Dave:
Forecasting interest rates is an extremely difficult cast. That’s why I’m asking you to do it is so I don’t have to do it. Put a marker in the sand for

Matt:
Me. America has elected its next President. Donald Trump won the 2024 presidential election. And when you dig into some of the data about what happened on election day exit polling tells us that the economy was at the top of many voters’ minds. So specifically, I’m curious, how did inflation and the relative unaffordability of the housing market shape the election and what does the new political landscape mean for the housing market? Hey friends, it’s Dave and I am excited to chat about all this stuff and learn about what might happen in the housing market in the wake of the election. With my guest today, Matt Walsh from Moody’s Analytics. Matt is one of Moody’s resident experts on the housing economy and he’s here to talk to us about how the economy influenced this election and how some of Trump’s proposed policies may shape the future of the housing market next year and actually well into the future. So let’s dive in. Matt Walsh, welcome to On the Market. Thanks for being here.

Dave:
Yeah, thanks so much for having me, Dave. It’s great to be here.

Matt:
This is an exciting time for economists. I feel like there’s a lot of new information coming out every single day. Most recently, we of course had the election and I think in many ways it seems like this was sort of a referendum on the economy. Do you think that’s mostly driving a lot of decision making in the recent election?

Dave:
Yeah, I think that’s a great point. I think it’s put well too, it touches on a pretty interesting question that us economists have been dealing with over the past year, year and a half. US economists look at the data and we see that the economy is performing really well. You take your pick of the indicator and it shows that we’re in good shape. GDP is running above the long-term estimates of potential. The labor market continues to turn out jobs. Productivity is up, wages are up, real wages are up, the unemployment rate is low and stable and most importantly maybe is that inflation is headed back toward the fed’s target, but that necessarily hasn’t translated into households feeling good about the economy. If you look at the consumer sentiment surveys, consumers are noting a bit of anxiety, maybe distress about economic conditions. The University of Michigan survey, for example, is really consistent with what consumers feel or how consumers feel in a recession. And that’s a little bit surprising when you put that in contrast with the economic data. And I think this is ultimately all to say that consumers are not feeling great about the economy despite some improvements that we’ve seen and despite the kind of strong metrics that we’re noticing.

Matt:
Yeah, I mean you could always say the election is a ultimate consumer sentiment because so many people were saying that the economy was the top issue on their mind, and so if they voted the party in power out, it speaks pretty loudly about consumer sentiment I think.

Dave:
Yeah, definitely. And I think that’s consistent with what we’re seeing across the globe too. There was this interesting piece in the Financial Times a few weeks ago that was looking at how incumbent parties were performing and across developed countries that have had elections over the past year, all incumbent parties have lost vote share. So I think that is not something that’s unique to the United States, but consistent across the globe. And I should mention that, and it’s not just the United States that’s lived through this kind of inflationary period that’s been across Europe and across Asia as well. For numerous reasons, supply chains were upended during the pandemic, the Russian of Asia, of Ukraine that muddled energy markets and agricultural markets. All of these things affected the globe. And I think these elections over the past year were certainly in response to some of that inflation.

Matt:
So really when we boil down sentiment, is your opinion then that people are still frustrated by inflation? That’s the number one thing. As you said, you look at these other indicators that, let’s be honest, I don’t think most people really look at GDP on a regular basis or really look at real wage growth or stuff like that. They rightfully look at how much they’re spending every single month and how they’re spending power is impacted. And as you said, when you look at the CPI or you look at different measures of inflation, it has come back down pretty considerably. But I’m wondering, Matt, if there’s a lag. I think there is, but I guess I’ll just ask, do you have any evidence that there’s a lag between inflation coming down and people sort of just psychologically getting used to higher price points?

