This Is What 5% Mortgage Rates Mean Now For The Housing Market

and we got kazumped on all of them. We got out bid, and then finally we found a house that we really liked and it happened to be a probate sale, so the owner had actually died and it was going through you know, this probate process, so no one else wanted it because no one else wanted to deal with that. So we actually got that house and it's been really amazing. It's kind of like an odd lots of housing, right, I mean like literally like here's like this like asset.

It's not the normal thing, and you have to put it a little extra work to move it. And it took advantage of that. That's right. We did our due diligence and we were very patient at a time when a lot of people kind of are worried about missing out. Now it really has been an extreme I mean the last two years have been extraordinary for all kinds of reasons,

particularly with housing. We've done We've done that a handful of housing episodes before, but it feels like maybe we're at some sort of turning point because rates have just seen one of the biggest upward move Mortgage rates just hit five Like, maybe maybe something's changing here. Is this the peak housing market episode that we're doing right after I bought a house and now right so we've jinxed your home bridges that you're gonna be underwater excellent years.

But it does feel like something's changing here, that's right. So we saw the thirty year mortgage rate hit almost five percent quite recently, which is, you know, a very big increase from what it has been over the past couple of years. And there's this wider macro discussion going on right now about financial conditions. As interest rates rise, how much of an effect is that going to have on financial conditions and the overall health of the U

S economy. Are homeowner is going to start feeling the pinch of these higher rates or have most people at this point actually refinance their mortgage at very very little Yeah, you know, I was thinking about this, you know, um, the other interesting thing about housing is it's such an important part of the economy. Obviously, it's a huge source of wealth housing assets, it's a huge source of consumption. People need to pay rent or have a place to live.

And as we've sort of being reminded in the last six months or year, it's a manufactured asset, has a supply chain like everything else, and we don't I think, for like twenty years or for a long time, we did not think much about that aspect of housing. It just you just take it for granted. You get the wood, you get the workers, and so forth. The labor part

had been stressed for a little while pre COVID. But I think that like we're all sort of being reminded that homes have like tons of parts, like a car has tons of parts, and if you're missing one thing or of a part of wood or for example, gets really expensive than that as building the new house difficult. Right, So it feels like we have all these different push

pull factors. So on the one hand, housing finance, the cost of a house is very very expensive at the moment, and with rates going up, you would expect it to get even costlier. But on the other hand, you're not necessarily seeing the supply response because of all these supply

chain and logistics issues that we've been talking about. Right, Well, I'm very excited we're gonna have a big housing conversation because, as you mentioned, mortgage grades nearing five percent, mac grow things, what's going on there, micro things, supply chain, commodity, all kinds of questions. We had to bring on two guests, uh this time to help us bring it down. We're gonna be speaking with Dustin Jailbird. He is the senior

economist at Fast Markets in the wood products area. Great on the sort of supply chain costs, lumber, all those things, what's going on there. And we're also gonna be speaking with Connerson, columnist for Bloomberg Opinion, founder of Huge Treat Creek Investments, longtime friend of the podcast, but amazingly, I think this is his first time actually coming on. So I'm really excited about this conversation. Uh, Dustin and Connor, thank you so much for coming on. Odd lots, Thanks Joe,

Thanks Tracy. It's it's a real pleasure to be here. Yeah. Likewise, I'm excited to be having this conversation. So Connor, actually, let's start with you, and you know, let's just start really big picture, like, Okay, we've seen this huge rate shock. Rates nominally are not that high, but the size of the move is absolutely historic over the last few months.

What are the sort of immediate, sort of first order implications for the housing market from this big move to basically five percent thirty year mortgage as the most obvious one is that affordability has certainly taken a huge hit. I've seen things like the average mortgage cost for a first trip if you're buying a house now versus a year ago, is up around it's that's certainly going to impact demand to some extent. Although at the same point, rents are up seventeen percent year or a year, so

it's not like this is happening in a vacuum. But I think just that affordability shock is the first thing we're trying to figure out. Yeah, this is something that came up recently, this idea of homeowners actually purchasing houses as basically inflation insurance, right, as a way to get

away from increasing rents. Right. So in two thousands six, when everyone's worried about is this another housing bubble, housing crash thing going on that was really more about home price appreciation speculation, people putting down very little hoping that homes would go up a lot over the next two to three years, whereas now arguably it's more of like my rent is going up a ton, and I'm worried about inflation. Maybe it's more of rent inflation speculation than

home price appreciation speculation. My impression is that overall in the economy right now, there may be some uh softening I don't know, logistics, maybe goods. Maybe what are you seeing on your side, like, because a huge question that we're you know, this issue is like, yeah, there's tons of demand for housing. We just can't get the ability of all these permits, but it takes forever. Is there any easing going on in any aspect of the sort

of the construction of new homes yet? Yeah? I mean, you know, right now, it doesn't seem like there's a lot of good news, right I think you know that the if there are some kind of silver linings here, certainly in the wood product space that I cover, you know specifically, you know, with fast markets, we're seeing lumber prices come off kind of the peak levels that we

