Chris Mayer, Professor of Real Estate Economics at Columbia University and CEO of Longbridge Financial, joins Mark, Marisa, and Cris to discuss reverse mortgages and the state of the residential real estate market. While the single-family market may tread water, multifamily may be in for a serious correction. Mark wonders if we can avoid the fallout from this economic meteor.
Chris Mayer, Professor of Real Estate Economics at Columbia University and CEO of Longbridge Financial, joins Mark, Marisa, and Cris to discuss reverse mortgages and the state of the residential real estate market. While the single-family market may tread water, multifamily may be in for a serious correction. Mark wonders if we can avoid the fallout from this economic meteor.
For more about Christopher Mayer, click here
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Cris deRitis and Marisa DiNatale. Hi guys.
Cris deRitis: Hi Mark.
Marisa DiNatale: Hi Mark.
Mark Zandi: How was Thanksgiving? Cris? Marisa?
Marisa DiNatale: It was okay.
Cris deRitis: It was okay.
Mark Zandi: Oh. Oh. Really? What's going on?
Marisa DiNatale: I don't know. It just seems like a lot of effort for ... I don't know. Everybody got sick at Thanksgiving.
Mark Zandi: Okay. That's a bummer.
Marisa DiNatale: My three-year-old niece threw up in the middle of the floor as we were preparing dinner. My brother-in-law got sick.
Mark Zandi: Okay. I don't want to hear anymore. That's enough. Yeah. Forget about it. Forget I asked the question. Cris deRitis, did you stick close to home?
Cris deRitis: I was also sick. Yes.
Mark Zandi: Geez.
Cris deRitis: So yeah, just okay. But it was fine. Good to have some time off.
Marisa DiNatale: How was yours?
Mark Zandi: Sorry to say, but I had a great Thanksgiving.
Cris deRitis: Oh, good to hear. Good to hear.
Mark Zandi: You know what the trick is? The trick is to find someone who can cook and my daughter has figured that out. She's now engaged to be married to this German fellow. Not that German means anything except that they don't eat turkeys in Germany. But he cooked the best turkey I have ever had.
Marisa DiNatale: Really?
Mark Zandi: Yeah. Yeah. Great cook. Got very lucky there. At least in that regard. We'll see how the rest of it goes. Only kidding. Only kidding. He's great. He'll be great. And we've got a guest. Chris Mayer. Chris, good to see you.
Chris Mayer: Good to see you, Mark and happy to join.
Mark Zandi: We were talking earlier. I guess your Thanksgiving didn't go that well either. You don't have to go into any detail. Sorry.
Chris Mayer: Yeah. No. My back wasn't cooperating, but ... You know.
Mark Zandi: I'm sorry.
Chris Mayer: Always good to get together and see the family. That of course being the most important thing as long as they're not two year olds having stomach issues.
Mark Zandi: It's good to have you. And Chris, you're the Paul Milstein professor of real estate at Columbia Business School. How long have you been at Columbia?
Chris Mayer: I have been at Columbia ... I spent four years down at Wharton, but other than that, in the early 2000s, I've been at Columbia for over 25 years now.
Mark Zandi: Oh, I forgot the Wharton stint. So you were with Susan Wachter and that group.
Chris Mayer: Joe and Todd and Peter, all the crew. Yeah. Good group.
Mark Zandi: And we just ran into each other not long ago. I really enjoyed it. I spoke to ... They were business school students, weren't they?
Chris Mayer: Yeah, MBAs. Yeah.
Mark Zandi: MBAs. Yeah. It was really a lot of fun. It was over a dinner and talked about lots of different things and really enjoyed that. I just ran into you in the hallway as I was going ... Very serendipitously ran into you going into that classroom. That was a lot of fun. Really enjoyed it.
Chris Mayer: Well, you did a great job and actually you made a great case given the students' relative pessimism. And I think you're used to talking to people who are pessimistic.
Mark Zandi: That's true.
Chris Mayer: Maybe the economy and the labor market is stronger that they think it is.
Mark Zandi: Yeah. No. I really enjoyed that. And we've crossed paths at different points in time over the years. Lots of different points of contact. You're also ... I didn't know this. You emailed this to me. I didn't know that You're the CEO of Longbridge Financial, a reverse mortgage company. I didn't know that.
Chris Mayer: Yeah. Yeah.
Mark Zandi: That's pretty cool.
Chris Mayer: It is actually. We're now the second-largest reverse mortgage lender in the country. I got into this actually with my work both as a professor and I started my career at the Fed actually as a colleague of Chip Cason's back when he was alive and did some stuff with Chip and Bob Shiller. But my work at the Fed pretty quickly became clear that Americans have enormous amounts of housing wealth heading into retirement and have not saved enough. And so if you can find a way to help people responsibly use home equity to help in retirement, it presents real opportunity. And I will say that over time, more and more Americans are bringing debt into retirement, which is tough to have to make mortgage payments into your 70s and 80s. And so we really have to think about how housing can help people manage their retirement because there are a lot of elderly people who have challenges. So that's how I got into the business. And for me, the mix of trying to work in the business side to solve important problems, but also to keep the academic perspective on the world, the mix of those things is important. Obviously that's something you do a lot, Mark, of is try to play between the academic and business audiences, and I think there's a lot of value to that personally.
Mark Zandi: That's so cool. And I guess the reverse mortgage industry has been under a lot of pressure, right? Reverse mortgage funding. It's RMF. They went belly up I think almost a year ago now, didn't they?
Chris Mayer: Yeah.
Mark Zandi: I guess they had some unique circumstances. Their portfolio and so forth and so on. But you've been you've been able to navigate through all that pretty well.
Chris Mayer: Yeah. No. Look, our company, we're owned by a New York Stock Exchange company, Ellington Financial. So we have the capital backing that puts us in a really strong position. And we took over the servicing of a couple of billion dollars of their private securitizations and were able to step in and help some of the borrowers and bring some of their team over. So it was certainly unfortunate for the industry. Our company's been able to both navigate and use that as an opportunity to help grow the scale of what we're doing a little bit.
Mark Zandi: I've always been perplexed why ... And correct me if I'm wrong because I don't know this industry well. It's never really taken off. If you look at the amount outstanding ... I don't know. What is it? Several hundred billion, something like that?
Chris Mayer: Yeah.
Mark Zandi: Why is that? Why hasn't it? When you introduced what you were doing, it sounded very compelling like it should take off. Why not?
Chris Mayer: So I'll do a contrast between the US and the UK. In the UK, more than one out of three mortgages for borrowers who are 55 and older is an equity release loan, which is essentially a reverse mortgage. In the US it's about 2%. The difference is in the UK, three of the five largest life insurance companies all are in this business originating the product. Legal & General is the largest player in the space. Aviva, some of the very large brand name insurance companies are in the space. In the US, MetLife at one time was in it. In fact, one of my business partners was at MetLife bank and brought them into the space. But MetLife bank left in 2012. If you remember when the Fed introduced the stress test and Prudential and MetLife were G-SIFIs and they failed MetLife and Prudential. MetLife shut down their bank and thus was forced out of the reverse business. Prudential actually sued the government and in fact won its case that it was not actually failing the stress test. But in the meantime MetLife left. B of A and Wells, which were both in the business also left for different reasons related to how the FHA at the time ran the program.
I think we're going to see this come back. Mutual Of Omaha's actually ... We do have one insurance company. And I think you're going to see next year our company work with another brand name company who may well come back into the space. And I think as you start to get that broader acceptance and people feel a little more comfortable with the product and not just as a stereotypical late night TV ad product ... And by the way, nobody complains when Nike runs TV ads, but if you're a financial services firm, not only in reverse, in any business, if you're a financial services firm and you run ads, people are very skeptical of what you've got. But I think that that acceptance is really the concern about the companies and the product really from a sense of not knowing what it is really the principal challenge that the industry faces. And for me as an Ivy League professor running a reverse mortgage company as well, the hope is that that provides a little bit of credibility.
