Housing's hot streak — rates, inflation, and why it persists

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You're listening to Mobile Money by Moomoo Demystifying Markets One Episode at a Time.

Hi. Welcome to Mobile Money by Momo. I'm your host, Justin Zacks, vice president of Strategy at Moomoo Technologies. I've spent my whole career in and around financial markets working at a bulge bracket investment bank to a leading global financial news organization. It's something I have a real passion for. This is a show that helps investors gain a better understanding of markets and their money.

In today's podcast, I will discuss why housing prices remain so high despite the rapid increase in mortgage rates. In order to do that, the first thing we need to do is understand how interest rates influence housing generally. The majority of homebuyers finance their purchase of a home with a mortgage and mortgages are related to long term rates generally.

And so what I want to do is start with an example. Most people right now are financing their homes with a 30 year fixed mortgage. So the idea is a fixed mortgage has fixed payments that you pay over the length of the loan, 30 years in this case every month. That's in contrast to a variable rate mortgage, mortgage or an arm.

You may have heard it called an adjustable rate mortgage, where the rate can vary in your payment. Very, very. These were very popular during the great financial crisis, but recently, because of the risk involved, they're not as popular. And most people have taken to getting these 30 year fixed mortgages by far the most popular types of mortgages out there right now.

So everything's going to be based on this. And to give you an idea that what's influenced the overall affordability of homes, it's been the interest rates and then also the home prices and that that really eats into your overall payment. Let's look at an example of the average US home buyer. In the third quarter of this year. The median home price in the US was $431,000.

And so what we're going to do here is assume you have 20% to put down and the rest of it you're going to finance it with a 30 year mortgage. So recently, rates have been around. Mortgage rates have been around seven and a half percent. So to give you an idea of how that might compare to when rates were 3% two or three years ago on a mortgage, the payment right now on a seven and a half percent mortgage for the average home buyer, that $431,000 home would be $2,411.

Yeah, that's right. Per month. That's compared to only $1,454 back when rates were only 3%. That's an increase of almost 66%. But let's take that one step further because home prices have gone up. So if we go back to the third quarter of 2019, this is before the pandemic, before all the stimulus, that definitely has influenced the housing markets and how people want to live and the size of the homes they want to live in.

All these things have really changed because of the pandemic and because of the stimulus that was inserted into the system. The average median home price back then in the third quarter of 2019 was $318,000 approximately. And so that payment at around 3% was $1,074. Again, comparing it to the same payment now. Same home, by the way, you know, it could be the exact same home, $2,411.

That's almost 125% higher compared to just four years ago. What what a huge difference for someone that wants to move in, go into a new home. That's exactly the same as was as the average American lives. And so the real question becomes, how does this huge increase in the price of a home of a median home influence everything?

And what you have to understand is housing is just like any other good. There is a demand and there is a supply in this price of the mortgage and how much your mortgage costs. That is really all about the demand side. And we're going to get into the supply side of how many homes are actually available, which is also a big important factor, both of the demand and the supply influence housing.

But housing is a very slow moving type of market, so it's going to influence prices in a much slower way over a longer period of time. So that's part of it. More immediately, I want to talk a little bit about what has happened with the number of transactions and the people that are buying homes with cash, because not everybody buys their home with a mortgage.

Some people just say, I'm going to just plunk it all down. They're going to take that $431,000 and pay all cash. So for that first part, the people that are paying with mortgages. So what's really happening here is now that payments are so much higher, only so many people can afford that increased payment. There are still people that can afford it.

And so what's happened? We've seen mortgages approaching 8%. You know, a few months ago, that was the highest we've seen in over 20 years. But during that time in mid-October, we saw mortgage application for home purchases fall to their lowest levels since 1995, which is, you know, a, you know, almost 30 years ago. And that seems really crazy.

It's particularly given how much the housing stock in the U.S. population has grown in that point. So these transactions, these low transactions levels, I really like to equate them to the stock market and the stock market. It's the same idea. It's it's volume. You know, you have the price of a stock and you have the volume. And a lot of times when you have very thin volume, you can see big fluctuations and it may not really reflect the true price of a stock or the housing.

