Home Values Will Decline In Coastal Cities: Mohtashami (Podcast)

at least for the near term. So let's get a sense of what that means for the US housing market. Let's bring on Logan Mohatshami. Logan is a senior loan officer AMC Lending group based in Irvine, California. So Logan, thank you so much for joining us. So we do have the feed on the sidelines here. In the early part of twenty nine, team of the Bias continues to seem to be with an upward bias. How are the US housing market? How is the housing market really dealing

with this rate environment? Well, in this second cycle, whenever mortgage rates get to about four and a half percent or higher, we see a slow down in the housing market, mostly in the hot coastal areas. But again for this year, the trend looks like existing home sales are going to be lower again and new home sales is really struggling right now. And I don't think the lower interest rates on the thirty year fix that we've gotten from last November to now is still good enough to drive sales

for growth. So logan, where are we in terms of the average mortgage rate right now? Right now you're looking still around four and a half percent, four point six to five diff You know, it's nothing. The mortgage rate impacts the marginal home buyer, the total principal interest, tax, inflation, all those higher home prices, higher mortgage rights. And that's one thing that I think we forgot about housing. Last year. Nominal home prices were at all time highs last year,

mortgage rates were higher in demand. We lost just roughly only a hundred and seventy thousand existing home sales from the previous year. So how is it actually held up considering all those variables actors? Okay, so just looking forward, if you are expecting a slowdown, if you don't think that there's enough strength to sort of sustain the momentum in the markets where in the US to expect the most pronounced bouts of a slowdown and and potentially decline

in home values New York, Seattle, California. And you can see that some of the homes that were bought let's say last March, April and May that might have been a part of a bidding process. It looks like to me that those homes on a year over year basis could be down. Uh, the Midwest, the South, everywhere else should be okay. But if we look at the purchase application data right now, last year, we were positive almost every single week except for six we only had two

real negative prints. Right now, we've already had two negative prints for the year. It's not even Valentine's Day yet, So that data line has already shown you today that there's a little bit of softness. Now. It isn't going to be a big decline in existing home sales. That I haven't forecasted growth in existing home sales since I'm expecting another year of slightly down sales, a little bit increase in inventory, but nothing too big on both fronts.

What could cause the US housing market they decline significantly more than you're anticipating, and maybe the market markets anticipating is it's simply the interest rate environment. If mortgage rates ever got about five point eight seven, I think that could create a noticeable decline in sales and a noticeable increase in inventory. This is for existing home sales. New home sales is always expensive there they have more issues

than the existing homesale market. But because demographics are about to get bigger and better for the housing market, I don't see a major decline in sales anytime soon. But if mortgage rates did get up to five and that basically takes us to the low levels of their previous cycle, with real home prices where they are right now, you can see a noticeable decline. But for now it's just going to be a slight decline for nineteen nothing too draft that similar to what we saw in so look

and talk. You mentioned the demographics here and this goes This might go to a longer term call on the housing markets. Gives a sense of how the demographics are playing into it. Are millennials buying houses that type of thing. Millennials are the biggest home buyers in the world right now. I think that we don't ever focused on that. I think housing demand problem or in some cases some people think the manage should be stronger. Is the move up

buyer is not there? People are staying in their homes longer. We might have gone from a five to seven time the year time horizon for people staying their homes to a twelve or twenty two year That will impact sales. But the biggest demographic patch we have in America right now are ages thirty one the median first time home buyers two. So I look at them as replacement buyers. I know a lot of people are, you know, banking on this demographic boom for housing. I kind of have

a different take on it. You have replacement buyers to come in. If you get a little bit more action than move up buyers, then you could get a little bit more existing home sales. But you know, five point five million existing home sales might be the for this cycle, and that's not a bad thing. I think some people just have um too much aggressive high forecasts for existing home sales and they think this is bad or something's off. It's just this is this is how the housing market

is going to be for maybe another ten years. Okay, so I guess I'm trying to figure out logan. If you're expecting the coastal cities to see uh decline in home values, how deep will it be? Given your forecast for mortgage rates will be mortgage rates should go even lower than what they are right now. I think I was one of the few people for nineteen that's forecast at lower mortgage rates. So even if mortgage rates fall, it doesn't change my forecast any And this is similar