Academics aren't necessarily ... They go up and down in the public standing. Academic economists. I don't know whether that could be viewed as a good or a bad thing, but certainly the work that we're doing and our team is doing, we're really making some progress on the acceptance. And in fact, there are a lot of insurance companies now that invest in proprietary reverse products, but they just do it quietly behind the scenes. I think over time we're going to see that acceptance come back. So some of it is going to be on the reputation side, but honestly ... I'll just give you one example. Harvard did a study a couple of years ago and looked at people 55 and older and looked at the month they made their last mortgage payment. And the month after people increased their spending on pharmaceuticals by 25%. So the month after you make your last mortgage payment, you got really sick.
It's a sign that many elderly Americans are living a lifestyle and living in a way that really is below the standard that they should be living in retirement as Americans and having worked their lives to get to where they are. And so I think people really are in a place where they can and should be looking at home equity. And on the flip side, since 40% of people ... Harvard just literally released a study yesterday. Since 40% of people over 65 have a mortgage, they're actually making mortgage payments, just imagine going on social security, trying to work part-time and to continue to make your mortgage payments for 10 or 15 years. That's not a great retirement. And so there really is a sense that we just have to figure out how to help people understand and be comfortable with the product and recognizing that all it is is just a mortgage. Nobody owns your home, nobody wants your home. This is just a mortgage where instead of making the payments, the payments accrue, but you can use the cash to live off of and that allows you to do things you wouldn't be able to do otherwise, maybe even including taking care of your own health or fixing up your home, et cetera. So anyway, it's-
Mark Zandi: Very cool. Yeah.
Chris Mayer: I think it's a valuable product in the industry.
Mark Zandi: You sound like a man on a mission and it's very impressive. You're a full-time professor at Columbia Business School and a CEO at the same time. That's pretty cool.
Chris Mayer: I am a part-time. I still teach at Columbia, but I'm part-time. We'll talk about housing and stuff and you'll see I still-
Mark Zandi: Oh, you're there.
Chris Mayer: Really engaged in the world.
Mark Zandi: I just want to say, I think if they switched you out for Tom Selleck, the industry would do much better. I'm just saying. I'm just saying.
Chris Mayer: Let me say I appreciate it very much. That's all I'll say. But there's a reason that TV ads do not include professors or PhD economists in them.
Mark Zandi: Right. Right. Well I think you'd be great.
Chris Mayer: There was one point briefly where Prudential was running ads with Dan Gilbert.
Mark Zandi: Oh, I remember that. Yeah. The CEO of Rocket, right?
Chris Mayer: No. There's a different Dan Gilbert. There's a professor, actually a PhD in psychology who does behavioral economics.
Mark Zandi: Oh, I see, I see. Oh, okay.
Chris Mayer: Who was running these retirement ads. And let me just say that campaign lasted a very short period of time. So the idea of having professors or PhD people as ad pitchmen on TV, I think you just got to go find football or basketball players or women's soccer players or actresses or actors. They're the right people for TV ads. Not any of us academics.
Mark Zandi: Don't say never. But we'll come back to housing. There's so much to talk about there. I want to turn back very quickly to Cris deRitis. I'm sorry Cris deRitis. Just to make sure that we don't get confused.
Cris deRitis: It's all good.
Marisa DiNatale: Two Chrises. Yeah.
Mark Zandi: The Chris's. I can call you Dr. deRitis. Should I do that?
Cris deRitis: We can keep it informal here.
Mark Zandi: Okay. Keep it informal. I'll just call you deRitis. That rolls off the tongue very easily.
Cris deRitis: Okay. All right.
Mark Zandi: And Marisa, I just wanted to talk a little bit about the week in the economy because there's a lot of data points that came out and a lot of stuff happening. So maybe I'll just turn to you first, Marisa. Of all the things that have come out this past week or events that have occurred, what would you single out as most significant? Anything in particular? I hope I'm not stealing from the statistics game, which we'll play a little bit later, but hopefully I'm not doing it.
Marisa DiNatale: Yeah. That may be collateral damage here, but whatever.
Mark Zandi: Okay. All right. Fire away.
Marisa DiNatale: Yeah. You're right. There was a lot that came out, so it's a little hard to pick. But I guess the most obvious thing for me to pick would be that we got another read on inflation for October from the personal consumption expenditures and personal income report and it showed no change in inflation over the month in October. So 0% on the PCE. That sent bond yields down again. A little bit of a stock market rally. Mortgage rates have fallen in line with bond yields coming down. Yeah. And at the same time, in the same report, we got data on spending that showed spending is holding up among consumers. So I would say those two things are the most important data points of the week arguably. I don't know. Cris may have ... But there's a lot to choose from.
Mark Zandi: Yeah. Before I do that, I want to bring Chris back in because just a stylized fact, if you look at consumer price inflation, CPI inflation excluding shelter, this shelter component, the housing component or the core consumer price inflation, the CPI, less food and energy, and then take out shelter, and you look at the year-over-year growth as of October, which is the last data point, both are well within the Fed's target. They're actually, I think below the Fed's target on CPI inflation. So the message is that the thing that's keeping inflation from the Fed's target is the growth in the cost of housing services. It feels like to me that given the way that is constructed, it's based on market rents and we know that market rents are flat to down nationwide over the past year, and that will continue. That strongly argues that inflation's going to come back into target here in an early way. Not next month, maybe not next quarter, but certainly over the next year. With that as a preface, Chris, does that sound right to you? Does that make sense to you, Chris Mayer?
Chris Mayer: Yeah. It does.
Mark Zandi: Okay.
Chris Mayer: And actually the way they calculate, as you know and your listeners may understand, is they calculate both rents and owner equivalent rent based entirely on the rental markets. So when home prices spike up or down, that doesn't drive up or down measured inflation. And if you look at the rental market, the way they do it is they look at new leases signed relative to the prior year, which embeds in it a lag because new leases today may be being signed where there's no growth in the rents or virtually no growth, which is, as you said, Mark, what we're seeing in the data.
But if you look back relative to a year ago, rents may be higher than they were 12 months ago. And so by the way it's calculated to go into the CPI, you do have this lag, which explains what you are referencing, which is CPI measured shelter is still showing some increases, but the rent data we're seeing are really not showing rent increases much at all. And that means that that's going to continue coming down over time with the lag. And so they're actually looking at data that is a little bit old. There are a bunch of data errors in how inflation is measured. But there is going to be negative momentum of inflation continuing to fall into the future that is already locked in based on where the market is today. Where the rental market is today.
Mark Zandi: That gives me a lot of confidence inflation's coming in. Cris deRitis, anything you want to add there? And then also I'm curious what data point or statistic or event you'd like to highlight for the past week?
Cris deRitis: Yeah. Nothing else on the inflation front.
Mark Zandi: Okay. So you're on board with that forecast. Okay.
Cris deRitis: Yeah. I think Marisa covered all the highlights in terms of PCE, income, spending. But I might highlight, we did get another read on GDP for Q3. Revised up. So 5.2%.
Mark Zandi: Amazing.
Cris deRitis: That's amazing. 8.9% nominal, which boggles the mind too. Again, this shows a lot more strength. I might point out that we had a read for the GDI, gross domestic income as well, and we've talked about on the podcast before that was one and a half percent so a little bit of a conflict between the two. But even if you average them, what's that? Three and a half percent so that's still an incredibly strong economy in the third quarter.
Mark Zandi: Now, Chris Mayor, when I saw you in Columbia and I gave my happy talk and I did my one-handed, two-handed economist thing and focused on some down servers. But at the end of the day it was a pretty upbeat view on the economy. I think you came up to me at the end and you said that you were more worried, more pessimistic. Are you still more worried, pessimistic about where the economy is headed or did I cheer you up? Are you starting to feel any better given all the data that has transpired then and now?
Chris Mayer: I think you cheered me up a little bit, but I would still have ... I think we probably agreed at the end of the day on where we saw the risk factors. The question was the weight on them. We'll go and talk a little bit about it. But I'm worried about both commercial real estate and the banking sector and lending sectors. I'm probably a little more worried than the average person and the average policymaker is about them and what we're going to see coming. And so that's probably where I see a little bit more risk is on the asset price side. The stock market for all of the strength in the economy is still not really that far above where it was two years ago. We've seen some ups and downs and now it's picked up a little bit over the last month or six weeks.
