00:00 Speaker A

housing data out today showed new US residential construction declined in May to the slowest pace since the onset of the pandemic as an elevated inventory of homes for sale and high mortgage rates hit builders. Still with me, we've got Christian Hoffman, Thornberg Investment Management, head of fixed income. So, as we're thinking through the significance of this and the fact that we had seen new housing starts actually dip to the lowest level since May of 2020 here. What does that spell out to you about the mix of both the pressures that home builders are seeing and the appetite for buyers right now in this market?

01:02 Christian Hoffman

So, we've seen a divergence for about four years between home builder sentiment and home buyer sentiment. With home buyer sentiment being pretty low and home builders still being pretty good, given the deficits that were really created going back to the global financial crisis. Now, if you think about some of the material costs and headwinds that we had during the particularly troublesome inflationary period and this new regime of tariffs and how that might impact the supply chain, you could see that that is problematic. I think the expectation and hope that mortgage rates would be a blip and start to decline again to help buyers, you know, do that first or second purchase, you know, I think that's becoming more subdued as well. So, you're seeing these real pressures build for, you know, home builders. That said, we maintain a pretty constructive posture on debt related to housing. You know, we don't appreciate a lot of house price appreciation from here, but I think the house pricing declines that you saw in the global financial crisis are unlikely to be repeated and that makes, you know, agency MBS, which has a very good convexity profile these days along with jumbo and non-QM and more esoteric flavors pretty attractively priced in this environment and with really, you know, mitigated credit risk in our opinion.

03:12 Speaker A

One of the additional complications to this that makes this even more significant is that baby boomers are not quick to move out of some of their own homes that they own because maybe they were able to refinance at very favorable rates. I was taking a look at a Redfin report today saying one in three baby boomers say they'll never sell their home. Almost like Jordan Belfort and Wolf of Wall Street saying, hey, I'm not, I'm not freaking leaving basically. At the end of the day, what is the significance of that one-third, 33 and a half percent of baby boomers who say they're not going to sell their home according to that Redfin data? Another 30% do say that they'll sell at some point, but not within the next decade it seems like right now.

04:18 Christian Hoffman

Yeah, and that's part of our thesis that's going to continue to support housing. There's also a big mix between haves and have-nots when you're looking at your balance sheet, right? So, while mortgage rates may be 7%, there's actually very few people paying that. Most people have had the benefit of locking in a two-handle, a three-handle, a four-handle mortgage up to 30 years, maybe it's, you know, 22, 23 years at this point, but they're going to be loathe to give that up because that has become an asset for them and that is going to continue to, you know, constrain the housing supply.