Afford Anything - First Friday: Jobs Are Cooling, Prices Are Climbing, and NYC is Freezing the Rent

Episode Date: July 3, 2026

#729: The U.S. added 57,000 jobs in June. Economists expected 115,000. Meanwhile, inflation hit a three-year high. The Personal Consumption Expenditures index - the Fed's favorite inflation gauge - jumped 4.1 percent year-over-year. That combination creates a problem. Weak jobs usually push the Fed to cut rates. Hot inflation pushes them to hike. In this First Friday episode, we break down which way the Fed might lean at its September meeting, and why traders see an 80 percent chance rates stay frozen for now. We also dig into Kevin Warsh's debut as Fed Chairman. His first official statement ran only 132 words, one of the shortest in Fed history. He cut forward guidance – the practice of making guesses about what the Fed will do next. He removed the names of dissenting voters. His statement mentioned price stability but skipped maximum employment, and we explain why that omission matters. Central banks around the world moved in the opposite direction. The European Central Bank raised rates for the first time since 2023, responding to a 10.9 percent surge in energy prices. The Bank of Japan hiked rates to their highest level in 31 years. Australia, Norway, Indonesia, the Philippines and Israel joined in. Brazil was the only country to cut rates – down to 14.25 percent. We cover China's consumer spending decline, the first since the pandemic ended, driven by a 16.1 percent drop in auto sales and a real estate crash that drained middle-class wealth. We end the episode with a deep dive into NYC's rent freeze – who gets the benefit, and who pays the price? Learn more about your ad choices. Visit podcastchoices.com/adchoices

The U.S. added 57,000 new jobs in June, far less than what we expected. There are signs the job market is cooling off, and the Fed is focused on inflation, price stability, much more so than employment. Inflation is starting to come down, but still significantly higher than we want it to be. We're going to go through all of those numbers in just a moment. People are starting to feel more optimistic. Big surprise in the Consumer Sentiment Survey that we'll talk about in the later half of the show. and we will do a deep dive into the New York City rent freeze. All of that is starting right now.

Welcome to the Afford Anything Podcast, the show that knows you can afford anything, not everything. This show covers five pillars. Financial Psychology, increasing your income, investing, real estate and entrepreneurship, acronym Double I Fire. I'm your host, Paula Pant, I hold a master's in economic journalism from Columbia. Normally on our Friday shows, we interview a guest, but there's one exception, and that's the first Friday of every month. That's the day we take a look at what's happening in the broader economy around us. So welcome to the July 26, first Friday economic episode. The U.S. added 57,000 new jobs in June, far less than the 115,000 expected.

The big winners, surprisingly, the biggest winner was professional and business services. That category added 36,000 new jobs. I say that's surprising because we haven't seen a lot of strength from that sector in recent months. We have historically seen a lot of strength in the healthcare sector, and we saw that again. That's not surprising. That rose by another 22,000 jobs, and social assistance grew by 25,000 jobs. One spot of bad news, particularly in the summer, is that the big loser was leisure and hospitality. Employment in that sector dropped by 61,000 because their hiring is just weaker than usual. Their seasonal hiring is weaker than usual. Now, if you've been listening to these episodes

for a while, you know that the main headliner jobs report comes from the Bureau of Labor Statistics, the BLS, but there is also a second report issued by a payroll processing company called ADP. The ADP report only reflects private sector data. They're looking at their own customers, their own payroll, taking anonymized aggregate data. But it's always interesting to compare the ADP report to the BLS report to see what are the similarities, what are the differences, to round out the picture by having multiple sources of data. So the ADP report for June was pretty directionally consistent with the BLS report. The ADP report showed that private sector payrolls increased by 98,000 jobs. Now that also fell short of the consensus economic forecast, which was roughly 110 to 120,000 jobs.

So both the BLS and ADP had a job growth that fell short of consensus expectations. The ADP report in particular was notable for the decrease between May and June. There were 122,000 private jobs added in May, only 98,000 in June. It's still growth on both fronts, but slower growth. In the private sector, the education and health services sector, that alone, drove nearly half of all private job creation. That added 48,000 new positions in the month of June. Trade transportation and utilities grew by 15,000 jobs, financial activities added 14,000 jobs. And information, which is a sector that's been pretty beat up, that actually added 7,000 jobs in June.

That's all according to the ADP report. Meanwhile, according to ADP, the leisure and hospitality sector, the BLS showed that that was pretty beat up. ADP report said the same thing. Leisure and hospitality delivered its sixth consecutive month of week hiring. According to the ADP report, it added only 2,000 rolls. You recall in the BLS report, it actually dropped. In the ADP report, the only sector that declined, that shed jobs, was natural resources and mining. That was the only sector in the red, according to ADP. One notable detail that was pretty interesting about the ADP report was that that hiring was heavily tilted towards small firms defined as companies with fewer than 50 employees.