So I do think in general the strength of the economy is going to pull us through all of it and I don't think what could happen in the financial sector ... Given how good the economy is right now, I think it's harder and harder for challenges in the lending and financial sector to derail the overall economy. So relative to when we talked six weeks ago or four weeks ago, I do feel increasingly better that even the risks are likely to not derail the overall momentum of where things are. But I think there's going to be some stories that may not be the number one story that could create challenges. And I also worry about just geopolitical stuff, but I'm an economist, so what do I know about that? But the geopolitical stuff still gives me real pause.
Mark Zandi: Got it. Got it. Well, we're going to come right back. But I just want to throw out the thing that I found most important in the last week was the continued low oil prices and lower long-term bond yield. So oil is now firmly on WTI, West Texas Intermediate, firmly below 80. It doesn't feel like anything's going to push that up to a significant degree because lots of stuff out there hasn't done it. Israel-Hamas, Saudi cuts, Russian sanctions, Chinese demand. We're getting more supply from American producers and that's keeping prices down. Now I say this. With inflation, I'm very confident in the forecasting. Oil prices, I am not, but it feels pretty good. And then on bond yields, boy, that feels pretty good too. I think I saw 4.25% on the 10-year yield. I think we're higher than that today, but I think I saw that yesterday or the day before and that feels pretty good to me as well. So another week of pretty good news, right Cris deRitis?
Cris deRitis: Yep. Keep it coming. Keep it coming.
Mark Zandi: Cris is the local bear, the relative bear so I'm just making sure.
Cris deRitis: It's in the name I think.
Mark Zandi: It's in the name.
Cris deRitis: Both a little bit worried here.
Mark Zandi: Okay. All right. Let's turn to housing and real estate more broadly. Commercial real estate, which you mentioned. And you mentioned before we got going here, this seeming disconnect that is developing between single family house prices, which believe it or not, they're rising again. Our Moody's Analytics repeat sales index, going back to Case-Shiller and their index, we construct something similar based on repeat sales. I think it's up 5% year over year through the month of October. It's crazy. And we're in the middle of the pack of all the price indices out there. And then on CRE, commercial real estate, prices are weakening, particularly multifamily. We also construct, Chris Mayer, repeat sales index for multifamily properties. And I think our last data point is Q2. I think it's Q2. Cris?
Cris deRitis: Correct.
Mark Zandi: Yeah, it was down 18.5% from the peak, which was I think last fall. Q3 last year, Q4 last year. So how do you think about that, Chris? What's going on there? That seeming disconnect between those two things?
Chris Mayer: Yeah. I will say the point you're making, Mark, is right, which is we probably have not in the data seen a bigger disconnect between housing and multifamily markets since I've been tracking the data. And it shows up in different ways. The Economist had an article this month mapping the country and basically the country used to be all one color, which is 2019 buying made a lot of sense and the whole country turned red and basically buying is a disaster. New York Times, everybody is writing articles that are saying the same thing.
And you see it in the data. We were talking about rent data flattening out. What's interesting is that it's very hard to think about a model where apartments and houses trade so differently, but there's been academic research suggesting that there's much less crossover than you might think. And so when I talk to people who are ... When you have a family who's living in a condo in the city and they've got one kid and a second on the way and you ask them, "Well it's so much cheaper to get into an apartment. Should you just go into an apartment or you're going to have the second kid and not move into a home?" I think that family's basically going to say, "You know what, I'm still going into the home and I'm going to grit my teeth and I'm just going to do it."
So some of it is clearly just the lack of supply of houses on the market. 60% of mortgages outstanding are below 4% and a quarter of them are below 3%. So everybody who's sitting in a home with a mortgage that's with a two handle or a three handle in front of it to go to a mortgage with a seven handle, even with a 10-year going to four and a quarter mortgage spreads, that is the difference between the 10-year treasury and the 30-year mortgage rate. Even though they're different, essentially the comparison is the right comparison and most people don't hold their loan for 30 years. That spread is close to record levels. Almost a 3% gap. And historically that gap is about half of that.
So mortgages are incredibly expensive. Houses have not come down. Rents are still at very relatively high levels. But rents went up, call it 30% post COVID, plus or minus a little bit. House prices have gone up 40 plus percent. Despite interest rates the housing market has stayed high. And it really is that there are people who are entering the home buying age where there are really no homes for sale and they have a very, very strong demand to live in a single family home. And so if you look at the vacancy rate for single family homes going back to the 1960s, it's never been as low as it is today, down to about half a percent of all what they call owner occupied type homes, mostly single family are vacant. In the apartment side, that's not the case. We're probably slightly below average on the vacancy side in apartments. Whereas for single family homes between 2008 and 2020, we built about two to 300,000 a year for a period of almost 15 years. And demand was much higher than that. And so the vacancy rate went from nearly an all-time high in 2008 to an all-time low because we just stopped building single family houses.
Part of not building them has been construction costs rising. One of the undiscussed implications of the immigration policy that we've had for the last 15 years has been that people who build single family homes, which has predominantly been an immigrant population ... Home builders since 2012 have been talking about a hard time finding people to build. And as economists we're all presumably skeptical. It's like, well, if you raise wages then of course you'll get people to build. But what's happened is they have to raise wages a lot and people don't really like those jobs that much. Sitting outside, working in the cold, working in the rain. It's not a super fun job. And it turns out even raising wages a lot hasn't gotten a lot of people to do it. And there's been no productivity. Construction in general has seen really no productivity changes. Maybe we'll build 3D houses and at some point that'll change.
But you still build houses more or less the same way you did before. It's pretty labor-intensive. And materials costs have gone up a lot. And so the combination of those things has meant that the supply of housing hasn't grown a lot. And if you look post COVID, construction costs, the PPI for construction is up substantially. And so even though home prices have grown more than 40%. The cost of construction, the PPI for residential ... I forget what they call it. The residential materials is up 38%. And so if you look on an after construction cost basis post COVID, home prices are up about 1.1% annualized since March of 2020. And if you look from 1987 to 2020, home prices in the US were up 1.1%. Sorry, 1.2% above construction costs for that 33 year period. So in other words, if you index home prices by construction costs, not by the CPI, home prices have grown post COVID at virtually exactly the same rate as they grew in the 33 years before COVID. 33 is just looking at the Case-Shiller index. And you should send me the index and I'll start using the Moody's index for my calculations as well, I promise.
Mark Zandi: Will do.
Chris Mayer: But one answer for housing or two answers is we haven't built a lot of it, the cost of building it has grown, and there's not a lot of substitutability between owner occupied housing and apartments. And those facts together make a case for housing prices where they are. Now there's a bare case to be made and in case Cris doesn't push me on it, we should go to the bear case, but I'll at least start with the bull case. And by the way, none of those facts apply for multifamily.
Mark Zandi: Although on the construction costs, aren't they up as well for multifamily? Builders have had a hard time getting materials and labor costs are up as well. No?
Chris Mayer: Construction wages do not show the same increases.
Mark Zandi: Is that right? Okay.
Chris Mayer: As construction costs, believe it or not. So if you look at wage increases, wage increases in the construction industry have not been higher than wage increases in other industries. Finding people to do them, it's interesting. Because the costs are high, essentially we just haven't built as much, which meant there haven't been as many people in the market, which hasn't then raised wages to the point where you start to see more going on. But a lot of the construction ... A lot of reason materials costs are higher is because while we saw some increase in single family construction, we saw historic increases in multifamily construction. And so multifamily construction rates were at the highest levels we saw in 20 or 30 years. And so we saw in the early 2020s, and actually even before COVID, 2017, '18, '19, because rents had been growing as home ownership rates were falling. I think you've written with Laurie it in the Urban Institute about credit continuing to be tight in the housing market relative to historical levels.