saw sort of about a month ago. You know, the cash market that we report based on our you know, our random length editorial team what they but they report on the markets down probably almost three per thousand. Uh. You know a lot of people follow the futures market and it's fallen a lot more. Uh So, you know, there has been some loosening on the framing side, but everything we hear on the ground, trucking, you know, especially

flat beds are still incredibly tight. I know there's been some talk recently on the van side of the trucking bar get things loosening substantially, but flatbeds, you know, it's it's a different animal. That's really how a lot of building materials go to market, and that is still incredibly tight. Part of it is seasonally, you know, demand is strong right now. We're entering the prime building season and so that is you know, still a challenge in the marketplace.

Another maybe kind of green you know, kind of green shoot here, some some positive. The rail side is starting to loosen a little bit. Uh. There's a lot of framing lumber, as you've talked about with you know, previous guests, you know Stintson Dean on this, a lot of framing lumber comes from Canada and a lot of that is delivered via rail. We've had huge rail challenges for several months.

Now we're starting to see some improvement there and that's helping deliver some of that that framing material to market. But it's still and you know, it's still very very tight, even as prices come off these these really hot levels. So can you just remind me what is the relationship

between lumber prices and new housing inventory? So when lumber prices are going down, is that bullush on new houses because everyone's like, oh, it's cheaper to build them, let's get started, or does it suggest that construction is already coming down and so you know there's less demand and more supply. Well so, I mean, and this is probably

something that that somewhat debate here. I would argue that, you know, the situation with lumber right now is more a function of the transport what we're seeing in the transportation markets this sort of loosening, right and what you're seeing on the housing side sort of the inventory effect. You know, there's still a lot of construction, actual physical construction going out in the marketplace, so you think about the actual would put in place or other building materials

put in place. Right, there's still a you know, a borderline historic amount of homes currently under construction. Right, there's this sort of huge sort of unfinished inventory that's in progress. Right, So there's still good demand, especially on the new construction side in some parts of the remodeling space. So at least in the shore term, you know, the demand picture for us the next three six months looks, you know,

hasn't really changed all that much. So again, a lot of what we see on the pricing side right now is more logistics and transportation issue as opposed to the building cycle. You know, that sort of actual starts slowing down or something like that. Right, that kind of makes sense, yeah, you know, and you know, it's something that I've been

thinking about a lot. Obviously we've done quite a number of logistics episodes, but it's something more broader that I've been thinking about a lot, which is that, you know, in a downturn or in a crash like we saw in March April, you can sort of like build up these big stockpiles of goods, right, Lumber sits there, other goods sit there, but you can't really build up an inventory of logistics capacity like that's just gone forever and send then when the economy picks back up again and

starts growing really hot, it's not like there's a bunch you can draw down. It just immediately gets a you see how it immediately gets squeezed. Yeah, for sure, you know. And and actually you know it's it's a good point, Joe, because one thing we see right now, it's kind of skewing more to what I see on a daily basis,

this being lumber and wood products. But what's interesting right now is when you look back, say twelve to eighteen months ago, you know, we had this big sort of positive demand shock of home construction and this renovation boom, so positive demand shock. Some of it was sort of underlying demographics and demand, but certainly COVID has contributed to the to that. And the supply side was constrained for

a lot of reasons. Some of it was actual plant capacity issues, but a lot of it too was the workers were furloughed, you know, sort of sent home, and it's taken a lot of time for for sawmills, would products mills, and other sort of building material producers to get those workers back and be able to sort of add shifts at overtime things like that. Now that's headcounts have more or less normalized that a lot in a

lot of parts of the supply chain. What we're seeing now is, yeah, it's that that throughput via trucking via rail that are causing bottlenecks. And one thing we've seen in lumber specifically, mills are actually having to curtail production right now. Not because they're they're not profitable, you know, prices are still close to record levels and their margins are swelling, but the issue is they're overproducing what they

can actually ship, you know, specifically in British Columbia. You know there's again there's a lot of sort of sawmill output and a lot of lumber that comes to the domestic market here in the US, some of that is sort of captive because of these rail bottleneck issues, which again from a builder perspective for your wholesale it's just incredibly frustrating, you know that the hits just keep on coming, even as we're seeing, at least at the plant level,

some improvements in supply chain. Connor, could you come in on that demographics point that Dustin just mentioned, and you know, we hear a lot about this idea that millennials are finally getting into the housing market. People wanted to buy houses and move away from cities during the pandemic. What exactly is going on here and are there any historical analogies that we can look at for this particular era.

