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Terminal and the Bloomberg Business App. Let's talk about one of the issues that's band to come up next week, two key data points ahead of the Fed September decision, kicking off with payrolls tomorrow and CPI next Wednesday. Housing costs remaining a top concern for many, including the former Secretary of Housing and Urban Development, Sewan Donovan. Shawn is the current president and CEO of Enterprise Community Partners and joins us now. Shann co Montor Joe agreed to be
with you. Thank you very much for coming on the program. Let's just talk about the scale of the affordability crisis that you've been talking about for Want and we've been living through. We finally coming out the other side of this, I.
Don't think so, And in fact, it's getting worse in places. I've been doing this work a long time, about thirty years, and I think what is different is really two big things. First, it is a problem that is deeper than it's ever been. We have the biggest rent increases we've ever seen. We have a doubling in what it costs to buy a home in the country in the last few years. But the problem is also everywhere now. It used to be on the coasts, it used to be in our bigger cities.
I was in Boise, Idaho last week, and they have a housing crisis there, and so it really is everywhere. It's also driving our economic challenges in a way that I've never seen nationally. Our inflation problem is a housing problem. Now you have companies who can't attract workers, and it's driving down economic growth. Half of all our renters in the country are paying more than thirty percent of their income,
which is unaffordable. That's eight thousand dollars a year they can be putting toward groceries, consumer demand, and so it really is at a different scale and it's in our presidential campaign right now. Thirty three governors across the country talked about housing affordability in their State of the State address. So it really is a different crisis than I've ever seen, and it is moderating from COVID, but at a level that is unlike anything we've ever seen.
I'll ask a dumb question. You can give me a complex oce we two hundred banks. This points away from solving this crisis a few rant cuts.
Absolutely not, because we are seven million housing units short of what we need. This is a supply problem, not just a rapes problem, and that means we've got to take action in many, many different ways, both on demand and on supply.
When you listen to the campaign trails, both of these individuals sound populist in nature when they talk about the housing market. Kamala Harris saying first time buyers can get twenty five thousand dollars a benefit to help them. Don't you think that would exacerbate the problem we're seeing right now?
Let's be clear, Harris's plan does both. It focuses on supply, it looks at over regulation, it looks at the need to encourage states and locals even require them to build more. But we also have to recognize that for a family, the real struggles are for families who can't even put food on the tab. We have a record homelessness crisis, and so we do need to figure out how to
help people afford housing more. We're never going to bring that cost of housing down enough that most people can afford a decent place to live, right So, and that's really you have to have a balanced program.
It also doesn't matter what Trump or Harris say, because this will be done in Congress. How could you see potentially a divided Congress get to any resolution on something like housing.
Well, this is what's so interesting about the way the politics have changed on housing. I said earlier thirty three different governors. I've been in Boise, Idaho, and Montana the last few months. Red states, Blue states. Give you another example. We had a tax bill that made it through the House of Representatives overwhelmingly the most bipartisan thing I think seen. There was a significant increase in the Low income housing tax credit, the best public private investment vehicle. We have
to build more affordable housing in the country. And so I think this really is a moment different from what we've seen in the past where there is bipartisan support around housing, and I think in the tax negotiations next year, you're going to see a big increase in the loan income housing tax credits.
As policy discussions continue, and presumably we'll take some time join back to John's point, if the Fetter reserve cuts by two hundred basis points in the next twelve months, will that make the home affordability crisis worse or better?
It will definitely help. It will make Obviously, rates are a critical thing, not just for home buyers but for builders out there, and so that will be important. But I want to go back to the fund mental problem. For many, many years, we've been lagging on building housing, and the supply problem has got to be focused on if we're really going.
To get to the solution.
You talked about how this is a problem that's widespread, and you talked about US cities, but it's widespread globally, and actually cities across the world are dealing with this affordability crisis. And a lot of people are saying it's because of how low rates got and because a lot of people could leverage up their home home purchases and thus lead to higher prices.
Why won't lower rates just do that?
Again, we've already seen home builders building as fast as they have in a very long time, during the pandemic, during high rate time, So what's to say that they're going to keep.