It's been hard for even people who historically would be good home buyers to get a loan. Home ownership rates were declining and had been declining consistently. And we went from 69% down to 64%. So there were many more renters. And that pushed up demand for multifamily and rents. That was happening throughout the 2010s, even before COVID. And so we have seen increasing amounts of multifamily construction. And that construction has really started to impact rents on apartments. And it's been particularly true in some of the hottest markets in the country. Austin, Nashville, Atlanta. These southern markets where we just saw rent spiking and we saw lots of stuff. Rents are now down 10 or 15%. I have a picture from ... I have a cousin in Austin who got married. I've been to Austin several times. A little bit of a geek that I am, whenever I see pictures of cranes, I turn around and I'm snapping selfies of myself with cranes in the background. Because I'm an economist.
Mark Zandi: You are a little weird. Just saying you're a little weird. Yeah.
Chris Mayer: Exactly. No. This is again, why you would never put me on TV. I'm the wrong person for TV ads. But I'm snapping selfies with these cranes in the background because of all the apartments that are getting built. And so in many parts of the country, particularly in the south where there aren't the building constraints that we have elsewhere, we've seen multifamily construction. That construction has been at levels that we hadn't seen in decades. It's going to be happening for another year to three years. The stuff that people started is still getting completed. And that's pushing down pressure on rent. That's pushing down rents. Gets back to our CPI conversation. Rents aren't going to fall. They're not going to collapse. But we've just built a lot of stuff in apartments. So some part of the decline in apartments has been driven by construction that we haven't seen in single family and a segmented market where there are really people who want to live in single family homes and in places where they send their kids to good schools and rents on single family homes have been stronger than rents on apartments.
And so some of what we're seeing is driven by what I'll call supply and demand fundamentals. But where we should come back to after this is what I'll call the investment market. So you have two markets going on for housing. One of them is the short-term market, which drives rents and prices, which is the supply and demand for units. But there's a second market, which is the valuation market, which is given what rents and prices are today, what do you think they're going to be in the future and what is the present value of that stock in the future? And that's what drives prices. And in particular for apartments.
Mark Zandi: That's interesting. I thought or I had this stylized view that the rental market or home ownership market were more substitutable as you're making the point, but maybe not so much. And so they're on their own supply/demand dynamics, investment dynamics and therefore can end up in a different place. Interesting.
Looking forward, we've had this correction in multifamily property prices down almost 20%. And by the way, they're down 20, but they're still up by our index 25 from where they were before the pandemic. So they're still well above where they were just a few years ago. So it's just a retracing of some of the surge in pricing that we saw during the pandemic. Cap rates have gone from being extraordinarily low to just low. They moved up. What I can't get my mind around is what happens in the single family housing market? Even if mortgage rates come back down to something closer to six, let's say, which in my view is equilibrium where you might land in the long run. So maybe we come down a point, a point and a quarter, point and a half, something like that. Even if that happens ... Even if you assume we avoid recession and people's incomes continue to move higher, if house prices stay where they are very elevated and rising, it feels like we're never going to get going here. Home sales are going to be on the floor for a long time. No?
Chris Mayer: Yes.
Mark Zandi: Okay.
Chris Mayer: I think house-
Mark Zandi: Or house prices decline. One of the two.
Chris Mayer: So the stylized fact prior to 2008 that some large institutional investors who were on the opposite side of the big short that on was we never see nationwide sharp declines in home prices. And 2008 proved that that is absolutely not the case. But that was in a market where we had large amounts of distress. Four million foreclosures and forced sales. I think in the housing market ... And my most cited academic paper of everything I've written is a paper on loss aversion, which makes a fairly straightforward point, which is people just don't sell stuff at nominal losses. It's not only houses. It's stocks, professional traders, all sorts of people. People don't like to sell things at nominal losses. We could debate whether that's rational or not as long as we want. It just turns out to be factually true of markets and of homeowners and of stock buyers and of professional commodities traders and everybody else at anyone's ever studied.
Mark Zandi: That certainly applies to me. I can testimonial to that. I can hold on to stuff forever. Because I just don't want to admit I was wrong.
Chris Mayer: People just don't want to admit they're wrong. It's a fact of human behavior.
Mark Zandi: Cris is definitely a like that. He'll never admit he's wrong. He smiles. Never admits that he's wrong.
Cris deRitis: I'm just waiting for the clock to ...
Mark Zandi: Sorry. I interrupted.
Chris Mayer: I'm willing to admit that I make mistakes except by the way, I have three daughters except when I'm talking to them, then it's a lot harder.
Mark Zandi: Good strategy. Good strategy.
Chris Mayer: Yeah. With my wife, I can never hold that position. I'm out immediately. But with my daughters, I still try and hold up that view. They don't really believe that of course, but I'll try. So what happened, for example, in the late '80s through the late '90s when home prices ... The previous peak before '08. You remember those times, Mark, where the largest bank in New England, Bank of New England failed in the late 1980s. We had rolling recessions. It wasn't correlated. Rolling recessions in different parts of the country. If you looked, nominal home prices were flat for 10 years after that period. And that was a period where we went into a recession. That's not analogous to this because we just started with the economy's strong and GDP just got revised up and the labor market is strong and we haven't even mentioned AI yet and the productivity gains.
Mark Zandi: Darn, I thought we'd get through this without mentioning AI somehow but you blew it.
Chris Mayer: This has to be the last time. That could be the last time. It's okay. But in the face of a strong economy, we don't have to live in a world where nominal home prices collapse. I think the disproportionate evidence we have over the last 40 years in US housing markets on the academic side is that when you see nominal price declines, it is associated with distressed selling. And I think I would argue more broadly that you could look at commercial real estate, you can look at other asset markets for some of the same reasons related to the view on losses, but for some others as well. Where you see sharp asset declines, you have somebody who's distressed, who's forced to sell an asset into a market where there's not a lot of demand.
And by the way, you see run-ups. More and more research on bubbles and work that I've seen and done over time suggests that over exuberance on one hand and distress on the other. And the over exuberance is by people who are non-experts. So it's when the people from somewhere else come into the market and start buying it up like crazy. Whether it's biotech stocks, whether it's AI, whether it's chip manufacturers of AI companies. When somebody who never buys chip manufacturers say, "Oh, AI is going to take over the world. I'm going to go buy that stock." That's what causes prices to get disconnected on the upside. And then the downside, it's distress selling. So it is perfectly reasonable, unfortunately that we could be in a market like this for a long time where you have a lot of people who are the opposite of distressed. They're living on three or 4% mortgages. They can continue to sit in those homes for a long period of time. They'll renovate them and do anything they can to avoid selling. And you have a demand of people coming in.
I think we're going to continue to see elevated levels of single family construction. But given interest rates, the demand for all that stuff is going to be somewhat limited because most of the demand for houses is still by people who are selling a home. So most transactions are trade up buyers or trade down buyers, but mostly trade up buyers who are selling an existing home and buying a new home. So that transaction, both sides of it are mostly gone and they're going to be gone for a while. And so it's going to be five, seven years before people pay down those mortgages to the point where they may think about pulling equity out to fund growth or to do other things.
And I think a very reasonable forecast for housing is that the people who are buying today are not getting a great expected return. That is if you take the present discounted value of the rents they're giving up relative to the price they're paying, it's not a great deal. But it doesn't mean the prices fall. Nominal prices may even rise a little bit if construction costs are higher. So you get some nominal price growth. You probably don't get the real price growth that we've seen historically. Real home prices have grown, again, a little bit north of 1%, 1.4, 1.2, 1.3% a year going back to '87. So maybe we don't get a lot of real price growth, maybe only a little bit. And we look back 10 years later and say prices are a bit higher than they were. The people who bought really needed to buy. They probably could have got a better investment return.
But the problem is they needed a place to live for 10 years so only on paper was that a bad deal because they actually got a place to live they wanted to live in. And so that's a perfectly feasible scenario. That scenario relies on two things. It relies on inflation remaining and controlling the economy and rates staying where they are in the economy growing. I can give two possible bullish cases where things could be a little better than that and they both rely on mortgages. So you're equilibrium mortgage rate in the sixes suggests that spreads on mortgages come down.
Mark Zandi: I'd say five and a half to six. That spreads-
Chris Mayer: Five and a half to six.
