Mark Obrinsky, Chief Economist for the National Multifamily Housing Council, joins the podcast and gives a detailed housing outlook. Topics include rent growth, housing shortage, and the impact of inflation on the housing market. Mark and Cris also welcome Marisa DiNatale as the new co-host of Inside Economics.
Mark Obrinsky, Chief Economist for the National Multifamily Housing Council, joins the podcast and gives a detailed housing outlook. Topics include rent growth, housing shortage, and the impact of inflation on the housing market. Mark and Cris also welcome Marisa DiNatale as the new co-host of Inside Economics.
Full episode transcript
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 co-hosts and we have a new co-host, Cris. Cris deRitis, of course, is the deputy chief economist. And we're welcoming Marisa DiNatale as our new co-host. Welcome, Marisa.
Marisa DiNatale: Thanks, Mark.
Mark Zandi: I did have some in trepidation about having you be a co-host. I'm just being honest here. My problem, frankly, Marisa, is your salty language. I was a little nervous about... Right Cris?
Cris deRitis: Oh, my.
Mark Zandi: It's hard to keep her-
Marisa DiNatale: It was a one-time incident.
Mark Zandi: One time? Is that right? Okay.
Marisa DiNatale: We'll see how it goes.
Cris deRitis: It was hardly that salty.
Marisa DiNatale: Thank you, Cris.
Mark Zandi: Well, you're very forgiving, Cris. I mean, but-
Cris deRitis: I'm just excited that she's our co-host. It's been a long time coming.
Mark Zandi: The only thing that saved you from me was, we can edit this. We generally don't, we don't edit, but every once in a while, so I thought we could do that. Marisa promised me she would keep it light, keep it-
Marisa DiNatale: Keep it clean.
Mark Zandi: Keep it clean, yeah.
Marisa DiNatale: I'm very excited to be here, so
Mark Zandi: Well, thank you.
Marisa DiNatale: ... it'll be fun.
Mark Zandi: And you're on the West Coast, so I think we're recording this a little early for you, aren't we? Or is just normal, fair for you?
Marisa DiNatale: It's 7:30, it's fine.
Mark Zandi: This is fine? Okay.
Marisa DiNatale: Yeah.
Cris deRitis: She keeps East Coast time.
Marisa DiNatale: Yeah. I'm used to getting... The other day I had a 4:30 meeting my time. So this is late in the afternoon for me.
Mark Zandi: No big deal for you.
Marisa DiNatale: Yeah, no big deal.
Mark Zandi: Okay. Very good. And I should say it's wonderful to have you. I mean, you keep the trains on the tracks here. You manage the entire global forecast process, which has gotten pretty complex, I'd have to say, over the years. We've got folks all over the planet and we're doing all kinds of forecasting work now. I think this week we're doing the NGFS scenarios, is that right?
Marisa DiNatale: That's right. Climate change scenarios. That's right.
Mark Zandi: Right. That's the national greening of the financial system. These are the folks that put together the scenarios that many financial institutions around the globe are using. We take what they do and we expand what they provide to our broader models and provide all of the variables and our models to our clients. That's a process, isn't it?
Marisa DiNatale: Yeah. One that fortunately I don't have to manage, someone else does, but a whole team of other people in our climate group do it. But yeah, our whole research department is involved over 40, 50 people and it is quite the challenge. It's brand new for us. It's brand new for pretty much everybody over the past year or two. We're still figuring out the best way to do it and provide the most value to our clients. We have that, we have many forecasts ongoing as you know, at the same time, simultaneously, every month. It's a lot to juggle.
Mark Zandi: And a lot of kind of idiosyncratic scenarios, I noticed, we're running scenarios. China-Taiwan-US conflict scenarios.
Marisa DiNatale: Right.
Mark Zandi: Brazil, Bolsonaro-Lula, well, I'm not sure how we're describing it, but a mess in Brazil scenario kind of thing. Lots of different scenarios.
Marisa DiNatale: Yeah.
Mark Zandi: We have a guest, Mark Obrinsky. Mark is the chief economist at the National Multi-Housing. Is it council? That's the council, right? National Multi-Housing Council?
Mark Obrinsky: It is the National Multifamily Housing Council. We-
Mark Zandi: National Multifamily, sorry. National Multifamily Housing Council, NMHC. That's a mouthful. What do you say? NMHC or how do you describe-
Mark Obrinsky: We wish we had a different name, but changing names is even harder than sticking with National Multifamily Housing Council. Amongst ourselves we refer to it as the council, or NMHC, yeah.
Mark Zandi: That makes a lot easier. That makes a lot better. You are the chief economist of the council?
Mark Obrinsky: I am indeed.
Mark Zandi: We have known each other for many years, I dare say decades, I think.
Mark Obrinsky: It's a scary thought, Mark. I don't remember exactly when we met, but I think it's pretty close to the point at which I'm equidistant... That point is equidistant from my birthdate and today.
Mark Zandi: Yes, right.
Mark Obrinsky: That's how long ago it was.
Mark Zandi: I know, and I'm sure you came to NMHC from Fannie or was there some other-
Mark Obrinsky: That's correct. But walk it back a step. I might have even met you in a job prior to that. I was the deputy chief economist at the old U.S. League of Savings Institutions.
Mark Zandi: Oh, that's right.
Mark Obrinsky: The former Trade Association for the saving and loan industry before that industry and that Trade Association kind of faded away, let's say.
Mark Zandi: What years were those when you were-
Mark Obrinsky: I was there from 1984 through 1989, or '90.
Mark Zandi: Oh, those were action-packed years.
Mark Obrinsky: Those were action-packed. I got to see a lot then.
Mark Zandi: Yes. Right.
Mark Obrinsky: But that was my introduction to housing economics. I had done nothing in the way of housing prior to that. Got me into housing finance and the housing industry. From there, I did move to Fannie Mae where I... There for about 10, 10 and a half years.
Mark Zandi: And did you know Cris when you were at Fannie? Did you guys overlap?
Mark Obrinsky: No, we did not overlap. I'm too old to have overlapped with him at Fannie.
Mark Zandi: Cris, you came to Fannie after Mark had already left?
Cris deRitis: That's right. Yes.
Mark Obrinsky: Yeah, I left in 2000.
Mark Zandi: In 2000. The SNL crisis came to a fevered pitch, what? Early '90s, wasn't it? Did you left right before it all fell apart or was it falling apart by then?
Mark Obrinsky: Late '80s actually.
Mark Zandi: Late '80s, okay.
Mark Obrinsky: There's actually a theme here. I kind of hate to bring it up, but before I was at the US League of Savings Institutions, I was teaching at a mid-size university as we like to call it. Bradley University in Peoria, Illinois, I arrived there in 1979. People told me Peoria is immune to cycles because we have caterpillar tractor here.
Mark Zandi: Right.
Mark Obrinsky: Five years later, bumper sticker said, "Last one to leave, please turn the lights out." Because world economic downturn and Japanese competition crashed caterpillar two. First I crashed Peoria and then left to saving and loan industry. Then that industry fell apart, I moved to Fannie Mae, I got out of Fannie Mae before that was taken over by the government. Now, I'm with the multifamily industry and we've had a good 22 and a half year run for me. Maybe my bad luck is finally ended.
Mark Zandi: Yeah. That's ignominious track record there.
Mark Obrinsky: Yeah. And I said it anyway. I'm just trying to be honest.
Mark Zandi: Yeah. Well, I've got something similar for you. We play the statistics game, so we're going to play... This isn't the real game, but I'm going to play a little bit of a game kind of in the spirit of your personal history. Let me ask, what did these three years have in common? 1929, 1980, and 2008. You guys are economists.
Marisa DiNatale: I know what the answer is, but-
Mark Zandi: Oh, you do know what the answer is?
Marisa DiNatale: I think so.
Mark Zandi: Go ahead, fire away.
Marisa DiNatale: I mean, aside from recessions, that the Phillies were in the World Series.
Mark Zandi: They won the World Series.
Marisa DiNatale: Won the World Series?
Mark Zandi: Yes. Yeah.
Marisa DiNatale: Okay. Yeah.
Mark Zandi: In fact, those are the three years that the Phillies or the athletics, which preceded the Phillies won the World Series. 1929, 1980, and 2008. And those are also years when what?
Marisa DiNatale: Of course, yes.
Mark Zandi: The world fell apart-
Mark Obrinsky: In different ways.
Mark Zandi: And the economy fell apart.
Marisa DiNatale: So are you rooting for the Phillies then, or no?
Mark Zandi: I am. I am rooting for the Phillies, but I'm buckling in at the same time. Because if they win this World Series, if history... I don't know, causation, correlation, who knows? But that's something to keep in mind. The Phillies had a better track record then you Mark in terms of predicting that.
Mark Obrinsky: And that's a sad state of affairs.