Up Because we have to recognize that housing is a financial instrument, but you can't build it if you don't allow zoning to build that. So in a neighborhood where a community is saying, not in my backyard, I don't want any more housing, there are different measures of it. Harris's plan says she would add three million units. Our numbers are for real affordability. We have seven million units shortage.
So rates are just a piece of the issue. But fundamentally, what we allow to be built and how we for the lowest income people, how we support them to do that is critically important.
You're an expert in this with a lot of experience, a lot more than anyone around this type of that's for sure. Harris is offering two things. Wants to incentivize building but also support buying. And I think we all understand there is a mismatch in the time arizon for those two policies to bear fruit. You can support buying that works immediately. The supply issue is going to take years to play out in the near term. Don't you risk higher prices with these kind of policies.
You have some risk, but understand, for a family that is right now spending half of their income towards rent or to own something, that increased support might mean they put more food on the table, it might mean that they do other things to support their family. So it has some effect, and there is some risk to what you're talking about. But at the end of the day, we know we have to do both. We have to
support supply and demand. And I do think what's exciting right now is you have a consensus around the country on Democrat for Democrats and Republicans that we have to build more. Here in New York, we have a city of Yes proposal. In Montana, they just passed the legislation that says cities can't restrict housing development in certain ways. So that is a growing moment, and you're right, it will take time, so we better get started.
How long has this problem been building for? Maybe we can finish here and just give you a big picture opportunity. You were part of the government coming down at the financial crisis the housing crisis A nine were the problems now where the states plants it back then? The lack of supply how connected to these two issues.
So what I.
Would say is this has been a chronic problem over decades. Housing affordability has been getting worse for probably fifty years in this country, but it's really become an acute crisis through COVID. COVID gave it a jolt of adrenaline in terms of making the problem worse. I want to go back even before the Obama administration, given that we're on Bloomberg TV. I was Mike Bloomberg's Housing commissioner here in New York City and this was a huge focus for us.
It's taking old industrial areas rezoning them. Right now, we have a billion square feet of empty office space around the country. That's an opportunity to really think about. So absolutely, this is a problem that's been building, but it is different now in terms of what we saw during COVID. People are demanding those people who used to work in
an office, they're now working at home. They're demanding more space at home, and so we have a demand that's grown enormously during COVID that we have to meet.
This was SAFSMA and we look forward to doing again with you. Thank you, place are appreciate it. Shown town of in the eventiprise community. Kate Alhillo of Russell Investments saying the inflation problem is largely solved at this stage. Expect we'll hit the two percent inflation target in early twenty five. The Fed has the space to be aggressive if needed on rates. We still expect a self landing, but we can't rule out the possibility of a recession.
Kate joins surround the table. Kate, good monitor. You great to be here, Thanks for joining us. Let's start with payrolls tomorrow morning and the data through the next hour or so. What even the team looking for.
Well, we're looking for a beat on what we saw certainly in July, and something close to the one sixty five range. And if we get something, you're close out. We think the market is pretty powersitive. Continue to see some of this brightening out. Any chance that we are below one twenty, below one hundred, that's where you start to see some material volatility.
So good news is good news, and band news is definitely really bad. Band news. Talk to me about that would leaves the bone market.
So yeah, so I think again, I don't think the bond market's moving tremendously unless you see the labor market really start to show more signals of a weakening versus a normalization, and then you know, potentially you start the recession discussion to be more prominent. We're not there yet, but if you start to see some challenging prints in terms of labor, that's where you start to see some movement.
This is really interesting to me.
You think it's an asymmetric response that essentially people are not going to unwind what we've seen in terms of the rally and the bond market.
What gives you that conviction? Yeah, well, I'd say a couple things.
First, I think the first hundred basis points of cuts, whether it happens this year it kind of drips into next year, is kind of easy to get to the two hundred or so that's being priced in through the end of next year. That's where you might see some movement still, but you still end up having the terminal rate.