It is the price at that particular time in point. A But you might see some readjustment and this is really the idea of demand and supply coming back into balance. And right now I said the demand is just not there from a lot of people and this is just sheerly based on affordability, other factors in terms of people actually wanting to buy homes that probably have never been higher.

And we'll get to that a little bit later. But ultimately, only so many people can afford to pay these elevated prices or want to. You know, it eats into a huge amount of your costs. And everyone knows inflation nowadays and food and gas and all these things. It's very expensive. So the idea that I now want to pay 100% more, 125% more for a home that is, you know, basically the same as what I might had.

But particularly if you're trying to move up, if you're trying to move up, say, on a 20% home, that's 20% more expensive, maybe just a little bit bigger, it could end up costing you 150% more than your current payments because maybe you're locked in at 3%. And so these are all the types of factors that are keeping a lot of people right now out of the market that do want to buy a home.

And they are interested in upgrading or or they've their family expanded. They need a little bit more space. But it's it's really tough, right now for a lot of families to do so. And that other buyer that we talked about, the person that is paying all cash so cash buyers traditionally have about been about 25% of the market in the years before the pandemic, what you might consider a more normalized market.

And now they're about a third. So those are the people that are not as influenced by interest rates, but they still are in a certain way when you think about it, because it's money that they can earn on that investment. So if you're sitting on, you know, $431,000 in cash, you know, back before the pandemic or during the pandemic, when interest rates particularly low, you weren't earning very much on that money.

If you were just going to park it in treasuries, you might earn, you know, a 10th of a percent now. Now you can earn almost 5% on that money. So that's that's competing with with this, because not only are homes somewhere that you're going to live, they're also in important investment in a lot of people that buy cash.

Definitely think of them in terms of that investment and what those alternatives they might get and so if you're plunking down cash for that type of thing, you're going to want to see an appreciation on your investment. And if prices are already this high, you know, are you know, can you expect housing prices to increase 5% or more a year like you can get in Treasuries?

And and obviously, this is after maintenance, repairs, utilities, taxes, insurance, renovations, improvements, all these different things. So you take all of that into account. It becomes even for the cash buyer, you say, well, they really have to have a good reason to say, I want to do this. And again, some people just love the home and they have to they're going to live there for.

And so at some point it's an investment, but it's also someplace you live. So it's kind of skirts this middle ground between being an investment and being something that is an emotional purchase, something that you're going to use in perhaps one of the most important purchases of your lifetime. So interest rates obviously influence housing a lot. And yet the other question is, you know, kind of why have interest rates gone up so much?

And and we've seen some of this due to inflation. So inflation rose and the Federal Reserve raised interest rates to combat inflation. This is going to lift interest rates on, you know, in the shorter area. So you're, you know, your one year to year interest rates and they influence, you know, the very near end interest rates, but it also influences the longer rates.

But some people might say, you know, while long term interest rates went up, but it seems like mortgage rates went up even more and you would actually be right if you thought that. So normally you were going to see about 150 to 200 basis points of a spread between the current mortgage rates and the ten year note that's due to forbearance, mortgage servicing, origination, what something they call the primary secondary spread.

That's the pass through late rate to sell a loan into the secondary market. But now that spread is almost 300 basis points higher and that's actually in line with the peak of what we saw in 08 09 during the great financial crisis, which was about just over 290 basis points. And so it's very interesting. So why has this risen so quickly if you know the markets fine, people still have money, employment's still good?

You know, is is there a financial problem? And part of it comes down to two things. And I looked at an article recently from the Brookings Institute and they kind of broke it down. You know, why is that? It's not the same thing because what we saw in 08 09, it was really about credit risk in and people wanted to be compensated for that credit risk because people were defaulting or might default.

And here you have two factors that the Brookings Institute is saying is causing this much wider spread. The idea that you have a four and a half percent ten year note while having seven and a half percent mortgage rate, you know, why isn't it six and a half? And part of it has to do with the fact that short term rates are higher than long term rates.

