First-Time Home Purchases Keep Rising, Mohtashami Says

whether at the grocery store or the trading floor. Find the Bloomberg P and L Podcast on iTunes, SoundCloud and at Bloomberg dot com. Earlier today, we found out that sales have previously owned US homes climbed for the fifth time in six months, to the highest level since two thousand and seven. At the same time, we're seeing thirty year mortgage rates starting to rise and some weakness emerging in place like Miami and New York City. So what's

ahead for the home market. I want to bring in Logan Modashami, Senior loan officer at AMC Lending Group, to get up some broader perspective. Logan, when you look forward, at what point will these higher mortgage rates start to impede the progress in the housing market. So as of this year, we've seen higher rates maybe uh slow down the rate of growth, but as of now, nothing has

has changed the demand curve. I think what what people missed sometimes is that in the ten year yeal sold off just basically the same amount and last year existing home sales for the cycle high with inventory at psycho lows, and today's report we just hit another psychle high with inventory low at demand is still rising, but overall demand is still very socked because our demographic still in this country or more for renting than it is for home buys.

Can you speak a little bit about today's report about January existing home sales, they were up about three three and a half percent. The selling rate is stronger than the consensus estimates. They are looking for five point five five million. But I thought even even more interesting is this comparison where single family sales are up two and a half percent, condos up eight percent. Uh, and um, I'm wondering whether you could speak to those uh, those numbers.

Here's here's the thing, existing homesales. If you if you listen to housing people, they tell you that existing home sales can't grow because inventory is too over. That's not great. But the biggest buyers homes in America to their millennials. So first time homebuyers are growing, and naturally condos would be one avenue that they would be buying, especially single women. Single women buy homes twice the rate of the single men.

So if we get more and more first time home buyers, you should see more and more first time home sales being predicated to either the condo or the smaller single family and residents. You said that we've seen. You mentioned the cycle highs in home sales, and you see prices generally rising at least on average, at least when you look at the US across the board. But there are some specific signs of weakness we've been looking at, for example, the rental market UH for condos in New York City, Miami,

also Toronto. There's a lot of concern that prices are getting ahead of themselves. Do you think that those fears, those specific kind of location specific fears are unfounded or do you think that these could be UH sore spots in the U. I would tell you that real home prices are nowhere close to where they were once you adjust home prices to inflation, we're nowhere close to the housing bubble peaks. So do you take real home prices

with real wages growing and interest rates this slow. This is a factor why home mind is still continuing to go. I think people make the mistakes of using nominal home prices and real wages when they should be looking at real wages and real home prices. And this is why national home sales can still grow even though nominal prices are still at high Now, we do have certain spots the luxury market in New York in the home building broom,

in terms of multi family growth has cooled down. It's it's actually negative in so that rate of growth has cooled down. They're going to have more supply come on the market. The demographics for a rent in a few years is going to turn to home mind, So there's gonna be a natural dislocation of supply and demand coming it soon. But I don't see a major concern because, for example, the home buyers we have now and the best in the cycles, the best I've ever seen, and

they can afford to buy homes. But housing inflation is a real issue, and it impacts the marginal home buyer who's gonna renter, who doesn't have the income or liquid assets to purchase at home, and that's been the case for twenty years now. The housing bubble f facilitated some of that demand with exotic debt structures. We don't have that anymore, so this is one of the reasons why we don't see low FCO score Americans buy homes anymore, which I don't think it's ever going to come back

because they don't have the capacity to buy home. So the how the inflation story is real, but it's not as bad as the nominal headlines show. Logan. I wonder if there's an element that we may be missing having to do with people who are self employed, because you want to claim right as little income as possible if you're self employed, but then that bumps up against the actual very strict guidelines when it comes to filling out

the application for a mortgage. I'm wondering if you could speak a little bit about that changing demographic in terms of the workplace and how that plays out in the home market. Well, self employed Americans, I believe we're less than fifteen million UM, so the ones that are really doing good you know right now you really only needed one year tax or trying to show the income um.

But in general, yet the stated income loan was designed to allow self employed people to buy homes that had the cash a little but show its little as possible on their on their tax returns. So you know, you can make a valid case that some home buyers could be buying homes but they just don't want to pay the taxes. But then again, I just I don't think it's scale that's big enough to really move the markets, because some of the really successful self employed people still

have still can show enough income to buy homes. And being a lender here in southern California for thirty years, we've had many, many many of our clients or self employed people, so that is a factor into it. But I think it's very hard pressed to ever bring back stated income loans under the Consumer Financial Protection because guidelines or showing income. So look, and there was a story on the Bloomberg this morning talking about why Trump's immigration

crackdown could cause a dent in US home prices. Do you believe that no, because we're that would it's just not enough scale. Housing is a home practice or function of inventory. Inventory in the last twenty years have only been about six months. From two thousand six to two thousand eleven. That was the housing bubble pent up uh staifth demand, and then the burst happened. Outside of that.