So sure, this is the main difference between the current cycle and the mid two thousand's because the average age of the first on HomeBuyer tends to be in the early thirties. And so what's was strange about the housing bubbles that the people born in the early nineteen seventies that was actually like the smallest generation of people in

in the long time in US history. Only about three point one million Americans are born every year during that time, and so as they were in their earlier thirties, that was the sort of peak at the housing bubble. So the demand that we had at that point was really unnatural driffern by speculation rather than demographics, whereas now it's

the opposite. There were four million people born per year around they're the ones were in the early thirties now, and so that's why the demand picture is so much different now than it was then. This really fazing. I don't think I'd ever realized that aspect. I mean, I knew, you know that in the mid two thousands there was a lot of unhealthy respect that of activity, but I had never thought previously about how just there wasn't really a very large base of I guess you would say

natural buyers um during that period. But I guess that's really interesting. But I guess what about the bigger questions, So like for people who aren't in the housing market, or for people who didn't lend the lottery like Tracy did and actually get get a house. The other question was said mortgages, like well, will housing ever go down? Will it ever get cheaper? Or it will it at least slow down in prices such that it's not a

big risk to wait a couple of years. Is that a possibility, Like, could we see there's the nominal price of a house come down? And what are the factors that are sort of driving this? Maybe both of you can sort of come in on this question. Yeah, might doing this. There's sort of two ways in which that could happen over the next five to ten years. One is that you have millions and millions of people losing their jobs, because utimately, if you don't have a job,

you can't pay mortgage. Maybe you're a FoST seller. And then the other is that we do you know, at some point baby boomers will transition out of their current homes, whether it's voluntarily or involuntarily, that's probably more of a late, later part of the decade story. But once that happens, particularly in places with that don't have great demographics maybe we're parts of the Northeast and Midwest places like that, then you just don't have people to step into buy

those homes and they it out in price. Yeah, I mean, I generally agree with Connor. I mean I think you know, when you look at the dynamics in terms of demographics over the next five to ten years, you know, it's it's a very positive story. And again barring some sort of unexpected recession where yes, sort of employment goes down and you know, some aggregate demand the economy goes down, you know, for for're kind of having a steady sort

of business cycle expansion. It seems hard to imagine a situation where you're gonna have broad based, sort of downward moves in home prices. And you know, another you know, and again we look at this from the building side of the equation here. You know, one thing that we think is going to be really challenging is just for construction activity to be able to ramp up sufficiently to build the number of homes that we need to meet, not only existing demand, you know, your to your demand

in the marketplace. If you're a believer in this idea of pent up demand, sort of suppressed headship rates where people are not forming households and some of the key demographics we've talked about here at more kind of tradition rates we've seen over you know, over history, it's gonna be really problematic for the industry to ramp up. Labor is going to continue to be an issue. You know, we've heard a lot about the zoning and you know issues,

particularly the multi family side. Think about that. In a hot, tight labor market, how are we going to ramp up you know, say half a million residential construction workers if we want to ramp up to say, you know, one point eight million starts or completions consistently, and we're seeing that right now to you know, it's completion rates. You know, we're starting homes at a one point you know, one

point six one point seven million, you know pace. The completions are you know, pretty flat, around one point three million, you know completions, and that is some of that is is supply chain oriented in terms of actual building materials, but some of that is also labor, some of that is land availability. All those factors are gonna also on the supply side make construction constraint and kind of underpin

home price appreciation. This is really striking. And I'm just looking at this chart on my terminal right now because I just want to drive home for listeners what you said, which is that we have had housing start pick up. You know, a home builder is gonna get a plot of land and start putting down a frame and all that, but completions like actually turning the housing start into a home that someone can then move into, has clearly not

kept up. So currently, like just look at the February numbers, the official it's like close to one point eight one point eight million homes and the actually completions one point three and so yeah, I mean there's this huge gap that's emerged between Okay, you want to start a house,

but actually get a house completed. Yeah, something that Dustin and I have talked about over the past few weeks in response to this rate shock, is that home builders have had this, you know, to the point of that data, they've been starting a lot more homes than they've been completing,

and so they're inventories of homes that are construction. That backlog has been growing, and we wonder if that's going to be something that management teams think about over the next couple of months where they say, we have a lot of homes that are construction that are at risk, if you know, maybe they're supposed to be delivered in the first half of next year, and if market conditions really change, that could be the kind of thing where

they might have to take losses or write downs. And I believe the homebuilding stocks are down year to day, so I think investors are worried about that as well, and that would just be really bad news. If they start to your homes and just focused on finishing their backlog, then you create more supply is shoes next year. I was about to ask about the home builder stock, So if you look at something like k b H, I think it's trading below its book value at the moment.

What what is that telling us about the future direction of housing construction and profitability. I guess right, So the book value for a lot of these homebuilding stocks is really based on inventories, which is homes under construction and

land that they own. And so to me, if homebuilding stocks are trading below book value, that's saying not only our investors thinking they're gonna miss earnings of the next few quarters, they're saying they're gonna take actual write downs on the land and the homes under construction that they have, which is to me a pretty severe forecast. But if that were to happen, that just shows that the economy I think is much much worse than appreciated. Or it

could just be an overaction. M but like this is pretty wild. Like we're in a market in which demand for housing even seems to still be red hot, right five percent uh five percent mortgage rades despite that, I mean, it still sounds like there's huge lines and bidding wars,

like it doesn't seem like that's gone away yet. And yet you have these home builders, which you know, are well off their recent highs, and investors saying like some of these plots like are they might take a loss they might just completely write them down like it does.