And so a lot of people would probably say, well, why does that matter? Because mortgages, most you just told me most mortgages are 30 years long, but most people don't hold their mortgage for 30 years. Even if they live there for 30 years. Maybe they pay it off early. Maybe they move. So the average mortgage is probably the average 30 year mortgage is probably only held around six or seven years.

And again, here you're seeing six and seven year Treasury securities trading yielding above the ten year. We're in a more normal environment. You would see that is the opposite. So that is going to increase that spread between the mortgage rate and the ten year rate. The other part of it is, is prepayment risk. And really that has to do with the uncertainty around where future interest rates are going to be.

And if you just seen what's happened in this Treasury market, you know, particularly on the long end and how much rates have moved up and then they moved down and they've moved up and recently they came back down. I mean, you just heard, you know, the biggest increases in X number of years. It seems like every month we're hearing these types of headlines.

And that's really about the volatility, this bond market volatility that increases prepayment risk and people really don't know what's going on there. And when there is uncertainty, there's going to be a bit of a of a wider spread. So payments are obviously a lot higher than they were recently. And house prices have also really increased a lot. So but how does this really stack up historically?

So if you want to do that, you really there's two different markets you really want to look at. There's existing homes, ones that have already been built which are resold by the owners. And then there's new homes which are sold by homebuilders. And then the new home market accounts for usually around 10% of the homes sold in the existing ones are about 90%.

And so one of my favorite indicators to look at is called the S&P CoreLogic Case-Shiller National Home Price Index that measures homes across the nation, existing homes, and it measures homes that have sold before. So that's the most interesting part about this index. It's really comparing apples to apples. You have this home, it's sold a certain number of years ago, now it's being resold.

What are the differences in those prices? And that's what they're really tracking. And they track a bunch of different metro markets. So what you have to realize is, you know, there is a national housing market and people move, but a lot of people don't want to move. So housing can be regional and it can be even block by block for a lot of people in terms of location.

So it's very location specific. Think about being on the ocean or three blocks off the ocean. You know what? You may pay to be right on the ocean as opposed to a few blocks off. There's definitely going be differences based upon are those locations, even even super micro ones. So if you look at the most recent data from September home prices rose 3.9% from a year earlier in September.

So we can still see that existing prices are still hitting those, you know, hitting those highs. And so 15 of the 20 metro markets measured, you know, the 20 biggest metro markets measured by Case-Shiller reported month over month increase, including cities hitting all time highs. Atlanta, Boston. Charlotte, Chicago, Cleveland, Detroit, Miami, New York were I’m based here, Tampa and Washington.

So the meeting is just going all over the place. Very, very interesting. What you do see is some of those housing in the western area. You know, your Californias, your mountain regions, the prices there have already peaked. But you do have to realize, though, is there is a lag in a lot of this data. This is that is from September being reported.

You know, a month or two later. And that data was from contracts that might have been signed 90 to 120 days beforehand. So a lot of times you're really looking at the stuff that is delayed five or six months. So it's something to really think about when you see this data. You know, it's it's good solid data, but it takes a long time to get through the pipeline because it takes a long time to buy or sell a home.

It's not like a stock where it's instantaneous and you see it right away. So it's important to note that. So just to give you a little perspective here, when we talk about housing prices. So, you know, obviously there's inflation, but if you look at some of these numbers, you know, I pulled up from the government's statistics of what the median home prices were 2010, about $275,000 go back to 2000 $169,000, 1990, about $123,000, 80 $64,000.

And in 1970, $23,400 was the median home price. It's interesting to see how some of these prices have moved in. And obviously, just because these prices have moved up in the past does not mean that these prices will always go up. And we saw that during the great financial crisis. You know, just because a home may be considered an investment doesn't mean that they will always increase.

And you also have to look at that relative to inflation. And so that's a little bit about the existing home side. So let's talk a little bit about the new home side. And to me, that is actually the more interesting part because with existing homes, a lot of people are locked into their 3% mortgage. They have a good job.

You know, unemployment is really low right now, so they don't necessarily have to sell. But with new homes, you know, these builders, they have a certain number of, you know, plots of land. They're half the pay. They have to keep moving their business along. They can't just have these homes sitting there for five or ten years while they wait to get the price they want.