Mark Zandi: That is sad state of affairs.
Mark Obrinsky: I say this as someone who lived in Philadelphia for a good eight years and I certainly followed and loved the Phillies back then.
Mark Zandi: Well, who's your pick?
Mark Obrinsky: Who's your pick? Well, I don't forecast. I only forecast stuff I know. I'm certainly not going to forecast stuff I don't know.
Mark Zandi: That's how we differ. Indeed. We'll forecast anything. What are you forecasting, Cris?
Cris deRitis: Do I have an option?
Mark Zandi: Yeah, you have no option.
Cris deRitis: There's no option.
Mark Zandi: Yeah, no option.
Cris deRitis: Go with Phillies.
Mark Zandi: Right. Okay. Yeah. Well, it's going to be an action-pack weekend, Mark, here in Philadelphia. This is Friday, got the first game of the World Series tonight. The second game is Saturday night. Of course, we love our Eagles. They're six and 0, the only undefeated team in the NFL. They play Sunday. And I think there's two more World Series games, Monday and Tuesday. So this is going to be very exhausting, watching all these games, because these baseball games go on forever. But anyway. Well, it's good to have you and we will definitely come back to talk about the multifamily housing market.
A lot going on there and really critical to the broader economy given the housing shortage and also given inflation because rent growth is a big part of what's going on with regard to inflation and want to hear your views on that. But before we go there, let's talk about this past week and all the economic data. This is a plethora of data, a cornucopia, a feast of economic data. And maybe I'll turn to you Marisa and just ask, given all those things that came out, GEP, a lot of housing numbers, we got the employment cost index, read-on wages, durable... I mean, trade. It was-
Marisa DiNatale: Income. [inaudible 00:11:28].
Mark Zandi: Lots of spending.
Marisa DiNatale: Lots of housing data. I know we got a ton.
Mark Zandi: Where do you want to start? Which indicator would you start with?
Marisa DiNatale: Well, let's talk about the ECI, which is the employment cost index.
Mark Zandi: Interesting. You've gone to the ECI first. Cris, would you have thought that? Would you have said ECI?
Cris deRitis: Oh yeah, that's friends then.
Marisa DiNatale: He's-
Mark Zandi: Knew you would've gone to the employment cost index.
Marisa DiNatale: Yeah, let's do that.
Mark Zandi: Mark, would you have gone with the ECI first?
Mark Obrinsky: No.
Mark Zandi: So what would you gone with first?
Mark Obrinsky: Well-
Cris deRitis: It's going to be-
Mark Obrinsky: ... the most important one.
Marisa DiNatale: GDP?
Mark Obrinsky: No, no. Clearly the quarterly survey of apartment market conditions.
Marisa DiNatale: Exactly.
Mark Zandi: I forgot about that one.
Cris deRitis: Nice. Nicely done.
Mark Zandi: How could I forget that one? Was that released today, Mark?
Mark Obrinsky: It was released today as a matter of fact.
Mark Zandi: Oh, okay.
Mark Obrinsky: What a great setup, Cris. Huh? Isn't this guy good?
Cris deRitis: Yeah, well, we definitely got to hear about that survey. In fact, I saw you gave me some advanced warning on that and there's a lot going on there that we need to talk about.
Mark Zandi: Okay, well, let's talk about the ECI, the employment cost index. Fire away, Marisa.
Marisa DiNatale: It came out this morning. So this is the quarterly survey that shows wage growth and this is the Feds preferred measure of wage growth. So this is really what they're keyed in on when they're looking at whether or not inflation is bleeding into wages and we're creating a wage price spiral. So if you look quarter-over-quarter, data for the third quarter came out this morning, total compensation costs for all civilian workers rose 1.2% quarter-over-quarter in Q3. Year-over-year, that came out to 5%. These are both down, whether you look quarter-over-quarter or year-over-year, a 10th of a percentage point.
So year-over-year growth in Q2 was 5.1. It ticked down a little bit to 5% in the third quarter. Same with the quarter-over-quarter number, down a 10th of a percentage point. So it moved in the right direction. It's not a huge move, it kind of budged down a little bit, but it is cooling, if you take it together with some other wage me measures. Another one we look at is the Atlanta Fed wage tracker. That also has been cooling the past couple months. It shows much stronger wage growth than the ECI overall, but it is also moving in the right direction.
Average hourly earnings, although I don't really like that measured, that's also cooled in the past couple of months. So it's moving in the right direction, it's not huge. I think in terms of, when I look through the whole report, it actually looks a little bit more hopeful than those top line numbers would indicate. So for example, if you just look at workers in the private sector and you look at total compensation, quarter-over-quarter, that went from one and a half percent in the second quarter to 1.1% in Q3.
And wage growth slowed by about the same amount, if you just look at wages and you take out benefits. And then when I look across industries and occupations, there is kind of some broad-based slowdowns across most industries and occupations too. We still see really strong wage growth in the service sector led by leisure, hospitality and retail trade. Those have very strong wage growth. Construction wage growth is still really strong, but given that's very interest rate-sensitive industry, I would expect that'll cool too.
Mark Zandi: So-
Marisa DiNatale: So it's good. It was in line with expectations, moving in the right direction, but it's not in anything to be dancing in the streets about in terms of signaling much lower inflation.
Mark Zandi: So of all the indicators that came out, you picked ECI wage growth because it's a read on what matters in terms of inflation. And right now inflation is kind of obviously at the top of the list of concerns and is driving what the Federal Reserve is doing in terms of interest rates. So we need wage growth to moderate, to be consistent with a moderation and overall inflation and get the Fed ending its rate hike cycle and potentially hopefully avoiding a recession. So that's why you picked this indicator. It's so central to all of what's going on here with inflation and monetary policy.
Marisa DiNatale: That's right. The-
Mark Zandi: And you're saying it was okay... I guess one thing is, we've been getting all these ugly numbers and the fact that it wasn't ugly felt to me pretty good. I mean, I go, "Oh, thank goodness."
Marisa DiNatale: Right. It wasn't a bad surprise.
Mark Zandi: It wasn't worse than anticipated, which is-
Marisa DiNatale: Yeah, it wasn't worse.
Mark Zandi: And then there are some things in the bowels of the report that give you a sense that wage growth might be rolling over, starting to moderate.
Marisa DiNatale: I think so. I agree. I would agree with that characterization, yeah.
Mark Zandi: My favorite measure in the ECI, and I think this gives you the best window into underlying wage dynamics, is wages and salaries for private industry workers excluding incentive pay, one-off pay bonuses, that kind of thing. I know that's a mouthful, but that gives you a sense of the core underlying wage growth. And that does feel like it's moving in the right direction. It peaked on a quarterly basis. The increase in the first quarter of this year moderated in the second, it moderated again in the third. Still elevated over 5%, but that gave me some solace that we're headed in the right direction. Does that sound about right?
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Hey, Cris, anything you want to add to that conversation around the ECI? Is that consistent with your-
Cris deRitis: Yeah. I think that's about right and I don't think it changes the Fed's stance or policy going forward. It's kind of in line with the expectations. So it doesn't cause them to accelerate or back off on the hikes.
Mark Zandi: Yeah, it's to script.
Cris deRitis: Right.
Mark Zandi: And the script is, the Fed's going to raise rates three-quarter point when they meet in a week. Another half point in December, probably another quarter point in January. I don't know where markets are now, but that feels like at that point they're going to pause and take a look around. Is that what markets were thinking at this point?
Cris deRitis: Yeah, I think there might be another quarter point in there, somewhere.
Mark Zandi: Although after today we'll take a look and see what it says.
Cris deRitis: Yeah.
Mark Zandi: We'll see. Okay. So Cris, of all the economic data that came out, we covered the ECI. Which one would you pick to highlight?
Cris deRitis: Well, I don't want to give it my stat away for the stats game.
Mark Zandi: Oh, cool. You can-
Cris deRitis: But I would say second to the ECI would be the PCE inflation measures, in terms of understanding Fed policy. That's the key gauge that they use. And that came in according to scripts as well.
Mark Zandi: PCE being the consumer expenditure deflator.
Cris deRitis: Correct.
Mark Zandi: Right.
Cris deRitis: That came out this morning as well.
Mark Zandi: Okay. And what did it show?
Cris deRitis: What's that?
Mark Zandi: What did it show?
Cris deRitis: 0.3%, again, kind of in line with what we had in August. This 0.3% is the month-over-month for September. Year-over-year, which is probably what people are most focused on, 6.2% on the headline and then 5.1% on the core. That was a bit up, but again, in line with expectations. For that reason, I don't see the Fed changing course. Still too high, right?
Mark Zandi: Yeah, pretty too high.
Cris deRitis: All about target.
Mark Zandi: That should be 2%. That's their target. That's
Cris deRitis: Correct.