It's like it feels like a pretty extraordinary disconnect. There's I think the sort of cell side view of what's going on with comboiling stocks is that the valuations are cheap, but when mortgage rates are rising, you don't own them, and it's sort of you just kind of wait until rates turn and see where things are and then reassess.

It also just emphasizes to you know, it's interesting that I think the home builders have had a lot of confidence that demand was going to be there right even as cycle times for particularly the single family side of the market, cycle times have gone from say, you know, six to seven months on average pre pandemic, and now we're somewhere probably around eight nine, maybe even approaching ten

months in some cases. You know, I think while you saw this growing delta between completions and starts go up, I think the home builders had some confidence that demand was going to be there months out, particularly given how low rates have been. But now as this affordability question has come into play, I think there's just generally less confidence what the home buying market will look like in three even though we have all these underlying sort of

demographic tail winds, right. But you know, one thing that we all often remind clients is that just because there's pent up demand out there, it doesn't necessarily dictate that it has to be realized in the marketplace, and affordability

does still matter. So I think you know, you're seeing it in some of the home builder sentiment data recently that you know, maybe they're getting a little bit skittish, and you know, I think completions are going to continue to move higher here, those start numbers could start to kind of flatline a little bit as they try to sort of focus on those backs. Can we talk a little bit more about what happens to affordability when rates

go up? So, I mean, clearly you would expect higher interest rates to knock demand a little bit um, But what's your expectation for exactly what happens here and how much of it depends on how high FED actually raises rates.

Something that that interests me is that redfin, they do housing analytics and help home buyers and comb sellers, put out a piece last week, I believe, talking about softening that they see or some ends the potential softening, and it was really focused on high cost markets like San Francisco, Los Angeles, New York, just because that affordability is is

really really challenged. It was challenged to begin with, and it's even more so now, and they hadn't seen that to the same extent in the destination markets that people have been moving to during COVID with remote work and migration.

And so something I wonder is that, arguably about like the Austin, Texas housing market has been driven more by the bio profile people moving there the local market conditions, and so could we start to see something where the high cost markets start to stagnate a little bit, But as long as people are still moving to those destination markets and bringing their bigger budgets with them, that doesn't impact their affordability issues. Well, so this raises another question.

And of course, when COVID initially hit and suddenly everyone wanted to move or it seemed to catalyze some big shifts and we saw, okay, a bunch of people said, you know, left the Bay Area, We're going to move to Austin or somewhere else in Texas, and or maybe they went down to Florida or something like that, or some sort of Maybe people just want, you know what, I can't live in a city. I want to live in a suburb. But it doesn't feel like like the

other places cooled down. Like are we seeing other other areas where prices are falling because everyone is moving out of them. It seems like some places got really hot, obviously, places in Texas, et cetera. But it doesn't seem like the other places like actually cool, they really got that cheap, or at least in New York here, you know, nothing

seems to be particularly cheap. I think that gets to Dustin's point about the headship rate going up where And this could be a strong economy, strong job market thing as well. That in the twenty Times we spent all this time talking about people still living in their parents basements when the job market and wage growth was weak, and now that those things are strong, you have that pent up demand for new household formation and things like that. Yeah, and I was just gonna say too, I think that

last point Connor on household formations. You know, you look at the official census data, you know, and you have to take it with a grain assault to some degree because the data can be quite choppy. But you know, at least looking at data, you know that when you look at sort of the number of households, it was

sort of flat year over year. But again to Connor's point, you have to think that there's a lot of people returning to the shelter market, both on the ownership side but also the rental side of the market to right, and so you know, they kind of move hand in hand. You know, you're not seeing any relief on the ownership side of the market, but it's the same story in some cases, if not worse, on the rental side of the market. So you know, kind of the real estate

market across the board is having this massive adjustment. As you know, a lot of especially young people who maybe live with parents during the pandemic, are stepping back into the rental market. You know, job growth and income growth is driving people to separate away from roommates, right, so you know, now you don't need to share an apartment.

