Where Is Housing Headed?

Speaker 1:
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.
Jaret Seiberg:
Welcome to 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. Today we're going to focus on housing, which we expect to be a major issue headed into the midterm election. My guests are Max Rakhlenko and Eli Nir. Max is an equity analyst covering the housing sector, and Eli is part of our macro team looking at mortgage rates and housing data. But first as always is my partner in podcast, Scott Smith, who is TD Cowen specialty salesperson for financials.
All right, Scott, what's going on in the market these days?
Scott Smith:
Well, Jaret, since we last got together, we really had the big change in the markets being the move higher in interest rates globally, which obviously has implications on housing, which I'm sure you'll dig into with other folks. But between that and the fact that the Iran War seems to have definitively moved into a longer phase of trying to strangle the Iran economy as opposed to winning in some sort of shorter term kinetic war has impacted oil prices as well. That has driven up the inflation expectations.
And I think what that really yielded was what we got out of Warsh at Jackson Hole, which did change everybody's perception a little bit about what the forward curve was going to look like. I think we had been getting people, at least in the financial investor community, a little bit more focused on the idea that we were going to have a long period of no moves and that the next move would be lower post Jackson Hole, post some of these other inflationary data points, I think that did shift a bit. And I think what we're seeing is the financial services names deal with both the inflation from oil and the global market move higher in rates.
Jaret Seiberg:
Okay. So how is that playing through to the banks, the insurance companies, the asset managers? Are they all reacting the same or are we seeing differences in the sectors?
Scott Smith:
Where it really impacts things the most so far has been in consumer finance where we've seen the most choppiness and certainly some of the more negative sentiment as people have concluded that costs across the board are going to be higher for folks right as some of the other data continues to be flat to slightly more negative. So that space has probably been the most challenged in the near term. For banks, it's generally been viewed as kind of constructive. Higher interest rates for life insurance companies also viewed as generally constructive. We haven't really had anything happen on the consumer or the corporate credit side that's been noteworthy. So a lot of what those sectors are seeing is business as usual, curve's a little bit better. People feel relatively constructive about all of those factors. So the negative in consumer finance and the neutral to maybe slightly positive in other sectors.
Jaret Seiberg:
So Scott, one of the big bills out of Congress that they're still trying to pass is the CLARITY Act dealing with crypto and crypto market structure. I know a lot of the banks and financial firms are interested in that. Are we seeing that bleed through into any of the financial names or is it really mostly in the crypto space?
Scott Smith:
Jaret, your call that there was a lower probability for CLARITY passage was obviously spot on. And I think most investors had gotten there and then there was in the last part of last month rather, there was a series of headlines from the administration and from some crypto executives about how this was definitely going to pass and we were going to be moving a lot of mountains to get something done. And I think that for some investors got people kind of refocused on the idea that there's a passage probability. More of the people that I talked to who are financials dedicated are in your camp that it's going to be incredibly difficult to get done politically. But people are wondering about where all those potential campaign dollars could be put to use if the Democrats don't get on board, air quotes around the get on board, with getting something done on CLARITY.
It is very much still a focus for investors across the financial services arena, but I would say that dedicated financial people still think it's kind of unlikely here, but that doesn't necessarily mean that there's a problem for names like Circle or any of the other heavily crypto related companies.
Jaret Seiberg:
All right. So one last question for you, Scott, and we'll let you get out of here. When we talk next time, it'll be right before bank earnings start. Is there anything significant that you're looking for in these couple of weeks leading into the start of earnings season?
Scott Smith:
Jaret, September is a pretty heavy financial services conference month. So investors will be looking for a lot of management commentary, which will preview obviously what we'll be hearing in earnings. So far, consumer industrial loan growth remains pretty positive for banks. For credit quality, both consumer and corporate, it's very much the same story it has been all along, which is generally very good. Pockets of weakness at the low end, a lot of strength at the high end. We've been hearing from some of the banks that any hesitation in 2025 on the commercial loan side to take on some risk and try and expand. People have realized that in 2026, you just don't have a choice. You can't wait for some of these issues like the Iran War to resolve themselves. Demand is there. You have to engage your financial services partners and get some credit so that you can expand your business.