Mark Zandi: Yeah.
Chris Mayer: So that's where I was going to go with the five-
Mark Zandi: It could be lower. It could be lower.
Chris Mayer: It could be lower if spreads come back to the one and a half versus three. But I will say that bond buyers have been burned by what we will technically call negative convexity. A negative convexity which makes bond buyers hate owning mortgages is what all of us homeowners love. Which is the ability to refinance a loan when rates fall. And the problem is when rates are sitting at historically high levels.
Mark Zandi: Yeah. Don't want to.
Chris Mayer: You need a premium to own a mortgage bond because you realize if rates come down into the upper fives, all those mortgages at seven are going to refinance. And so I'm not willing to lend at lower levels because I'm afraid that there's going to be a refi wave of those people. And so in a world where interest rates are high and spreads are high, that is likely to keep spreads high in mortgages. If you think there's some scenario where rates come down, that's one thing. And the second is where do we think real rates should be? And this is a subject on which ... If you go back and look back to the beginning of the TIPS market, so measuring real rates-
Mark Zandi: This for the audience. The treasury inflation protected securities market. The TIPS market.
Chris Mayer: That's right. So I can buy a bond which gives me 10 years of real returns. So the federal government is going to pay me based on inflation. And so what I can go and figure out in the market is if I can buy a bond that pays me an inflation indexed return, and I can compare the yield on that to a nominal treasury bond, I can impute out what expected inflation is going to be. And if you look at the 10-year treasury, which is around four and a half, expected inflation is about 2.2 and a little bit less, actually. I think now it's closer to two. And the real rate, which is the non-inflation portion of returns is about 2.5%. By comparison in January of 2022, it was minus 1%. I point to January 2022 because if you go back in the record and look, you will see a number of Fed officials say, "Whoa. What are we doing buying all these bonds? We're not only going to stop buying them, we're going to start redeeming."
And when those comments came out, there was an immediate incredibly sharp increase in real rates. And the last time we saw that was back in 2013 when there was something called the taper tantrum. And the taper tantrum in May had exactly the same effect. At that time, the Fed said, "We're going to start pulling back on the bond portfolio." And real rates went from minus 0.5% to over 0.5% within weeks. And so the Fed's portfolio, if you go back before QE existed and you go back and look in the mid 2000s, the beginning of the TIPS market, real rates were pretty close to 2.3 to 2.5%. Today real rates are about 2.5%. So the question is when the Fed ... And the Fed has trillions of dollars of stock to still offload, but they've said they're going to stop buying, they're going to let it run off over time. And I believe them because of all their concern about inflation and everything else.
So as the Fed offloads that, they don't actually have to do it. Financial markets look at what's going to happen in the future, they don't price what's happening today. So they price the Fed's willingness to let their bond portfolio run down by trillions of dollars. There's a case to be made that real rates really should be in the twos absent these multi-trillion dollar interventions. And if we think the productivity growth in the future is likely to be higher because of technology ... I won't use the A word. The two letter A word.
If you think that productivity growth is going to be moderately higher, if we think that we're not going to see a lot of immigration and wages are going to go up, maybe real rates should be back at that level. And if so, that means that when you discount future rents to prices today, if you own a long-lived asset like real estate, those discount rates should be higher and have to be higher because you've invested in real estate, you have to earn a return relative to inflation that's the same return that you invest in stocks of technology companies or stocks of regular companies that are benefiting from productivity gains.
Mark Zandi: Okay. So to connect that back to where we started on prices, what are you saying? Now you're talking about multifamily?
Chris Mayer: So multifamily and single family.
Mark Zandi: Well, my interpretation of what you said on the single family side is of course things can go in lots of different directions, but most likely we're just going to go flatline here for a long time and let incomes catch up, interest rates come in maybe a little bit, and ultimately over time we're going to see more transactions as the markets normalizes. But hey, that's not going to happen next year. That could be five, seven years down the road. You mentioned New England-
Chris Mayer: That's exactly right.
Mark Zandi: Circa the 1990s as your case study. Which makes a lot of sense. By the way, that has all kinds of implications. Gazillion implications. Most obvious being home ownership is going to be a problem. It's going to be very difficult to get first time home buyers into homes. And that means home ownership is not going higher, maybe even start to go lower. But anyway, then you went on about real interest rates. Now you're tying that back into the multifamily?
Chris Mayer: Now I'm getting to multifamily. So you're exactly right, Mark.
Mark Zandi: Okay. Okay. I see. Okay.
Chris Mayer: Other than the fact that when I buy a home in principle, I should get the same return as other stuff. I think in practice we're just not getting-
Mark Zandi: It doesn't matter. Yeah. It doesn't matter.
Chris Mayer: Right. In multifamily, if I put a dollar into an apartment REIT or if I put a dollar into an apartment building, I have to earn the same rate of return as if I put a dollar into Microsoft who has the AI stock. Or I put a dollar into a consumer goods company or an airline. My dollar has to earn the same rate of return. If we think that AI is going to help some of those consumer goods and travel and financial services companies improve productivity, they're going to see potentially stronger returns on equity, which is what many equity analysts are saying. And the AI and the chip and the other companies, the software companies, et cetera, are also going to see benefits from that. And my dollar in real estate has to earn the same rate of return as those other investments.
Mark Zandi: Yeah. It's almost like ... Another way of interpreting what you're saying, I think ... I'll just say and see if you agree, is that you've got two different types of buyers and sellers. In the single family housing market it's mostly us as individuals and there's all kinds of ... We're not basing it on relative returns. We're not doing this careful calculation between rent, buy, and investing in stocks and everything else. We're not doing that because we've got to live somewhere and we like where we live. But in the multifamily side, a lot of institutional owners ... And they're certainly driving the prices up and down and all around, and they are looking at the relative returns in this context of higher real rates going forward, prices have to be lower. Multifamily prices have to be lower.
Chris Mayer: Yes. And quite a bit lower.
Mark Zandi: Quite a bit, which is what we've seen.
Chris Mayer: So you talked about prices going ... But 20% isn't nearly enough.
Mark Zandi: Oh, interesting. On the multifamily side, it's not enough?
Chris Mayer: On the multifamily side, not even close.
Mark Zandi: Oh, interesting.
Chris Mayer: Real rates went from minus one to two and a half. And that was the peak of the multifamily market. If you do the math and ask, I need to earn a real rate of return that's 3% more than it was at the peak, and you ask how much do prices have to fall for that real return to be there, it isn't 18%. It's 30 plus percent.
Mark Zandi: Okay.
Chris Mayer: So if you use a different index. And I hate to refer to indexes that are not the Moody's Index of course, but let me just point to Green Street.
Mark Zandi: By the way, I use other indices too, so I'm sure-
Chris Mayer: I know. It's a little bit like what do you admit to in the privacy of your home or of course on a podcast. So if you look at the data that Green Street have, they suggest that multifamily prices are down closer to 25 to 30 than down 18, and Green Street has prices close to the level they were at the beginning of COVID. If you use that NAV estimate, if you use that cap rate and look at apartment REITs as of last Friday, a week ago when we're recording this, Green Street's estimate of NAV ... And I look at the share price of multifamily companies. And I de lever the whole thing. And I ask, what is the premium to asset value that REITs are trading at? REITs are trading about 15% below the asset value mark to market relative to Green Street's price estimate. So if you combine-
Mark Zandi: Is the Green Street also based on actual transactions or is that market based or is it appraisal based?
Chris Mayer: They use market transactions, but Green Street takes a heavier pen to those transactions than other people do. They are more careful about how they look at future NOI. So they're really careful in calculating how they calculate cap rates. I would say they use a sharper pen than other people do in calculating their cap rates, which is why they're more volatile up and down than other measures are. But Green Street puts more resources into studying commercial real estate than any other analyst by a factor of three. They have very have three or four X to number of people relative to any other shop that does this. They're privately owned. I don't own stock in the company. I'm not a paid spokesperson. But I tend to look at their data because they just put so many resources into what they do. And if you combine them relative to the 18% number you talked about, you could easily see a 20 to 25. The stock market as of Friday is predicting another, call it 20 to 25% decline in multifamily prices relative to where they are today. And the math on that is not hard to go to.
