Anne Hartnett 
Hi, I’m Anne Hartnett, and I’m here today for our 2025 Q2 update with real estate economist Matthew Gardner of Gardner Economics. Thank you for joining me today, Matthew. 

Matthew Gardner 
Hello, and how are you? 

Hartnett 
 I’m well, thank you. Thanks for joining us today. 

Gardner 
 You’re more than welcome. 

Hartnett 
 Well, our first question I have for you is President Trump has said he’ll soon name a new Fed chair aligned with economic views. If that happens, what impact could it have on interest rates or Fed policy in general? 

Gardner 
Oh, a great question. Well, first of all, about Chair Powell, I believe 10 months left in his current term, and it’s his second one, and I certainly don’t expect the president’s going to renominate him. But at the same time, and we’re hearing this over the last couple of weeks, he’s trying to posture to actually get rid of him. I don’t see that happening, but it is clearly something which is on his mind. Now, naturally, it’s not surprising that the president wants somebody who’s more in line with his own political beliefs.  

Question going to be now, who is it, and how much impact will that person have? There’s a couple of names being bandied around. I want to get into the weeds but Kevin Hassett is the current National Economic Council Director. I think former Fed governor and that would be Kevin Warsh and Chris Waller as well. Treasury Secretary Scott Bezzent, he’s starting to have his name come up again. Again, all definitely acolytes of the president. The problem is that it would naturally shift the status quo that we’ve seen for a very long time, meaning the independence of the Fed and that independence is remarkably important. It’s important because the stock market equity markets want that. They don’t want the same situation that we saw.  

Bit of a history lesson here, going back to the Nixon administration, there was a Fed chair then, Arthur Burns was his name and he was beaten up by President Nixon to reduce interest rates going into the ‘72 election. He did it, and many people have suggested that that was the reason why we saw skyrocketing inflation after that, so not a smart thing to do.  

Now, I think that with impacts whoever it is, yes, they’re going to be a supporter of the president, but it’s not, there’s no way they can actually turn around and say we are going to do this. And I say that because the seven governors have permanent voting rights when it comes to setting monetary policy. But so too five of the 12 regional Federal Reserve Bank presidents, and they vote on a rotating basis other than that the head of the New York Fed. Yeah, he’s permanent, Chair Powell. He’ll be around until 2028. So, I tell you this because it means that a lot of things would have to fall into place for the president to get what he wants and to see a massive drop in interest rates. If he could do it, I don’t think the market would like it, and then we all know the president doesn’t look very closely at his success based around the successful inequities.  

But the bottom line here is that I think we’ll see Chair Powell stay through the balance of his term but do expect to see interest rates to start coming down before then. I’m currently calling for only one drop this year, probably in September. Some other people are saying two and then likely more next year, but the uncertainties over tariffs I guess what’s holding the Fed back. So any expectation that we’re going to go back to a remarkably accommodative Fed policy that quite frankly become used to very unlikely to happen, but it is certainly going to be worthwhile watching.
 
Hartnett 
There’s also been renewed discussion around privatizing Fannie Mae and Freddie Mac. What kind of ripple effects could that have on housing finance and market stability? 

Gardner 
Yeah, it’s a question that’s been brought up for about the last 10 years. But the big thing is, it is not easy, as Treasury Secretary Mnuchin found when he was in the White House under the first Trump administration. He tried to do it, failed and ended up kind of walking away from it. It’s my opinion that the likelihood of them being privatized in the near term is still pretty low. And I say this for several reasons, the first of which is they’re currently sitting conservatorship and we’ve seen no cogent plan to get rid of that, let alone privatizing them. 

Now, we know that the head of FHFA, Bill Pulte is keen on doing it, but there are a lot of obstacles, and the biggest, my biggest, the first one I bring up is capital requirements. Yes, they’ve been refilling their capital reserves after the financial crisis, but they’re going to need to come close to doubling their current reserves up to about $300 billion, and that would be a requirement that’s going to take some time unto itself. So again, not going to happen overnight.  

The second issue is a lack of bipartisanship in government. Now why is that important? Well, it’s a problem because if they’re privatized, that means they need to be very attractive to private investors around the globe in order to get the funds that they would need in order to invest in mortgages. Now, any perceived political instability, well, that’s going to lead I think a lot of investors take a step back and just say, ‘You know what? I’m not sure we’re ready to do that yet,’ especially if they’re looking to invest what would be billions of dollars.  