Maybe you're going out and getting your own place. I mean, all this is impacting the shelter market across the board here, so everything is really tight, and even in the high cost cities where people are migrating out of so that actually is a good sort of step back, and I want to go back to this question of pent up demand, And this was obviously something that we talked about a lot even prior to COVID, which is just like, Okay, there's this huge wave of potential millennial home buyers post

Great Financial Crisis. We know that housing starts were very slow, So there's like this story of like the under housed economy was the thing that we were talking about prior to COVID hitting, and then it really seemed to accelerate. But what are the numbers, Like, what are we actually talking about in terms of how much pent up, how big that pent up demand is, and what we need to see on the sustained basis to do something about getting back in equilibrium, Like okay, at one point eight

million annualized, how does it starts enough? Does it need to go to to like what it what seems like a reasonable like numbers here to bring into balance? What's the shortfall? So I think there are two ways of looking at this. First is looking at the vacancy rate of of homes that are like sort of owned homes and rental homes and looking at what a normalized level was over time, and that maybe tells you something about what the current shortfall is, and that numbers around two

million housing units. And then sort of for pent up demand, that gets a little tougher because again you're making assumptions about what home ownership rates might be in an ideal environment, should they So the homeownership rate look like it did, but you're seeing that both say millennial households, but also households in their forties and fifties, that home ownership rate is much lower than it was pre two eight. And so if that were to normalize, that's several million more.

And to Dustin's point, it's it's unclear whether we can meet that demand on the construction side over the next several years. Yeah. And and just to extend on Connor's point, it's something that we had fast markets. When we do our kind of long term housing forecasts, it's really a demographic story, right, And this is always a big point of debate is what is this pent up demand idea? Right?

And you know when you look at other people who forecast the market, you know the ranges anywhere from there's there's zero pent demand. We're already over building too. We're six million units short, right, So I mean there's a massive range out there, you know, just kind of attach

some more numbers to it. First of all, you need to think about what existing demand is for shelter, right, and that that number is when you think about what household formations could be trending at to just meet you know, again, existing demand, you're probably talking about anywhere between one point

one and one point two million units. Then you tack on every year there's shelter loss that is either destroyed because of natural disasters wildfires, infills, so you know, homes that are torn down and then built on a new home built on that lot. You know that averages you know, two hundred to three hundred thousand units a year. And

then you tack on second and third home ownership. You know that that puts us between somewhere around one point four and one point five million units of demand annually, just existing demand. So and then you have to build on top of that, right to deal with the pent up demand that Connor talked about. Let's say you think there's three million units of pent up demand because of

the vacancy rate issues plus these four gone households. So if you build out a one, if you complete at a one, point eight million unit rate, that's going to take you ten years. You know, that extra three under thousand units you're getting a year a year, that's gonna take you ten years to fill that pent up demand gap. So that's just that's a that's a huge number that

you're dealing with their right. So justin you mentioned this very wide range of expectations, is that historically is that unusual. Have we been in a situation like this before where people can't really agree on that number, or is this the result of just being in a very very weird post COVID time where there are a lot of different things going on and we're just not sure of how

they're all going to play out. You know. I think it goes back to Connor's point, is that this idea of pent up demand is it's a little bit nebulous, and some of it is a function of what you think quote unquote normal headship and household formation rates should be, you know, looking at the key demographics as they kind of come of age in home buying years, and that is a difficult thing because it's it's somewhat arbitrary in terms of what that should be. Right, determining that in

to some extent. It's also a function of where you start calculating, like what year you start calculating pent up demand, right, so if you start in two thousand verses, that starting point matters in terms of what that cumulative build up of pent up demand is. So so you can arrive to very different answers there. That's kind of where we see it when we kind of do this type of analysis internally ourselves, so we keep kind of arrange you know, I don't think anybody knows what that exact number is.

So I've got a theory related to this pent up demand thing that's sort of in defensive data Boomers in the housing market. When people, when people our age think about baby boomers the sort of stereotype as they all got to buy a house in Los Angeles and made a gazillion dollars over the next thirty years. But it's sort of like, when did the baby boomer pent up

demand in the housing market get met? And we know that mortgage rates in the nineteen eighties were still in the double digits, and you can imagine how we would feel today if mortgage rates were ten percent, how many people would be locked out of pot ownership and as rates kept declining, that allowed more and more people to

get into homes. And I would argue in a sense that some of the early least mid two thousands housing construction boom was lagged pent up demand from thirty years of people who finally could buy a home based on four to mortgage rates. So this could go on for quite a long time. That's interesting. Yeah, And this also of course gets to the challenge of like what is a cheape house, right and when where when is housing affordable?

Because okay, we could look back at the early eighties house we're su cheap, mortgages were of course uh much higher. Or we can look back at out of the Great Financial Crisis when houses were cheap and mortgages were cheap, and yet unemployment was close to ten pc, so there were not a lot of people at the time who could had the income or there you know, there were there was a significant curtailment of people at the time who even had the income to to get a mortgage.