So what you see here from from the builder side is a lot of times they have to move their inventory. At some point they can wait a few months, maybe they can wait up to a year, but at some point they have to move their inventory there. They're there to make a profit for the company on a regular basis.

So to me, that's where you're usually going to see some of the price changes. First is in that new home market. So from the most recent new home data from October from the government, what I do see here is some reversals in some of the trends, although obviously off of, you know, definitely extreme levels. So the first thing to look at is the number of new homes sold and purchases of new single family homes actually decreased 5.6% to a annualized pace of $679,000.

So that is actually still up 17.7% from October of 2022 a year ago, when mortgage rates averaged closer to about 8%. So the thing I want to look at with new home sales is really twofold is again, back to the price and the volume and see where those trends are going because those trends are going to be indicative of the overall market in the future.

And we have seen some changes in some of those trends. So the most recent data from October on new home sales purchases of new single family homes decreased 5.6% to a annualized pace of 679,000 homes. And that's actually quite a low rate historically. And you do see a decrease. But what you also have to realize was during October, mortgage rates peaked at around 8% and compared to last year in October of 2022, are those home sales are actually up 17.7%, even though mortgage rates were about 7% at that time.

So you saw higher mortgage rates and actually more sales on a year on year basis may be an indicator that we're moving a little bit. And part of that may have to do due to the price change. And so the median homes sold during October for a new home was $409,000 approximately. And so that's a drop of 17.6% year on year.

And so the peak was back and that was actually the peak back in October 22 at around $497,000. So you did see that big drop and people did react on a year on year basis by buying slightly more homes. Again, this is still slight move more and we'll talk a little bit more about supply a little bit later in the podcast.

But what I do want to get at is maybe we have seen some of this reversal and again, new homes are going to be much more sensitive to the price and much quicker moving than the existing home sales. So I would want to see are these existing home sales starting to fall in line with some of these new home sales?

And it'll be very interesting over the next few months and year to see exactly what happens. So we've talked a lot about absolute price terms and how high they are. Let's talk a little bit about what the average home costs are relative to the median income. So the median home traditionally has cost about 2.6 times the median income, a ratio real estate agents often use as a kind of a threshold for affordability.

That ratio is now above five times. And so what you're seeing is a record number of people in the housing market are going to be cost burdened. And it's actually very interesting to look at because you have the people that are in their homes that are, you know, own homes and the people that rent. And right now, you know, it's it's not just these home prices that are going up.

Rents are going up a lot, too. And right now, 52% of renters and 23% of home buyers were housing burdens in 2022, according to the Census Bureau. So that that has to do with approximately giving more than 30% of your income to housing. That's how it's defined by the Department of Housing and Urban Development. And so you might want to ask, well, you know, 52% of renters, only 23% of homeowners.

Well, let's go back to what we talked about before. A lot of people are not paying that 125% more because they haven't moved. They locked in, you know, either they purchased, you know, years ago or they refinanced and they're locked in with a 3% rate. So they're paying a lot lower. But eventually those mortgages will start to roll off.

Eventually, people may get a job in a new city and have to move. You know, those things happened in the mortgage roll off. Approximately about two and a half percent of people will have a mortgage roll off every year. So these things will eventually move through the pipeline, but it could take years. But meanwhile, you're saying the renters are really burdened.

But if you look at the actual costs, you know, and so meanwhile, what should you do in on the other side? You think about what it costs to rent versus to buy. So you would think, well, all these renters are really cost burdened, but because of the lack of supply, because these people, these owners don't want to sell, it's actually more expensive to own versus rent, at least if you're doing it, you know, going in there right now and getting those seven and a half percent mortgages, it now costs 52% more to buy a home compared to rent the same thing.

And that's according to data from CBRE. And at the peak of the housing bubble in 2006, it was only 33% more expensive, a gap that quickly reversed when you saw housing prices come down. And this is, you know, nationally, regionally, some of these I mean, I saw some of this data, particularly in California, in Los Angeles, those numbers are over 200%.