Another issue actually is going to be, well, returns or profits back to investors. Will it be enough? Now we know the stock market’s been doing great, etc., etc., but in reality, Fannie and Freddie can say they made a lot of money. Well yes and no; it’s not exactly accurate because they were investing in their own mortgage-backed securities. But they were using highly subsidized debt because it was guaranteed by the government. Now, assuming that they would no longer have access to that money, they raised the question as to whether they will be profitable enough for the private sector to want to get involved. And the final part, this is going to be a bit of a tricky one for many real estate brokers to hear, is that I think if it does go ahead we’re going to have to start questioning whether the 30-year fixed rate mortgage could even survive. It might go away.  

Now, don’t worry, I think it’s very unlikely, but I should probably explain why. Now, we all know that a majority of mortgages are 30 years in term, at a fixed interest rate and with no prepayment penalty. Now, this is actually remarkably unique, around the globe, I think as far as I’m aware America is the only country where this sort of mortgage is standard, and it only exists because the  Fannie and Freddie, they’re the de facto buyers of the mortgage bonds. Now, some think that investor appetite would be limited because of one the exceptionally long duration, as well as prepayment with no penalty. Now, both of these are not positives when it comes to the investor community. Now the asset speculation I think that let’s say if we could, if it did happen, and they figured out a way that 30-year mortgage could survive, well, that would mean one thing. I think you’d see mortgage rates interest rates go up a lot higher even from where they are today.  

So I think the bottom line is that, yes it is plausible that Fannie and Freddie could be privatized at some point. I just think the obstacles that I’ve mentioned today are so large that I just don’t see it happening certainly in the next couple of years. 

Hartnett 
 There’s talk that the urban condo market is seeing price pressure. Are we witnessing a real price correction in urban high-rise inventory, or is that concern overstated? 

Gardner 
Yeah, it’s without a doubt. Condos in the condo market in general have been through a pretty rough ride over the past several years. Why? Well, it started off obviously with COVID, and many markets saw significant out migration from that urban cause because the ability to work from home and with many companies now still trying to figure out their return-to-work programs or policies they plan to put in place. It’s still unclear, and this naturally has had a significant impact on demand, but as with everything to do with real estate, it is all local.  

And there’s been a lot of speculation regarding – OK, it’s bad now in some markets, but is it going to get worse before it bottoms out? Well, it’s not solely a collapse in any condo market just because of people moving out. Soaring insurance rates, special assessments and those specifically following the Surfside building collapse that happened in Miami a few years ago, underfunded HOA fees, on top of the current high inventory levels. They nailed a lot of markets and specifically in Florida. Now, markets there, I would say includes Naples, Palm Beach, I should also say Orlando, they’re still seeing significant price reductions, high inventory levels, it’s going to be a while before I think, they bottom out. Not just however, in Florida elsewhere, some California markets still seeing distressed Palm Desert, Laguna Woods actually and also San Jose are examples where they’re still having a bit of a tough time. DC , even the DC market as small as it is because of DOGE layoffs in federal government, that’s hurt that market as well.  

So yes, not just Florida, many other of the more urbanized markets are having problems. But some in fact, I would actually say a majority, are either getting close to bottoming out or they’re already. And even in Florida, Miami and Tampa, two examples seeing prices start to rise, demand starting to return. I’m actually, I was speaking at an event in New York a week or so ago, and the brokers they were telling me that even in Manhattan, which suddenly got hit hard, condo transactions have started to pick up, prices have been flatlining for quite some time now, but the light is at the end of the tunnel and in a lot of those markets.  
But the bottom line is, I think it’ll be some time before the whole Florida state’s urban markets get back to where they were. Most, however, have seen enough of price correction. It’s starting to be more attractive to buyers now, and the worst of declines are behind them. And the final thing I say is that we all know that the issues that we’re currently seeing in the office sector. Well, because of that, we’re actually going to see a lot of office buildings go back to the lenders. They will then trade to sell them again at a significant discount.  

Now that means potentially that they will get bought, return to the market as obviously as office space at a lower rent, and that I think has potential. I certainly could see that happening here in Seattle to bring more people back into the office, and that will, without a doubt, help the open market. So, don’t count them out, they’re going through a hard time. I think they are mostly bottoming out. Some are already seeing prices rise again, but markets are certainly not created equal.
 