Dave:
Yeah, yeah, certainly. I mean, I think that’s probably the most likely explanation for some of the disconnect between what consumers are feeling and the actual performance of the real economy. I think they have these benchmarks in their mind about the prices that they paid before the pandemic using the pandemic as kind of a rough moment in time. So if I go to the grocery store today, I see that the cereal that I bought before the pandemic for $2 is now six $7 and that doesn’t feel good to me. My purchasing power has decreased substantially even though maybe over the past year that price hasn’t changed. I still remember pretty clearly that I was paying a lot less for those items before and I think that takes a long time for consumers to come to terms with that inflation and comes to term with that price point. Eventually that will filter out of these sentiment surveys. But I think it takes a lot of time as you mentioned, to come to terms with that.

Matt:
Part of me wonders too, if the negative reaction to inflation, which stinks, don’t get me wrong, no one likes inflation, but the impact of inflation is sort of made worse because from the great financial crisis up until Covid inflation was really low. And so I think people got really anchored to this environment where prices were barely going up. Obviously there are areas of the economy where they’re going up, but in a large part, CPI was low and people forgot that inflation is sort of part of a normal part of the economy. Of course what happened to Covid is not normal, but it just feels like the swing from a historically low period of inflation back to super high inflation is particularly painful.

Dave:
Yeah, definitely. And I think when we go to look back at the past two, three decades, the period between the great financial crisis and the pandemic, I think we’ll seem like a bit of an outlier because I think going forward we’re going to have a bit stronger inflation. I think inflation expectations are a bit higher than before and that’s attributed to two factors here. One, the labor market is a lot tighter than before. We have an aging population, so more are retired. There’s greater competition for workers which drive up wages, which ultimately drive up prices. And there’s a bit of a trend in onshoring here. So I think we were benefiting from some of the tailwinds of globalized supply chains and driving down prices for manufactured goods and other things. And some of that has shifted. There’s been a lot of talk of tariffs recently and I think that does change the inflationary environment over the next

Matt:
Decade. Alright, we got to take a short break, but Matt and I will get into what this economic context means for the housing market right after this. Welcome back to On the Market, I’m here with economist Matt Walsh. Let’s get back into it. That’s a great segue to the housing market. What does a environment with likely a higher baseline inflation going forward mean to you for the housing market?

Dave:
I think maybe the most direct impact of higher inflation on the housing will certainly be through rates. Mortgage rates really respond to the 10 year treasury yield. If we are living through a time when inflation is expected to be higher, that pushes up those long-term yields and we could expect to see that in interest rates. I think consistent with that previous story of the last decade being a bit of an outlier in terms of inflation, I think it’s also a bit of an outlier in terms of long-term yields where things were low because the Federal Reserve was doing quantitative easing, pushing long-term yields down inflation was a lot lower, inflation expectations were a lot lower and I think we can expect to see yields higher for longer going forward.

Matt:
Thank you for summarizing. That’s super helpful. And we do talk about this quite a lot on the show, but I do want to just call out. The reason that yields are so important is because mortgage rates tend to move with the yield on 10 year treasuries. And as Matt said, during the period from the great financial crisis to the pandemic, we saw unusually low yield. So even when the federal funds rate was not at zero, it was during covid mortgage rates were still below historic averages. If you look at the long-term average, I think it’s somewhere around five and a half, six and a half ish depending on the timeframe. And we were under that under 5% for most of the 2010s. And so moving back to an environment where mortgage rates are higher, it’s unfortunate for the housing market in some ways, but it is just a return to a normal environment. And I dunno, just looking at yields today, they’re up to almost four point a half percent. It’s one of the highest that they’ve been in the last several years. So despite rate cuts, despite some excitement about potential stimulative effect of a Trump’s second presidency, yields continue to go up. So Matt, this is a selfish question because I love looking at this stuff, but do you think yields are going to stay in this four or four and a half percent range or do you have any thoughts on where they might go from here?

