Mortgage rate hike concerns are ‘chronological snobbery’ from younger Americans: Strategist

Smead Capital Management CIO Bill Smead examines the trajectory of the current bear market, generational sentiments on relatively elevated mortgage rates, and the state of the real estate market for prospective home buyers and businesses.

Video transcript

- All right, well, let's take a look for more on the broader markets. We're. Joined by Bill Smead, Smead Capital Management CIO. Welcome back to the show, Bill. So I want to get your take on what the markets are digesting right now as we continue to see a choppy day for them?

BILL SMEAD: Well, we call this a nasty bear market because it's a bear market that's designed to cure the sins of the prior euphoria episode. So the punishment has a tendency to match the crime. So you've had a huge set of manias. Charlie Munger, Warren Buffett's right hand. Guy says, this was the biggest financial euphoria episode he's seen in his career because of the totality of it.

And so what we're seeing now is a rotational bear market that is moving from one enflamed euphoria segment, whether it be crypto or whether it be FANG stocks or whether it be high price to sales, et cetera, they're just moving from one to another. Now, they're moving to venture capital and private equity. And before it's all done, they will have crushed a lot of that stuff and paid back the punishment for the sins of the prior episode.

SEANA SMITH: But what do you make of the conflicting commentary that we've gotten from Fed officials today? We had St. Louis Fed President James Bullard. He was saying that more rate hikes are needed. Economic risks remain elevated. Kashkari, on the other hand, saying that there's still a chance of a softer landing. What do you think?

BILL SMEAD: Well, we're a bit conflicted ourselves. We see the fantastic demographics. There's 41% more millennials than there are Gen Xers. Therefore, that's 41% more 26 to 43-year-old consumers of everything from houses and cars to getting married to having kids to do all those things that create necessity spending. And necessity spending is the most favorable spending to what we used to call the multiplier effect in macroeconomics. So you've got that favorable backdrop.

Then the second thing you've got is you've got chronological snobbery in operation here. So I'm 42 years in the investment business. And for 32 years, 7% would have been a great mortgage rate. But because the rate was almost nothing a year ago, people act like this is the worst thing that's ever happened. So back when baby boomers were a huge group, my first mortgage was 13 and 1/2% in 1983. And by the way in 1984, we built a ton of houses at double-digit mortgage rates.

So I think people are missing the boat. We're going to have more permanently higher inflation, probably in the 5% variety. I think the mortgage rate at 6 and 1/2 or 7's doing a pretty good job of discounting that inflation. And therefore, whatever softness the landing might have-- might be because of better necessity spending than people had assumed.

- Still trying to digest chronological snobbery bill. That's a new one that I have not heard before. But back to those mortgage rates, if you are in a home, you're looking to upgrade. And your mortgage, let's sy, high two's, low three's, that's a double your mortgage payment if you're looking to go buy a new home right now. What do you think lies ahead for the housing market?

BILL SMEAD: Boy, I hate to burst your bubble. But that is a lousy question. What you're asking is are older millennials, who got completely spoiled by what's happened to them on their first or second home purchase, are going to damage the economy because they don't get to stay as entitled as they were before? That's not who we're concerned with. We're concerned with the millennials that are getting married this year in record numbers and next year who are going to want to buy their first house. That's who we're going to build the houses for is to meet the demand for the necessity not the fantasies of the millennials who have spent their 20s going on exotic vacations.

- There are no homes for those first-time homebuyers right now. They're not building them. You're aware of what's going on in the real estate market. Developers, builders, they flat out don't buy those homes. Are you meaning to suggest that if your mortgage payment is going to double that you want to support the economy and just swallow that because you're spoiled?

BILL SMEAD: No, you're missing the point.

- Please--

BILL SMEAD: The point is I drove from Phoenix to Portland, Oregon and back two different ways. And most of what I passed was empty land. 75% of the United States is uninhabited. And many of those uninhabited places are wonderful places to live, like a Klamath Falls, Oregon, or a Bishop, California. And what you can't do is you can't live in an elitist coastal city and find affordability.

But you also don't have to live in an expensive coastal city. You can live wherever you want because all you need is water and Wi-Fi. So Lennar and DR Horton are go-- they're going to build homes where people can afford to live. And businesses will locate themselves in a place that's affordable to live.

So, for example, let me take you back when Amazon was trying to find a second headquarters. The obvious place was Detroit, Michigan, fantastic airport, two huge state universities to pump grads into your business, and affordable homes in Bloomfield Hills and the rest of the suburbs of Detroit. Now, did they consider that to be a good idea for one second? No, they picked New York is where I'd rather be, right?

That is what they chose because it had nothing to do with affordability. It had everything to do with arrogance, not affordability. And that's what you're wrestling with. Where are people going to locate their businesses? And where are people going to live? And right now, that's not Downtown Seattle.

- I would love to continue this chat for the next couple of hours. Unfortunately, Bill, we got to roll onto the next segment. Bill Smead, we really appreciate the time. Come back. Let's continue this real estate discussion. Ahead, we're just--

BILL SMEAD: Thank you.

- --getting started here on Yahoo Finance.