to what happened in as well. Mortgage rates were training lower the entire year and sales were down, but still sales are are holding up as well. But for California, New York, in Seattle, UM, even though inventory monthly supply isn't high, pricing will be an issue. So to me, we have to see how do sellers react if they don't get the price they want. You know, a few years ago they just wouldn't sell their homes because they needed a certain price level. To make sense, because we

just started the increase of home prices. Now that's four years ago. We've got about near twenty trillion dollars of equity out there. We have a fifteen trillion dollars of net equity for these home home owners, they might be willing to take a little bit lower prices just to move the move their homes, so that to me can create year over year declines in some areas of California, Seattle, even Las Vegas, even in New York because now they feel a little bit better, they have a little bit

more equity, so they have to cut their prices. They will where four years ago that wasn't the case. So logan, how about on the new home supply are the Toll Brothers of the world. Are they still buying homes or are they pulled back? New home sales is much different. Sales have not gone anywhere for a while now. But um, that big spike we saw a new homes there last month or for the month of November kind of discount that that marketplace is struggling and until we see the

stod new home sales trends come back again. Uh, don't look for housing starts to really grow aggressively. And you know told Brothers, in these these companies, they sell to a very small market base, so you will find wealthy buyers for those products just in the rate of growth of them is just not going to be the same, and this might be the case for a very long

time if interest rates don't go lower. Every single housing cyclists have two percent lower interest rates to help boost them at For that to happen, we need about a one in a quarter and two and a quarter thirty year six. That means a ten year yield have to go negative. I don't think that's going to happen. Longer term. The builders have to build cheaper homes or smaller homes to grow that base. Especially as told brothers, Yeah, Logan Mota Shami, thank you so much for being with us.

Love the perspective. Logan Motor Shami, a senior loan officer for AMC Lending Group, talking about what he's expecting on the coastal cities in particular with a slow down of potential declines in home values. Interesting. Paul I thought also that he sees mortgage rates going lower from here, not higher from here, but that may not be enough to really juice the market in a way that the coastal cities need kind of compelling to especially at a time

when people are still calling for higher rates. It hasn't been a particularly exciting year in uh. Frankly, broadly in markets at a day to day level, But if you look at returns, holy cow, credit has crushed it. How your bonds have returned nearly five percent so far. You're to date being led by the riskiest of risky bonds. Joining us here to figure out how much longer this rally can continue. Peter Sheer, head of macro Strategy to Academy herdis based in Connecticut, but joining us here today

in our Bloomberg Interactive broker's studios. So, Peter, are we sort of at the precipice of another sell off? Or could we see those ten percent returns eleven percent returns at some Wall Street analysts are calling for this year? You know, I think we could. I'm saying that bonds have wound up. We were talking about following angels. They didn't go to hell, they wound up in purgatory. So I think we're stuck. Now some of the big total returns gone, and now you're gonna have to live off

of coupon return and kind of roll and carry. So it's gonna be a little bit boring. What does that mean in terms of total return over So you know, in high yield you could add another five to seven percent that way, Okay, so you could get to ten to twelve percent returns and on you know, triple B bonds, you're gonna be lower, but I think it'll still be a very nice positive return. We're not done yet, so

I think you're supposed to keep in credit right now. So, Peter, given the rally that we've had in the credit markets this year, where are you're in terms of the risk profile. Are you still out there looking for risk or are you using the rally to kind of improve the credit quality of your portfolio. So we went kind of from raging bull and kind of didn't matter to we're being

a little bit more elective. What I find interesting right now in the market is I actually like the triple B sector, so the lowest end of investment grade, because I still think that's the part that was least you know, loved, so there's still more room to buy it. I don't actually like single B, so the stuff above triple B, because I don't think they got the messages that take credit is bad. So the single as are the companies that are going to do the M and A activity,