Mark Zandi: That's their core. Excluding food and energy, consumer expenditures deflator, that's their benchmark inflation measure. They target that to be two, we're at five.
Cris deRitis: 5.1. So actually going in the wrong direction over the last month.
Mark Zandi: Yeah. But-
Cris deRitis: Not terribly so.
Mark Zandi: But annualized, it's kind of five-ish or something.
Cris deRitis: Yeah, right.
Mark Zandi: Okay. Mark, do you want to talk about the diffusion index, the survey you put together now? Is that your favorite indicator or of all those-
Mark Obrinsky: Well-
Mark Zandi: I mean, I know that's a little self-serving if you pick that one. It feels a little self-serving. I mean, is that actually the most important indicator that came out in your mind this week?
Mark Obrinsky: I can't believe you would think that of me Mark, really?
Mark Zandi: Well-
Mark Obrinsky: Self-serving? I don't know.
Mark Zandi: Yeah, good point.
Mark Obrinsky: Yeah. So-
Mark Zandi: That was harsh. That was harsh.
Mark Obrinsky: But, well, let's put it this way, let's put it in context. And I think we have to talk a little bit about the GDP numbers. Can't kind of ignore them.
Mark Zandi: I was waiting for that.
Mark Obrinsky: And so let's do that. I think my view is similarly what I think yours is, Mark. The third quarter data showed what most of us, maybe all of us knew, is that we were not in fact in recession. At least by September 30th economy was still moving forward. Consumption numbers, solid, not up but solid. But a couple of other signs in that report, net exports, help push the number up and I don't think anyone thinks that's going to be contributing a lot to GDP going forward. With the value of the dollar being so strong this is going to probably turn around and go the other way at some point.
I don't know if it's next quarter or current quarter, next quarter, whenever. We did see residential investment decline, fairly hefty rate. I think that's totally to be expected with the interest rate hikes we've already seen from the Fed. Expect that to continue going forward. So there are some signs of weakness to come in the GDP figures. And the question is... Oh I guess the other thing to say is, though the overall GDP number being up, let's call it two and a half percent to round, it maybe may suggest that productivity numbers were not quite as bad as one might have thought prior to that, which is good in relation to the wage number.
So that's the other point to make about that. But having said all that, there's weakness coming and I'm among those who think that the Fed needs to be mighty careful not to throw in all this monetary tightening, not see enough of an impact on the economy and then just keep tightening until it does see the impact, for as long as macro has been taught I think, the famous phrase is, monetary policy operates with long and variable lags. If I know this, obviously the Fed knows this, they've done a lot of tightening already.
You're probably right that the forecast for them, adding another one and a half percentage points of tightening before pausing may be what they're going to do, but I'm not so sure that's what they ought to do.
Mark Zandi: Mm-hmm. Now, even in the context of that wage growth and that high inflation, feels like inflation expectations are back pretty close to where they'd want to see them, but it feels fragile. Despite all that if you were on the FMC vote to what? Pause after this next great hike?
Mark Obrinsky: I'm not going to say what I would do because I haven't spent enough time looking at as much stuff as they look at. So I'm just saying there's a danger in over tightening just as there is an under-tightening. They do have a dual mandate supposedly, although somehow half of that mandate tends to get lost when inflation becomes a concern and causing a recession to bring inflation down, particularly in a world where, in my view recession is... Excuse me, inflation is not primarily a function of too much demand at this point, it's more a function of supply issues.
I'd just be a little wary of... Because when that's the case, you can still make inflation go down by raising interest rates, but you really have to shove up pretty high and really knock demand down. You pretty much have to have a recession for that to work, not so sure that's what we want right now. I would think they have a little more time to be careful than to overdo it right now and tighten too much. That's my view.
Mark Zandi: Yeah, no, I mean, I'm very sympathetic to what you just said. The pushback and I think it's not an unreasonable one, two things, one, to get to... They have a dual mandate, full employment, inflation that's low and stable. To get to full employment though a necessary condition is low and stable inflation. So you have to accomplish that, otherwise you can't get the latter, the full employment, at least not in a consistent way going forward. And the second pushback is, inflation is largely supply-driven but at this point it's metastasized and infected the inflation expectations, wage price dynamics.
And the only way to ring that out is a tight monetary policy. And even if you believe it was supply side-driven at this point, that's almost not relevant because it's in the wage structure and we got to get that out and that means a weaker economy. So I hear you, but I understand the other side of it too. But I guess your broader point is, and I totally agree, there's two-sided risks here and that's what you're saying. It feels like what you're saying.
Mark Obrinsky: Right.
Mark Zandi: The monetary policy.
Mark Obrinsky: Right.
Mark Zandi: Do you do an explicit forecast for the economy? I mean, do you have a GDP forecast for 2023?
Mark Obrinsky: No, we truly don't do forecasts for lots of reasons. First of all, because we're not very good at them. To do a real forecast, a real macro forecast, you really need to spend full-time with smart people and look at the data carefully. And as you've mentioned, implicitly, if not explicitly, you got to look at the whole world, you can't even just look at the US. What's the point of having some other rum group of four researchers produce another bad macro forecast? Why would we-
Mark Zandi: Oh, I can't, no.
Mark Obrinsky: ... do that?
Mark Zandi: I welcome your forecast any day, Mark.
Mark Obrinsky: No. We-
Mark Zandi: I'm sure you-
Mark Obrinsky: You guys are out there, why would we want to duplicate that? Our general view, this is in research at NMAC, is we can't do everything. Let's not do things that other people are doing well. Let's do things other people aren't doing and that are important to our industry.
Mark Zandi: Perfect. That's fair.
Mark Obrinsky: So our industry doesn't need another forecast. They particularly don't need another interest rate forecast.
Mark Zandi: Yeah, well, talk about tough thing to forecast.
Mark Obrinsky: Well, is this-
Mark Zandi: There's one forecast I'm going to ask you for though at the end, and this has kind of been our way of gauging where people's minds are on the economy. What do you think the probability of recession is over the next year? So I'm going to press you a little bit on that, but not now. Maybe towards the end of the conversation we'll come back to that and see if we can engage you on that one. But my sense is, looking at the data... By the way, my probability of recession actually came in this past week, just as a teaser.
Cris deRitis: It just doesn't make sense, just doesn't.
Mark Zandi: This past week, the data, it was about as good as it possibly could get from... It could have been better, but it was pretty good. I mean, the GDP number, positive but clearly it's going to slow.
Cris deRitis: Exactly.
Mark Zandi: It got juiced by temporary.
Cris deRitis: Exactly.
Mark Zandi: But that's a good thing. That's exactly what we need. We need GDP to... It's been flat since the end of last year, gone nowhere. And that's exactly where we want it. Because if you want the economy to cool off without going into recession, that feels like I couldn't draw the line any better than that. And it feels like that's the kind of growth... No growth we're going to get going forward here given the internals of the GDP number. The wage growth, that feels like that's rolling over, peeking. The inflation numbers, that was to script and that feels like that's peaking and going to roll over.
I don't know. I came away thinking... And then of course all the financial market response has been pretty constructive. I mean, got 10-year-olds at 4%, but the stock market's hanging in tough and credit spreads, they're consistent with the non-recession scenario. I mean, I feel better about the economy today in its prospects than I did a week ago. Which of course-
Cris deRitis: I'm shopping with Goldilocks. All right, good.
Mark Zandi: Yeah, I don't know. But anyway, we'll come back to that. So-
Cris deRitis: All depends on the Phillies then.
Mark Zandi: Yeah, I think a lot depends on those Phillies. Yeah, you make a good point. Okay, let's do this. Let's talk about the multifamily market in more detail and then we'll come back and play the statistics game. Because we already digest a lot of statistics so let's save the game for later in the conversation in the multifamily market. And here, Mark, I think this is a good place to bring in the survey, the quarterly survey, because I think that says it all. Do you want to describe the results there and what you think it means?
Mark Obrinsky: Yeah, sure. Let me just quickly describe for those not familiar with it, what the survey is. Every quarter we send out to most of our members four questions and we try to get quick responses and then turn the data around real quickly so it's not detailed data, it's just sort of quick qualitative answers to questions. And as you say, is a diffusion type index. So we ask, first of all, a market tightness question. So compared with three months ago, are the markets you are familiar with or operate in showing higher rents and higher occupancies, lower rents, lower occupancies or about the same?