So it's 200% more expensive to buy right now than it is to rent. And most of the time, you'll see a lot of these numbers come back in to balance so that either means that rents are going to go higher and housing prices will stay or remain in similar levels or perhaps go up, or that housing prices will come down.

And if you look at kind of what's happening in the market in the affordability, it's it's hard to say that rents are going to be able to go up much more unless people's incomes, in their real incomes go up a lot more. So you may see some of those housing prices come off. It's just a matter of, you know, how long it's going to take.

And ultimately you have to ask yourself, you know, if all these people were housing burden, you know, who is buying all these homes. So I did a little research into this and it was surprising to me and maybe it's surprising to you it was not who I thought. You know, you always think about people in their twenties and thirties and influencing the housing market the most.

But all of this demand, the people that are really buying this and moving it is is the baby boomers. Those are people born between the mid 1940s and the mid 1960s. And what's happening is they are aging in place rather than moving into assisted living or senior living arrangements. So a recent report I read from a Barclays senior economist, he talked a lot about this and basically said boomers are creating more households, partly because they're separating due to divorce or death.

And he noted that almost all of the additional demand that we're seeing for housing right now is driven by the aging population and significant increases in the 65 to 74 year old range and the 75 and older groups. So now we know who's driving the demand. But the real question becomes, you know, why haven’t and the original question of this podcast, why haven't housing prices come down?

Because the interest rates rose. And ultimately a lot of this has to do with the lack of sellers. And we talked about the people that are locked into 3% mortgages. And I also want to talk a little bit about the household formation. You know, there's, you know, depending how you look at it and what's the six, you cite, there's about a 6.5 million person household gap between the household formations.

So in 1973, there was 212 million people in the US and now there are 340 million people. But those new home sales statistics I cited are about the same as they were in 1973 in absolute numbers. So we're just not creating enough homes quickly enough and it's taking longer to build homes. You know, a lot of the homes now are multifamily, whereas they were single family in the past.

You know that that mix has gotten a lot bigger and because of that and because of zoning regulations and other other supply chain issues, it now takes about 15 months to build something where, you know, in the past it usually took about an average of seven months. So with the builders, you know, they're not going to go out there.

You know, they want to make their money. They're going to go out there and try to overbuild because they got burned in the great financial crisis. They don't want to have that happen again. And so they're happy to kind of grow incrementally and not create enough homes, you know, and limit that supply because it will keep the price high.

You know, eventually some of these fixed rate mortgages will roll off. It's really interesting to think about is some of these other countries. So, you know, the US is kind of unique in that people finance with 30 year mortgages in Canada, they use a lot of variable rate mortgages in in a lot of ways Canadian prices are even more out of control than the US in terms of, you know, the income level to the housing price.

So I'll be watching the Canadian market and what's happening there with prices as a possible precursor to what may happen in the US. The other way I like to think of it again is back to the to the stock market in and it's the idea of, you know, limited supply. So when you have a stock that has a low float, there is a potential for a short squeeze.

And you know, sometimes the short squeeze will last quite a long time if there is that incremental demand. And like I said, housing, this is in stocks which move very fast. And in housing, the market moves very slow. So a quote, housing short squeeze is not going to just last a month or two. It could possibly last several years.

I think of this stock called a vinfast auto. It recently went public via a special purpose acquisition company on the Nasdaq. On August 15th, within days of its debut, it went from its initial price of $10 to like $93, and it was at one point worth more than Ford and GM. It's it's a Vietnamese auto manufacturer that specializes in electrical vehicles.

If anyone doesn't know, you know, check it out. But it has a free float of only about 7.2 million shares available to trade that's like something like less than a percent. I think it's like 0.3% of the company's authorized shares. So it's something to think about. Like so when you don't have a lot of shares outstanding, sometimes it's easier for a short squeeze to occur because there's no incremental sellers.

At some point people may realize, well, you know, I you know, it's gone up a lot. I may want to sell it. And we did see that with the stock that's you know, take a look at the price. But last I checked, it was well below $93 a share, the peak that it had reached. And so the real question becomes, you know, are you talking about a housing crash?