Mark Zandi: So that would wipe out all the gains that are in our index going back, unless you're concerned about the banking system. The defaults, the delinquencies.
Chris Mayer: Correct. Correct.
Mark Zandi: Got it. Got it.
Chris Mayer: So just to give you the simple math, Mark, if you go from a five to a 7% cap rate and nothing else, that changes ... The cap rate is just a multiple. You were going to explain the cap rate
Mark Zandi: I was going to.
Chris Mayer: The cap rate is just the inverse of the price earnings ratio. So if you think that interest rates, the required rate of return goes up 2% going from a 5% cap rate to a 7% cap rate is the equivalent of a 40% decrease in price. And that is the difference in the PE ratio. And that's what you're seeing in the stock market from peak. The stock market's pricing more than that decline. And by the way, whether how one thinks about it, the single family REITs are trading about a 16% decline in home prices. So the public markets are predicting apartment prices using Green Street's data have another 15% to go and single family home prices got to drop another 16%. We talked about why I don't think that's actually going to happen. But the difference, as you described, completely accurately between owners of single family homes in the stock market and people who buy a home is owners of single family homes in the stock market have to actually get a competitive rate of return on their capital for them to invest in the asset. Whereas people who are buying homes have to own the home and their return comes from living in it.
So I don't think the stock market is predicting that housing prices are going to fall that much. What I think the stock market is saying that the price to rent ratio in single family homes is not enough to justify where prices are today and stock market investors need to buy housing at a lower price to get a competitive rate of return. But in multifamily, stock market investors are no different than private equity buyers of real estate or institutions like Columbia in their endowment. They need to earn a competitive rate of return across the capital markets. And now we get to your point, which is the distress in banks.
Mark Zandi: So just let me frame that for a second. Okay. So the concern, the hand wringing here has been CRE prices are coming down multifamily, we've been picking on multifamily, but some of these other office fundamentals are even worse and prices feel like they can ... By your calculations, I'm sure they're going to be down 50, 60%, something like that. Retail, industrial may be less so, but still some price declines. So the concern is those price declines combined with the possibility interest rates remain very high, owners of these properties now face higher interest costs as their mortgages start to roll over and they get refinanced into a higher rate. So now you have less equity, no equity because of the price declines. On top of that, you have higher operating expenses. And then on top of that, the fundamentals look iffy, remote work for big urban office towers and all that multifamily space coming online and big urban areas, so forth and so on. You add all that up, that feels like a lot of defaults. And then when you get defaults, that gets into your point about distressed sales and you get into this self-reinforcing what has been dubbed the Doom Loop. The Doom Loop. Is that correct?
Chris Mayer: Correct. My colleague Stan Van Newberg, he's talking about the office market. I'll stay away from office both because he's the expert, but also because office is obvious. You don't have to have anything to do with real rates to be pessimistic about office. But multifamily, the fundamentals are fine. If rent growth sort of stops at zero and then goes to one, two, 3% a year in future years because supply growth comes back to normal levels and demand continues to grow, we're not looking at declines in apartment rents of anything of the order of magnitude that we're describing. But I'll give you one quote that came from data looking at Trap and Goldman in their latest housing report. If you look at CMBS originations-
Mark Zandi: Commercial mortgage backed securities.
Chris Mayer: Commercial mortgage backed security. Thank you. You keep making me explain acronyms, which is good. New loans today are happening seven and a quarter plus percent. If you look at loans that are rolling over in 2024, the average interest rate is around 4.5%. Commercial loans. Commercial loans rolling over in 2025 are going to be 4.4. And in 2026, they're going to be 4.3%. And they're going to roll over into a world where they're going to have to finance those new loans at two to 3% higher rates. And you could have exactly the same rents that you had before. You could have higher rents, but to pay a two or 3% higher interest rate off of a base of four point a half, if your interest rate goes from four and a half to seven, your interest costs are going up 40%. Unless your rents are 40% higher ... And remember your costs. We start talking insurance costs and inflation. Those have real effects on the cost of operating apartments and property taxes and wages and all that stuff are high. So your costs are not flat. Your costs are rising faster than inflation, particularly insurance, which is going to get worse.
It is very tough for many units to pay those increases even if you have a perfectly fine building. And if you look at who holds those loans, by the way, the number of bank loans rolling over in 2024 is higher than 2023. In 2025, it is higher than 2024. And in 2027 it is even higher because all the loans that were made in 2020 and 2021 when rates were at incredibly low levels, they roll over in 2027. And that is a slow moving crisis that unless we get real growth in rents, which I'm not seeing, is going to be hard for a lot of those loans to roll over.
Mark Zandi: I hear you and I think we're going to end on the stats game because I think we need something uplifting after this conversation. And I know you're running out of time. We're all running ... We complete this part of the conversation and then do the stats game, and I'll let you get back to your two very significant jobs. But the pushback on what you're saying is ... And when I say pushback, the more optimistic perspective on what you're saying is that everything you've said is well known. We know all this. It's embedded in prices and the arithmetic is very clear. The regulators and the banking system and other investors in the marketplace see this coming. So it's not like it's going to take them by surprise. Not that that doesn't mean there isn't going to be a lot of financial pain and defaults, but it means that they can be managed.
And moreover, if we look at the banking system, just distracting a little bit from the non-bank part of the system, but the banking system, and you look at the exposure of the banks, particularly the big SIFI banks, large banks, it feels pretty small. If you look at the total commercial real estate assets on their balance sheet, that's mortgage, that's loans, that's securities, that's CNI loans to REITs, just add it all up. It's five 10% of their asset base and it's actually lower than it was 10, 15, 20 years ago. And then I'll say one more thing and then I'll stop and get your reaction. They're capitalizing to these incredibly large loss rates. I think in the CCAR, that's the annual stress test that the large banks take every year for capital planning, they are assuming overall commercial estate values peak to trough are going to decline, I believe, Cris deRitis correct me if I'm wrong, 40%. I believe that's 40% all in across all CRE. So okay, I said a lot there. Meaning that, yeah, I hear you. The meteor is coming. I know it's up there in the sky, but I have ways to mitigate the damage it's going to do to Earth. Does that resonate at all?
Chris Mayer: Yes and no. This is not a big bank problem. This is not a G-SIFI problem. And the reason is actually exactly what you just said, which is the bank stress tests heavily penalize real estate lending. Heavily. They run incredibly harsh scenarios. And by the way, they have to run rate increases on top of the scenarios you just described. So if you hold fixed rate loans of five to seven to 30 years, the stress tests just crush those loans. And so large banks have gotten out for the most part of real estate lending. So where are those loans sitting? They're not sitting with the G-SIFIs. They're sitting with small and regional banks and they're sitting with life insurance companies and they're sitting in the hedge fund and the investment base space. That's where the loans are sitting. They're not sitting with the large banks. So I'm not predicting in any way that these are going to be problems.
Many of those institutions are not marked to market. A lot of that stuff is in privately held institutions or small mid-size banks. And regional bank index is not a lot above where it was in March, despite the improvements in the economy. The regional bank index for regional banks is pricing in continued concerns and every time rates go up a little bit, you see the regional bank index just get crushed. When it went up to 5% briefly, the regional bank index was bouncing around the March lows. And so the market does see this and does see where it's sitting. And it's not all regional banks. Some regional banks don't have this composure. Some of them have a lot of it, and it's a real problem for those institutions, but it's going to sit in lots of other buckets in the economy, not in those places.
But if you look at new lending, the problem is going to be when you get a credit crunch. A credit crunch is historical lenders take losses and as the roles of the losses don't want to make new loans. And so what I worry about ... Look, capital markets are efficient as ever. If you give somebody the opportunity to make a buck, somebody's going to jump in and want to make a buck. This is not like the late '80s when they were given away real estate by the federal government and people could make fortunes. But I still say that when I look at the people who make commercial real estate loans, new loans are hard to get everywhere and standards are very tight. And I think we're just going to have a bunch of challenges ahead in the commercial real estate side. If real rates come down and if spreads on mortgages come down and if the 10 year comes down, that stuff gets better.