And we can produce an index number like most of these things. 50 means it's essentially unchanged, above 50, things are getting stronger or growing, and below 50, it's the other way around. We had had... Let me take a quick look here. one, two, three, four, five, six quarters where the market tightness index was above 50. Not always much above 50, but at least a little bit above 50, indicating that we're seeing tighter markets on balance in most places. And then in the data release this morning, the number fell to 20, so that's well below 50, indicating that on a broad array of markets things are slowing. We're seeing slower rent growth and, or higher vacancy rates. That was a pretty sharp turnaround. And again, just on interpretation-
Mark Zandi: When's the last time-
Mark Obrinsky: ... I know economists understand how to interpret this, but not everyone files this in detail. A low number doesn't mean that rents dropped a lot or that vacancy rates went up a lot. It means that they went up across a broad section of markets. So they may have only dropped a little bit, but it's the direction that we're looking at, so the direction on a wide basis. So just to make up on-
Mark Zandi: Can I ask on that?
Mark Obrinsky: Sorry.
Mark Zandi: Just the technical question. So what if rent growth slows, that would be consistent with the easing and market tightness, would it not? Or does it actually have to decline? Do rents actually have to decline for people to say-
Mark Obrinsky: It's the way we ask the question. We're trying to get them to tell us not about rent growth but about rents.
Mark Zandi: Oh, okay. So what they're saying, it's-
Mark Obrinsky: But in fact, people answer the way they want to answer. So I think many people answer as you would, Mark, which is that if we had been seeing year-over-year growth rates of 8% in rents and now it's 4%, you'll probably say compared with three months ago, that's lower.
Mark Zandi: Right.
Mark Obrinsky: But the trickiest question is, what if rents are going up and vacancy rates are also going up, then what do they say? But that doesn't happen so often. It's a problem.
Mark Zandi: Right. In the 20... So just to articulate it. When you say diffusion index, this is the number of the percentage of respondents saying that conditions are tightening less, or easing, I should say, less the percent that say they're tightening?
Mark Obrinsky: Yes. And we do show those numbers too. You can find them on our website.
Mark Zandi: Oh, you can.
Mark Obrinsky: You can get the actual percentage of people answers. And so on that question, we had 66% of respondents say that conditions were looser than three months ago and 5% who said they were tighter. So you take that difference, which is, let's call it 60%, divide by two, 30% and subtract that from 50 and that gets you your 20.
Mark Zandi: Right.
Mark Obrinsky: And let me know if I'd said that too fast.
Mark Zandi: I think I got it. Did you guys get it? Yeah. Okay. So two questions. One, on the market tightness question, it's 20% or percentage.
Mark Obrinsky: It's just the 20, it's just an index.
Mark Zandi: Just 20. It's an index number, 20.
Mark Obrinsky: Yeah.
Mark Zandi: When's the last time it was at low? And abstracting from... I'm sure it was about that low in the teeth of the pandemic shutdowns. I'm sure it got that low, of course.
Mark Obrinsky: In July, 2020 was 19.
Mark Zandi: 19. Okay. And then what? Do you have to go all the way back to the great financial crisis to find something as low as that?
Mark Obrinsky: Well, April of 2020 it was 12.
Mark Zandi: Okay.
Mark Obrinsky: So then yes, before that you have to get back to 2009, 2008. I think the lowest number we ever showed though was in 2001, it fell to four.
Mark Zandi: Was that 9/11 or something?
Mark Obrinsky: Yes. It was the fourth quarter of 2001. It was 9/11.
Mark Zandi: 9/11. Yeah, that makes sense. And the second question, what was the high point? So if I go back, my sense is a year ago probably, the market was all very tight. What was the reading then?
Mark Obrinsky: Well, a year ago, so we had 79, 77-
Mark Zandi: 79? Okay.
Mark Obrinsky: ... 79, 79 in the first three quarters of 2021. And so again what that's indicating is, a broader array of markets are showing tightening across three straight quarters.
Mark Zandi: Right.
Mark Obrinsky: You're seeing a broad level of tightening of the physical space market for apartments.
Mark Zandi: Right. Okay. So I go back a year ago, it was tight, the market was tight, close to-
Mark Obrinsky: Market was tightening.
Mark Zandi: Tightening. And I would also say, when you say tight based on other data?
Mark Obrinsky: Yeah, I would say that.
Mark Zandi: Not based on this survey.
Mark Obrinsky: Yes, right, exactly.
Mark Zandi: You would say it was tight.
Mark Obrinsky: Yes.
Mark Zandi: Brands were rising rapidly, double digit, year-over-year growth, accelerating, vacancy rates, low and falling. Maybe not record low but pretty close. Would that be a fair characterization, overall?
Mark Obrinsky: Yes, it would. Absolutely.
Mark Zandi: Broad-based, I mean, across much of the country. It was everywhere, rent growth was-
Mark Obrinsky: Yes.
Mark Zandi: And it feels like it's fallen off a cliff from a year ago. Certainly in the last quarter it feels like a bit off a cliff, right? Is that fair to characterize it?
Mark Obrinsky: I think we don't know that for sure yet. I think what we're seeing, if you look at the month-to-month rent increases, the peak was actually probably sometime last summer, maybe late last summer and have been moderating since then by some data. The September number, month-to-month, so September over August, 2022 was flat and maybe down slightly in affluent terms.
Mark Zandi: So the peak was summer of 2021.
Mark Obrinsky: The peak in monthly rent growth.
Mark Zandi: Yeah. Was summer 2021?
Mark Obrinsky: Yes. Yeah.
Mark Zandi: 2021. Okay.
Mark Obrinsky: So the rate of growth has been easing off a little bit and it seems to be flat and maybe declining a bit in September. Have to also say that there is some seasonality to the rent numbers, but we don't see seasonally-adjusted numbers produced, typically, these are mostly by private data sources and so you have to make a qualitative adjustment in your head and say, "It might be just seasonality right now, let's see several months before we draw too many conclusions yet."
Mark Zandi: Now to the listener, let me just say, the reason I'm pressing so hard here is because this is really critical to understanding what it means for future inflation. We're going to come back to that in just a minute. But to nail this down, this kind of pattern that we're observing is really, really important to inflation, the cost of housing and ultimately inflation. Because the cost of housing is such a key component of inflation. That's why I'm really pressing here.
So my characterization of what you said is, market was really tight or tightening, but if I look at the broad set of data, it feels like it was really tight. In rent growth on a month-to-month basis, sequential basis was peaking back in the summer of 2021. And now here we are a little over a year later, things are easing very quickly, the market is loosening. It's not loose I'd say, but it's loosening because vacancy rates are still low and rent growth now feels like if not declining, pretty close to declining. Is that fair, the way I just described it?
Mark Obrinsky: I think that's fair. Yeah.
Mark Zandi: Okay. Very good. Well, one quick question, just I should have asked earlier, who responds to this exactly? I know they're your members, but who are your members exactly?
Mark Obrinsky: That's right. Good question. So essentially, anyone in the apartment industry can be a member, but that means as a practical matter, we have apartment owners, property managers, developers, we also have brokers, we also have lenders and we also have a few suppliers of different types, whether that's people who supply washing machines to the industry, it also means service suppliers. So there are some legal services, some architectural firms that are members, that sort of thing.
They don't make up the bulk. We don't send out our survey to all those folks. So we pretty much confine it to owners, managers, developers, and then lenders and brokers who we figure have a sense for what the markets are doing.
Mark Zandi: Got it. So pretty broad array of stakeholders in the multifamily market. You get pretty concerned.
Mark Obrinsky: Right and they see the market from different sides. And the other thing is, we've only talked about one of the questions. We do have other questions that are more on the investment side, so we get at that side of it too. And hence you do want some of those players answering these kinds of questions as well.
Mark Zandi: And what I noticed was, on those other questions, pretty large declines in pricing. So it sounds like... Or I should say volume. Sales volume. So these are transactions. And I mentioned pricing, but in the context of equity and debt financing, particularly debt. Debt looked like it really... And that probably goes to bank lending to the multifamily sector. That feels like that really came off pretty considerably in the last quarter.
Mark Obrinsky: As a matter of fact, we've been doing this survey since middle of 1999 and only-
Mark Zandi: Wow.
Mark Obrinsky: ... the second time in this history did not a single person say that, "Now is a better time to borrow."
Mark Zandi: Yeah, right. I've actually had a lot of bankers in the CRE space mention it. And in fact when I was speaking at your conference in DC, because it was a couple months ago, it came up that bankers, particularly the big guys, feel like they're under a lot of regulatory scrutiny and that the Federal Reserve and others are raising capital standards with regard to their multifamily lending. And that is really having an impact on their ability to provide credit. Does that sound right?
Mark Obrinsky: And we've had some people tell us that some banks, and I don't think I will name them, but have been told not to make loans to apartment owners or developers at this point. So-
Mark Zandi: Wow.
Mark Obrinsky: ... whether that's what everyone is hearing or what these individuals have been hearing from the banks, I can't say for certain, but there's no question that banks are pulling back. And even those that don't, you have, the dual impact of the rates themselves are much higher now than they were six months ago, but on top of that, what we call proceeds, that is to say they won't give you 80%, now it's maybe 75% or maybe it's 65% or whatever it might be. So the amount of debt financing you can do is a smaller share of the total capital stack. So in that sense too, it's a tougher time to borrow.