You still a while to go to get there. So again, I think if you get some good news the labor market is more normalizing July was maybe a little bit of a misshoot, but the FED is still moving to focus on the labor market and not inflation that you don't end up seeing a big shift back up in rates because we know that the direction is pretty clear.
We were talking about the incredible volatility of markets at a time where there are so many unknowns and they're just as this feeling that one data point could really tip the scales in a pretty significant way. Do you basically view bad news as being a buying opportunity? I mean, if you end up seeing a negative, some really problematic print, can you say, look, you look at the fundamentals, you look at these companies that are performing pretty well.
Oh, right, time to buy. Yeah. I mean, I'd say a couple of things.
It's great to actually see volatility back in the market and the market reacting. I think the challenge is it's overreacting to single points or news, and so we're staying pretty close to home in terms of our strategic allocations. If we see those overreactions, we are leaning into them. It tends to be more as trimming our winners. Even when rates have moved up over the moved down over the past period, we've been trimming. If we see a
big self, we'll be leaning in. But I think it's more because the over reaction that we're seeing from the markets, because of the volatility and the uncertainty. The market is still trying to find kind of the narrative.
Would you say, trimming in the bond space and then we'll go to the sock space.
Yeah.
Are you basically saying that the market is posted in too many rate cuts?
Yeah, So we think that the magnitude right now is at the point where it's probably as much as it's going to go unless we start to see a recession theme start to pick up. So we have started to trim some of our duration positioning.
You know.
Connoscent Bloomberg Opinion. Love Connoscent.
It's great.
Check out this tweet. If the FED was unburdened by what has been get it fantastic, And if the FED had a blank sheet of paper to begin with, they'd probably set FED funds around four percent instead of where we are right now. Instead of this performative channel from various people about the signal that AT's send if they cut by twenty five or fifty in the anchoring to five twenty five to five fifty. Can we play that game?
Just some scenario analysis. If we were to have a blank sheet of paper the Federal Reserve, what would the rate be today?
Four twenty five four fifty.
Yeah, so we're about one hundred basis points off side of the.
Fat, Yeah, which is why I say the first hundred basis points is easy to get to, so you don't see as much movement. It's the stuff further out that we're still trying to figure out in the magnitude of how far they get.
We've heard that number a few times, haven't we That maybe there are one hundred basis points off side. So it's to Conn's point, what is this performative chatter about the signaling from twenty five versus fifty? If you're off side, get a move on and just say you're off side.
Isn't the FED and this isn't meant as a pejorative, but isn't the FED essentially a performative instrument. Isn't it sort of the signal that that they give.
To markets they behave that way?
Yeah?
Well, and so at a certain point, and that really goes to this question of how do you trim positioning? How do you understand whether they're on a trajectory that's much steeper kin to what Adol Husaini was talking about, where they could go back to zero versus between three and four percent.
Yeah, and I think that that's where you don't make any kind of severe moves because there is a lot of uncertainty and try to take advantage of the volatility.
Okay, this is awesome, busy twenty four eyes I had for you in the thing. Thanks for dropping by, Thank you, thank you, Katy Ahila there of Russell invests at al Husaini. If Columbia thread needle writing, the FED put is back. One of the key unknowns is how the economy will respond to the FED executing rate cuts. If the past through of cuts into the rear economy is slow, the FED may find it south behind the curve once again,
as with the surround the table for more ED. Good morning and welcome back.
Hey fantastic.
You said in your recent note the market pricing masks a broad distribution of outcomes. How wide are the range of outcomes right now?
Yeah, I mean it's striking if you look ahead, you know, we're starting to praise well in access of one hundred basis points this year, and if you look into the end of next year, the probability that that funds managers to stay around four percent is closed to zero. So it's a fantastically broad distribution at the moment and getting brighter every week.
And as a feeling, it wouldn't take much weak economic data to really amplify some of those bets that if we drop to one hundred k tomorrow morning, at unemployment stays at four point three percent, we start pricing in a series of fifty pases point cuts. So if you're facing these kind of outcomes and the range is like one you can drive a truck through it, do you chase this bull market rabby, what do you do with this?