that are gonna still do stock buybacks. And then weirdly. I also don't like the double B sector, which is the high end of high yield, partly because all this money's flown in so it's gone into the quote unquote safe part of high yield, which is double bees. So I think you want to be a little bit cautious on high yield, kind of skew yourself a little bit more to triple B and fund managers to do that

and even start looking at leverage loans again. All right, so a mild bull, not a raging bull, but a tempered bowl. Peter Cheer with the expectation that HIO bonds could still return tended towelve first sent so far this year, the question is how long can it last? You know? And people talk about or the ninth inning. This has been a credit cycle that we're probably in the twenty

third inning, um. But I have to wonder, do you even see more investors getting into credit via credit default swaps, via e T s, via instruments that they can get out of very quickly. I think there's definitely more trading mentality. People want to look for what's the right hedge, how do we get out if we need to? And I think this isn't going to be driven as much by

demand but by lack of supply. I think we're going to see less than a trillion dollars of I G credit, which sounds like a lot, but that would be the least since two thousand and eleven. You have about seven billion of I debt that matures this year. You're seeing tender offers in very large size by companies like Verizon and Budweiser. So I think this is going to be a limited supply and people are companies are reacting. They're saying, WHOA, this was bad. The companies with a lot of debt

got punished. Their stock price was really far down, whether your Budweiser, g E, Newal, rubber made. So you're starting to see companies change that narrative. So I think you're gonna see less and less debt available to buy, and that's where you'll get the squeeze, not because there's so much more new demand. So, Peter, you mentioned you're assuming some risk still in the high yield sector. What are some of the sectors that you think are still attractive

to you right here even after the rally. So we like anything kind of to do with liquid, natural gas. We do believe that everything we're hearing out of d C is a trade deal is still likely to come, and it's gonna be very heavy on Chinese buying. Liquid natural gas is one of the products that will agree to. There's a lot of build up that's still necessary. So we see that area is something that is underappreciated. Some of the price, you know, some of the potential for

deals priced in. I think people are gonna be surprised just how power for the deal is. So we like that sector. Autos at the other end, is one we're still watching very closely. What we're trying to figure out is how effective they've been by the tariffs and trade war and how much is just saturation in terms of automobiles and what higher rates are doing to the consumers

domestically and more of a saturation overseas. So autos are kind of there that we're taking a closer look at what would have to happen to make you, uh, not fulish anymore in credit. So I think one no sign of a trade deal. I think if we're not going to get a trade deal, we're gonna have serious economic problems. The slowdown we're already seeing in China and Europe is going to get worse there and spread to hear So

that would be one thing. The other is if companies quickly kind of forget about how bad it was in November di sever and start releveraging themselves. Right. Big part of this is you know, you're kind of looking management in the eyes and saying are you going to behave? And to the extent that you believe management's gonna behave, you want a long credit. If they start going back

to the bad ways, you want to pull back. But to that point, Goldman Sacks put out a report overnight where they basically said, we're no longer recommending that you invest in the shares of companies that are responsible and that are deleveraging. Go ahead and go towards those that have much worse balance sheets because the FED is going to have your back. I think there may be premature on that. I want the ones that have worst balance

sheets that are still deleveraging. I don't want to touch again some of those high qualities single A companies that might decide to leverage themselves or do something that as punitive. But I think they're a bit early on that. I still want companies that are doing the right thing, because I think the markets are going to be fickle and if you do the wrong thing, you'll see big sell offs and stocks. Again, are there any sectors that you see a preponderance of companies doing the wrong thing that

we should stay away from. No, I think that was probably true September on October. Right now, most companies seem to be doing the right thing, which is encouraging. Alright. So going forward, you like credit, when do you see this turning? I mean, how how long do people have before you start to see the risks building up again? I think at least six months, maybe a year, maybe longer. Do you think that there will be another credit crisis?

