The housing slump is coming

And while the broader economy is almost certainly not in a recession, the US housing market is facing a painful reset. As the Federal Reserve raises interest rates to reduce inflation, the most rate-sensitive sector of the economy — housing — is taking it to the chin. Today’s guest, Mark Zandi, chief economist at Moody’s Analytics, breaks down the turbulent state of the US housing market, the potential for a correction, what a nationwide fall in home prices will mean for the broader economy, a simultaneous global housing decline, and how a strange China year affects very much on our economy.

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Derek and Mark took a peek at the lid to understand the worrying numbers in the latest inflation report.

Derek Thompson: I suppose we should start with the inflation report this week. I’ll start here with a confession: I got this completely wrong. I was looking at gas prices, and I assumed we were going to have the second month in a row of general inflation that would basically be zero or just below zero. We don’t get that. Instead, we got a rise in core inflation. What is the most disturbing thing you have seen in this inflation report? What surprised you?

Mark Zandi: Well, headline inflation has been good. It had risen 0.1. That’s a victory, if that’s where we’re at. This is due to lower oil, gas and energy prices. All the best there, no problem. The real problem is core inflation – except for energy and food. Economists tend to look at that because that’s a very good prediction of future inflation, because energy and food prices, as we’ve seen, go up and down and go all over, but core inflation gives you a better sense of where we’re headed. That was high. Uncomfortable height, 0.6. My buddies who did it for a living were expecting 0.3. It doesn’t sound like much, but that’s a big difference. On an annual basis, that’s a difference between 7% inflation and 4% inflation, so that’s a huge problem, and definitely moving in the wrong direction. This means that the Fed has a lot of work to do in raising interest rates. The markets clearly didn’t like it. Nobody should like it. It is very frustrating.

Thomson: And just to be clear, because this caused a problem for two people last month, we’re reporting here both the monthly numbers and the yearly numbers. A month ago there was this complete stoning where Joe Biden said, “Inflation is zero percent.” And some people said, “No, that’s the month-to-month number. You need to report inflation as an annual number.” So 0.3 is what you or your guys at Moody’s were expecting for the monthly inflation number, and it came out to be twice that month-to-month.

sounds: yes. That’s just right, 0.3. And then, to convert annually, the poor man’s way of doing it is multiplied by 12, 12 months, and you can get an idea of ​​what inflation would be like for the whole year if it kept increasing at a month-to-month rate. Which if it is 0.3, it is 4 percent, if it is 0.6 it is 7 percent. This gives you a sense of the difference between them.

Thomson: The Shelter Index is a major part of the reason why core inflation continues to rise faster than you and I expected. It rose 0.7 percent in August, compared with 0.5 percent in July. The rent index rose 0.7 percent in August. Something a little confusing that maybe you can help me explain: If I asked Zillow, if I said, “Hey, what’s going on with rent inflation in Zillow?” They’ll say, “We saw national rental prices go up in about February and March.” But you connect to a host of other sites that list new rentals for apartments ready to move into. And they’ll say, “Yeah, we saw peak rent inflation this spring.” But now you ask the government and the government is telling you that the rental CPI is still accelerating. Why do we see this contradiction?

sounds: It’s just the way the Bureau of Labor Statistics does this. He surveys tenants in groups of sixths. So one sixth of the tenants one month and then for six months after that or five months after that. When you get a rent increase in the market, say in February, it takes about six months for that to translate into what it means for rent inflation as measured by the BLS. It’s just a systematic way how the BLS does it.

And in the case of housing cost measurement, there are a lot of counter-intuitive things here that go into this topic. One really important point, and an interesting point, for most homeowners, is that the cost of their housing is increasing according to the Bureau of Labor Statistics because of this rent increase. But that doesn’t mean that the money being spent increases, does it? Because they have a 30-year fixed-rate mortgage and a 15-year fixed-rate mortgage. Nothing changes for them. But the BLS says, “Oh, your inflation just went up.” So from a monetary perspective, and from an income perspective, it’s not as bad as it seems. it’s bad. I am not saying that it is not. It doesn’t mean exactly the same thing as if food prices went up 8-10 percent, because you’re actually paying more money to buy those groceries.

Thomson: It only seems to me that housing inflation, empirically, is very different from energy inflation. When gas prices change, after two weeks everyone sees a higher price at the pump. And when they have to refill their cars, they have to pay more money for the same amount of gasoline. But with rents ballooning, a lot of people, and most people renting, are on already booked contracts. If they are homeowners, they pay off mortgages that are probably foreclosed. And so it’s a little uncommon for how high shelter goes up. Inflation should make us think about the fact that everyone pays higher prices because most of the people who pay for shelter don’t pay higher and higher and higher prices every month. This is a very strange situation.

sounds: Well, that comes back to your Zillow point. Zillow, this rent increase is for people who are moving into new apartments or someone who is renting their lease and is now renewing the lease. But as you point out, that’s a small part of the population. For most of the population, this does not happen for a period of time. A Zillow rent increase is not the rent increase that most people experience at any given time. But, broadly speaking, there’s already good news that Zillow is reporting that market rents aren’t rising as fast. That will eventually start showing up in the Bureau of Labor Statistics’ consumer price inflation gauge. Maybe, my guess is too late this year, next year we’ll start to see that roll. We need that, because it now adds a lot to overall inflation.

This text has been edited for clarity.


Host: Derek Thompson
Guest: Mark Zandi
Producer: Devon Manz

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