It kind of feels like there are very rarely sweet spots, maybe one with rapidly improving job growth and yet mortgage rates really low. Was like that sort of like brief like extreme sweet spot. But then again, I guess that was like a year of huge housing bidding wars, So it doesn't feel like there's ever like the perfect time. Yeah. I mean, I've been out of college for twenty years now and I've never once heard people say housing so

cheap it's it's time to buy. And so maybe maybe the late were okay because the job market was strong, real hum price boom hadn't happened yet, mortgage rates were coming down. But it's if it's only a few years out of a multi decade period, then maybe housing just

never gets cheap. Is there any prospect for something meaningfully different on the supply side, and like, is it a different kind of construction, is it something regulatory that could open up a lot of space like people always you know, it's like everyone on Twitter all the times like build, build, build, And it doesn't feel like that's a very controversial stance. Everyone likes the idea of more housing stock in general,

but they're all kinds of constraints. There's the physical ones, just the sort of you know, labor and lumber, and then there's regulatory ones, whether that means to make cities where it's difficult to build, et cetera. Is there anything that could happen that would actually meaningfully just change the

supply side of this applied demand equation? Yeah, you know, Joe, It's it's interesting because I think, you know, the last decade, we've been so worried about affordability on the demand side, right, it seems like we haven't really prepared ourselves for what we're gonna do when when we get there on the and and now the supply side is constrained, right, you know, And I'll kind of break it down between single family and multi family because I think you know, they're they're

definitely crossover issues. But you know, to me, when I look at this, you know, on the multi family side, certainly the permitting and zoning issues seeing you know, like like major challenges right that are kind of installing the ability to gramp up apartment construction and smaller, more affordable sort of units out in the marketplace. And so that is going to continue to be a challenge, right for

political reasons. I think you know, maybe Connor you could probably talk about better than I, but I think that's that's going to remain challenging. I think the advantage with multi family. Right, when you look at history in terms of productivity of construction, multifamily actually has a lot better

sort of track record of increasing productivity growth. So I think even in a labor constrained environment, you know, we are seeing you know, sort of technology like wall panalization, off site construction that are being implemented, a component manufacturing, you know, more quickly adopted in the multi family space. So I think even if we're in a labor constrained environment, we probably have the ability to ramp up multi family

given those factors. Single families very labor intensive. You know, you're you're building on site, your stick framing. In a lot of cases, most of our homes are built with wood. Historically it's been a cheap way to build, but it's it's kind of been contingent on a wall supply labor market in that context, you know, on the single family side, I mean, certainly zoning and things like that can help, But again I come back to really issues on the

labor side. Can we pull in more sort of migrant workers in key building markets like in Texas and California. You're talking about the residential construction employment is dependent on you know, anywhere third of the labor market there in residential construction is our foreign born workers. So in an immigration constrained environment, you know, it's gonna be tough to ramp up. If that loosens up, maybe we get some some quick burst of production, but beyond you know, kind

of really pivoting to off site construction, manufactured home construction. Um, it looks like a challenge we rode ahead for single family in particular. So I look at it sort of in two ways. I follow what the homebuilders do and say really closely, and they've really, in my opinion, to kind of optimize their businesses where they're really trying to be cautious about how many homes they build. They don't want to get caught with too much inventory. They're really

focused on high profit margins, returning cash to investors. And that to me was isn't gonna be enough to meet the housing demand we have. I have this line that I like to use that the future as a policy choice, and I think ultimately that really is what it comes down to. And you can sort of look at in the response to the the return of soldiers from World War Two, and there was this sort of we're all in this together. We have to build enough homes to

meet the demand for gis and people like that. And we met the challenge with zoning changes and giveaways to homebuilders and things like that. And I don't see that same political will right now, and you know, ultimately that's what we need. Otherwise I think this is just going

to be the reality for at least this decade. Can I just ask going back to the baby boomer point and your well intentioned defense of baby boomers, Connor, But one of the things we hear, one of the things we hear a lot is this idea of either large financial institutions like private equity coming in and buying up

a bunch of single family homes or sometimes multifamily. And this idea that you have a lot of baby boomers who have built up wealth over the years, and there are very low mortgage rates, and so what they do is they go out and buy second homes and then rent those out for additional income. How much does that constrain supply and how much would you expect or how much additional inventory would you expect to come on stream

when um baby boomers? How do I put this? I guess when when they die so even though the numbers from institutional investors buying homes are large, like tens of billions of dollars, sounds like a lot when you're talking about tens of trillions of dollars of real estate value in the United States, that's not a very large percentage. And so it it gets a lot of headlines. But to your point, that's not really where the sort of

soaking up the inventory is coming from. And an earlier guest, Mike Simonson, spoke to that when baby immersed die, I think the question is I mean, maybe they just give their homes in the real estate to their kids and it stays in the family and it doesn't get released onto the market. So I think that will help to

some extent, but sort of there's magnitude wise, I don't know. Yeah, So there's a new startup that Andrews and Horowitz is funding that allows people to basically do what commercial real estate investors do, which is not they don't want to be a landlord and they don't want to sell their home, so they can like swap it in for this portfolio of like sort of like a quasi read and so they retain ownership, retain home housing equity, and so you know, they're I feel like they're going to find a way

to prevent these houses. Capitalism will find a way to prevent these houses from coming out to the capitalism A yeah, you know. The the other thing going back to Connor's point to you know, one one question about you know, even if this sort of baby boom or supply is released into the market, it's a question of also the geography,

Right where are these times located? So you know, if you have lots of migration to the sun Belt, you know, if if these are sort of whatever vacation homes or second homes in I don't know, Midwest or northeastern United States, you know, sort of cake cod like, are those places that we really need the housing supply to be released from? Right?

