Episode Details

Affordability is back in focus in D.C. after the brief U.S. shutdown. Our Deputy Global Head of Research Michael Zezas and Head of Public Policy Research Ariana Salvatore look at some proposals in play.

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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Deputy Global Head of Research for Morgan Stanley. 

Ariana Salvatore: And I'm Ariana Salvatore, Head of Public Policy Research. 

Michael Zezas: Today we're discussing the continued focus on affordability, and how to parse signals from the noise on different policy proposals coming out of D.C.

It's Wednesday, February 4th at 10am in New York. 

Ariana Salvatore: President Trump signed a bill yesterday, ending the partial government shutdown that had been in place for the past few days. But affordability is still in focus. It's something that our clients have been asking about a lot. And we might hear more news when the president delivers his State of the Union address on February 24th and possibly delivers his budget proposal, which should be around the same time. 

So, needless to say, it's still a topic that investors have been asking us about and one that we think warrants a little bit more scrutiny. 

Michael Zezas: But maybe before we get into how to think about these affordability policies, we should hit on what we're seeing as the real pressure points in the debate. Ariana, you recently did some work with our economists. What were some of your findings? 

Ariana Salvatore: So, Heather Berger and the rest of our U.S. econ[omics] team highlighted three groups in particular that are feeling more of the affordability crunch, so to speak. That's lower income consumers, younger consumers, and renters or recent home buyers. 

Lower income households have experienced persistently higher inflation and more recently weaker wage growth. Younger consumers were hit hardest when inflation peaked and are more exposed to higher borrowing costs. And lastly, renters and recent buyers are dealing with much higher shelter burdens that aren't fully captured in standard inflation metrics. 

Now, the reason I laid all that out is because these are also the cohorts where the president's approval ratings have seen the largest declines. 

Michael Zezas: Right. And so, it makes sense that those are the groups where the administration might be targeting some of these affordability initiatives. 

Ariana Salvatore: That's right. But that's not the only variable that they're solving for. Broadly speaking, we think that the president and Republicans in Congress really need to solve for four things when it comes to affordability policies. 

First, targeting these quote right cohorts, which are those, as we mentioned, that have either moved furthest away from the president politically, or have been the most under pressure. Second feasibility, right? So even if Republicans can agree on certain policies, getting them procedurally through Congress can still be a challenge. Third timing – just because the legislative calendar is so tight ahead of the November elections. And fourth speed of disbursement. So basically, how long it would take these policies to translate to an uplift for consumers ahead of the elections. 

Michael Zezas: So, thinking through each of these constraints, starting with how easy it might be to actually get some of these policies done, most of the policies that are being proposed on the housing side require congressional approval. In terms of these cohorts, it seems like these policies are most likely to focus on – that seem