So all of those things are, I think, what investors are expecting to hear. I do think we might hear a little bit lower commentary on capital markets activity, which makes sense given how strong 2Q was. But I do think the other thing that's going to start to factor in here is what could be incrementally positive. So a number of the XLF names, in fact, something like 65% of them have had positive earnings revisions for 2026 in the last couple of weeks. What we're going to hear in conference season and in the lead up to earnings about how things could be even better with another leg of revisions I think is going to be hard to see. So it does feel like people are going to be positioned a little bit more flat barring something like the end to the Iran War.
Jaret Seiberg:
All right, Scott, that is spectacular as always. Thank you. We'll check in with you next month. Without further ado, let's turn to housing. The housing market seems pretty scary right now based on press reports, but to help us understand it, I have two of my colleagues, Max Rakhlenko and Eli Nir. They're going to help us put the housing market all in context.
So Eli, let's start with you. What are the data telling you about the state of the housing market? Is it as bad as the headlines might suggest or could it be even worse?
Eli Nir:
Well, thanks for having me. I wouldn't say it's great right now. The best way I would describe it is low demand, low supply. So right now, affordability issues are really weighing down on housing demand. Existing home sales are near all time lows, and supply right now is also low. You have a locked in market. People don't really want to sell their homes if they got a really good mortgage rate during the pandemic. And even though supply is a bit more than demand, they're just going sideways at the moment. And now even with higher construction costs, it's hard to see a real stimulant for building outside of deregulation and policies coming from the government.
Jaret Seiberg:
Uh-oh, it's always a problem if we're relying on policies coming out of the government.
Hey Max, what about you on this? You've always had a cautious view of housing the last time we had you on. Why is that and where could we maybe see some improvements? Give me a reason for optimism here.
Max Rakhlenko:
Yeah, certainly. I think if you're looking for optimism, we might want to hop on a different podcast. The way I'd frame it is I don't think that there's much downside. If you look at existing home sales on a SAR basis, we've sort of been bouncing around this very high threes, very low fours range. And I think to us, and this has always been our thesis, is that I think that we're going to remain in that range for longer. So it's not that I think that there's necessarily going to be much downside. It's just more of everyone keeps looking for upside. Everyone is trying to figure out ways of how housing can get back to four and a half million and then sort of start to approach the low fives, which is where we were pre-pandemic.
And with that, I would just go back to Eli's point that affordability remains a major, major problem. If you look at whether it's the Atlanta Fed or some of the other indices out there, we are at or just north of multi-decade low level. So as long as affordability remains a challenge, I think that housing is going to remain quite soft.
Jaret Seiberg:
All right. Well, let's talk about what we can do to maybe get us a bit of a rebound. Max, what's your view as to the Kyiv to unlock policies to accelerate some housing activity?
Max Rakhlenko:
Yeah, certainly. So for me, it does all come back to the demand side, just a little more color on how we think about affordability. But if you just look today versus 2019, home price appreciation compared to wage growth, and home price appreciation has obviously massively outpaced the wage growth that we've seen on average. Now, over the past couple years, wage growth has actually outpaced home price appreciation. And if you look at home price appreciation compared to even just overall CPI, it's actually trailed, but we're still just continuing to digest the massive, massive increases in the home values that we saw in the early stages of the pandemic. So long story short, it just to us feels like it's going to be a slow grind towards getting back to a bit more of a normalized place.
Now, putting all of that to the side, the mortgage rate and the interest rate environment is still something that we also have to focus on. And this week mortgage rates, at least in the 30 year, are just under 6.7% and they continue to trend back higher. So that is another challenge on top of how much we've seen home prices appreciate compared to wage growth. So long story short, doesn't feel like there's going to be much end in sight and it's really going to be a slow grind towards normalization.
