Dovish Fed Can't Fire Up Housing Market While Headwinds Persist: Miller Samuel
High Mortgage Rates, Low Inventories Mean at Best "Less Disappointment" in 2024
What will the Federal Reserve’s meeting next week mean for the U.S. housing market?, this is the question I put before Jonathan Miller, president and CEO of Miller Samuel, a top New York-based appraisal and consulting firm. What has slowed down the housing market? Will a dovish Fed policy message - eventually rate cuts - give home sales, construction a boost?
Why Jonathan? Because he has been doing this for nearly 40 years, keeps track of home sales and rentals in some 50 markets across the U.S. He is good at assessing the micro, and very good at analyzing the macro forces driving the housing market at any point in time.
So here’s a very slightly edited version of the interview I did with him and posted as a Substack podcast earlier today.
Today, I'm joined by Jonathan Miller, President and CEO of Miller Samuel.
This is a New York-based real estate appraiser and consultant company covering more than 50 residential housing markets across the United States.
Jonathan:
It's great to be here, Kathleen.
Kathleen:
What we're going to talk about today is the Federal Reserve meeting coming up and how that could impact the U.S.
housing market.
We know that the last couple of years haven't been great, particularly last year.
And now the question is, let's say even if the Federal Reserve doesn't cut rates, which it's not likely to when it meets next week,
But the messaging, the signaling will give us this sense that rate cuts are coming in 2024.
Over this past year, 2023, housing sales weren't necessarily so great, but there's a couple of things driving that, right?
Jonathan:
Yeah, so there's two key points.
One is the fact that rates have risen at their steepest ascent in four deades, which has taken some of the wind out of the sail of the housing market.
And we're seeing transaction volume, sales activity, actually less than pre-pandemic.
And the other thing, which is something that I think has thrown a lot of people for a loop, is the idea that listing inventory is chronically low across the U.S.
In fact, if you had to pick a metric for housing that was the most
important one to watch it would be the the level of supply how much inventory. and the reason is with that steep ascent of mortgage rates people that locked in at three or four percent during the pandemic era boom i call it uh you know it's hard to reconcile with you know you have a three percent mortgage versus uh the prevailing rate in the mid-sixes
How do you become a buyer and lose that low rate?
And that's what we've been sort of dealing with the last couple of years.
SPEAKER Kathleen Hays
Well, so give us a couple figures on inventories, because I don't think people may realize, even if they've been looking for a house, but more so if they haven't couldn't get one, that the typical level of inventories is at this level, and where it is now is more like this level.
SPEAKER Jonathan Miller
Right.
So the way to think of it is, you know, right now, nationally, if you look at existing home sales, inventories are around a million units or homes.
And at one point during its peak, it was at four million.
and uh and i cover so for example i cover a couple dozen housing markets in florida and just since 2019 just before the pandemic inventory in florida is down about 60 so what's so when you look at a typical housing cycle when you have a
say call it an adverse external event like a spike in mortgage rates that reduce affordability you tend to see inventory pile to the sky because sales slow down and in this cycle we saw inventory fall
um because people are waiting to see perhaps what the Fed is going to do at some point will rates come down and and so that is and so as a result we didn't have prices come down in any significant way; in fact in the last few quarters we're seeing prices rise again uh you know in many markets to all-time highs so inventory is this distortion.
SPEAKER 2 Kathleen Hays So is this going to change the patterns we're
used to? Another question before we go forward ---
What has been the impact of you know 40 decade low in rates on the housing market? people might think oh well mortgage rates came way down and so therefore it you know it should be a very good place for buyers in that period before the rates went up again
SPEAKER Jonathan Miller
Yeah, I think the problem is, and I think what we learned during the pandemic era, housing boom, I call it, is that rates that are too low for too long make housing less affordable.
Because what it essentially does is it obliterates supply.
You know, inventory is something that is created organically through, you know the life cycle of the occupant.
You know, they become empty nesters.
They need a change.
They get a job change.
They need to move.
They have triplets in a one bedroom apartment in Manhattan.
They need more space, right?
All those things are, you know, sort of happen
over time and when you have rates exceedingly lower record lows it basically clears the deck and it needs time to regenerate and the only way I can see inventory coming back in a meaningful way is to have rates you know trend lower but I don't think it's realistic
to think of rates at 3 or 4% again, that seems, in my mind, more of an historic anomaly than something that we could sort of characterize as normal.
SPEAKER : Kathleen Hays
So in terms of construction, what happened last year?
What's the outlook now, particularly when you look at new home construction of single family homes, that is, and multifamily homes?
SPEAKER : Jonathan Miller
Yes, so I think the way I think of it is higher interest rates have affected the new home market in terms of, you know, homes available for sale.
You know, new home sales were down year over year, but multifamily has been where all the action has been.
And now we're seeing rents nationally for the last six months have really come down.
And in fact,
in Manhattan the research we just released you know we we saw rents peak in the summer Manhattan was late to the party New York was but generally everything is weaker but it's still very high so in many markets rents are still 15 20 percent higher than pre-pandemic and if you notice a lot of sort of comparisons I'm making are less about year over year and more about
compared to just before the pandemic began or the lockdown began.