Mark Zandi: Right. Well, let's talk about what is driving all this. Everything in economics, it comes down to demand and supply. So I don't know how you want to frame this or where you want to begin, but what was driving the tightening market back in the summer of 2021 and now is driving the pullback in the market? There's a long list of demand, supply issues here. What would you put at the top of the list of reasons for what we're observing here?
Mark Obrinsky: This is going to be the easiest question you will ask me this entire podcast.
Mark Zandi: Oh, is that right? Okay.
Mark Obrinsky: It is. We haven't produced anywhere near enough housing of any type pretty much anywhere in the country. So by any type, I mean for sale and for rent. I mean, people talk about double-digit rent increases year-over-year. Yeah, there were 10% in some cases, but home prices were up 20%, 25. So when both for sale and for rental housing is seeing these kinds of increases, that tells you that the demand has not been met by a sufficient supply. And we've been under-building for, you could argue, since the bursting of the house price bubble.
And things, of course, collapsed after that, but then we haven't really gotten back on track fully since then. And for reasons, I'm not sure I know all of them, but the demand was slower to come back, but boy, once it did, we found out just how little housing we had built and how badly we needed it. And so I think more than anything else, the lack of housing supply is what's caused the tightness both for home ownership and for rental housing. Now obviously Fed's tightening of monetary policy has affected the for-sale market quickly and things are turning around much more rapidly there, but anyway, I think that's the underlying issue.
Whatever kind of cyclical downturn or slowdown we are facing in the next six 12, however many, 18 months, I don't think this undersupply issue is going away and I think either now or then we're going to need to build a lot more housing.
Mark Zandi: Okay. So the entire housing market is undersupply, both on the rental side where you're focused and on the home ownership side. In fact, I think the home ownership vacancy rate is at a record low, it's never been as low. So on that, based on... And I measured, it's even tighter than the rental market. So that explains partially the tightness that we have observed. It was certainly back summer of 2021 that underlying tightness in the market helped to... Well, you got to pick up and demand coming out of the pandemic, the economy reopened, households started to form, that had not formed during the teeth of the pandemic.
So that surge in demand bumped up against that lack of supply and that caused rent growth to go skyward, back again a little over a year ago when the market was as tight as it was. Is that a fair characterization of that dynamic?
Mark Obrinsky: Yeah, for sure. Yeah.
Mark Zandi: But now here we are today, we still have that undersupply. It doesn't feel like that's gotten any better. Vacancy rates are as low as they were a year ago, but now we have rent growth falling off sharply and now rent declines in more markets. So what goes to that dynamic? What has caused that?
Mark Obrinsky: Well, that's a demand side phenomenon-
Mark Zandi: Demand source. Okay.
Mark Obrinsky: But one has to be a little careful here. So it's demand side, it's caused by, at some level, obviously the Fed tightening monetary policy, but it hasn't yet been the case that we've seen. People who are looking to rent apartments showing up with lower and lower incomes and therefore it's immediately an affordability problem. That's actually not been the case. Here's a couple of interesting statistics from some earning calls from apartment REITs this week. Equity Residential or EQR, which is the biggest apartment REIT by market capitalization anyway, they said in the last 12 months the average income of someone who signs a new lease on one of their apartments... This is not the statistics game, but think what that number might be in your head and then I'll tell you the actual number. It's $174,000 and I'm guessing that's higher than what you may have had in your head.
Mark Zandi: Wow. About a hundred thousand dollars more.
Marisa DiNatale: Yeah.
Cris deRitis: Yeah.
Mark Obrinsky: So they're not having a problem with people being unable to pay the rents. That's not yet what the problem is. Similarly again, EQR says the rent to income ratio for these people signing new leases is 20% or a little less. The other largest apartment REIT, Mid-America Apartments or MAA, the largest by number of apartment units owned, although they own them in somewhat less expensive markets, so the capitalization is the same but different point. They say the rent to income figure for their new lease signings is around 22%. So neither of these is showing the kind of stress level that would suggest affordability is pulling back onto demand. So what it means-
Mark Zandi: Can I push back just a little bit before we move on?
Mark Obrinsky: For sure.
Mark Zandi: These are high-end though rental, right?
Mark Obrinsky: Yeah.
Mark Zandi: This is not bread and butter workforce rental or affordable rental. Is that right or wrong?
Mark Obrinsky: Of course, that's correct. Yeah.
Mark Zandi: Okay.
Mark Obrinsky: So these are market rate rentals. Equity residential has probably higher end than Mid-America does, but that's mostly by markets that they're in. Mid-America, much more in the southern tier, Mid-America, as the name might suggest. And EQR much more on the coast and the expensive markets. But you see this replicated throughout the entire market rate industry. Another one of the private data providers, I don't know if I'm supposed to not say their name or say their name.
Mark Zandi: No, they're not far away. We're good with any competition.
Mark Obrinsky: Yeah, so RealPage, it looked at the data. They have a large sample, I don't remember how many millions of apartments that they're looking at, but the media, and I believe it's the median, not the mean, the median rent to income ratio. This is going to be on new lease signings because once someone signed a lease, no one's keeping track of incomes anymore. But it's still 23%.
Mark Zandi: Okay.
Mark Obrinsky: So it's not just the so-called luxury, which really just means higher end, not just there. But it's also not the entire market. So I accept that there are a lot of apartments that are not in that set of things. But anyway-
Mark Zandi: So this why there's a lot of suspense here.
Mark Obrinsky: My point to all this is that what is happening is that there's a great deal more uncertainty about what the future's holding. So people may still have good incomes, but I think they're getting a little more nervous about what the next year is going to bring. And so a couple things happen. You're seeing fewer people walking in and they're looking to lease. So new lease up, traffic is down. On the other hand, not many people are leaving either. So move-outs are also down. The renewals is a very high number right now.
Part of that is, some of these people would've moved out to buy a home and that's about the last thing they want to do right now, both with mortgage rates and again, that economic uncertainty of not being sure what the world is going to look like in a year from now. So maybe this isn't the best time to sign a 30-year contract.
Mark Zandi: So you're saying, it's not that rents have gotten so high that it's gobbling up such a large share of people's income that they can't afford it and therefore you're getting demand destruction, people aren't renting because they just simply can't. You're saying they've got the income, it feels like they've got the income because the rent to income ratios are still kind of okay in the 20-25% range. And just as a benchmark, people think if it's over a third, you got a real affordability problem, so 20-25% seems okay. That's not it. It's that people are just so very nervous about, will they have that same income six months from now or a year from now. That's what you're saying?
Mark Obrinsky: So yeah, let me just be clear. So the first part of that is data and the second part of that is my trying to understand the data, just to be clear.
Mark Zandi: Yeah. You're very careful. Do you notice that, Cris? He's incredibly careful.
Cris deRitis: Yeah. But this must imply that the new household formations are not coming online. The system, if it's still functioning and the rents are not increasing, it must mean you're not getting new entrants coming in, pushing up rent prices further, right? So is that where we're seeing the effect here? The younger adult is not moving out because of the uncertainty or they're doubling up, tripling up?
Mark Obrinsky: Well, I wish I had data on that, Cris, where I can find any.
Cris deRitis: Yeah, I know.
Mark Zandi: Logically, that would have to be called-
Cris deRitis: But that's what's going on, right? I mean-
Mark Obrinsky: Yeah, so no, that makes total sense. I think we saw some, what's the right word? Unbundling of households from early in the pandemic through a year ago or so, maybe to earlier this year, more people forming households and maybe sort of pushed some household formation from the future to the present. And now we're seeing maybe a little bit more doubling up again. And whether that's people who were going to move out from their roommates and then decided not to, "Let's sign another 12-month lease on this" so that they didn't form a new household or people in other living situations that didn't form a household. I think that's happening, obviously, can't prove that data just yet.
Mark Zandi: Does that resonate with you, Cris? Or if I ask you the same question, what would you put at the top of the list of reasons for this, what we're observing in the rental market? Does that sound right?
Cris deRitis: Yeah, my narrative is that there is demand destruction in the form of those household formations not occurring. It's not that people are pulling back to the extent that the... based on what Mark has suggested, that they're not pulling back and doubling up, tripling up to a large degree. It's just that the new households that should be coming online just aren't, they're just suppressed. And that is causing the prices to moderate here.
Mark Zandi: I've got one other possible explanation I'm going to put forward, but before I do that, I want to call out Cris's glasses. Have you guys noticed Cris's glasses? It looks like he's got diamond-studded glasses.
Cris deRitis: What are you talking about?
Mark Zandi: No, look at that.
Cris deRitis: These are plastic-
Mark Zandi: Oh are they? Don't they look diamond-studded to you guys?
