ANNOUNCER: Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
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JARET SEIBERG: Welcome Two Cents, the financials podcast at TD Cowen. I am Jaret Seiberg, Managing Director and Financial Services Policy Analyst at TD Cowen Washington Research Group. We start our October podcast with Scott Smith, TD Cowen's specialty salesperson for financials, who will provide an update on the market. Then we shift to housing for a conversation with Max Rakhlenko, an equity analyst at TD Cowen, who produces our monthly housing blueprint.
But first, let's catch up on the news out of Washington for financials. Federal Reserve independence looks a lot safer. The Supreme Court has ruled that Lisa Cook may remain as a Fed governor at least until arguments in January. That means she will be at the next two FOMC meetings. It also means the Reserve Bank presidents should be affirmed to their new posts, as expected, in mid-January.
We also got some regulatory updates. Federal Reserve Vice Chair Michelle Bowman said that the Basel III Endgame capital proposal should be released late this year. That's a bit earlier than we were expecting. President Trump also has nominated Travis Hill as the FDIC chair. He has been the acting chair. We view this move as positive for sustainable deregulation.
And SEC chair Paul Atkins has committed to issuing a proposal in the coming months to switch to semi-annual reports on corporate earnings, rather than the quarterly reports that exist today. We expect follow-up developments on all of this in the coming months.
All right, so let's turn to our first guest. Scott Smith is well known to everybody on this podcast. He's our TD Cowen specialty sales person for financials. As I mention in each episode, no one has a better handle on how the broader financials team is thinking about the sector than Scott. So, Scott, what's going on in the world of financials?
SCOTT SMITH: Oh, boy, Jaret. It's been a really interesting time in financials, actually. We've had some credit scares or credit concerns at least. Tricolor's bankruptcy, then followed by the First Brands bankruptcy, had people very concerned about auto credit. Been a lot of articles about it as well. And then, after the fact, there was a story about a large hedge fund losing $100 million in the credit, First Brands.
And I think all of that sort of sparked a significant selloff across auto finance, but consumer finance more broadly. And all of that ultimately rolled right up into the alternative asset manager weakness that we've been seeing lately. It even, to some degree, hit the banks. There was also an erroneous report by a competitor. They had to put a [? retraction ?] on that talked about credit getting much worse than it is.
And so, clearly, in markets and investors are very much on edge around the questions of consumer credit. And we look forward to some of those answers coming to us in earnings in the next couple of days.
JARET SEIBERG: So, Scott, TD Cowen has launched launch coverage of not just the large-cap banks, but the mid-size banks as well. Can you talk a little bit about what our expanded research universe looks like?
SCOTT SMITH: Sure. So we had Steve Alexopoulos add a couple of smaller names. They tend to be very specific names with a unique line of business, a couple of the other names that are either tied directly to a more technology or a more crypto sort of world than traditional banking. And then Janet Lee rolled out on the mid- and small-cap banks, with a fairly broad group of regional bank coverage. The expansion here takes us to a total of 45 banks under coverage.
JARET SEIBERG: Well, that's great, Scott. Certainly, we're going to have a lot to talk about when we have our November podcast. But is there one or two issues related to the regional and the large banks that we should be looking for as they start to report in a week or two?
SCOTT SMITH: Well, if you go back through conference season from about a month ago, the big positive surprise for folks there was that C&I loan growth was actually better than expected. So the recovery from liberation day was faster than I think some people were looking for. So certainly investors will be looking to see whether there's a continuation there. And obviously, people will be looking for credit data as well.
All of this comes as we've had today's first big miss of government data. I think we're going to get much more real-time data from the banks on the health of the consumer and the health of the overall economy in the next couple of weeks. And, again, key focus C&I loan growth and credit quality overall.
JARET SEIBERG: Perfect, Scott. Thanks, as always. Can't wait to chat next month. All right. So let's now turn to our second guest. Max is an equity analyst at TD Cowen and the author of the Housing Blueprint, which is a monthly publication that we produce. Max, let's start at the very beginning. What is the Blueprint, and why are we publishing it?