And the reason for that is year over year has been heavily distorted by the first Fed pivot in the spring of 22 up until about the December pivot.
where they were sort of suggesting that they were looking at 75 basis point cuts sometime in 2024.
That period, you know, a lot of the housing metrics are distorted like, like sales and inventory because of the lack of supply.
SPEAKER : Kathleen Hays
So you mentioned 2024 and rate cuts.
Again, the expectation, the bets that, oh, in January, certainly by March, the Fed's going to come out and start cutting rates have died down.
It's pretty important.
Fed speak recently achieving that.
So what, as people in this industry looking at housing,
What will be important in the, what's the number one thing I guess I could ask?
SPEAKER : Jonathan Miller
Sure.
SPEAKER 2: Kathleen Hays
About what people hope to learn from this meeting, what they will take away from the Fed meeting next week.
SPEAKER : Jonathan Miller
So I actually think the most important thing that has happened was the December meeting because what it did for the first time is it created a framework for consumers to think about that rates
I've probably peeked in the Fed's eyes and that they're talking about cuts.
And that's something that hadn't happened in the prior year and a half, two year period.
And so what it has done is give consumers an outlook that if they were to buy now they could probably refire, you know, in the next couple of years.
In other words,
You know, I think most consumers, you know, right now are thinking one year from today, rates will be a little bit lower.
Two years from today, they'll be even lower than that.
And so that gives some kind of optimism for the, for the housing market, which is the exact opposite of the overall economy.
I mean, you know, I've been characterizing the last
a year and a half, two years as a housing recession, not a technical recession, but that if you're in the housing economy, it's been very weak because transaction volume has been so low, lower than sort of what you would characterize as normal levels.
And so at the same time, the economy has been
arguably very strong, unemployment's below 4%, wages while falling in the last half of the year, last year, are still higher than going into the pandemic era.
And so that's an essential ingredient, having a job and higher wages is an essential ingredient
for buying a house, buying a home of some sort.
So, I think just looking into 2024, there's more optimism.
The other way I think of it is 2023 is a year of probably the low
and the low a low for transactions and 24.
Now we can argue the nuance but the idea is that there will be more transactions in 24.
I'm not suggesting there'll be some sort of housing boom or frenzy because even with rates falling they're still much higher than they were during the pandemic itself.
And as you said, yeah, I was just gonna say one other sort of quip that in the beginning of 23, I was describing 23 as being the year of disappointment.
because sellers weren't going to get maybe the price they would have gotten in 21, and buyers aren't going to get substantial discounts.
I think 24, I wanted to call it the year of incremental change, that everything's going to happen slowly.
But many of my colleagues have said, why don't you call it the year of less disappointment?
And I think that's probably the better way to characterize it.
SPEAKER : Kathleen Hays
Yeah, and I guess that's gonna be especially true if the Fed does go slowly, if it doesn't rush right into rate cuts, because if they, that's the kind of thing.
But I think I love this point that people are going to say, this kind of the olden days, right?
Long ago, when that's what people did, they started with a mortgage rate at what, 7%, then they reified to five, and then people reified to three, you know, so right.
Yeah, that may not exactly occur, but the idea that people are going to have, hey, go ahead, pay up now, you know, get a house and just wait for the rates to keep coming down.
SPEAKER : Jonathan Miller
Right.
And, you know, that, of course, requires a firm sort of comfort level with the US financial system, you know, and, you know, we won't get thrown for a loop.
But, you know, I think that's what
Many, you know, at least on the street, that is the conversations that I'm hearing.
There's an expectation, not in terms of how much rates will fall, but that they'll probably be lower.
And the fact that the Fed said that they were going to cut in their next move, now the question of where, you know, at what point does that happen?
You know, I think
six months ago the conversations were you know cut would come in the you know back half of 24 and then it's moved forward and now maybe it's moving backwards because the the you know the employment numbers are stubborn you know they remaining low and the um and wages as well those numbers are stubborn as well so they don't want to that's what's so unusual about this situation purely from the housing perspective
is you're having you're we're seriously talking about rate cuts with unemployment below four percent i mean that that is an unusual mix yeah yeah and that depends as the fed has pointed out that depends on then their rate cuts on inflation continue to fall because if inflation continues to fall
SPEAKER : Kathleen Hays
Even with 4% unemployment or 3.7%, whatever it is, then the policy will get more restrictive if they don't do that.
So we're hoping we'll get a lot more clarification next week, particularly from Jay Powell, the Fed Chair's press conference.
So I'd say, summing this up, you're reasonably positive on housing.
You're reasonably positive that the Fed certainly isn't going to hurt some rebound in 2024, but it is going to assist it.
Now, there's another area of real estate, which is commercial real estate.
And I think when the Fed's looking at the landscape,
when people are gauging what the economy is doing from this part of it, and certainly a very important investment part of it, that this is not such a happy picture.
What you have said, there's a structural change.
It's not just a cyclical change for commercial real estate.
There's been a lasting change that's going to continue to be an issue for this industry.
What's the number one factor here?