Or I think we've had a really strong valuy so far this year. I think what we want to do is take stock that the starting level of yields is still quite attractive, that the curve is likely to continue to steep in versus wood markets expect and so that gives us a little bit of juice. At the same time, I don't think you want to be maxed out. I think you want to leave a little bit of dry powder for an environment where the data manages to surprise us to the upside.
I was struck by the fact that you hear the likes of Howard Mark saying that the neutral rate in this new environment is something like three to four percent. But if you look at this wide spectrum of potential outcomes, you actually see an average rate below three percent by twenty twenty six. Do you think that that's maybe overestimating the chance the FED really does get down to close to zero again.
Well, I think there's a there's really strong probability that that happens in the coming years. Right that the data deteriorates to the point where unemployment starts to feed on itself, you get those recessionary dynamics in that environment. The odds that the FED funds rate goes to zero, I think is exceptionally high, and FED research does continue to point to that probability being high in the coming decades. Will it happen in the course of the next twelve to
twenty four months? Is anybody you's bet we have a significant amount of fiscal uncertainty on the flip side of the selection that that may forestall a recession. But if the dynamics are there, FED funds going back to zero, I think is very a very reasonable assumption.
There's a pretty profound sort of extrapolation that I'm feeling from you, which is said, essentially, this is not a different environment than pre pandemic. That essentially, this is not a more inflationary time than we were in twenty nineteen in twenty eighteen. And this flies in the face of what a lot of investors are saying, including some pretty big ones. Can you explain why you think so?
Yeah.
Look, I think the large part of the inflation story again just goes back all the way to the mid nineties, is driven by anchored inflation expectations. We've run this massive experiment on the course of the past three years, the extent to which those inflation expectations form a center of gravity that pulls inflation towards two percent, and I think it's played out really well. It's underscored the Fed's credibility in maintaining that level. I don't see any reason why
inflation should be different going forward unless the FED strategy changes. Inflation, at the end of the day, is a financial variable determined by the FED.
If the FED cuts by fifty basis points, and then fifty basis points again at a time where the economy is not falling off a cliff, isn't that the variable that could cause a higher inflationary environment.
We're going to find out, right, if in fact that neutral rate is closer to four percent, that means the economy is going to be very sensitive to rate cuts straight out of the gate. Right, one hundred basic points of cuts could significantly accelerate growth, could put upside pressure on inflation, and then we're not going to get you know, FED funds below three three and a half percent in the coming twenty four months.
This is a key unknown.
We just don't know at the stage, given how much flux we've had in the course of the past through three years.
And please to add a settle this because you have to realize how finely balanced things aren't going against tomorrow morning. We're one bad jobs print away from pricing at a series of fifty basis point cuts and one good one away from reversing a lot of what we've priced in over the last few weeks.
And essentially, what we don't know is what the responsive markets will do to the underlying economy. We keep talking about how this isn't a very interst rate sensitive economy, as many people expected on the way up. What's to say it will be on the way down?
Should I fear the disinversion? Can we finish there? When the curve starts to normalize and you get this bull statner, typically that means bad things are about to or are happening in the US economy. The rate cycle is just about to start or is happening. What is it this time? Could it be different this time?
Not as much?
I look at the curve and I see in the course of the past, you know, again twelve to twenty four months, the curve is deeply inverted, signaling that the FED has taken us to a very restrictive place. They're taking the foot off that brake pedal right now, and the curve is disinverting. The pass through into the real economy, I think is an open question. Right You had your previous guests talk about the sensitivity of the housing market, housing cappacs to those interest rate cuts. It's a key
unknote to this day. If in fact, we see that housing demand come back, housing capecs come back on the flip side of the election, potentially corporate capex reaccelerate the Fed's going to have a really high floor in terms of other cuts relative to what's price today.
Ed small as always, Thank you, sir. I was signing that a Columbia threat nade to jobbas claims came out at two twenty seven. The meeting estimate was two thirty. I said earlier, if you walked into a room of economists, you'd walk back out confused. If you look at the States this morning, you're not getting clear direction either. Jay Bryceon of Welst Fago is challenged with solving some of these issues. Jay, what is going on in the labor market in America?