So I think that's what also makes it quite uncertain, even if that supply side release occurs, is it geographically going to be in the place that you know, the locations that you need. So housing the original non fungible token, right like how housing like southern Illinois, It is not a house in uh central Texas between Austin and San Antonio. And so just because it exists doesn't mean it's going to solve an acute housing shortage that people immediately need.

I think something we haven't talked about yet too, is that if hybrid remote work becomes a thing, yeah, tens of millions of workers need an extra bedroom as a home office. That's sort of tens of millions of bedrooms from the national housing stock that are going to be there because maybe now instead of needing a three or four bedroom home, you need four or five bedrooms or what have you. And so I do think that's sort of a subtle factor that hasn't been discussed enough in

terms of why the shortages existing. Yeah, you think about the amount of floor space that's pivoted from the commercial space and the office space to the home right for that exact reason. Kind of people needing an extra you know, people needing an extra extra space for an home home office maybe two. That's a lot of demand in terms of floor space going to the residential side all of

a sudden. And I know that the numbers are kind of squishy on the percentage of the population that's that was pre COVID remote work and now where we are now. But if that number doubles, let's say, just for just a thought exercise. That's incredibly bullish for real estate demand in general, not only new construction, but also renovation demand where we're seeing you know, particularly for lumber and structural panels.

That's a huge category, a channel of demand that we're seeing being driven by this work from home movement and all by the way you have soaring home equity that's helping fund that. That's really interesting. How much are you seeing on that? So like we've we've been talking about

all the housing starts, etcetera. But how important for lumber would products is the either renovation or someone wanting to add a deck to their home, Like how big of the how big of a contributor is that to overall demand. I'll speak to lumber mainly, and it's probably different by building, you know, the type of building material, but certainly for for software, lumber demand, what we call repairing or modeling is actually the largest single end use market in terms

of volume. It's larger than new residential construction. Yes, and that always surprises people that would not have been like, yeah, and it's it's lumber is a little bit different than say even plywood or OSB you know, always be tends to skew a little bit more towards the new construction space. But you know, you mentioned it, Joe. You think about all the renovation that happens, you know, new decks, putting in fences, people putting in you know, those you know,

flower beds, things like that. There's a lot of sort of home improvement that happens on the renovation side that is substantial, and probably the best number to kind of size up the market is from the Harvard Joint Center and Housing Studies, and that market based on their estimates including both improvements. So home renovation and maintenance is around a four hundred and thirty billion dollar market. So that's substantial.

And to put some context to it, total construction spending, it is probably about over eight hundred eight hundred billion in total. Uh that excludes sort of the maintenance portion, So if you've tacked on maintenance, it's probably more like a trillion dollar market. So that's a pretty big chunk of total residential construction that that it goes into that

renovation space. It's incredibly important, and I think it's going to remain outsized because of how you know, we have such a shortage of both new and existing home inventory, people are sort of pivoting to renovations to to enhance their shelter space. Can I just ask in terms of supply shortages, I mean, we've had lumber, trust plates, kitchen sink, garage doors. What's the sort of next thing on your radar or what is your pricing data telling you will

be a future crunch point? Boy, it feels like we've covered everything, right because, like every component of a house, I'm not sure what the next thing is, tracy, because I mean, I think when you think about it, right that the way that the shortages have progressed, it's almost been in tandem with what the building cycle looks like.

Right first it started with lumber and structural panels and engineered wood products, and now it seems like more of the shortages are stemming from what you know, how you finish at home. Again, you mentioned the windows, that h VAC systems, you know, so you know, you know, it was kind of joking at the beginning of the question, but it does feel like we've really touched a lot,

you know, all points of the building cycle. So you know, it seems like again that those parts to finish a home are really going to be continue to be the critical determinant of of us being able to complete homes, especially considering a lot of that material either the components are the actual building materials themselves are sourced from offshore. I think why you're seeing maybe a little bit of

relief on sort of the framing materials. A lot of it is sourced domestically, you know, the vast majority of it, and so it's it's a lot more function of the domestic transportation constraints, which are still tight but probably improving a bit on the margin. Well, you know, container ships and port throughput. You know, it continues to be a constant challenge with complex items like that. So you know, I don't know what's the next thing, but it seems

like that area is still going to be problematic. What's the next thing you're thinking about right now? Like what should people be watching? And it can be anything but sort of like what's the what's the next thing on

your mind? I think for me, since again we talked about how home building stocks are down so much this year and builders have been still trust saying they're trying to meet construction backlogs and growing community counts by ten percent this year, is that when they are part earnings over the next couple of months, what will they be pivoting at all in their business models and response to

changing market conditions? Because as an investor, I'm looking at them trading in some in some cases three to four times estimated this year's earnings, saying, Okay, what's going on? Like the markets trade value like you're going out of business? Proved to me that you're you're gonna not have an

issue a year from now. Yeah, And I mean, I think on our side of fast markets, we're obviously thinking a lot about what, you know, the picture, the building picture looks like in right, it feels like the market is kind of set here in terms of the construction activity we're going to see, except what maybe the exception sort of the d I Y side of the renovation market.