MAX RAKHLENKO: Yeah, thanks so much for having me on. This should be a fun conversation. So what is the Blueprint? The Blueprint is a monthly deck published at the beginning of each month with you. And then we also now include the TD Strategy group as well. They've got a couple slides. But ultimately, it's a broad-based look at the housing market.
The focus predominantly is on existing home sales and all the drivers around it, just given the home improvement names as well as the furniture stocks that we cover, lean much more into the existing home market than the new home market. But we look at home sales. We look at mortgage rates. We look at HELOCs. We look at sales by price tier. So it's really a comprehensive 60- to 70-page deck that we put out with the broader team.
JARET SEIBERG: All right. So we have all this data in there. What is it telling us about the state of housing? What's the big takeaways when you talk to investors?
MAX RAKHLENKO: Yeah, so right now we are seemingly at trough. We've been at trough for existing home sales, right around 4 million, for a while now. The question is, how do we get that market moving again? We've obviously now had 100 basis points of rate cuts over the past year. And pending home sales are starting to pick up. That's a positive. That's a leading indicator.
So the question is, how quickly will the housing market get moving and to what extent? If pre-pandemic housing was at 5 to 6 million units sold on an annualized basis, today we're sitting at 4-- when can we start to make intermediate steps forward? 4 and 1/2, maybe 4.7-- how long is it going to take to get to 5?
But then there's also other dynamics. Unaffordability is at very high levels. It's very hard to buy home. Home prices are off a little, over 50% now versus 2019. So there's a big push and pull in the housing market. So it's really trying to wrap our heads around that.
JARET SEIBERG: Max, if you had to pick one stat that tells us the most about housing today, what would it be?
MAX RAKHLENKO: Yeah, it's the continued 4 million homes sold on a SAR basis. We've been at this trough now for a while. And while I might cheat and give you a second data point, I will say that within that, the mortgage rate piece is very interesting, because we've now had 100 basis points of rate cuts going back to last fall.
At the same time, the mortgage rate still remains well above 6%. Right now, we're seeing at 6.3. So despite all these rate cuts, the back end of the yield curve and especially mortgage rates have remained quite elevated. So the question is, how many more cuts do we need?
Economists that we speak with talk about wanting to get to roughly a mid 5s 30-year-fixed with duration, and then what's the impact that that's going to have on housing? And can we go from 4 to at least 4 and 1/2 within the next, hopefully, 12 to 24 months.
JARET SEIBERG: All right, so you're focused, and your equity analysis is heavily on the home improvement and related industries. What's the takeaway from all this housing for those companies?
MAX RAKHLENKO: Yeah, so the takeaway is twofold. In any given year, whether housing is doing well or not, roughly 95% of homeowners don't actually move. The vast majority of Americans end up staying in their homes every single year. And they're just not spending.
We've had higher interest rates. There's economic uncertainty. So first and foremost, we really need that average homeowner to spend a little bit more. They're still spending on break-fix projects. But those bigger discretionary, either single-item purchases or projects, they're really pulling back on. So first and foremost, we need the core consumer to improve.
And then, secondarily, it does come back to the existing home market. Homeowners tend to spend roughly twice as much as they're getting ready to sell a home and then soon after they move into a home. So that does create a secondary benefit. But you really need both of those factors to work.
And then third is the HELOC market. HELOCs are tied to the front end of the yield curve. And we've seen those rates continue to decline. And as we have more rate cuts, I expect that HELOC market is going to continue to unlock. And that's going to drive a benefit as well, because you tend to use-- roughly 10% to 12% of home improvement projects are funded by HELOCs. And those are bigger projects as well.
So as the front end of the yield curve comes down, the HELOC rates come down and hopefully people start to tap into their home's equity more, which drives bigger projects.
JARET SEIBERG: So our focus, then, in the short term should be on HELOC market and what those rates look like? That's a good indicator for your space?
MAX RAKHLENKO: I think in the near term, HELOCs could potentially have a bigger impact than existing home sales, just because there's obviously seasonal dynamics. Spring and summer is really good for housing. As kids get back to school, as you get into the holidays, seasonally, it just becomes smaller. So for now, we are more focused on the HELOCs than we are on existing home sales.