Jaret Seiberg:
All right. Come on, Eli. Tell me that you can be a better optimist than Max.
Eli Nir:
I think I'm just as pessimistic about it. Another way to look at affordability would be also the opportunity cost, right? So somebody who's renting is not going to double their monthly payment just to own a home that they don't really see potentially appreciating that much. So when you look at just rent payments to mortgage payments, if you look at percent of your income that goes to mortgage payments, everything is just very elevated right now. And people don't really have a reason to go out and buy a home unless they absolutely need to. Demographics, people moving, getting a new job, all that stuff is going to the main driver of the housing market for a while.
We put out our forecasts on existing home sales and housing demand, and it's pretty much in line with what Max was saying. It's just going to go sideways from here. There's really no reason to anticipate a huge acceleration. There's really no reason to anticipate a huge fall off. We're just kind of stuck in this weird moment right now with elevated rates. The biggest catalyst that could happen would be a decline in mortgage rates. Right now, we are not expecting the Fed to hike, which would actually result in a bit of a rally in the 10-year based off how high rates are. But even if you get that and you don't get hikes and you have long end rates coming down, the low end of where mortgage rates go is probably maybe 6.2, 6.3. It's still really elevated compared to your average rate during the pandemic when all of this lock-in effect happened. And there's still a growing risk that you get a bad inflation print. The Fed hikes even more than what the market's pricing in and mortgage rates go even higher.
So you can't really see a huge fall off, but it's hard to imagine the scenario where outside of an exogenous shock to the economy that the housing market just starts ripping again.
Jaret Seiberg:
All right. Well then let's follow up on that, Eli. So what are the constraints on supply and demand here? We talked about rates. Are there constraints other than pure interest rates?
Eli Nir:
Well, it's the price of homes, like Max said, outpacing income. That's a big constraint on demand. On supply, it's the lock-in effect.You're not going to sell your home just to buy another one and pay twice as much in rates. That just doesn't make sense for someone to do unless you really think you're going to make a great investment or you really, really want to move. What's also happening with tariffs is you have higher costs for steel and aluminum and lumber, and now with higher energy prices from the conflict in the Middle East, construction costs are now rising. Home builder sentiment is also near all time lows, and they'll discuss things like high rates weighing on buyers, but they also continue to discuss how the environment for building continues to get a bit worse as costs rise, and it's just a bad combination.
Jaret Seiberg:
Max, let's switch this conversation around. So we've talked about how turnover is low, rates are a problem here. Is that resulting in HELOC volume or are people trying to renovate their houses, make them bigger? What are you seeing there and how is it impacting some of the companies in your universe?
Max Rakhlenko:
The latter part of your question was certainly the thesis once housing started slow is, hey, if all these people are stuck in their homes or not moving, therefore they're probably going to want to invest in their home, especially given how much the value of their homes has increased over the past handful of years. Now, that hasn't really played out. A lot of that is due to lower consumer confidence, people just being less sort of bullish on their environment and how things are going to potentially play out.
That being said, over the past six quarters, we've actually seen HELOC extraction on a year-over-year basis pick up each quarter for six. Actually, the second derivative has been positive, meaning that the growth continues to improve. Now, that's great to see, but what we are seeing is that a lot of the HELOC extraction is going towards debt consolidation, and we're just seeing less than what we've seen historically go towards the home improvement sector.
So at this point, there's probably a little bit of the HELOC pick-up that's going towards home improvement, but I think it's still going to take a little while longer. What we are seeing is people spending on break fix projects. So something in your home breaks, certainly people are going to invest and get that fixed, but those more discretionary 50,000, 100,000, $200,000 projects that we thought we would see more of, that just hasn't really played out, at least not yet.
Jaret Seiberg:
And how does that translate to some of the companies you look at? Where could we see this being impacted?