Dave:
Yeah, it’s a great question. It’s a difficult one to answer too. Forecasting interest rates is an extremely difficult task. That’s why I’m asking you to do it is so I don’t have to do it, put a marker in the sand for me. So I think ultimately while we see this kind of short term divergence between where the Fed is going and long-term rates here, ultimately that kind of plays out a little bit and we expect to see that long-term yields follow the path of the federal funds rate here. As the Fed cuts, I think investors’ expectations will match up with what the Fed is doing, and we should start to see long-term yields come in a little bit as I mentioned. I mean I think we can expect to see things higher for longer at a mortgage rate that’s a bit more consistent with the long run average rather than the artificial, I don’t want to say artificially low but suppressed yields that we saw in the prior decade. But I do think we see the mortgage rate not at 7%. I think that comes in about a half basis point over the next few months and ends maybe 2025 at six, averaging around six, five to six.

Matt:
Okay. All right. I like it is similar to what I’m seeing. It’s not like some super bold claim, but I was looking at some forecasts for yields and it said halfway through 2025, some of the betting markets basically have it at 3.6, 3.7% for a 10 year yield. And right now the spread is 225 basis points. So that would put us right around 6%, something like that. So given that that mortgage rates will hopefully come down from where they’re today as of this recording, it’s about 7%. So that would be substantial benefit. But overall, it seems like most people believe mortgage rates aren’t going below maybe five and a half is kind of the lower bound I feel like for the next year or so. So what does that mean for housing affordability at a 40 year low? And even though mortgage rates could help, it’s not going to help that much.

Dave:
Yeah, and I think this is a good time to mention maybe my favorite statistic here. We’ve done a bit of work to compare the level of affordability today to the level of affordability that we saw in 2019 and what it would take for incomes or house prices or the mortgage rate to change to get us back to that level. And for the mortgage rate, we would need to see something that is consistent with a 460 basis point decline all else equal to get us back to that 2019 level. And that is something that is totally out of the cards for the next few years. Oh my God. So to put a number to it, we need mortgage rates to get back to 2.6% for us to see that level of affordability.

Matt:
Well, that’s not even, I mean, did average mortgage rates even get to 2.6%? I don’t feel like they ever did. I know some people who have twos, but it’s like two nine, I don’t know anyone with a two six.

Dave:
Yeah, if you’re lucky you they have that two nine, I don’t know, two six is,

Matt:
Yeah, it’s like you’re going to be telling your grandkids about your two nine mortgage because you can’t never get

Dave:
Rid of it. That’s right. That’s right. So I think that really goes to show how strained affordability is and what it would take for us to get back to that level we saw in 2019 and really puts into perspective what this modest decline in mortgage rates would mean for the housing market overall. And ultimately that’s all else being equal. I think we can expect to see incomes rise and house price appreciation moderate a bit. So we don’t need to see that kind of level of decline to restore affordability, but it’ll be a slow progress to restoring affordability. It’ll take a lot of time for that to kind of play out in the housing market and us to restore some level of equilibrium and balance.

Matt:
Just to summarize for everyone and just remind everyone that affordability in the housing market is largely impacted by mortgage rates, but the other variables are housing prices of course, and real wages, basically how much people are getting paid and if they can afford those homes. So I think just to underscore what Matt was saying is that we would need mortgage rates to get to a level we’ve never seen before to restore affordability back to 2019 levels because since 2019 prices have gone up so much that we would have to basically compensate more with lower mortgage rates to make up for those increased prices. And even though real wages are up for the last year or so, there was a few years during the pandemic that real wages were down. So that obviously didn’t help affordability either. So Matt, I need to ask you one of my favorite questions to ask economists right now, and I get to ask this, which is a great part of my job. There is sort of this narrative, at least in my world, and maybe yours too, of the housing market analysts, that some people say that prices have to come down or appreciation is going to stagnate because there’s this underlying belief that affordability needs to return to somewhere near the long-term average of affordability. Do you think that’s the case or do we have sort of a new normal in the housing market where housing is just less affordable?