That sector added 53,000 positions and outperformed both mid-size and large companies. That is unusual. Again, if you're a longtime listener, you remember in months past, we've talked about the ADP report and how six months ago we were telling the opposite story. Six months ago, it was the large companies that were doing most of the hiring. and the small ones were lagging behind, now that storyline has flipped. Between both reports, we're seeing signs that the labor market is cooling off. It's soft data all around.

And so the question becomes, how will that affect what the Fed does? And the answer likely is that the Fed is less likely to raise interest rates. To give a little context for this, in the last First Friday episode, we talked about the probability that the Fed might raise interest rates. interest rates because inflation numbers are high, higher than we want them to be. Those high inflation numbers, plus the fact that we have a new Fed chair, Kevin Warsh, who is very hawkish on inflation, meaning he's very worried about inflation. All of that combined, painted a greater probability that the Fed might raise interest rates, but now poor job numbers decrease that likelihood. So at the moment, investors are pricing in a less than 20% probability that the Fed will

raise rates at their next meeting. Said another way, investors are pricing in an 80% probability that the Fed is going to hold interest rates steady, which currently is at a target range of between 3.5 to 3.75% for the overnight federal funds rate. By the way, if you're wondering, how do we know the probability? It's calculated from futures contracts that are traded on the Chicago Mercantile Exchange. Now, one of the reasons that there is an 80% probability of the Fed holding rate steady, which is not what investors were guessing even a couple of weeks ago, a big piece of that is that oil prices are retreating.

So crude prices have dropped back towards pre-Iran war levels following the recent peace talks in Switzerland. And that retreat in oil prices is having carryover effects for all kinds of inflation data. we're going to talk more about that later in the show and is a major factor in the expectations that rates will hold steady at the next meeting. So the next time the Fed meets is July 28th and 29th, end of this month. So with an 80% probability priced in that they'll hold rates steady at that meeting, the big debate that's happening right now is what are they going to do at the next meeting after that, which is going to be September 15th and 16th. And again,

later in the show, we're going to talk more about inflation so that we can get some more context as to what might happen in September. That's the topic. That's the big hot topic that a lot of people are debating right now. Before we get to that, let's talk a bit about this new Fed chair, Kevin Warsh. So on June 17, Kevin Warsh hosted his debut meeting as the Federal Reserve Chairman. on that day, June 17, the Federal Open Market Committee released 132 word statement. Now, even by Fed standards, that's a really short statement. In fact, the statement was originally 341 words and Warsh slashed it down to only 132, making it one of the shortest statements that the FOMC has ever released.

And it was notable not for what was in it, but rather for what, wasn't in it. So first of all, Warsh intentionally got rid of what's called forward guidance, which is the practice of explicitly hinting at what the Fed might do at future meetings. Remember how we're like, okay, we have a sense of what they're going to do at the July meeting, but what are they going to do in the September meeting? Warsh eliminated any hint of any future meeting. He has long time been a very vocal critic of that practice. He's argued that it boxes in the Fed. You know, when they go cast their vote, they want to, they don't want to shock people,

so they want to vote in a way that mirrors the forward guidance that they previously issued. But if new data has come up, you know, he wants the Fed to be able to be flexible and be nimble and respond to new data that comes up and not feel boxed in by the fact that everybody is expecting them to vote in a certain way or to take a certain action. So he eliminated forward guidance. He also removed the specific names of voting members, including details on who voted against the policy decision and the reasons for their dissent.

Warsh said that behind the scenes they're fighting, and in fact he used the phrase, quote, good family fight. He said that, you know, the committee's having a good family fight about many issues, but he removed disclosing who voted for what and why. He wants the Fed members to be able to cast their votes anonymously and not have to justify their rationale. That is a new departure. He also eliminated a very longstanding paragraph.

There used to be this paragraph in there that noted that the Fed would take into account, quote, a wide range of information. he got rid of that paragraph entirely, that boilerplate, and he compressed everything down into one single, very blunt sentence that just said, the committee will deliver price stability. And that caught everyone's attention because notably, it talked about price stability, but it did not talk about maximum employment.

Now, the Fed has a dual mandate. Their dual mandate is to keep inflation in check and also keep people employed. but the statement focused on just one side of that dual mandate. It focused on price stability, which is a fancy way of saying, don't let inflation get out of hand. It focused on price stability, but it didn't talk about maximum employment. So that gives us a very, very big clue. Clue is too soft of a word. It gives us a big waving flag as to what the Fed's priority is right now.