And if so, what would cause it. I don't think there's gonna be another credit crisis because I don't see the leverage in the system or the trading system. In the financial crisis, there was everything was kind of interconnected, you know, one thing not the other. There were products like c P d O s which were constant proportion default obligations. There were l s s s which were

leverage super senior. So everything was linked and as soon as one part of the capital structure started getting in trouble. Everything had to get sold. There was a lot of mark to market risk. I do think we can get bouts like we saw in December where the e t f s and for particular drive prices lower, but they can rebound quickly. There's just not liquidity. But I don't see people being forced out of the market alright, So going forward, you don't see another credit crisis. So if

people are going into credit right now, you don't. You say that people do have a trading mentality, but it sounds like perhaps they shouldn't. Perhaps it should be more buy and hold. Yeah. I think you're supposed to pick the credits you like, stick with it, and that's how you're gonna make your money. And if there is a bubble, I think the bubble is much more in terms of volatility selling. We see that in the equity markets. But you know, all these e t f s really generate

a lot of options to activity around it. H y G, which is one high yield et F that's about three times the dollar price of j n K which is another one, has a lot more volume because the option activity is very big. B k l N, which was a leverage loan, had a big trouble. There was a huge put strike done one. As you near that twenty two price on b kln, the decline accelerated, it went through and bounced back. So I think the options markets are again becoming the tail wagging the dog. That's where

I see the problem. So I think selling volatility is very careless, and that's what you gotta be careful. Peter Cheer, thank you so much for being with us. Always wonderful having you. Peter Cheers, head of macro Strategy for Academy Securities based in Connectic but Connecticut, but joining us here today in our eleven three oh studios. Well, we all know that the Chinese economy is slowing, but what about the health of the Chinese credit markets. We had two

big borrowers just miss payment deadlines this month. So to help us dig into what is going on in China in the credit markets, let's bring in the birthday boy himself, Damien Sassaur. Damian is the chief Emerging markets credit strategist for Bloomberg Intelligence. He joins us in our Bloomberg eleven three oh studios in New York's. So Damien on behalf

of Lisa. I happy birthday. Thank you, Thank you give us a sense of is this the beginning of a credit you know, real problem for the Chinese economy, do you believe? Well, I think it's an extension of what we've seen in and I mean last year was a record year in terms of the faults. We saw roughly eighteen billion U S dollars worth of the faults in China um and including um Win Time Energy, I mean

when time Energy was the second biggest default. Or that's one of the two today that people are talking about right them in China. Mentioning trying to mention is a big name. They've issued a lot of bonds and a lot of dollar credit at also, So it's it's actually interesting. And what what I take out of this is very simple. You know, with Chado banking being removed from China and it becoming more difficult to access finding for Chinese corporates,

what you're seeing is sort of a bifurcation. You know, there are certain companies right that the government will allow to default, such as those like win Time which are involved in coal and non clean energy, and and others that are just systemic to the to the economy and they're just gonna do everything they can to support that that that company, and so you're seeing that bifurcation play out today. One thing that I'm wondering is how much

to international investors have to care? And this is it's sort of I mean a little bit. Uh. I don't know, selfish or self centered in terms of the developed market, but I'm just wondering how much of this dollar debt versus local debt. Well, I mean, let's the first question, how much should we care? We should care a lot, because as goes China, so goes a lot of the things in the world that we care most about. Right, But to your point, how much do we care about

these two specific issuers? Probably not so much. Even though China mention is a pretty big issue of dollar debt, a lot of the holders people believe, and it's difficult to prove because the data is just not as transparent, are actually Chinese corporates who have had their their money offshore in dollars buying back that debt. So you don't necessarily know if it's US retail or even US institutional funds who own that debt, because it's just it's not

as transparent as you what other life like. So the verdict is at as to who's getting hit with the move today. But that's kind of where we are. So, Davian, how much of the credit issues that we're seeing bubble up you mentioned team we started to see it and now we've got these two big issues. How much are a really issue or specific or are they really representative of Boyd? The economy is slowing here and we're going to see more of this. Yeah, No, I mean the

economy is definitely slowing down. Um. I think really what it is more function of is not so much growth patterns or inflation or some of the you know, kind of fundamental metrics that we look at to to to to assess the health of the Chinese comedy. It's more a function of, you know, just dislocations in the market with shadow financing being pulled out from under the rug.