Dave:
So I think that’s the base case. The most likely scenario is that the housing market is so unaffordable. We expect to see inventory slowly come up as the mortgage rate comes in, income slowly catch up to what is sustainable with the level of prices that we’re seeing today. And home prices move sideways in the meantime over the next few years. But I do think that there are some risk, and when I say risk here, I mean I guess alternative scenarios to that where home prices can sustain faster appreciation because there might be this new equilibrium in home prices where households are willing to contribute a larger share of their income to their residences sustaining higher home price growth. And I think a lot of that is due to some of the structural changes that we saw during the pandemic. People today are looking for more space.
I’m a good example of this. When I moved during the pandemic and I needed a two bedroom house because I needed an office, because I don’t go into the office every day, so I’m willing to spend a bit more money because I’m spending a little bit less on commuting and I also need this workspace. So could be the case where now that we need more workspace and more room, we’re contributing more of our income to our houses. Also people could be responding to the increased competition that we’ve seen over the past few years and willing to stay in their residences a bit longer than before.

Matt:
What you said though, that, and I’ve heard this echoed from a bunch of other people as well, saying that the way to restore affordability is not that prices are going to crash, but sort of a gradual, like a combination of things where mortgage rates come down slowly, real wages continue to grow, and appreciation is relatively flat over the next couple of years. So I’m curious, does that mean, I don’t know if you or Moody’s Analytics does house price forecast, but do you think appreciation or do you have numbers that you’re expecting for home price appreciation in the coming years?

Dave:
Yeah, so we do have a house price forecast and nationally year over year we’re about 1% by the end of 2025, which is pretty much flat and it stays in that range through 2026 before things restore some level of balance. And we see home prices return to that re pandemic level of average. About 5.5% I think is where nominal house price gains are year over year.
So to put some numbers to it now across the United States, I think we see a bit of a spread here where places in the Northeast things perform a bit better, and that’s simply because the housing markets are a bit tighter in terms of supply. We haven’t seen the increase in inventory that we’ve seen in places like the Southwest and the mountain division or the Southeast in places like Florida, the Carolinas and others where we’ve seen inventories return in some cases back to their pre pandemic normal. Now that’s still low relative to history, but it’s an improvement from those really tight pandemic years.

Matt:
Just to clarify one thing you said when you said 1% growth next year, is that real growth or nominal?

Dave:
That’s nominal growth. So that’s nominal growth. So if you look at the real price gains here, they’re pretty much zero or slightly below zero.

Matt:
And just to clarify for people, real basically means inflation adjusted, nominal means non inflation adjusted. So I was asking Matt, sometimes economists we do this will say 1% growth and what we mean is 1% over inflation, which would be real growth, but Matt said this was nominal growth, which means 1% and then you subtract inflation for that a lot of times when you’re thinking about investing returns. And so let’s just assume inflation stays at around 3% next year. Hopefully it goes down. But I’m just saying, given that assumption for this example, real returns would actually be negative 2% because you have 1% growth minus the rate of inflation. So that’s super interesting, Matt, it’s counter to what you hear, right? Because I think a lot of folks believe that because rates might come down in the next year that that’s going to fuel appreciation. But it sounds like you think differently, and I’m hoping because this is a nerdy bunch we got listening to the show, if you could explain this to us a little bit mechanically.

Dave:
Sure.

Matt:
Does that mean that you think demand is going to stay low or supply is going to come back at the same pace of demand, or what happens so that prices stay so low because it hasn’t happened for a long time?

Dave:
Yeah, yeah. I think it is a little bit counterintuitive When you have interest rates come in, we would expect to see some demand come back online and I do think that some demand will come online, but we will see a greater increase in inventory. I think there’s a lot of evidence that when these interest rates come in, we will expect the mortgage rate lock in that we’ve all talked about for the past two years start to dissipate and more inventory will come back online. There’s been a lot of construction both on the multifamily side and the single family side that’s coming online. And ultimately that will alleviate some of the supply constraints that we’ve seen that have pent up home price gains that have really kept a floor under price appreciation. So as that inventory come online, that kind of help alleviate some of the tight markets and bring prices in a little bit. So there will be some response from demand, no doubt about it, and we will see sales increase. They’re at a really low level now, they’re going to head back up over the next year, but ultimately that price appreciation will continue to slow.