Cris deRitis: What are you talking about?
Marisa DiNatale: No, they don't.
Cris deRitis: Oh, Mark's got the fancy ones. Look at that.
Mark Zandi: Yeah. He's got the fancy ones. He's the one who's doing right.
Mark Obrinsky: These are also plastic.
Mark Zandi: Yes. Okay, just setting that straight. Here's the other possible explanation. And this is more secondary or tertiary, it's not the top. I think your explanation makes the most sense. Could it be remote work dynamics? So we saw a surge of folks during the early part of the pandemic, say 2020, going into certainly the first... In fact, if you look at our data in migration out of urban areas into other parts of the country, it peaked I think in the summer of... I think it was actually June of 2021, it actually peaked.
So you saw a lot of folks moving from these high cost, high-rent areas in the Mountain West into the lower cost, low rent areas in the Southeast, over into Texas. And a lot of folks leaving California and Seattle and moving into the Mountain West, same dynamic. And that caused very significant increase in demand and thus rent in those areas in the Southeast and Mountain West, that if you look at the rent data across metropolitan area, that's where you've seen the biggest rent.
And it really didn't have the same depressing effect on rents in those big urban areas. They kind of moderated. Came in a little bit more during the teeth of the pandemic, but just because of the kind of arithmetic here, it's juiced up rent growth in those other markets, those markets in the Southeast, in the Mountain West. And now what's happening is, since summer of 2021, we still see a lot of folks leaving the bigger urban areas, but much less so than was the case back a year and a half ago. And so this dynamic is starting to wear off and now it's depressing rents as opposed to juicing rents. Does that resonate? Does that sound roughly right?
Mark Obrinsky: Well, a couple things. So my example of exactly that phenomenon is Boise, Idaho.
Mark Zandi: Boise, by the way. Boise, the mayor makes a... There we go. Really important point. It's not Boise, it's Boise. They get very annoyed in Boise when people say Boise. Just saying.
Mark Obrinsky: Thank you for correcting me on that one. I do want to say it correctly. But if 50,000 households leave Seattle and move to let's say Idaho, the impact on the Seattle housing market is essentially nil.
Mark Zandi: Yeah, exactly.
Mark Obrinsky: But the impact on the Idaho market is, you've just blown out the entire market. There are no more houses left in Idaho.
Mark Zandi: You said it beautifully. That's exactly what I wanted to say. But that was beautifully said.
Mark Obrinsky: That's why the city of Boise had the highest house price increase for one of those 12 month periods during the last couple years. And now they're negative because a few people left. It's a smaller market, it doesn't take as many and absolute numbers to sort of juice it or knock it down. So I think that's truly what has happened there. For the larger narrative, I'm a little agnostic, not because I think it's wrong, but just because I think I'm trying... It's easy to come to snap conclusions that are wrong.
And we've seen this any number of times. We go back to 9/11, no one's ever going to want to live in a big city again. Really? That was about the best 10-year stretch big cities in the US have ever had in recent years. And then we had the great resignation. Actually people got sick and they couldn't go to work or kids weren't in school so they had to stay home and watch them. Not really the great... Now we have quiet quitting. Do we though? Do we really? I'm not so sure.
And I know that it's not anything that you suggest, Mark, but these things become memes in the popular press and everyone says they're true until everyone forgets them. And then you forget that you ever said any of those things and it's gone. I think work from home is different, it's no question. It had been happening anyway, it had been on the increase. We've probably moved it forward quite a bit because of the pandemic. But not everyone can work from home, so it's still a minority of people who are in a position to be able to work from home, so we have to just keep that part of it in mind.
And the other thing is, it's not as if... Wow, I don't have to... I work in downtown Manhattan and it's such a horrible commute to come in from New Jersey, so I better live in downtown Manhattan, so I don't have a horrible commute, but it's costing me a lot of money. Now I don't have to, I'm going to move to New Jersey. Really? There's a lot of good things in New Jersey, don't get me wrong, but it's not like people don't want to be in New York. New York's been around a long time. Not as long as Paris, but same issue there.
Paris is always going to be Paris, New York's going to be in New York, people are going to move there. People want to move to San Francisco. If they just build housing in San Francisco, they'd attract a lot more people, they'd stop leaving. And actually I have some hope that under the current administration they may actually be moving towards improving the housing construction in California.
Mark Zandi: Yeah.
Mark Obrinsky: So we'll see. So I take your point Mark, and it's not that I think it's wrong, but I think there are a couple of trends going on here and we'll see what they play out. But I really think that some of these cities just need to build more housing and they wouldn't be quite so unaffordable and they'd be far better off.
Mark Zandi: To that point, and I totally agree, we are seeing more supply. And this goes now a little bit to the outlook for the multifamily market and rents and what it might mean for inflation. It feels like we got this demand issue and that's not going to go away. If uncertainty or income and, or both, that doesn't feel like that's going to get any better over the next six, 12 months. The economy under any scenario is going to be under a lot of pressure. The job market is definitively going to slow by definition because the Fed's going to make sure that that happens.
And then also on the supply side of the market, it does feel like we're getting more supply. And in fact, if you look at multifamily starts, that is a pretty high level historically, not the highest it's ever been, but it's within speeding distance. And you also have a lot of multifamily property in the pipeline going to completion, haven't been able to get across the finish line because of supply chain issues and can't get appliances, can't get building materials, whatever it is to finish, or labor because of the pandemic as you pointed out.
But as those issues iron themselves out, as the supply chains continue to ease, as labor markets ease up, we should start to see those properties that are in the pipeline come to completion. So we should get more supply. So I just painted a picture of continued week demand, some improved supply that suggests that vacancy should be no longer falling, maybe even rising and rent growth should remain under pressure at least over the next year or so. Does that sound right? Does that resonate for you, that framework?
Mark Obrinsky: Yes. But central to the point that you're making is the slowdown that the Fed is engineering. So were it not for that, the level of new... I look at completions rather than starts for a minor technical reason, that way it's calculated, some of the starts that are listed as multifamily are actually not, they're duplexes, townhouses. So it's really single-family attached housing. So it's not literally part of the multifamily housing. So by the time to get it completed, that gets corrected.
So completions number, typically lower than the starts number for that reason as well as some others. But anyway, the number numbers have been picking up, actually they're sort of down this year over last couple of years. But at the levels, you're looking at 350,000 five-plus, so units in buildings with at least five units in the building. Back in the early to mid-'80s, you were looking at 500,000 and above. Back in the early '70s, you were looking at over 700,000, almost 800,000 one year.
So to the extent that you think generations matter, and I'm willing to say that we can easily exaggerate the importance of the generations moving through the pipeline, but when the baby boomers came online, there was a lot of concern. "Uh-oh we're going to have to build a lot of housing." And we did. We built a ton of new housing. And coming online for them was in two waves. One before and then after the big recession of '80, '81, '82 however you want to count that.
But what we used to... One time called echo boomers, Gen Y, whatever, however you want to define them anymore, millennials. I don't know how people define any of these generations anymore, but they're at least as big as the baby boomers and we're not seeing a comparable increase, at least on the multifamily side of new construction. So these numbers, they may look large relative to everything we've seen since 1990 on, but in the broader context, I don't think they're at all out of line, except that we might need-
Mark Zandi: No.
Mark Obrinsky: ... more of them. This might not still be around.
Mark Zandi: Not arguing that at all. But in terms of what it means, I'm focused like a laser beam on rent growth because we're going to, in a minute, take this back to inflation. In my mind, rent growth is driven by the vacancy rate and the vacancy rate is driven by the change in demand and supply. And we're all on the same page around demand remaining weak, maybe even declining for the reasons we discussed and I'm arguing, we're going to get more supply.
It's still not 1980s, which by the way, was all juiced by tax incentives and then juice that up and then we saw a crash in the multifamily market after that because of the high vacancy rates that resulted. But regardless of that, that we're going to get more supply, so that means to me that rent growth in 2023 is going to be soft. I mean, maybe even declines in rent growth. That's where I'm going. Does that sound right? Cris, does that sound right to you? That forecast?
Cris deRitis: It does. I don't know about declines, but flat would be my-
Mark Zandi: Yeah, we may not get declines. Because landlords are going to be pretty reluctant to cut rents in a broad-based way, at least consistently. Does that make sense to you, Mark? Or am I overstating the case?
Mark Obrinsky: No, I think it makes sense as long as when we're talking about rent growth, we're sticking with this month-to-month change and not looking back 12 months, because those numbers take forever to actually turn around.
Mark Zandi: Mean the year-over-year can be however many-
Mark Obrinsky: The year-over-year numbers [inaudible 01:05:09] in a moment get to the inflation question.
Mark Zandi: Yeah, good point. Yeah, good point. Okay. Very good. Okay, so I want to talk about, connect the dots back to inflation. And Marisa, can I call you back into the conversation?