I mean, I don't think the markets really understood the extent to which shadow funding in China, just how that greased the pipes and loosen the economy and allowed borrowers to extend leverage and do all that. I mean, it was a massive it was a massive way to grease the pipes domestically and now that it's gone just overnight. I think the markets having a little bit of a difficult time reacting to that one thing that I'm struck by.

Over the weekend, there were signs that perhaps trade negotiations are breaking down in addition to negotiations over the government shutdown, etcetera, etcetera. The response has been sharply negative in the U. N Right, we've seen the un weekend considerably versus the dollar. Now we're gonna have to start talking about where the thresholds are where people start to get concerned. Is this a good thing for jijimping or a bad thing that their

currency is weakening? Uh, well, it depends really where we are in the negotiations. But look, I mean, we've had this conversation many times least I mean, in my opinion, us trying to trade negotiations. I don't think we're gonna have any They're gonna be ongoing for years and years and years. Specifically whether whether where it relates to I P And I'm sure Mr Sweeney over here can talk

ad nauseam about what that really means for us. But you know, from where I sit, it's all about rate differentials, the correlation between dollar u on and the difference between US and Chinese interest rates. The correlation has been very tight over the better part of the last three years. So as go those rates differentials, so go dollar u on. And what we saw at the beginning of this year was a rebound along with all risk assets, and we saw dollar yuan rally through the month of January, had

a huge month. But now after after the new year, and you know, people are back in the office, I think people are take another look and just fundamentally, yeah, just take a step back. What does this practically mean for companies looking to finance themselves, either in China or

the government itself. What does this mean for its economy? Well, I think if you look at the fact that you might need to pay more to borrow money in China on a nominal basis relative to the US for the first time since two thousand and nine, it's a pretty big deal, right, I mean, I'm talking about the fact that you will actually need to pay more to borrow in dollars than you were then you would in China. You on, and this remember China growing at seven six

percent plus. In the US we're only growing at two and a half three percent right, Yet you're gonna have to pay more in terms of yields here than there. It just doesn't make much sense. It doesn't reconcile. But that has much more to do with the fact that, um, you know, rate differentials are moving in the everg direction and they're quite frankly, I think they're gonna invert this year. So you know, how does the world credit market you China right now? I mean, is this something that is

still you want to put money there? You know, I think it's really again, it's going to be idiosyncratic. There are a certain more gets. There are certain issues where you know, their their balance sheets are healthy and fundamentally there's reasons to be um to be bullish about them. But you know, yeah, no, I mean I think sentiments is deteriorating. I mean, we got a lot of data this week, Paul. We see inflation data coming out, we see trade data coming out this week. Overnight we saw

reserves which barely budged go figure um. And so the numbers you mentioned least, you know, what are the big numbers that you know she and the Chinese are looking at. It's that three trillion in in AFEX reserves that really doesn't move so much. It's that psychological seven handle on dolla U on. I mean those can't both exist in a happy place without, you know, with what's going on between US and China trade talks. Damian Sassaur, we love

having you on, especially on your very special birthday. Davian Sassaur is chief Emerging market credit strategist for Bloomberg Intelligence. Check out his research. It is fabulous. Well, Amazon dot Com has certainly been in the news for a variety of reasons, one of which was the long anticipated HQ two. Where were they put their second headquarters and they chose Queens, the Borough of Queens in New York City. Lots of

economics going back and forth there to attract Amazon. But we've got other news and just kind of goes to that Amazon story, and it goes to the corporate headquarters and where companies are allocating their corporate headquarters and what kind of incentives local municipalities are making to lure those corporate headquarters to their markets. Um to walk us through kind of the Fox coun story and any kind of light it might shed on the Amazon story is Austin Carr.

