housing recession is coming

While the broader economy is almost certainly not in recession, the US housing market is facing a painful reset. As the Federal Reserve raises interest rates to tame inflation, the most vulnerable sector of the economy — which is housing — is taking it on the chin. Today’s guest, Moody’s Analytics Chief Economist, Mark Zandi, talks about the turbulent state of the US housing market, prospects for recovery, what falling housing prices nationwide will mean for the broader economy, the global synchronizing decline in housing, and China’s bizarre year. How is it affecting the economy.

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Derek and Mark take a peek under the hood to understand the relevant numbers in the most recent inflation report.

Derek Thompson: I think we should start this week with the inflation report. I’ll start here with a confession: I got this completely wrong. I was looking at gas prices and assumed that we would see headline inflation essentially zero or below zero for the second month in a row. We didn’t get that. Instead, we heated core inflation. What was the most worrying thing you noticed in this inflation report? What surprised you?

Mark Zandi: Well, headline inflation was fine. It was 0.1 up. It’s a win, if that’s where we are. This leads to lower oil, gas and energy prices. It’s all right there, no problem. The real problem is the main inflation – energy and food. Economists look at it because it’s a pretty good forecast of future inflation, because energy and food prices, as we’ve seen, go up, they go down, they go around, but core inflation gives you a better understanding. That’s where we’re going. He was high. Uncomfortably high, 0.6. My people who do this for a living were expecting 0.3.0. It doesn’t sound like a whole lot, but it’s a big difference. Annually, it’s the difference between 7 percent inflation and 4 percent inflation, so it’s a big deal, and definitely headed in the wrong direction. That means the Federal Reserve has a lot of work to do to raise interest rates. Obviously, the markets didn’t like it. Nobody should like it. It is quite disturbing.

Thompson: And to be clear, because this bothered some people last month, we’re reporting both month-to-month numbers and annual numbers here. It was complete rigmarole a month ago where Joe Biden said, “Inflation is 0 percent.” And some people said, “No, it’s a month-to-month number. You need to report inflation as an annual number.” So 0.3 is what you were expecting or what your folks at Moody’s were expecting for the month-to-month inflation numbers, and it doubled for the month-to-month.

Sounds: Yes. That’s right, 0.3. And then to annualize, a poor man’s way of doing this is 12, multiply by 12 months, and you can figure out what inflation would be like for the whole year if it grew at that month-to-month rate. doing. If it was 0.3, it’s 4 percent-ish, if it’s 0.6 it’s 7 percent-ish. This gives you a sense of the difference between them.

Thompson: The Shelter Index is an important part of why core inflation is rising faster than people like you and I are. It rose 0.7 per cent in August, from 0.5 per cent in July. The rent index also rose 0.7 per cent in August. Something’s a little confusing that maybe you can help me clear up: If you ask Zillow, if you say, “Hey, what’s up with rent inflation on Zillow?” “We saw national rent prices peak around February, March,” he would say. But you call around a bunch of other sites that are listing new rents for apartments people are ready to move in. And they’ll say, “Yeah, we saw rent inflation peak around this spring.” But now you ask the government and the government is telling you that the rent CPI is still going up. Why are we seeing this discrepancy?

Sounds: This is exactly how the Bureau of Labor Statistics does it. It surveys tenants in groups of one-sixth. So one-sixth the tenants for one month and then six months after that or five months after that. When you find an increase in rent in the market, such as in the month of February, it takes about six months to translate this into a mean for rent inflation as measured by the BLS. It’s just methodologically how the BLS is doing it.

And in terms of measuring housing costs, there’s a lot of non-intuitive stuff that goes into it. One really important point, interestingly, is that for most homeowners, this increase in rent has led to an increase in housing costs, according to the Bureau of Labor Statistics. But that doesn’t mean the cash they’re spending is increasing, does it? Because they have got 30 years fixed rate mortgage, 15 years fixed rate mortgage. Nothing is changing for them. But the BLS says, “Oh, your inflation rate just went up.” So from a cash perspective, from an income perspective, it’s not as bad as it sounds. This is bad. I am not saying that it is not so. It doesn’t mean exactly the same thing as an 8-10 percent increase in food prices, because you’re actually spending more cash to buy those groceries.

Thompson: It seems to me that shelter inflation is, empirically, very different from energy inflation. When gas prices change, everyone, two weeks later, 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 gas. But with rent inflation, many people, mostly people who are renting, are in contracts that are already closed. If they own the home, they are paying the mortgage that is probably off. And so it’s a little bit funky how the shelter is rising. Inflation should make us think about the fact that everyone is paying a higher price because most of the people who are paying for the shelter are getting higher and higher and higher every month. Not paying prices. Very strange situation.

Sounds: Well, that goes back to your Zillow points. Zillow, Rent Hike is for people who are moving into new apartments or someone who is renting and their lease has come and now they are renewing their rent. But as you point out, that’s a small part of the population. For most of the population that doesn’t happen for some time. The Zillow fare hike is not representative of the fare hike that most people are facing at any given point in time. But, broadly speaking, it’s actually good news that Zillow is reporting that market rents aren’t growing as fast. This would eventually begin to show up in the Bureau of Labor Statistics’ measure of consumer price inflation. Maybe, I guess it’s too late this year, going into next year, we’re going to start seeing that roll over. We need it, because right now it is adding a lot to the overall inflation.

This transcript was edited for clarity.

Host: Derek Thompson
Guest: Mark Zandik
Producer: Devon Manze

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