Marisa DiNatale: Of course.
Mark Zandi: Can you give us a primer on how rents get into measures of inflation like the CPI and in the consumer expenditure deflator?
Marisa DiNatale: Yeah, so shelter costs make up a very large proportion of the CPI. They're a third, I believe, of the overall CPI. So that's not only rents, but that's also so-called homeowners equivalent rent, which is the implicit rent that a homeowner pays him or herself every month. So it's a huge portion alone, of the way the government measures inflation, which means it means a lot for what we see in month-over-month and year-over-year measures of inflation. So the CPI looks at both new... They ask people what they're paying for rent. They're also asking about new rents, and they're asking about renewed rents.
So if you stay in the same apartment and your lease comes up for renewal, they ask about that. There's some evidence that at least looking at private sector sources, and Mark, I'm sure this is what you can look at too, is that people signing brand new rents right now are seeing much softer rental price increases than say a year ago or so, so that the renewals are still hanging up there, but the new rent signers are seeing weaker pricing for rent. Because of the way the government calculates rents that'll take quite a while to show up in the CPI.
So there's going to be this very long lag catch-up effect before any softening and new rents shows up in the CPI data. In fact, I've been reading a lot about it, and I think you guys have talked about it before on the podcast. It could be a year before we start actually seeing that manifesting itself in the official inflation statistics.
Mark Zandi: I think 6, 9, 12 months, we should start to see some meaningful effects.
Marisa DiNatale: So it's a very long lag item. Somebody signs rent, it's usually for a year, so that price is not going to reset again for another year. So it's harder to capture changes that are happening right now in the market in the CPI data. Which goes back to Mark's concern that the Fed is looking at data that might actually be lagging and trying to hammer down inflation, but there is a lag with a lot of this stuff. So there is that risk that they could overdo it.
Mark Zandi: Yeah. Cris, do you want to add anything to that description of the link between-
Marisa DiNatale: No, I think she would laid it out perfectly.
Mark Zandi: Okay. So this goes to my outlook for inflation and my somewhat more optimistic perspective on what it means for monetary policy and ultimately what it means for the risk of recession. It feels like to me that the cost of housing in the inflation statistics, particularly the CPI, are peaking right now. It reflects this very tightening market, rental market that we had back a year ago, in Mark's survey when we were peaking in terms of tightness, when rent growth was at its peak, month-to-month, year-over-year.
And that probably will continue to put upper pressure on the inflation numbers you hear for the next few months. But as we move into next year, and certainly by this time next year, we are going to see a significant meaningful moderation in the cost of housing, in the CPI, in the consumer expenditure deflator. Given the market conditions, rents we're seeing not right now, and just what we just established will be pretty weak rent growth of any rent growth in the coming year.
So as we make our way towards the end of next year, going into 2024, this significant tailwind to inflation is certainly going to blow a lot less harder. It may actually become a bit of a headwind to inflation. It's key to getting inflation back down. How would you react to that narrative? Mark, do you have a perspective on that? Does that sound roughly right to you or do you have a different perspective?
Mark Obrinsky: No, it sounds exactly right. A quick little point, just not misunderstand. There's no complaint about how the CPI measures rents. What they're doing is a perfectly reasonable thing to do. There's nothing unreasonable about it, but it is true, as Marisa says. Eleven-twelves of the respondents to the survey are going to say, "My rent did not increase, zero from last month." And that's what it should say because that's what it's trying to measure. It's just not as good an indicator of what's happening at the margin, what's happening in markets today. Now, you know this, Marisa knows this, Cris knows this, I know this, obviously the Fed has to know this too. It's not that they don't know this. They have great analysts and researchers and-
Mark Zandi: Sure.
Mark Obrinsky: ... account at the Fed. The question is, how will they react to knowing that that's what I don't know? As you say, I think it's a reason I think they just need to be careful about not going too far and then have built too much tightening into the system. If they did nothing else on tightening, we would already still see rents pausing, flattening, maybe declining going into middle of next year.
Mark Zandi: He's a real dove, Cris, isn't he? I mean, Mark-
Cris deRitis: It sounds like it. Yeah.
Mark Zandi: Yeah. Man, what a dove. He'd skew the whole FOMC if he got on the Fed.
Cris deRitis: Yeah. Well, they need a little bit more diversity of thought there.
Mark Obrinsky: Well, they could use... Well, I won't say that. Let's leave it at that.
Cris deRitis: Yeah, got it.
Mark Zandi: Hey Cris, you heard my kind of frame there. What do you think?
Cris deRitis: Yeah, I agree with that. But that's... You're out still. So that's why I-
Mark Zandi: Mark, if he gets appointed to the board, these guys are going to keep raising rates to the sky. We're going into recession.
Cris deRitis: No, I'm not saying that's what they should do. I think that's what they would do. They're going to overstep because of the credibility issues.
Mark Zandi: Hey, we're running out of time, let's play the game. We'll end the conversation with the game, the fun part, the statistics game, and that is, we each put forward a statistic, the rest of us try to figure that out through questions and clues, detective reasoning. The best question is one that's not so easy. We get it immediately. One that's not so hard, we never get it. And one that's apropos hopefully to the data that's been released or the discussion at hand. So with that, let me turn to you, Marisa. What's your statistic of the week?
Marisa DiNatale: Negative. One-
Mark Zandi: Are you sure? Are you sure it's negative?
Marisa DiNatale: I am. I had to double-check it, but yes. Negative.
Mark Zandi: Mark, there's a bit of dyslexia on these stuff at times, but okay.
Cris deRitis: Can I get in?
Mark Obrinsky: Well, this is a tough crowd here. This is a tough crowd.
Marisa DiNatale: I know.
Mark Zandi: Oh, yeah. We're very serious about this game.
Marisa DiNatale: It's quite the initiation into the podcast for me. It's like a roast. Okay, so the number is -1.63%, in August. This came out this week.
Mark Zandi: Came out this week, and for the month of August, down 1.63%. Is it a house price?
Marisa DiNatale: Yes.
Mark Zandi: Is it the house prices in the West?
Marisa DiNatale: No.
Mark Zandi: In for the month of August, it declined 1.6% in some region of the country? No, nationwide. It didn't fall 1.6% nationwide. Did it?
Marisa DiNatale: The correct answer is somewhere in the middle of what you're saying.
Cris deRitis: Oh, interesting.
Marisa DiNatale: Your guesses.
Mark Zandi: Is this the FHFA series?
Marisa DiNatale: No.
Mark Zandi: Is the S&P Case-Shiller?
Mark Obrinsky: Case-Shiller, yeah.
Marisa DiNatale: Yeah, it is. It's Case-Shiller.
Mark Zandi: Okay. And is it month-to-month?
Marisa DiNatale: Yeah.
Mark Zandi: Okay. And it's not the nation, I know that.
Cris deRitis: And it's not a region.
Mark Zandi: San Francisco?
Marisa DiNatale: No.
Mark Obrinsky: Is it the 10 city average? The 20 city?
Marisa DiNatale: No. But you're... Yes. Mark gets it.
Mark Zandi: Oh, okay.
Marisa DiNatale: It's 20 city Case-Shiller-
Mark Zandi: Okay. Very good.
Marisa DiNatale: ... deposit index.
Mark Zandi: Wait, he gets it? He gets the credit for that?
Marisa DiNatale: Of course. He said the correct answer.
Mark Zandi: He took it the last centimeter. I took it all the way up to the line.
Marisa DiNatale: Nevertheless, he answered correctly.
Mark Obrinsky: Mark, I'll be happy to share the trophy with you and all the earnings involved.
Mark Zandi: You are way too nice, man. You are way too nice. Yeah, we're a cutthroat here. No, you deserve it. You get a cowbell for that. I think we got some extra cowbells. Okay, so why'd you pick that Marisa?
Marisa DiNatale: So I picked it for, I think this discussion of how we've been talking about the multifamily market, but we know the single-family market pricing and demand is falling off a cliff, really. This is the second straight month of price declines in the Case-Shiller, when you look month on month. Still up strongly over 13% if you look year-over-year at prices. But I picked this one not because the top line statistic is so interesting, but because every single one of the 20 cities in the composite had a price decline over the month. Every single one of the 20 cities.
Mark Zandi: Even Philly? I don't think Philly's in that index though, is it?
Marisa DiNatale: Philly is not in it. No, Philly is not in it.
Mark Zandi: Should be. Mark, why don't they have Philly in that index? That's just bizarre. It's the key market.
Mark Obrinsky: Philly index can't help you on that.
Mark Zandi: All right. Okay.
Marisa DiNatale: They've Cleveland, they have Minneapolis, they don't have Philly.
Mark Zandi: Cris, I think we need to construct our own index. What do you think, Cris?
Cris deRitis: Yeah, that might be a good idea.