But I will say that Federal Reserve officials may not give themselves a lot of credibility when they say there are absolutely no problems because I don't think it's really true. The G-SIFIs it is. And the really puzzling thing to me is why they keep pointing to real estate and pushing to tighten standards here and there. You're not going to be able to roll over these loans without extending them for years and I think it's going to get hard to do it across the board. And I think we're in for a period that could just be a few years of prices continuing to fall and things are rough. And that's the good scenario. And the bad scenario, we have some element of distress. But when you're talking about the markets, I think apartment REITs and the REIT market in general is pricing in a moderate level of distress in commercial real estate. In other words, I think their prices are overshooting fundamentals by a little bit. I don't think apartment prices should fall quite as much as I was describing earlier. And so I think the REIT market at the moment is pricing some distress that is in addition to the other stuff we're seeing.
And I think the banking sector, there's some individual bank stocks that are pricing in some level of that, but there are a lot of other holders of these assets that we could go look at. And the great thing about global markets is they're held globally, not just in the US, so that spreads the pain over a lot larger base. I do think it may not be a great time for a while for folks on the commercial real estate side, and I do think there's likely to be some elements of distress that are not just in office that are really across the board.
Mark Zandi: Well, okay, with that sobering assessment-
Chris Mayer: I wasn't so bad, right? Housing prices won't collapse. They stay where they are. Commercial real estate. I could be much worse.
Mark Zandi: The meteor is coming guys. It's going to hit, but it's going to be okay.
Chris Mayer: No. It's not a meteor is going to crush us.
Mark Zandi: It's going to be okay under most scenarios. Maybe one or two scenarios it could be bad, but okay. All right. I hear you and it makes a lot of sense. There's definitely a lot of risk there. But let's end the conversation playing the game just to liven it up a little bit. Lighten it up, I should say, a little bit. Tradition has it then Marisa goes first. I don't know how this tradition came to be, but it is.
Marisa DiNatale: It's a good one.
Mark Zandi: Oh, I should remind everyone the game. We each put forward a statistic. The rest of the group tries to figure that out through cues, deductive reasoning and clues and the statistic is one that's not so easy we get it immediately, one that's not so hard that we never get it and if it's apropos to the issue at hand, all the better, but not necessary. Marisa, fire away.
Marisa DiNatale: Okay, so my statistic was taken during the course of this conversation, so I was scrambling a little bit to come up with something else.
Mark Zandi: I could see it on your face. I could see you scrambling over there.
Marisa DiNatale: You see the panic?
Mark Zandi: Yeah, the panic set in.
Marisa DiNatale: Okay, so I'm going to do something a little bit different. I'm not going to give you a statistic. I'm going to make you guess some geographies. Okay. So we got a lot of house price data. This is on the single family side. Moving back to the single family side. So we got a lot of house price data this week.
Mark Zandi: Our data?
Marisa DiNatale: We got our data, we got the Case-Shiller data, we got FHA data, right? So in the Case-Shiller and the Moody's Analytics house price indexes, if you look at the biggest metro areas in the country, say the top 25 metro areas in the country, there are three metro areas where house prices, and only three, where house prices are down over the year.
Mark Zandi: In the FHFA series?
Marisa DiNatale: Well now I'm looking at the Case-Shiller right now, but this is also-
Mark Zandi: Oh, Case-Shiller?
Marisa DiNatale: Yeah, but this is also true of our Moody's Analytics house price index too. Okay.
Mark Zandi: You're talking about the big metro areas then?
Marisa DiNatale: Yes.
Mark Zandi: What's the universe of metro areas you're talking about?
Marisa DiNatale: The top 25. The biggest 25 metro areas in the country. Okay.
Mark Zandi: Okay. Where are they down?
Marisa DiNatale: By population. Okay.
Mark Zandi: Okay.
Marisa DiNatale: What Cris?
Cris deRitis: San Francisco.
Marisa DiNatale: Hold on.
Mark Zandi: Oh, what?
Marisa DiNatale: And these are metropolitan areas, not metropolitan divisions. Okay?
Cris deRitis: Okay.
Marisa DiNatale: Okay, so there are three where house prices are down over the year. Can you guess which three they are?
Mark Zandi: Not San Francisco? That would be one, I would say. No?
Cris deRitis: Austin.
Mark Zandi: Is Austin in the list though? Top 25?
Marisa DiNatale: No.
Cris deRitis: Oh, top 25. Okay.
Mark Zandi: Yeah. Top 25.
Marisa DiNatale: So San Francisco, I'll give you partial credit for. It's actually-
Mark Zandi: San Jose?
Marisa DiNatale: It's actually up in the Case-Shiller, but it was down in the Moody's Analytics, so that was the one where there was some disconnect.
Mark Zandi: Oh, you're saying across all three of these house price measures ... No, that's not what you're saying.
Cris deRitis: They're down year over year in both the Moody's and the Case-Shiller.
Marisa DiNatale: Moody's and Case-Shiller. There are three that are down in both of those. San Francisco was down in one, but not the other.
Mark Zandi: I got it. I got it.
Marisa DiNatale: So I give him partial credit for that.
Mark Zandi: Is Phoenix in the-
Marisa DiNatale: Yeah, Phoenix is one of them.
Mark Zandi: Vegas? Is that-
Marisa DiNatale: That is one of them.
Mark Zandi: So we have one more to go?
Marisa DiNatale: Yep.
Mark Zandi: Is it-
Chris Mayer: Dallas?
Mark Zandi: Dallas. Yeah. I was going to say Dallas.
Marisa DiNatale: No, but Dallas is on the border. Barely positive growth over the year.
Cris deRitis: LA?
Marisa DiNatale: Nope.
Chris Mayer: Denver.
Marisa DiNatale: Nope.
Mark Zandi: Denver. Not Denver. It's not in the Northeast. It shouldn't be in the Northeast.
Marisa DiNatale: It's in the same region of the country where you're guessing.
Mark Zandi: Yeah. It can't be Boise. That's too small. It can't be Salt Lake.
Chris Mayer: Too small.
Mark Zandi: That's too small. What's the other big metro area down there?
Cris deRitis: Seattle.
Mark Zandi: Seattle.
Chris Mayer: Seattle.
Marisa DiNatale: No.
Mark Zandi: Not Denver. We should get this.
Marisa DiNatale: Yeah, you should get it.
Mark Zandi: What are we missing in that? Portland? No, not-
Marisa DiNatale: Sorry?
Mark Zandi: Portland?
Marisa DiNatale: Yes. Portland. That's the third one.
Mark Zandi: Okay. Portland. Okay. Yeah, Portland. That's a good one though. That's a good one.
Marisa DiNatale: Vegas, Phoenix and Portland is where house prices have fallen over the year among big metro areas, and those are the only places where we're measuring declining house prices.
Mark Zandi: I just want to point out that my home in Vero Beach, Florida, way up according to our index. And Philly. Philly's booming. We got like 9% year over year growth. What's that all about? I don't know.
Marisa DiNatale: Yeah. Philly's looking good.
Chris Mayer: By the way, Florida, if you asked me where I'm most nervous about, Mark, you probably didn't want to hear me volunteer Florida, but I'll volunteer Florida.
Mark Zandi: Climate insurance costs, that kind of thing?
Chris Mayer: Climate insurance. When we talk about things that force people to realize problems, they're negative things and high growth of insurance if God forbid we have the next storm, et cetera. But if you go through the area south of Fort Myers, between Fort Myers and Naples and the wreckage there, and you then say I'm an insurance company, you're going to be pretty nervous.
Mark Zandi: Yeah, I hear you. I hear you. I love that.
Marisa DiNatale: That's where my mom lives.
Mark Zandi: All right, Chris Mayer, you're up next.
Chris Mayer: All right. 6.5.
Mark Zandi: You're playing the game, right? What is it?
Chris Mayer: Yeah. 6.5 years.
Mark Zandi: 6.5 years?
Chris Mayer: Yes.
Mark Zandi: That's not the average duration of a mortgage, is it? No.