JARET SEIBERG: All right, so let's shift our conversation, now, into a universe that's much more comfortable to me-- the world of housing policy. What are you hearing from your companies about the changes that they really want out of Washington?
MAX RAKHLENKO: Look, since we've come out of DFC, the housing market has been broken. Builders haven't been building as much. If you think about six months as being the break-even at equilibrium, six months of inventory, we're just not there. We haven't been there for a long time. So ultimately, any help that DC can give us is all going to be incremental. So even small help is still going to help overall.
But when I speak with management teams, they're just begging for anything that they can get, no specific call-outs. Obviously, this is an area that you've been very focused on. But with home prices up over 50%, unaffordability is just at peaks. And we really do need to get more supply into the market.
JARET SEIBERG: Yeah, I think that's a great point, Max. We've seen multiple administrations in a row, including this one, be very focused on the buyer side of the equation. And I think that's because it's easier to address. The Democrats were focused on first-time home buyer assistance. The Trump administration, very focused on trying to bring down mortgage rates, with the idea that would produce lower monthly payments.
Yet, all this focus on buyers, the more that you free them up to pay a higher price for a house, it just means we get faster home price appreciation. And those benefits all accrue to existing owners. By contrast, if you could do something to boost the supply of homes, then you could actually get some price stability in housing. And you could actually-- some of those demand-side factors could really boost home ownership, rather than just boost home prices.
I think the problem on the supply side is there are no great options. The government can sell excess land. That's not really going to help. Maybe a tax credit program would have been useful. But, that was not included in the One Big Beautiful Bill. And then we have all the uncertainty over tariffs-- lumber tariffs, all sorts of building supplies, appliances. All that adds to the uncertainty on that front and, again, discourages the construction of affordable, entry-level housing.
And then, of course, you have local zoning. And the federal government can't fix local zoning. Perhaps we could try something coercive, like tying highway funding to zoning reforms. The problem is, there's just no appetite on Capitol Hill for any of that. And so I do think we're going to be stuck here for a little while.
MAX RAKHLENKO: I think your last point's the important one, on the local zoning. Our understanding is that that is a major, major problem. And to your point, there's very little that DC can do about it. And there's even probably less appetite to do so. But ultimately, I do think it comes down, today, to getting more supply on the market. That's going to be the bigger tailwind than demand. But that is the harder challenge to be able to solve.
JARET SEIBERG: Max, one last question for you-- I brought up tariffs. Are you hearing anything on the tariff front from your companies?
MAX RAKHLENKO: They're having to push price through. The bigger companies that we cover certainly have a lot of bargaining power. They have very, very complex supply chains. And, therefore, they have more optionality. But it's really hard to not push price through. If you look at PCE data by various industry types, we're seeing a real pickup in inflation across home improvement, across furniture, across flooring.
At the same time, we've also seen a deceleration in units. Things cost more-- you can afford less of it. So we are seeing inflation pick up. That being said, maybe it's less bad than what was feared when tariffs were first announced. So we'll see how this all plays out. But we're starting to get price increases. But it certainly feels not as bad as the original estimates that might have been out there.
JARET SEIBERG: All right, let's leave it there. Max, thank you so much for joining us this month. We want to wrap up this podcast, as always, with our preview of the coming month. So what are we looking forward to in October?
We actually have two Federal Reserve conferences that we're going to be watching. One is on community banking. That's on October 9. And then we have a payments policy conference on October 21. It's somewhat rare for the Federal Reserve Board to hold conferences. And so when they have these big events, it really offers an opportunity to hear directly from regulators about what they're thinking in these spaces.
We also have a key hearing in the House on deposit insurance reform. I continue to think this is an underrated issue in the financial policy space, given the renewed interest on Capitol Hill on trying to do something to expand deposit insurance.
And then lastly, we're going to hear from all the bank regulators on October 22. It's part of their semi-annual testimony to Congress. And that should offer us updates on all the key regulatory issues, varying from bank capital, to what we're seeing on the crypto front, to the future of the annual stress test.
With that, I'd like to thank you all for joining us this month. We'll be back at you in early November with our next edition. Thank you, everyone.
ANNOUNCER: Thanks for joining us. Stay tuned for the next episode of the TD Cowen Insights.
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