Well, John, I mean, I think you kind of talked about it before. I mean, you know, what we're seeing is we're just not getting as much hiring as we had before, and I think that's consistent with the ADP number we got this morning. But we're also not seeing businesses laying people off, and that's we're consistent with the initial job less claims number. So you know, the labor market is moving has moved back into better balance, which is a good thing. Things are slowing down at their
labor market. But you know, you and I think Lisa used this word earlier. You know, you're kind of on a knife edge right now, and you know you don't want things to deteriorate further from here.
Jay, What gives you confidence it won't. Is there any reason to be confident that things stabilize, that this isn't just a moment in time, it's an end state for the rest of this year.
So I think there's two things, John, that I think things kind of stabilize here. And you know, recession is not the base case call. One would be if you look at the financial position of households in general, it's pretty good. Yes, we have seen delinquencies go up on credit cards, on autos, we've seen you know, we're hearing antidotes of low income consumers feeling some stress. But if you step back and you look at the debt situation, if you look at the debt service ratio of the
business of consumers, it all remains pretty good. And the same thing applies to the business sector in general. Businesses large don't really have to lay people off, you know, in aggregate right now. And so those I think are two good things. To take a deep breath. Things aren't falling apart out there. And you know, a continued expansion is probably still the base case.
Jay, Let's say the base rate right now is one hundred basis points slower and companies had an easier time borrowing at a more reasonable price. I guess would you start to see a pickup in hiring based in the fact that companies are still hopeful and or frankly, the reason why they haven't been more aggressively hiring is in part because of uncertainty around the economy as well as the election.
You know, at least I think that's part of it. But you know, we're also seeing when you look at the overall economy, you are seeing signs of softness. Right We all know that, you know, the housing market has been kind of soft for a while. We all know that manufacturing is also soft right now. The only real thing that's really holding up the economy right now is the service sector. And so you know, when we get the ISM number at ten o'clock, that will be important
to tell us what's what's going on in there. And so you know, as rates come down, you know, the point here is that should help to stimulate sort of things. I think there's some uncertainty whether whether it's towards the election, whether it's towards the economic outlook in general, but you know, in general, what we are seeing is monetary policy is in a restrictive dance right now. Rates do need to come down to help stimulate spending.
Jay, Is this normal to have this level of uncertainty the knife edge? It's almost talking about this idea that things could tip the scales one way or another. Is this always how it feels at tipping points that seem to last forever with such model data.
Yeah, you know, so there's always uncertainty out there, right And if you go back, you look at the pandemic, right, that was a very fast moving sort of situation. You look at the financial crisis, lots of uncertainty around there, absent a major shock. And you know, the last major shock was the pandemic a few years ago, and the unwinding from that apps in a major shock. I'm kind of hard pressed to think of a time in the last you know, few business cycles when things have felt
a little bit uncertain as they do right now. So I do think it's it's not normal right now given where we are. But you know, unfortunately, just the nature of the way the economy works and the way the overall geopolitical situation works, there's always a base level of uncertainty.
You said earlier, not much hiring, not much firing sounds very goldilocks, but we've heard from Mike McKee was just talking about hours worked will be important. What kind of number of hours worked would you need to see to then get concern that potentially the next point of call is going to be layoffs.
Yeah, So if we're seeing, you know, if we're seeing aggregate our hours work tomorrow going down let's call it zero point three percent or something like that, then I'm starting to get a little bit concerned, you know, at that point. And so I think Mike had a really good point there in terms of the hours worked. And you know, the first things that you do see is you see temporary workers start to go down. You know, it's like twenty four out of the last twenty six months,
we've seen the number of temporary workers going down. So we're already seeing that. And if we do start to see hours worked going down by that magnitude zero point three percent, zero point four percent, then I'm really starting to get a little bit concerned.
Thanks for the updates, sir, JAKEE briceon there of Wells Fargo. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and, as always, on the Bloomberg Terminal and the Bloomberg Business app.