Mark Zandi: Yeah. And, Cris, what did our index say for the... And in fact, we have data for what month, Cris?
Cris deRitis: For September.
Mark Zandi: September. Oh, okay.
Marisa DiNatale: Even more timely. So how about that?
Mark Zandi: What do you say-
Cris deRitis: Do you know number is, Mark?
Mark Obrinsky: I don't.
Mark Zandi: I do indeed.
Cris deRitis: Oh, you do?
Mark Zandi: You don't know the number? Oh yeah, absolutely.
Cris deRitis: It's negative. Zero points rate.
Mark Zandi: Nationwide house prices... Yeah, down six-tenths of a percent. Yeah. And annualized, our data shows the national house prices actually peaked in July, so it was down in August and September. And annualized, the decline is now 6.3%. So given the two month decline, if you annualize it, the same rate of decline occurred for the entire year down 6.3. That's nationwide. That's pretty meaningful. And San Francisco's-
Cris deRitis: Okay. Doesn't it?
Mark Zandi: ... getting crushed. Yeah, right. And that's September, by the way. And so we're pretty proud to get that out very quickly. That was a good statistic. But I will just point out, S&P Case-Shiller doesn't... When I said nationwide, I meant the 20 city average.
Marisa DiNatale: Oh, okay.
Mark Zandi: Come on. There is no nationwide other than the 20 city average.
Cris deRitis: All right.
Mark Zandi: Everyone knows that, right, Cris?
Cris deRitis: All right.
Mark Zandi: You're next, Cris. What's your statistic?
Cris deRitis: All right, I'm going to have to go with -0.1%. Statistic that came out this week. Indeed.
Marisa DiNatale: -0.1%.
Cris deRitis: -0.1%. Came out this week.
Marisa DiNatale: Is that a month-on-month figure?
Cris deRitis: What's that?
Marisa DiNatale: Is it a month-on-month figure? Month-to-month?
Cris deRitis: No. Nope.
Marisa DiNatale: Quarter-to-quarter?
Cris deRitis: How about a little hint? It's a -0.1% or thereabouts.
Mark Zandi: Thereabouts. Oh, that's an interesting hint. That's got to have some meaning, deep meaning, the thereabouts. Mark, you were going to ask a question.
Cris deRitis: Might be -0.09 right now, might be-
Mark Zandi: It a financial variable?
Mark Obrinsky: Oh yeah.
Cris deRitis: It is indeed.
Marisa DiNatale: Oh, it's the 10 year, three month treasury spread.
Mark Zandi: Oh, yeah.
Cris deRitis: Indeed. Indeed. Inverted this week.
Mark Zandi: That's a good one. That's a good one.
Cris deRitis: I know you've been talking about it all week. But that doesn't influence your recession odds at all.
Marisa DiNatale: No, they're lower.
Mark Zandi: Well, we got this whole negative, positive thing going, so-
Cris deRitis: Okay. All right.
Mark Zandi: I'm still focused on that policy yield curve, 10 year versus 100. That's-
Cris deRitis: And that's going to be soon enough, right?
Mark Zandi: We'll see my friend. But that's a good one. So you're saying that 10 year treasure yield less the three month TBI turned negative. So the three-month bill yield, short-term rates are now higher than long rates. And as we've discussed, inversion of the curve where short rates rise above long rates, that's a recession signal.
Cris deRitis: Correct. Now we have two.
Mark Zandi: Can I ask-
Cris deRitis: The 10 two and the 10 year, three month.
Mark Zandi: Can I ask on that one. How long is the average lead when it inverts to a recession actually occurring? Do you know? I mean, I know the 10 year, two years, almost 12 to 18 months.
Cris deRitis: Yeah, that's what I was going to say.
Mark Zandi: You think is that long?
Cris deRitis: I think it's similar, but-
Mark Zandi: Oh, so that would mean no recession until end of next year?
Cris deRitis: Or later. Yeah, that's right.
Mark Zandi: Yeah. Not first half, but later in the year. Okay. That's a good one.
Cris deRitis: But that's an average, right? I think that-
Mark Zandi: Yeah, I'm sure there are cases where it's much shorter than that. Hey, Mark, you're up. You want to play the game, I know. Right?
Mark Obrinsky: Well, I'm happy to play the game, although it appears I may have made one minor error. I did not realize that the data had to come out this week.
Mark Zandi: No.
Mark Obrinsky: That rule does not apply.
Mark Zandi: I violate that rule. I said the best, it doesn't have to be the best. I violate that all the time.
Mark Obrinsky: Okay, and I have no idea whether you'll think this is easy, impossible, or somewhere in between, because I just don't know you all well enough. But my number is 893,000.
Mark Zandi: That's the number of multifamily units in the pipeline going to completion?
Mark Obrinsky: That guy's good.
Marisa DiNatale: Wow.
Mark Zandi: Baby.
Mark Obrinsky: And here are the points about that.
Mark Zandi: And no collusion, Mark. There was no collusion. Right?
Mark Obrinsky: There was not.
Mark Zandi: No collusion.
Mark Obrinsky: Absolutely not. The point about-
Mark Zandi: Where's my cowbell on that? I got it. Go ahead Mark.
Mark Obrinsky: I was going to say, so the point is, that's an all-time high, highest ever. But to your point, and Mark, you were bringing up the point that if we begin to see some of the supply chain disruptions ease, some of that stuff will come back online. However, some of it is also because a greater share of new multifamily construction is high rise rather than garden. That's a trend that's been going on for some years now and that takes longer to build.
So more stuff will be in the pipeline longer as a natural phenomenon because of that. So it's not as if it's going to all come online really in a hurry and we'll just jack this up. I think we're just going to see larger numbers, multifamily under construction on an ongoing basis, but not necessarily this high. This should align with what you were saying, Mark.
Marisa DiNatale: This is permits. Is this permits or this is starts?
Mark Obrinsky: No. This is under construction, started but not completed.
Marisa DiNatale: Okay.
Mark Zandi: They're in the pipeline, they've got a foundation or whatever and they're off and running. You can mothball them, but boy, I don't think you can do that for maybe a single family, but not a multifamily. That-
Mark Obrinsky: Well, the other thing is, in multifamily world, if you're building, you're starting a high rise, once you start construction, you're still 18 months out from completion. So you're not going to stop it because there might be recession in six months. You got to get this stuff built and you just have to... And that's one difference between the industry today. And by today, I mean late '90s through the present. And before that, you have professional apartment owners, this is their business. They're not going to disinvest and go into something else if the industry goes into recession. They have to manage through a recession and that's what they do. And they'll come out the other end. So they're thinking longer-term than just what the cycle's doing right now.
Mark Zandi: And of course, as you pointed out, Mark, we are undersupplied, so, okay, I know once things normalize here a little bit on the demand side, people are going to scarf down these units because we don't have nearly enough.
Mark Obrinsky: Exactly.
Mark Zandi: I'm not going to give one because we're definitely running out of time and I've got a hard stop in a couple of minutes, but I do want a lightning round. What is the probability of recession in the next 12 months? Ready? Marisa?
Marisa DiNatale: 60%.
Mark Zandi: 60. Cris?
Cris deRitis: 70.
Mark Zandi: 70. Mark?
Mark Obrinsky: Well, it's either there will be or there won't be. So I'm going with 50%.
Mark Zandi: 50. I'm with Mark. I'm going with Mark. And Mark knows what he's talking about. 50, 5-0, 0, 5-0. And I'll just point out, that the guys with gray hair, in the case of Mark, no hair, Mark Zandi, no hair, we're at the 50. And these youngsters, although Cris is getting a little gray there, in those diamond-studded glasses. So I'll flip the coin.
Cris deRitis: All right.
Mark Zandi: We'll see. Okay. All right. We're going to end this podcast that way. What's written in granite now, Marisa, 60, Cris is at 70, Mark O is at 50 and Mark Z is at 50. So we'll see how this all plays out. Hey Mark, that was fantastic. I thought that was highly productive and I learned a lot. And I'm going to follow that survey now very carefully. Thank you for bringing that to my attention. I don't know how I missed that in the past, but that's a great survey, so thank you-
Mark Obrinsky: You're welcome. And we also have another survey we've only been doing for a shorter period of time, I think a couple years. Unfortunately it's a similar name, but even longer so you won't like it. Quarterly survey, I forget what it's called, construction stuff. But it has lots of detail on precisely those kinds of questions you're asking. Are there supply shortage issues on certain things? What about the labor? How can you be able to get later? What have you done when you can't get labor? What kinds of delays do you have? Lot of great information, easily found on our website, but if you can't, let me know and I'll send you the URL.
Mark Zandi: Yeah, we should cover that on economic view. It sounds like something we should be covering. Okay, with that, we're going to call it a podcast. Talk to you next week. Take care everyone.