Chris Mayer: It is not.
Mark Zandi: Because it's longer than that now, right? It's like-
Chris Mayer: And it's going to extend way longer further. You're right. 6.5 years.
Mark Zandi: 6.5 years. The-
Marisa DiNatale: Is it something to do with multifamily?
Chris Mayer: No, it is not a real estate statistic.
Marisa DiNatale: It's not?
Mark Zandi: Oh. Okay. That's where my mind was.
Chris Mayer: But you'll see my linkage in a second to real estate, but it has to do with where you started, Mark, on the economy.
Mark Zandi: Where did I start? Oh boy.
Chris Mayer: When you and I started, which was the labor market has been really strong and we're not going into a recession. We're going to keep it going.
Mark Zandi: Six and a half years. Bummer.
Chris Mayer: A recession. Recession is a key part of this statistic.
Mark Zandi: We get a recession every six and a half years.
Chris Mayer: Correct. In the postwar period.
Mark Zandi: Oh. Okay. Yeah. That's a good one.
Chris Mayer: And the linkage to real estate is all of what we've been talking about assumes a soft landing. And if we don't get that, then all the bets are off in terms of all of our discussion because things could look very different if we have a recession and negative growth in terms of how to think about both housing and real estate and banking, et cetera.
Mark Zandi: That's very cool. Yeah. We should-
Chris Mayer: That was my statistic.
Mark Zandi: That's a good statistic. We should have gotten that right away because it's consistent with that 15% unconditional probability everyone uses. Yeah. Chris deRitis, you're up.
Cris deRitis: 71.4.
Mark Zandi: Is it a statistic that came out this week?
Cris deRitis: It did.
Mark Zandi: Government statistic?
Cris deRitis: No.
Mark Zandi: Not a government statistic. Is it from a conference board survey of consumer confidence? No.
Cris deRitis: Nope. It's a trade group.
Mark Zandi: It's from a trade group. Housing related? Real estate?
Cris deRitis: Yes.
Mark Zandi: It's housing related.
Marisa DiNatale: Oh, is it NAHB?
Cris deRitis: Nope.
Chris Mayer: Percentage of purchases by new home buyers?
Cris deRitis: Nope. It's an index.
Mark Zandi: An index.
Chris Mayer: Affordability?
Mark Zandi: An index. Trade group.
Cris deRitis: Nope.
Mark Zandi: 71.4. Yeah. It's not a sentiment index?
Cris deRitis: No.
Marisa DiNatale: A trade group related to housing.
Mark Zandi: It's related to housing and it came out this past week.
Marisa DiNatale: And it's not the NAHB.
Cris deRitis: No.
Mark Zandi: Should we get this, Cris?
Cris deRitis: I thought you would get this, Mark.
Mark Zandi: Ah, now he's trying to embarrass me. Yeah.
Chris Mayer: I'm the housing guy, so that's only because I'm the new guy on the podcast he didn't want to embarrass me.
Cris deRitis: It's the National Association of Realtors.
Mark Zandi: Okay.
Cris deRitis: Oh, okay.
Mark Zandi: Did they come out with anything this week?
Cris deRitis: Yeah.
Mark Zandi: What did they come out with?
Chris Mayer: Index of home sales.
Cris deRitis: These are pending home sales.
Chris Mayer: Pending home sales.
Mark Zandi: Oh, pending home sales.
Chris Mayer: Yeah. All right. There you go.
Mark Zandi: For some reason I thought that was home builders, the NAHB. That's how it got fooled. That's an art?
Cris deRitis: It's an art. National association of-
Mark Zandi: No, no, wait.
Chris Mayer: They are, yeah.
Mark Zandi: Oh, you're right. Sure. Pending home sales.
Chris Mayer: That's at a near all time low. That is an all time low.
Cris deRitis: At an all time low. Yep. That's going back to 2001. That's when they started.
Mark Zandi: Wow.
Cris deRitis: Lower than it was in the great recession. Lower than the early days of COVID when we couldn't actually transact a lot of houses. Just-
Chris Mayer: There's nothing that says it can't get lower.
Cris deRitis: That's true.
Mark Zandi: There's that meteor again.
Chris Mayer: 71 has a lot of numbers the added zero. Remember the old Spinal Tap? But it goes to 11. It's not just 10. It actually goes to 11.
Mark Zandi: That's right.
Cris deRitis: I'll give you the-
Chris Mayer: 71. It can go lower.
Cris deRitis: This figure is from October though, so I'll give you a little ... If you want more of an optimistic view, this was October. Very high mortgage rates. Since then mortgage rates have come down so we could see a little bit of pickup.
Chris Mayer: I predict going lower.
Mark Zandi: All right. I got one.
Cris deRitis: What's yours?
Mark Zandi: Two numbers. And we did talk about this earlier. 3% and -0.2%.
Marisa DiNatale: 3% is the PC year over year.
Mark Zandi: No. It's year over year percent change in something, but not the PC, not the consumer expenditure deflator.
Marisa DiNatale: But that is true.
Cris deRitis: It is the PC.
Marisa DiNatale: It is.
Mark Zandi: It's factually correct. Okay. Another 3%. That's funny. Oh, that's true. It was. Yeah. Overall inflation, 3%. You're right. Exactly.
Marisa DiNatale: Year over year. Yeah.
Mark Zandi: Oh, that's interesting. Yeah. No, this is another 3%. It's-
Cris deRitis: Housing related?
Mark Zandi: No. Not housing related, but a statistic that came out this week. A government statistic.
Marisa DiNatale: Is it disposable income?
Mark Zandi: No. In that ballpark though.
Cris deRitis: Spending?
Marisa DiNatale: Income.
Mark Zandi: Came from the BEA.
Chris Mayer: Is it a GDP number.
Mark Zandi: GDP. That's year over year real GDP growth on the nose.
Chris Mayer: Real?
Mark Zandi: Real. Three.
Chris Mayer: That's right.
Marisa DiNatale: Oh, okay.
Mark Zandi: That's pretty impressive. What's the -0.2? Cris deRitis, you should know this. You brought this up earlier.
Cris deRitis: I brought this up earlier.
Mark Zandi: You brought up the statistic earlier. Yeah. In the context of GDP.
Marisa DiNatale: Oh, GDI.
Mark Zandi: GDI. Gross domestic income. Yeah. So that gap is pretty large. The so-called statistical discrepancy, which is the difference between gross domestic income and gross domestic product is 2.5% of GDP. It's been higher only one other quarter in history since World War II.
Cris deRitis: So which one's, right?
Mark Zandi: I don't know. Something's going to get revised, but I think though the rule of thumb, the advice you get is, as you said earlier-
Cris deRitis: Average.
Mark Zandi: Average the two. So three plus -0.2, divide by two, it's about one and a half-ish. That actually feels like the economy to me, doesn't it? If potential growth in the economy is two and we've been growing one and a half, that explains the modest easing up in the labor market that we've been observing over the past year. So it feels like that might be actual reality here, but we'll see with the revisions.
Anyway. Okay. That was great. Hey, Chris, you took a lot of time with us under significant duress, so I really appreciate it. And we didn't cover a lot of ground. I had so many other things I want to talk to you about and maybe we can get you back on to talk about them and maybe by that point in time you'll be even cheerier than you are now.
Chris Mayer: Good. Well, I appreciate it. It's been a lot of fun. Great group to talk to, and I really enjoy the podcast.
Mark Zandi: Well, thanks so much.
Chris Mayer: An honor to be on.
Mark Zandi: Thank you. And just before we go, I want to call out one of our listeners, Milan Tomin. Milan is a avid Inside Economics listener. Spotify produces these statistics that show you what is your number one podcast, number two, number three, how much you're listening. And Milan is, I think ... What was it, Cris or Marisa, in terms of almost like 4,000 hours of listening on the Inside Economics podcast. Real fan. I think he's in the financial services industry in London. So thank you, Milan. I really appreciate your dedication to our podcast, and hopefully it sounds like you've found it of some value. So thank you for that. And with that, dear listener, I think we're going to call it a podcast. Take care now.