You know, it's very hard for US as a country to get over six months inventories because I think it's harder to move up so in scale four and buyers out of six million homes or under three thousand UH in certain cities where you have educated borners coming in and working, I just don't think there's enough for them to touch the entire general housing market in America. I want to thank you very much for spending time with us. Logan Matahni is the senior loan officer at a MC

lending group. It is expensive out there. Valuations of industrial companies are so high that it may be thwarting any merger or acquisition strategy. Here to tell us more as Joel Levington. He is our senior credit analyst for Bloomberg Intelligence, and he joins us now, great to have you with us. As always, Joel tell us a little bit about the new report, Spin the Wheel, Make a Deal. Prices high in cap goods I'm just telling you that does not rhyme.

But I guess credit analysts you don't have to rhyme at all. But go ahead, tell us spin the wheel, make a deal. Well, you should have got when strike op pose buy backs are in vogue. Very good, all right, you get that gold full mark star. Um. So what's the situation and what kind of companies are we talking about?

G E. Danna, Her, Honeywell, Caterpillar and so on. Yes, we're talking about your your manufacturing sector, in part because of what's happened with that with Donald Trump becoming president, there has been a huge run uh stock prices in the industrial sector to the point where multiples for acquisitions are at the highest that that we can find on the terminal, about thirteen point seven times. And the basic math tells you that, at least from the credit perspective,

it's dilutive to leverage leverage averages about two times. So if you're buying at thirteen point seven with debt financing, which is what the averages are, it's weaker for credit to go that route then to go to share a purchase route. All right, Joel, I am looking at you in a whole new light. Now you look like a different person. You're I always knew of you as a credit analyst trying to you know, keep companies truded their uh corporate corporate credit structure. And yet here you are

advocating for companies to buy back their shares. How does this work? Because aren't credit guys against this. Isn't that sort of a uh diluting of potential profits to pay back uh their debt? I mean, isn't this a problem? This has been going on a long time, right well, knowing how you looked at me before, um um, please that you're looking at me in a different light right now. But but what I would say is that it really

is a case of what's less worse. With relatively cheap financing still out there, there are very very few companies in the industrial sector that are looking to lower leverage. So it becomes what's a game of what is less punitive the share purchase, the share purchase route, or the acquisition route, And it tends to be the share purchase route would make more sense or the less worse case for bottle holders. Could we just go through a little of the detail because I want to see that. Okay,

you're talking about the valuation of a company. So let's just do an imaginary scenario right where you've got maybe Honeywell or Ge. They want to go out and buy a company, and the valuation is as you say, thirteen point seven, could we just say fourteen, so fourteen times and um, then they're deciding, well, maybe we shouldn't buy the company, Maybe we should give this money back to shareholders in the form of an increased dividend or buy

back shares. Buying a company, they've got to do some analysis that says that the internal rate of return for doing such is going to be better than whatever the alternative is. Correct at your absolutely right, pim and there are there are a few cases. Uh. An example might be Emerson Electrics purchase of pent Air's valves and control business, where they've identify ten percent of sales as cost saves. So that's a very unique case in our in our area.

But I do think that valves and control area is a a is a place where you can see a lot more consolidation happened. It's also one where try and had pushed pent Air to look to as a as being a consolidator before they wound up selling out that was Nelson Peltz's a tryan now, okay, But so just let's take this one one step further. What is connected to the compensation of chief executives at major corporations? Well, you know, that's a very case by case. I was

going to venture to say the stock price. The stock price is always one, and if you buy back shares, what happens typically to the stock price. Well that that

isn't necessarily going to be raised the stock price. But what I would say is that a lot are and stated on EPs growth, and you can get more bang for your buck as a CFO or CEO re purchasing your shares to increase your EPs as opposed to doing the buy backs excuse me, as opposed to doing acquisitions because acquisition multiples are so high makes the EPs look good. Exactly as we talk, I'm thinking about those private equity

companies Apollo, Blackstone, Carlyle. They've been collecting, amassing nearly a trillion dollars of dry powder on their books of money that they're looking to spend on something on companies. Ostensibly. Uh, does this mean that it's going to be very challenging for them to spend this? I mean this sort of raises a question of how effectively they can deploy that. It certainly does, and it certainly dictates what sectors that

they could participate in. In industrials where you're looking at GDP growth plus or minus a percentage for your typical business, if you're leveraged, if you're buying something at fourteen times UH, if you're doing a recap of a company, maybe you can leverage it six or seven times, which means that your equity component is gonna be another seven or eight times. And the basic math says like that's not really going

to work for good returns. And so a sector like mind where the growth is low tells you that that's not a place that they can go. Maybe something like tech or healthcare, where the growth rates are higher, they would be able to get a better return over time. So you don't expect any private equity involvement in the industrial space for a while. Well, you can never say never, but if you're trying to make the math work, it would be very hard to do it at these levels.