No, I'm not going to equate the housing market to a very specific stock here. But but the idea is the same in the the actual levels might not be the actual percentage increase and decrease might not be the same. But a lot of this has to do with employment. As long as people have money earning that paycheck, they're going to be able to make those housing payments.

They're going to you know, so you're not going to see prices crash in in generally, we learned a lot, you know, which is great from the last crisis, housing crisis. We're not giving no doc loans to people. We're not saying, okay, just go out here and buy your $10 million home. You don't need to make any money. So now you actually have to show supporting income.

You have to be able to make those payments. So the problem that you run into eventually is people unable to make those payments. And a lot of that comes from losing your job. So when you lose your job, you can't make the payments. And so that might be the ultimate economic indicator to look at in terms of when housing prices may come down or it may be at least stable.

So, you know, so I'll be looking at unemployment. The other part of the other part that comes in, particularly at the higher end of homes, is the stock market. Right? So as the stock market rises, people have more money. They feel like they have more money, they're more willing to go out and buy homes, take some of that stock market profit or just feels like they're more flush.

That's really a lot of driven by this investor psychology. Do you feel safe and on the lower end that investor psychology has a lot to do with inflation. It's like if inflation is coming down as it is now, maybe people are a little bit less worried about making their other payments and they're willing to increase their housing payments.

But if inflation starts to rear its ugly head, you know, in people do remember what just happened, you know, less than six months ago and how bad inflation got. So it's something to think about. All of these factors are really going to play into what will happen. But ultimately, in terms of having, you know, that quick crash, if we have a deep recession, that could happen, but otherwise you might not see a quick crash.

You might see a slow leveling off of prices or a slow decrease or a decrease relative to inflation over many years as as we readjust in some of these levels that are at quite extremes, come back more into balance. And ultimately, we will maybe we will see more supply of homes and maybe we will see more trading of the homes, actual people buying and selling homes.

And that's when you know, the market is in a better state in terms of realizing the true value in the true price. Another point to look at when you think about, you know, are we in the same position as we were before the great financial crisis is that rates are now higher than a lot of people's mortgages, which was the opposite before.

So you people had high mortgages and they were refinancing, they were cashing out, doing cash out refinance, they were doing home equity loans. So now people, you know, and a lot of really what happened and caused that crash was due to leverage. And again, we don't have that type of leverage. But could we get that leverage? Yes, but you would have to have people now cashing out at rates that are higher than their mortgage.

So if you're mortgage at 3% and you're going to get a home equity line at eight or nine or whatever it's going to cost you based on your credit rating, you might not be willing to do so if. Yeah, if, if it was lower. So if it was lower than 3%, you most of all, you know, it's almost free money and I'll take it.

But here, you know, you have a big cost to come into some of these home equity lines. People are going to think twice. And so you might not see a rapid increase in that leverage. So to me, it's going to be less about the leverage and to be more about the economy, employment, recession, the level of the stock market, the investor psychology that's really going to play into the fact or into the idea that we will or won't have any type of housing slowdown or a crash or, you know, there's so many different possibilities.

So a lot of people will ask, well, is, you know, is housing a good investment? And there are certain people that will tell you, the housing is always a good investment. And it's really a lot more complicated than that. And you can think of you know, there are a lot of advantages to owning a home. There's tax advantages.

You can deduct interest. You pay on up to $750,000 of your mortgage debt. But meanwhile, you've got to pay that mortgage. Don't don't forget that you can deduct state and local property taxes are limited at 10,000. But again, you have to itemize so you have to be in a certain tax bracket to make that worthwhile capital gains exclusion so you don't have to pay taxes on the first $250,000 of profit from selling your home if you're or if you're single.

And that's half a million if you're married. But there are downsides in terms of the costs in investment. You know, you have your general upkeep. You got to you got to, you know, plow the snow, you got to rake the leaves. You have the maintenance and something goes wrong with the roof, Your boiler goes out and it's cold in the winter.

And this is why maybe it's just so important for homeowners to have and honestly, everyone to have an emergency fund when these types of things go wrong. You have repairs, real estate taxes, and then think about transaction costs. You know, you know it stocks in a lot of cases have very low transaction costs. But, you know, when you go to sell your home, a lot of times you're paying 6% just for the broker.