Max Rakhlenko:
The companies that we spend the most time looking at in the sector would be Home Depot and Lowe's. And the two of them do have professional exposure, especially Home Depot. So they both would benefit. Home Depot's mix does go a little bit more towards these larger professionals that do more discretionary projects, but both of them do have some exposure to HELOC. So we'll certainly start to see it at some point. Just really haven't seen much of that yet.
Jaret Seiberg:
All right. Last question as we close out this segment for both of you. Let's put you both on the spot. Where do you see the housing market going over the next year? Eli, we'll start with you and we'll give Max the last word.
Eli Nir:
I don't really see sales picking up that much. The big thing to look out for could potentially be an improvement in the new home market and residential investment as you get a locked in market, not as much supply coming from the existing market, people resort to new homes, you potentially get more building as more uncertainty gets resolved out of the economy, and that could be a real potential spot for positive growth. That's kind of the potential biggest change you could see from where we are right now. But most likely a year from now, we're having the exact same conversation also saying that it's going to look the same a year from then.
Jaret Seiberg:
Max?
Max Rakhlenko:
Best case scenario for the stocks that we look at is a bit of a pickup in existing home sales activity plus consumer confidence starting to improve from these very low levels. If we get both of those, that certainly would be a positive, but I am also inclined to sympathize with Eli's point is that potentially we're still sort of stuck in this range, potentially a little bit higher, maybe a little bit lower. But if the question is, are we going to break out, that feels less likely.
Jaret Seiberg:
All right, Max, Eli, thank you so much. Housing is certainly a big topic. I'm sure we'll be turning to it again on this podcast in the next couple of months, and we'll have to have you both back. Thanks for joining.
Eli Nir:
Thank you.
Max Rakhlenko:
Thanks a lot.
Jaret Seiberg:
And that brings us to our final segment, which looks at the major financial policy issues from the last few weeks and previews what's coming up in the next few months. All right, so what's happened in the last month? The SEC is advancing rules for when tokens are securities. That's a plus for crypto. The CFTC has filed a motion to dismiss a challenge the CME has brought against perpetual futures on crypto assets. Prediction market litigation looks headed to the Supreme Court after New Jersey filed an appeal asking the justices to decide if states can block event contracts on sports. We have some debit interchange news with two appeals courts moving cases forward. We think this probably sets up a Supreme Court showdown next year. It remains a risk for the bigger banks.
As we discussed a little bit earlier in the podcast, we had Federal Reserve Chair Kevin Warsh speak at the Jackson Hole Conference. He took a more hawkish tone, which is leading to concerns about interest rate hikes. And then the FDIC has adopted an interim final rule on reciprocal deposits that should be broadly helpful to small and mid-size banks. So it's been a busy August despite the old cliche about Washington trying to take the summer off. We remained at full throttle through the month and it looks like we're going to be at full throttle into the fall.
Just coming up in the next few weeks, the Senate is going to return from the August recess and try to advance the CLARITY Act on crypto market structure. I'm a bit dubious that they can really get that bill done, but certainly going to create headlines. We have Treasury Secretary Scott Bessent testifying in the House on September 15th. We have an FOMC decision on September 16th. We have an SEC round table on 24-hour trading coming up on September 17th, and then a couple of more House hearings on the 18th on community banks and on the 23rd with all of the bank regulators. That one on the 23rd is definitely something we'll be focused on. We expect to get details as to what regulators are planning to do with the pending capital rule as well as expected changes to liquidity and tiering regulations.
And then a couple other big picture things at the CFPB. We're looking to see if the Senate will confirm Brian Johnson as the CFPB director, and we're waiting to see if the CFPB releases its request for information on credit card late fees. That's obviously a big deal for the major credit card issuers.
All right, with that, we will wrap up the September edition of the TD Cowen Two Cents Podcast. Thank you to Max and Eli, as well as to Scott Smith for being our guest this month. I am Jaret Seiberg with TD Cowen, and I look forward to having everyone tune in next month for our financial policy podcast.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.