Matt:
Okay. That’s an interesting take. How do you forecast that supply will come online faster than demand will return?

Dave:
So some of it is construction and we are observing a lot of construction and some of it is resale supply. It’s a mix of the two. I think it’s a great question. It’s a difficult one to answer too, but given kind of where we are with affordability, it’s a pretty high hurdle to clear to bring a lot of those households back into the market. I mean, right now, just some back of the envelope math that we’ve done, there are a ton of pent up household formations that just haven’t formed and won’t form because housing affordability is so low and we think that continues. So even though that the market is undersupplied from a number of units perspective, those households are pent up. They are kind of doubling up. People are living at home longer and we don’t think that they’re coming back anytime soon given where affordability is, and that will really keep demand suppressed for some time.

Matt:
Alright, well, to me that’s sort of the million dollar question for next year, right? As rates start to come down, which I think they’ll come down a bit, does demand or supply come on faster? Proportionally what happens there? Sounds like Matt and his colleagues at Moody’s believe that inventory is going to come up faster. Then demand, which is going to not necessarily send prices downward, but very modest nominal growth is what they’re forecasting. Okay. Time for one final word from our show sponsors, but stay with us. We’ll get Matt’s insights on how the tariffs in Trump’s plan might impact the housing economy right after this. Hey friends, welcome back. Let’s pick up where we left off. Matt, if I could change topics a little bit. I’ve got you captive here. So I am going to ask you to help educate me. A lot has been made in the campaign and since the election about tariffs, so no expert on this. Can you just give us an overview? I think we all know tariffs are basically a duty, basically a tax on imported goods. Tell us your thoughts on what implications this might have for the economy and the housing market.

Dave:
So essentially, as you mentioned, the tariff is a tax on imports that’s paid by the importer. Typically, US economists don’t really like tariffs because they’re paid for by American consumers. And what that looks like is a price hike for consumers and it’s not these global manufacturers taking advantage of their comparative advantage and pushing prices lower. This is an artificial price hike. I think what this means in general for the economy, Trump has talked a lot about tariffs and I think on the campaign trail, he seems to have leaned toward across the board tariff about 10 to 20% on all goods from all importers. That would be a substantial price hike for many. We’ve run some scenarios at Moody’s to look at what the economic effect would be. Now keep in mind these plans have little details in terms of implementation and timing. So this is just a general one-time, price, hike or tax and how that kind of filters through the economy overall. And what that looks like is a chase about a percentage point off growth over the next year, assuming that the tariffs are implemented day one and a 2% increase in inflation over the next year as well.

Matt:
So I’m no expert on this, but just to play devil’s advocate and make sure that I and everyone listening fully understand, but what is the argument that couldn’t you just instead buy American made goods? Is that sort of the idea behind implementing tariffs? Is that not possible? Not enough American supply by economists think? Where does that logic break down?

Dave:
Yeah, so I mean I think that is the argument, that’s the political argument is that we can return these supply chains back to the United States and use American workers, but that’s incredibly pricey to pay. American wages is a lot higher than paying some foreign workers to manufacture these goods. And we simply don’t have to manufacturing capacity. We’ve moved away from manufacturing and a lot of these economies toward other industries that are now staffed with American workers. So returning that supply chain, returning that manufacturing back to the United States is really just not feasible. So ultimately we’ll still have to source those inputs from foreign countries, but now they will just be more expensive.

Matt:
Okay. Yeah, I’ve read a lot. It seems like most economists tend to think along similar lines. I’m curious if you have any thoughts on what potential terrorists might mean for the housing market.