Austin is a technology reporter for Bloomberg News. He joins us on our Bloomberg Interactive Broker studio. So, Austin, I know you did a long story on fox Con and their move to bring headquarters to Wisconsin. What did you find. Uh? We just found that there was a great disparity between how this deal was talked about leading up to when it was signed with fox Con in the state of Wisconsin,

versus how the deal has actually gone thus far. We spent months reporting this for Business Week's new cover story, which is on news stands now and online right now um, in which it sort of details how it has fell short thus far in terms of job creation and even some of the conditions inside the factory that they've set up there for the early operations in the state where that the pay has been low, where people feel expendable, where they've been making an aggressive push towards more automation,

which likely means a lot of their roles will be obsolete. And so just overall, the sort of r o I for this project creating more factory jobs hasn't lived up to those expectations, which raises a lot of doubts about these types of mega subsidy deals. Which have become increasingly common. What kind of oversight was there an enforcement action with Fox Con as it became clear that they were unable or unwilling to fulfill some of the promises that that they had made. So the way that this deal is

structured is UH. It's it's all taggered, staggered to hiring and capital investment expenditures and now of words UH in exchange for about four point five billion dollars in subsidies, depending on how you calculated, the company has to invest about ten billion dollars and create as many as thirteen thousand jobs in the state based on the threshold of targets. But the first year UH they had to create as

many as one thousand forty jobs. They actually only created one seventy eight, So they missed that by if you, depending on again how you're looking at it, about two for the maximum threshold. So there are agencies in place to sort of monitor this deal. Their argument is that, look, they didn't create the jobs, they didn't get the tax credits.

But as we detail not just in this piece as well as a newsletter that just came out for a fully charged Bloomberg newsletter on the tech team Um, you know, there are other ways the taxpayers have already been vooting this bill, whether that's through putting the deal together, monitoring its progress, um, as well as overall just sort of some of the upfront investments that local municipalities have been

been making in the range of hundreds of millions of dollars. So, Austin, you mentioned four and a half billion dollars in subsidies from the state of Wisconsin. That's obviously big money, particular for the taxpayers of Wisconsin. What recourse does the state have, or the taxpayers have if these corporate entities don't fulfill

their end of the bargain. Yeah. Their argument is basically that, um, you know, again, if they don't meet these job creation targets, if they don't hit their capital expenditure targets, that they won't get the tax credits. But I think just as risky could be if they do actually hit these targets.

A Wisconsin Legislative Fiscal Bureau analysis actually found that the return on investment UH for this billions of dollars by the state won't actually come until two, meaning the state will be on the red end this deal until two. That's decades before they're going to see a potential return. It's also going to be difficult for budgeting in the

years ahead. Again if the company, if this deal goes perfectly, the state could be writing paychecks to the company essentially as high as three and twelve million dollars per year for these job creation targets. That's that's a lot of money that that just sort of that is built on this premise that a lot of these jobs are going to create this ripple fact, this multiplier economic ripple throughout the stage. So one could argue, Okay, this was a fail.

This fox Con deal ended up being more expensive for taxpayers whatever way you slice it, UH than it was worth. But it might be just an idiosyncratic case. Are there other cases of similar incentives that have had similar outcomes. So the comparative example that that I would cite UH to not just Amazon HQ two, but as well as

UH fox Cons move into Wisconsin. UH New York State in the city of Buffalo, Extra actually struck a seven fifty million dollar deal with Tesla to open up a solar factory UH in just ten minutes south of Buffalo. And that deal has been going on for years and years and had very similar connotations. You know, this big talk of job creation. Uh, you know, big you know, press events for the groundbreaking ceremony. But then, as with

most of these deals, there's often changes. The company is under different pressures, Tesla especially as under just given their or automotive pressures. Uh, they've put some of their solar ambitions on the back burner. And of course who has to sort of pick up the slack for us, it's the taxpayers as the job creations sort of slow down as it takes years for the company actually to set

up its factory. Um. We spent months reporting that story as well, and we actually got to visit that factory in Buffalo and vast majorities of it were still empty. We compared it to sort of an empty Walmart supercenter. Um. So that just raises, you know, again, doubts about these types of mega deals and whether they actually these companies live up to their promises. Austin Carr, we love having you. Thank you so much for being with us always fun.

Thank you Austin car technology reporter for Bloomberg News and Bloomberg Business Week, joining us here in our interactive Brokers studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney I'm on Twitter at pt Sweeney and Lisa bram Boyd's I'm on Twitter at Lisa bram Woyd's One before the podcast. You can always catch us worldwide on Bloomberg Radio speaking