SPEAKER : Jonathan Miller
The number one factor is work from home.
And what that has done is that it has enabled more people to not be in the office and still be efficient.
Now, there has been a tremendous effort to promote RTO, which is return to office.
And, you know, here we are like four years out, and we're still arguing about it.
If you look at
You know, you know, the data is sort of iffy on how reliable it is.
But one thing that many people rely on is CASL data, which is essentially tracking security card swipes in the building, because you can't really look at occupancy
um as a you know to determine how full these buildings are because you could have a company with 20 000 square feet and uh only they're only using 5 000 but they're paying rent on the rest of it um so it's not going to show up uh as unused
and what we're seeing essentially, at least in in Manhattan, is we're seeing the usage of space at about 50% sort of stuck.
It's been straddling 50% during the holidays, it's lower and then and you know it's not what it was sort of pre-pandemic and that's a structural change
It's sort of, you know, whatever the saying is, you can't get the toothpaste back in the tube.
You know, this has been going on too long for it to go away.
It doesn't mean that the levels that we're seeing right now of occupancy are going to, you know, stay where they are.
They certainly could increase a bit and, you know, moving forward in time, there's gonna be an ebb and flow.
The problem with commercial real estate right now, and I've experienced it directly when we were looking for new space in the city, is that, and this is the problem, there was a 60-minute special last weekend that came out that was, really touched on the key issues, but it kind of gave the impression that there's just no one to fill these spaces.
And the reality is that's not true, that's not accurate.
The reason is,
that many landlords are unable to negotiate the rent down to what the actual market level is, because if they do that, they can't make their debt service with the cash flow of the tenants paying rent.
And so I think inevitably, this is not something that's going to bleed into the overall economy.
But I think that we're going to see many, many landlords go under or turn over the keys or whatever the phrase is, over the next five, seven years, I think it's inevitable.
SPEAKER : Kathleen Hays
So what does that mean?
Again, you're saying you don't think this will bleed over into the broader economy, but is it potentially, is it something that you see gradually shifting, gradually correcting rather than something that- An overnight event?
SPEAKER : Jonathan Miller
No, I see it as gradual, incremental change.
This idea that if a landlord can't make their debt service,
You know, they're going to be, you know, they're going to turn over the keys.
But what happens at that point is the building is acquired by, let's call it stronger hands.
You know, so the buildings, a lot of buildings are going to transfer from weak to strong hands.
And then those landlords will be able to lease at market rates because they won't be encumbered by the same level of debt service.
So pricing has been restructured in the work from home environment.
And one last point if I can make is that think of office space as class A, B and C. The A is the best, the high end and the B and the C is the remainder.
Class A doesn't appear to be having a problem, especially as you move up in class A. B and C is where I think a lot of the
I think the 60 Minutes show illustrated that it's taken landlords about three years to sort of get out of the state of denial and things will come back around and I think we're dealing with something very different going forward.
SPEAKER : Kathleen Hays
Okay, but I guess the downside is certainly for those individual landlords or companies that are holding, you know, these properties where they can't lower the rent because they can't meet their debt service, etc.
So that's bad for them.
And at the same time,
This could potentially be some kind of, what do you call it, washing out, where the weak hands are, as you said, by strong hands.
But if they lower rents in places like Manhattan, Seattle, I mean, across the country, then the downtowns potentially could get a boost from that.
SPEAKER : Jonathan Miller
Yes, exactly.
That's why I don't see this as, you know, the end of the world sort of, you know, for working in offices.
I think the prices are structured in the old world.
And I think that there's a tremendous, there'll be a tremendous shift to lower office rents, which will bring in a whole new cohort of companies
and tenants that were priced out before.
I think that's really the direction it's going.
It's also interesting, there's been a lot of discussion about converting to residential.
Hey, we have an affordable housing crisis.
What do you do when you don't have enough affordable housing?
You build more housing, right?
And the idea is to build, you know, convert
maybe obsolete office space into residential.
And I think that's a very viable solution on the margin.
In that 60 Minutes show, the experts that they had on the show were estimating that in Manhattan, it's about 15% would be viable for conversion, which
is is something right it's something in it and it and it certainly would be helpful um but it's not the solution it's like one of perhaps many solutions that will need to be employed all right well jonathan miller uh i guess if uh if jay powell is asked a question about commercial real estate uh i'll raise my hand
SPEAKER : Kathleen Hays
I'll send them a note right now.
Be sure to listen to this because absolutely just what to say.
I really appreciate you joining us today.
And I want to remind people out there that you have your wonderful housing notes.
Yes, you do your blog, you can find a lot of this online.
SPEAKER : Jonathan Miller
And, you know, MillerSamuel.com, you can find anything you need.
We have a lot of information on housing markets.
SPEAKER : Kathleen Hays
You'll make us all much smarter.
SPEAKER : Jonathan Miller
That's the goal.
SPEAKER : Kathleen Hays
So I want to thank you, Jonathan Miller.
He is president and CEO of Miller Samuel, New York based real estate appraisers and consultants, not only covering over 50 residential housing markets in the US, but in a very busy day finding time for Central Bank Central.