Hartnett 
New construction once commanded a premium over resale, but now it’s directly competing. How is that shift impacting builder sales activity?” 

Gardner 
 “Well, that’s a really interesting question. I think that, yes, you’re right. Historically, there always was a premium to be paid for new rather than used, which I think is a term that a lot of we’re going to say brokers used to use when they were setting new construction. Now everyone’s talking about the sizable increase in inventory levels in the resale market, which we know is true. We’re up, I think, about 20% year on year, but we’re still down significantly from where we were in 2019, the last normal year for housing.  

So what does that mean for new construction? Well, where it gets really interesting is when you look at different markets across the country because they are acting, the new construction environment, very differently from one another. Now for example, if we look at the northeast of the country, parts of the Mid-Atlantic, even parts of the Midwest, well those are markets where public builders, the big guys, do not have a large presence. And because of that, there’s still a shortage. New housing and new construction is still commanding pretty significant premium over its resale counterparts.

But when you get into the Sunbelt, for example, where large builders are highly concentrated it’s a very, very different story. And it’s in these markets that builders are having to be very competitive, when compared to the resale market in order to try and get some of these homes sold. So a lot of them, they’re not only having already reduced asking prices, we also have seen a lot of concessions being offered to buyers of new construction. Again, bringing the prices down more in line with the resale market, but we also see builders buying down mortgage rates. And again, that does make them more competitive. 

 It was fascinating in speaking to a couple of builders recently. We know a lot of them have been doing that, that 3-to-1 program where they would use the mortgage rate by 3% in the first year, 2% the second and 1% of the third, and it converts to a normal mortgage. Well, they actually have gone beyond that. They’re now paying down mortgage rates the entire 30-year period. Now, that’s clearly unsustainable because it’s very expensive for them to do, but they are just having to get rid of a significant buildup of inventory. In fact, if you look at standing inventory of new construction in America today, it’s at a level we haven’t seen in almost 20 years. And of course, every home that’s built that’s standing that’s not sold is costing that builder a lot of money every month.  

So, where we are seeing highly competitive markets again, many of the Sunbelt that is bringing prices down of new construction to compete. So I would say that sellers of existing homes and brokers representing them, they might want to do their homework on what’s happening in the new construction market close to them when they’re starting to think about pricing. So the traditional premium you are seeing it in some markets across the country, but where the large builders are concentrated, again, specifically the Sunbelt, they are being very competitive because they have to do so just to get their way through the standing inventory that they’ve already built.” 

Hartnett 
 “What’s the one metric or trend you’re watching most closely as we move into the second half of 2025?” 

Gardner 
 “You always ask me for one. I’m an economist; we can’t do anything in one’s. We’re pretty lousy at it. I mean, there’s so many important things that I track every day, but all right maybe I’ll give you two. The first would be, and if I think about specifically as it pertains to housing, I’m watching the direction not of sale prices but of asking of list prices, because I that I think sale prices there are lagging indicator, right? I say that because that’s a deal that was written some months ago, and a lot of factors went into those different mortgage rates, whatever that may be. But when you look at list prices, where list prices are still rising, that’s a positive for the market where they’re flatlining or falling. Well, that says that the market is certainly seeing a shift, and if list prices start to drop, well then just by the very pure math says that sale prices have to as well so I am watching these prices. 

 And the other thing would be the amount of new inventory, not total active listings, number of new imagery coming to the market every week or every month. And don’t look at it year over year. We know it’s higher compared this month or whatever month you’re thinking about to that same month in 2019. That’s an apples-to-apples comparison when we start getting your listings above that level. Well that I think is going to be quite telling when it comes to market, because it’s going to ultimately mean a slowing down in pricing. Yes, we want some more listings depending on where we are in the country, but new listings and list prices they’re the two things I’d be watching in the housing market for the second half of this year because so many people had expected already a collapse in the market, which we know has not happened in general. I think that they’ll be watching it as well. I don’t see that collapse happening, but I do expect to start continuing a move toward some kind of normalcy.” 

Hartnett 
Thanks, Matthew. I always enjoy hearing your insights, and I look forward to catching up on our Q3 in 2025.

Gardner 
 Thank you, and I always appreciate you asking me to come on and share my thoughts on the housing market.