and typically you've been better
off historically speaking. And so people have to understand that when they are making a decision to buy or to rent, it's not just that, it's is there another good use for this money?
You know? Right now, for example, the only.
Thing that makes buying look good is that the stock market is so overvalued.
If the stock market.
We're more fairly valued, then you'd really want to rent, because you wouldn't want to be giving up that money that you could be putting into stocks.
All right, So let's talk about your call in the economy. Here we're going to hear from the Fed tomorrow. Inflation is trending down. I don't see in a recession. What am I missing?
So I think there's a there's not a very strong probability of a recession. And this is something I've been saying for two years and a lot of people have been calling recession and there just simply hasn't been data suggesting a recession. What we had last month, though, is one of the most important variables, which is housing construction has really been on a downward trend, and historically speaking, that's one of the things that does tend to predict a recession.
So just over the last few days, I've updated my recession forecasting model, and the probability that a recession will start in the next year went up from about thirty three percent to forty seven percent.
Okay, looking at your bio, you used to be working on the Federal Reserve Board as an economist. Can you walk us through typically when there's a two day meeting at the Federal Reserve, how that process goes on in the presentations that go forward as far as trying to gauge the economy. Since this is the meeting, we'll get the quarterly updates for the economy as well as the dot plots.
Yeah, you have to know that that at the FED there is something like two hundred and fifty PhD economists, and at the various other Federal Reserve banks around the country they also have economists on staff. And they're trying to look at all parts of the economy. I remember once when I was in a meeting and Alan Greenspan was the chair of the FED at that time, and he and there was.
Something indicator, Yeah, exactly.
There was something that had happened with beef prices. And he said, you know, who can tell me why beef prices.
Have been doing this?
And an economy a PhD economist stood up and said, I am the specialist on beef herds. It's just it just blows your mind to understand. It's like two hundred and fifty people are forming their opinion about the overall economy. They're forming their opinion about one tiny piece of it and feeding it to the decision makers.
So it really is.
An extraordinarily extraordinary amount of data and expertise sort of helping them understand what are the stakes in the decisions they're making.
So what do you think the economists are telling Fitscherman Palazy gets ready for his meeting.
Well, there are real risks in the economy. One of the most important is the housing market.
You know.
The Dallas Fed, for example, produces what they call an exuberance indicator, and that shows whether the housing market seems to be in a bubble, and yeah, it's flashing red or the last few months, it's been flashing the last few quarters. It's been flashing red or yellow every quarter. So that is a risk that they look at.
Because we just had a real estate agent here and she covers Westchester County Scars Elves from very very good areas, and she said, it is still crazy bidding wars.
Absolutely, and that's that's what was happening back in two thousand and five, two thousand and six before the big mortgage market meltdown. So one of the real risks is that house prices start going down again. I don't think it would be anything like what we saw in two thousand and seven to two thousand and nine because we haven't had the kind of the kind of idiocy that we had back then. But that is one of the risks to the economy.
How challenging is it coming out of the pandemic when there's really not a lot of historical precedence to give this because it seems like everybody's gotten it wrong as as far as their calls to be in a recession. Over the past eighteen months, Paul and I have talked so much about and people have been so wrong about it.
Yeah, you know, it's one of the things that you have to keep in mind when things are disrupted is that the data that the FED members are using to keep track of the economy that gets disrupted too. That's in fact, one of the things that you know, if the federal government goes into a shutdown like like there is some concern that they may do early next year, that's one of the set gets affected by a shutdown.
So the pandemic really disrupted the flow of data that the FED uses to make decisions, but also that people like my company use to make that kind of decision too.
So there's an ECFC function in the terminal that is the consensus for economists that are pulled by Bloomberg. There's still a fifty percent chance when you're looking at this of a probability of a recession, which seems relatively high compared to estimates, say Ah Goldman Sachs economists and some other firms on Wall Street. What is the catalyst that is making people so pessimistic Because when you're looking at consumer spinning numbers, it's obviously more than two thirds of
what's powering. The economy still very strong and resilient.
Look, the most important piece of the economy is the labor markets, and they have continued to be strong and resilient, and that drives income growth, that drives consumption growth. So you're right, those are the most important things, and they're
very healthy. As I said that, sort of the weakest thing that I'm seeing right now is the construction numbers, the housing construction numbers, both single family, but especially over the last few months, multifamily, and that's nationwide, and that's and part of that is because interest rates have gone up.
But honestly, the bigger problem is that for years, interest rates were so low that any idiot could get into the housing construction business, and plenty of them did, and so and so if we go into recession over the next year, it seems to me the most likely reason is that there were too many things, too many houses built by those idiots back in those days, and that weakens the entire economy. So actually, you don't want to be in a situation where where interest rates are especially low.
You want to be in a situation where it's hard to figure out, like it's hard to make a project work because in that case, the idiots are out of the market. The only people who make the projects work are the people who can do it well and can do it even when the economy turns south.
So just about thirty seconds, you guys are constructing some properties now, but you're financing at a higher rates, right.
Absolutely, it's it's we're we're financing a high rates and the big biggest problem is it's just more difficult to get the financing, so we have to work harder.
That's the way it should be. It shouldn't be easy for us to get financing.
But you know, one of our really good projects, for example, is in a secondary market, and some of the financing sources to say we want to be only in the biggest cities now, yep.
Interesting, Brad Case, thanks so much for joining us. Brad Case. He's the chief economist and director of research at Middleburg Communities and it's just a fascinating story. They were sellers in twenty two, as was I. I thought I was the only smart person out there. But again, a good move there.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio