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We did these slides for Houston in the fall. I presented these at the Bisnow DFM MPC event in Dallas this week.  I frequently get asked why home sales continued at 17% interest rates in the early 1980s but stopped last fall at 7%. The reason is that houses are 2-3x more expensive relative to median incomes than they were 40 years ago.

Household savings still remain quite high; this is probably influencing the recovery in sales we’ve seen since the beginning of the year

The Fed still thinks shelter inflation is going up; this is consistent with the OER measure lagging actual transactions by 6-9 months. 

Contrast this with Case-Shiller and NAR indices, which peaked months ago.

Investors have backed out of the housing market.

Mortgage applications have fallen to multiyear lows as rates have increased.

Rate locks are also at multiyear lows

We still think the Fed Funds rate will hit 5.5% for two reasons: 1) in high inflation environments, the Fed Funds rate has never gone down before crossing over the CPI levels and 2) the projections of FOMC members (red dots) tell us they think it will reach that level.

Generals are always fighting the last war. The Fed also fears a 1970s-style second wave of inflation.

An aging population is a big reason for the worker shortage that’s helped fuel inflation over the past 18 months. The working age population has hardly grown over the past three years. Instead, virtually all of the recent increase in the population that’s 16 and older has been among seniors. The number of people aged 25 to 54, a group economists call “prime-age” workers, inched up just 40,000 in 2022. Meanwhile, the number of Americans 65 and older jumped by 2 million. Since 2019, the prime-age worker population has barely changed while the size of the 65-and-older group has increased by nearly 5 million.

Basically, since 2019 we've added a working age population the size of Friendswood or Midlothian, and a retired population the size of Harris County, or Dallas and Tarrant counties combined. That's not very sustainable math.