And then if you add all these other costs up, it might come almost up to like 10%. And so when you look at that, you're saying, you know, are these really good investments? And if you look at some of the one of the interesting things that I like to look at is, you know, housing moves very slow.

So you have to look over a really long time. And if you looked over what's happened since like 1980, you saw mortgage rates going from, you know, at 1.20% to like 3%. You saw a trend of lower down payments. You saw a trend of a lot of things becoming cheaper. So let me give you an example of that.

Like you think about people pay more of their percentage of income in housing, but think about what things cost in. In 1901, clothing took up 42% of people's budget, food took up 14%. That's 56% total. Now that percentage is about 22%, and it's actually up from about 19.8% before the pandemic. So something to think about. So people have spent more of their money in housing and probably health care costs have also gone up as a percentage.

But these are all the types of things you want to think about because there's only so much in that pie that people can do. And so what the price changes don't tell you in all of this is all the money that's been invested. So you see these Case-Shiller numbers, but you forget like maybe you got a new kitchen, maybe they painted it, you know, you know, the house, your house is really a depreciating asset in a lot of ways.

It's the land that's valuable. They don't make any more land at some point that becomes more scarce. But the housing itself, you know, eventually deteriorates and if you don't take care of it will will fall apart and it will have to be upgraded. So all of these things are are something to think about when you think about investing in a home and how valuable it is to invest in a home.

So that's, you know, whether itself is a is a good investment. So what about real estate stocks, you know, related to residential housing? And I'm just going to talk a little bit about that, mainly just two buckets I think, of is some of these residential REITs or real estate investment trusts that own and operate, you know, residential housing and they rent them out to people.

And so what you've really seen here is a lot of these REITs have repriced lower even though they're a hedge against inflation. What's what's really hurt them is the interest rate. So as as the interest rates have gone up, they've underperformed other parts of the equity market because, again, the yields you can get on US treasuries, you know, very favorable and can compete.

You know, a lot of these have a similar investor profile. The people that are investing in REITs for some type of, you know, annualized or quarterly income that they're looking for are the same type of people that that may be investing in U.S. Treasury securities. And the second group that I that I think about that hasn't done as well either is anything that's related to brokerage, you know, and a lot of these companies and there's not that many of them but the ones that that operate or broker or adjacent to it it's really about transactions.

And we talked a lot about that before. So what the interesting part about a lot of those stocks is they may do better once they're, you know, the supply and demand come into better balance since we have more transactions. So once we see, you know, existing home sales start to go back up and start to get towards, you know, a more normalized trend, those companies may do well as long as people are buying and selling homes, the price of the home will matter.

But it may not matter as much as the actual transaction. So if, you know, a real estate broker is making a certain percentage on every home he sells, if the price is lower, he makes less. But he's still making money or she's still making money. And so that becomes the the real question with that is, you know, are you actually selling something because if you don't sell anything, You're not going to make anything.

And so those companies have a tough time when transactions are low. So the real question becomes, you know, when when will we see or what will indicate? Well, when these supply in demand comes in the balance. And probably one of the most important statistics to look at is the months of supply on the market and in kind of in a balanced market, usually you see there's about a 5 to 6 month supply.

And recently in October, I think we saw almost an eight months supply and that was up. It was 7.8%, 7.8 months supply compared to 7.2 months supply in September. And to give you an idea, the all time record high was 12.2 months supply in January of 2009, and the all time record low was 3.3 months in August of 2020.

And so right now we're above this normal range. And so it's something that I watch. It's also a very interesting recession indicator. So a lot of times you're going to see these months supply peak during recessions. So it's it's something I'll be watching, you know, is that going to come back down into line with five or 6% from 7.8 right now.

Or is it going to continue to go up at that point? Well, maybe that may be a precursor or or an indication that there is a recessionary environment. So just something to think about going forward. So there's you know, there's a lot of fascinating data out there with the housing, and I like to track them all. So great to have you listen to the podcast and I hope to have everyone back for a new episode next week.

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