We're seeing some softening there. But I think when you think about new construction and pro driven renovation, you know, a lot of that activity is already booked out for much of the year. We're wondering, now, okay, what does three look like with rates going up close to five percent now maybe going higher, building material costs continuing to remain elevated, you know, is that going to cool housing

starts to some degree? Is that going to cool the renovation market between you know, a combination of demand destruction and also thinking about this pivot back to the service side of the economy, right if people are less inclined to renovate their homes because they're going on vacation again, and on top of that, you know, just demand destruction from elevated price levels, you know, will we see some cooling in three both on the new construction and maybe

on that R and R piece too. So alright, well, guys, Dustin and Connor, that was fantastic. We covered a lot of ground. I learned a ton and great having you both on odd lots for the first time. Thanks for having me. Yeah, it's been a pleasure. Thanks to Jason Things. Yeah, that was great. It's almost like you don't even know where to begin to think about it. I had not thought previously about just like how much adding decks and fences and flower beds added to the lumber market. I

guess that's true. I mean, I thought the point about how the supply shortages are sort of following the trajectory of actually building a home was very interesting. I do feel a little bit better about buying over the past few months, right before interest rates go up. I'm sure you're really worried that, like, well, what everyone does. I think there's like a thing people buy a house, like, oh,

I definitely bought the top. Yeah. I mean I think everyone inevitably feels like that, and I suspect, you know, maybe that will turn out to be true. But I feel a little bit better. I have to say, you're feeling better. Is someone else's feeling worse like you? But no,

it's it does not feel like from this conversation. And I guess this is probably one of my big takeaways that even with five percent mortgage rates, that there's gonna be like some major softening, Like there's too much structural demand, there's too much pent up demand, the demographics are too good, there's too the supply is too constrained for there to be like some sort of shift quality. We didn't really get into it, but like I know, like loan quality

I believe is very high these days. It's like nothing like it was in the mid two thousands. So it does not feel like there's gonna be like some like wave of relief for a bunch of new homes that get really cheap. All of this. Well, you mentioned loan quality, and this is the other big thing that is emerging, and we just discussed it. But this idea that people who are buying houses now are not necessarily buying them as speculative assets and thinking that the price is just

going to keep going up and up and up. Rather, a lot of people seem to be buying these as logical uh investments or a logical choice and inflation protection. So rents are going up enormously, I might as well own my own house in the current situation. Yeah, we had the CEO I forget, I forget which homebowner. It might have been Kaby Homes. Yeah, I knew you wrote about and saying like, look, you know he said housing

a shelter and it's also shelter from rising rent. And I thought that was just like really fascinating, Like people want. People want a predictable monthly check and to not have to UH that they pay out and to not have to worry that their cost of rent is going to jump twenty next year when the landlord upset, and so in an environment in which there's a high degree of anxiety about rents, going up every year. You could pay extra and buy a house, but then you're you could

theoretically lock in a monthly cost. It's stable for thirty years out right, And so even if mortgage rates are going up, at least they're relatively and predictable. And Connor made that point, like, yes, the all in affordability for homes is like up thirty percent, but rents are sevent and you have to have shelter. That makes it such that the price of you know, it has gone up to cost of bind but not it makes it sort of relativistically not as much anyway. So many, so many

different angles. Yeah, but you're you're entirely right there. There is just so much to digest in the housing market at the moment. It does kind of feel like overwhelming. Well, we'll come back in six months. We'll see how far under the water you are or whether you're you're already ready another another episode based on my personal misfortunes. Excellent, Yeah, all right, shall we leave it there, Let's leave it there. This has been another episode of the All Thoughts podcast.

I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wi isn't though. You can follow me on Twitter at the Stalwart. Both of our guests are on Twitter and they're grade follows. Dustin Jailbert He's at two By Forecaster and Connorson. He's at Connorson. Follow our producer Carmen Rodriguez at Carmen Arman. Follow the Bloomberg had a podcast, Francesca Levi at Francesco Today, and check out all of our podcasts on Twitter at Bloomberg

going to the handle at podcasts. Thanks for listening. Hey, there are All Thoughts listeners. We are very excited to let you know that All Thoughts is nominated for a Webby Award. You know, Tracy, I'm not normally like a big awards person or get excited about that, but now that I saw that we were nominated for the Webby for Best Business Podcast, suddenly I'm feeling very competitive and I want you really want it. Yeah, okay, Well, on that note, listeners, if you enjoy add Thoughts, if you

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