Dave:
I think this is an interesting question because there have been tariffs in place on Canadian lumber for a while,
And on Trump’s first term he implemented these tariffs in 2018. And there’s been a bit of work done to kind of quantify the price effects of those tariffs because ultimately the home builder needs to buy that lumber and pay those tariffs and pass on those costs to consumers. And the National Association of Home Builders have done a bit of work on how much that tariff had cost builders, and I think across the board it was about $9,000 for a new single family home for these builders, which does drive up the cost of new homes, undoubtedly those builders have to source that added cost from somewhere. I think if we look at the anticipated effect over the next few years, it will undoubtedly raise prices. But by how much I think is an open question, and the reason I say that is because builders have done a lot of over the past few years to promote affordability for buyers.
They’ve done rate buy downs to counteract the effect of higher rates. They’ve covered closing costs, they’ve given discounts, they’ve been sacrificing their margins for transactions, for closing transactions. And I wonder if builders will do the same where they would kind of take a hit on their margins here that are still very inflated from pre pandemic to internalize these costs to keep buyers at least interested in the new home market and in purchasing new homes. So I do think it will raise prices. I think it’ll raise prices across the board. But I wonder by how much here, at least on the new home sales side, there’s an indirect effect though too, which I think is important to mention. I mean, if we’re going to institute tariffs across the board and some higher for other countries, that will be inflationary and that will mean a response in the bond market and higher rates. And that ultimately will hurt demand if mortgage rates stay higher for longer.

Matt:
Got it. Okay. Sorry if these are very rudimentary questions. I’m still learning about tariffs, but is there any chance that the price increase that you’re saying from tariffs, is that short-term or is that sort of a sustained amount of inflation? Is it like a short-term pain for long-term benefit? Or would the inflation stick around?

Dave:
It’s a great question and I think it is a one time price hike, but typically what happens is these supply chains get rerouted to other places and that could lead to higher prices at a bit more of a sustained pace. If the manufacturing was to be brought back to the United States, that could mean higher prices for a bit longer. And this isn’t just one time, it takes a long time for these price hike to play out in the economy. So maybe it is one year of higher prices for longer, but that does take a bit of time to filter through the larger economy.

Matt:
Yeah, I mean, again, I don’t know if it’s specific to terrorists, but we saw this during the inflationary period. We just went through that. It started in one industry, then that cooled down and then it went to another industry and it was kind of like this whack-a-mole situation where inflation was high in one area, then it would go high in another area, and it was just sort of rippling out through the economy, which made it feel, at least to me, it was dragging out over a really long period of time because we were always seeing some area that had really hot inflation.

Dave:
Yeah, that’s exactly right. I mean, I think the auto insurance inflation that we saw today, you could trace that back to the supply chain disruptions during the pandemic. I mean, that’s four years to play through the economy. And if that was uncomfortable, I mean, I think the same thing is true of these tariffs. I mean, it could take a long time for this to kind of play out and filter through.

Matt:
Well, thank you for educating me on this, Matt. I really appreciate it. Before we get out of here, is there anything else you think that our audience should know about the housing market heading into 2025?

Dave:
I mean, I think there are a couple key narratives in the housing market. Key themes in the housing market for 2025. I think one is this structural undersupply of housing that should support construction. By our estimate, we have 1.9 million units, and that does include some of the pent up household formation that I mentioned earlier that haven’t otherwise formed because of low affordability. And I think that does kind of support the idea that home prices won’t decline on a nominal basis and it will support increased demand for construction. Should there be limited supply of builders that prevent that construction from happening, whether it’s from mass deportation or slower increases in immigration into the United States because of a change in policy. I think we could see some risk of higher price appreciation over the next few years if we aren’t able to sustain the building that we expect to see given that shortage of housing.

Matt:
Okay. Well, good to know. That’s something that we’ll definitely keep an eye on this show over the next year. Matt, thank you so much. This has been a great conversation. Appreciate you sharing your insights with us.

Dave:
Yeah, thanks so much for having me, Dave. It’s great to be here.

Matt:
Of course, we’ll link to Matt’s information in the show notes if you want to check out more about him and his team, what they’re doing at Moody’s Analytics. Thank you all so much for watching or listening to this episode of On the Market. We’ll see you again soon.