Thanks very much for telling us all about this, Joel Levington. Here's our senior credit analyst Bloomberg Intelligence really gives you a different perspective on what's going on, doesn't it. Well. It also makes me understand a little bit better why there have been so many shared buy backs, even companies that do raise debt to lock in low interest rates for a longer period of time and then use that

to buy back shares. You know. The original this sort of knee jerk reaction is this is sort of making a bad situation for the credit investors. But perhaps this is the lesser of a number of evils. Very interesting, Thank you so much to it will be keeping a track of that. P and L is brought to you by proper Cloth, the leader in men's custom shirts. At proper cloth dot com, ordering custom shirts has never been easier.

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it maybe some increases or eggs. Indeed, I was going to go to the drinks thing, because the big thing about McDonald's, which just reported its results, is that it is going to promote drinks by lowering the cost. And here to tell us more, as Leslie Patton, our consumer reporter for Bloomberg News, here to tell us all about Mickey D's. All right, so Leslie, tell us about what the company's doing, why they're doing it, and do you

think it's gonna work. So McDonald's, starting in April, they're going to be promoting dollar sodas any size and then two dollars small Mick cafe drinks UM across the US. This is the first time they've done this on a national basis. They've done it here and there regionally, so you may have seen it at your local McDonald's. Especially the dollar SODA's I think is a pretty popular thing.

But I think they're just trying to get more people in the door, maybe during some of those off hours, like in the afternoon when you need a coffee pick me up, um, you can get one for only two bucks at McDonald's and then also it may be a sign that some of the food deflation that we've seen in the past couple of years maybe starting to wear off a little bit, especially kind of in the back half of this year. So McDonald's is going to promote drinks instead of food to kind of help the bottom

line a little bit. Okay, So that's interesting that you say that, because when I read this, I thought to myself, you know, everyone's talking about inflation and the reflationary trade, and then you hear about McDonald's cutting their prices, and that kind of speaks to an opposite narrative, but you're saying it fits in. It just sort of shows how they're trying to get an edge in a place where to be less affected by inflation. Is that correct? Yeah,

that's right. You know, it's a little nuanced because they're doing drinks instead of food this time, because drinks are super high margin for restaurants. They're one of the highest margin things on the menu, much higher than food. So it makes sense that they would be promoting the beverages in a time when maybe we're starting to see food

inflation tick up a little bit. So does the fact that McDonald's is taking this step mean that the boost that they got from introducing All Day Breakfast is wearing off. You know. I think we saw that a little bit when they reported uh fourth quarter earnings that was a little bit of a concern, a little bit of slowdown in the US comps. So perhaps some of that hype around All Day Breakfast is wearing off and they're going to have to find something a little bit new, something,

something exciting to keep customers coming in. I wondering if you could describe for us the state of the strategic plan as it relates to the franchises and also the operations in China. Um. Sure so so for the franchises UM here in the US. I know McDonald's and globally McDonald's has been selling off their company owned stores, moving to that asset light models what they like to call

it in the industry. So that's something we're seeing more and more of, and mc donalds is continuing on that path. Other restaurants are doing the same thing. So really no surprise there, UM nothing super new. I don't think we've heard too much about that lately. And then the same with China and some of its other Asian businesses selling off the rights to own and manage those stores is something they've been working on for a while now too.

So how much can we glean about the broader restaurant industry or sort of lower cost restaurant industry from McDonald's results. We've been hearing about the sort of restaurant recession and uh seeing some of the bad results that have come out of places like Chipotle, UH and others. Does McDonald's serve as a sort of harbinger of things to come for others or is it really an idiosyncratic story. You know,

it's a it's a little hard to say. I think in general you could take McDonald's and say, yes, this applies to the rest of the industry. The rest of the industry is seeing what McDonald's is seeing in terms of maybe food inflation is going to start um picking back up, or we're going to see some food inflation in the back half of the team. But at the same time, McDonald's is very much its own beast. It's um you know, it's known for fast food, convenience value,

that sort of thing. So if we if we try to take that to like a Panera or Chipotle or the casual dining industry and may not necessarily translate exactly um as to what's going on at this at the staff food company. Let's see who they want who do they really want to take take some share from? I mean, for example, when you cut the cost of some of these sugary drinks, particularly coffee based, that means that Starbucks might be losing some sales or Am I wrong? No,

it's possible. I think probably there's a little bit of customer overlaps there, But for the most part, I think McDonald's and Starbucks probably have some different customers. Maybe they could steal a little share from dunkin Donuts. That's maybe who they have a little more overlap withst in terms

of the coffees and beverages that sort of thing. Um. But really, I mean McDonald's and the rest of the industry, they're just happy to take share from whoever they can, from from the mom and pop coffee shop, from the regional player, to from from anyone. Leslie Patton, thank you so much. Really a fascinating look at sort of how some of the restaurant companies are dealing with inflation in some areas but perhaps not others. Thanks for listening to

the Bloomberg P and L Podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio. P and L is brought to you by proper Cloth, a leader in men's custom shirts, with proprietary smart sized technology and top rated customer service.

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