Of course, their priorities are subject to change if the data changes, but we know that what's on their mind at the moment is price stability. Now, just to unpack what those two things really mean, so the Fed has a target inflation rate of 2%. It's clear, it's overt, it's explicit, it's a 2% target inflation rate. By contrast, they do not have a target unemployment rate. So to achieve maximum employment, you need any health. economy needs some degree of unemployment. There must be people who are in between jobs, people who are searching for jobs. Unemployment is a sign of a healthy economy, some degree of unemployment is, because it means that some workers are transitioning between jobs. Some are

entering the workforce, some are leaving the workforce, some are getting shed by companies and getting recruited by other companies. That kind of movement is. part of a healthy economy. But the Fed doesn't have a specific target. A lot of economists say that somewhere between a 4 to 5 percent unemployment rate is healthy. Now again, that's not an official stat. That's just what a lot of economists say. And that's about where we are right now. Unemployment in June dipped to 4.2%. So that likely is a major part of the reason why Warsh's statement focused entirely on price stability and didn't mention the employment mandate. What's the Fed going to do at their September 15 and 16 meeting?

Well, we know that one measure of inflation called the PCE, the personal consumption expenditures price index, recently jumped 4.1% year over year. That's its largest increase since April 2023. We're going to talk more about that. we're going to unpack more inflation data. We're also going to talk about what's happening in the rest of the world. How are other central banks managing their money? Are they raising rates?

Are they lowering rates? What's going on over there? We're going to unpack all of that up next. And then later in the show, we're going to talk about New York's rent freeze. Welcome back. So let's discuss what's happening in the rest of the world. In Europe, interest rates are climbing higher. The European Central Bank raised its interest rates by a quarter of a point,

25 basis points in June. This is the first rate hike by the ECB since September of 2023. Over the span of the last three years, they've been in a cycle of a holding rate steady or sometimes cutting rates. So this is a big departure from their previous activity. And the big trigger for this was an almost 11% surge in energy prices, 10.9%. That, of course, was fueled by the conflict. in the Middle East and the shipping disruptions in the Strait of Hormuz.

The inflation in the Eurozone jumped to 3.2% in May, and that was what forced the ECB to intervene in order to prevent higher energy costs from spilling over permanently into the costs of food and core goods and wages. And let me actually pause here since I mentioned wages and talk about the relationship between all of these factors. I mentioned earlier that here in the U.S., the fact that we have soft jobs data means the Fed is less likely to raise interest rates. Let's do a deep unpacking as to why, because a soft payroll number shows that companies are not hiring as aggressively, which means there are fewer open job positions out there.

And if there are fewer open positions, this means that employers don't need to raise wages. in order to attract talent. And that slower wage growth reduces consumer spending, which keeps inflation from spiking further because otherwise you get into what's called the wage price spiral, where prices go up, workers demand higher wages in order to deal with the higher prices, then wages go up, higher wages lead to higher consumer spending, so then prices go up, and so then you're locked into this wage price spiral, right? moving back over to Europe, the worry that the ECB had is that higher energy prices would drive

up the cost of food, the cost of basic goods, because you've got to pay for all of the shipping and the transit, and higher oil prices have these second order effects on lots of goods. And so the ECB's worry was that the cost of all of those goods would increase, and that would then trigger the wage price spiral. So it was based on that worry that they decided to raise their money. interest rates. They also, in addition to doing that, they overhauled their economic forecast. They changed their inflation expectations for 2026. Previously, they had been expecting that this year they would have 2.6% inflation. They raised to those expectations up to 3%. They also downgraded

their GDP growth expectations. They actually downgraded it to less than 1%, just 0.8% for 2026, which is scary because that really creates fears of stagflation across Europe. There is some good news, which is that on July 1st, Eurostat released their preliminary flash inflation data, showing that their efforts have helped. Headline inflation actually dropped down to 2.8% in June. It was 3.2% in May. That actually exceeded their expectations. They thought that inflation might cool from 3.2% down to 3%. In reality, it cooled from 3.2 down to 2.8. So it cooled more than they had expected, which is great. So that's the number for headline inflation, which includes everything. Now, when you look at core inflation, which strips away the cost of food and fuel,

that slipped from 2.6% down to 2.4%. So directionally, it's moving in the right direction. Services inflation also cooled significantly from 3.5% down to 3.2%. And the big, big relief came from energy prices. So in May, energy price growth was 10.8%. In June, it went down to 8.7% due to a drop in global oil prices after the diplomatic peace talks in Switzerland. So great news in the month of June in Europe. In just a moment, we'll recap what's happening in Asia, Australia, Latin America. But before we get to that, I realize I haven't communicated.

the stakes here in the U.S. for why it matters that the Fed is likely to hold rates steady for a while, at least for the month of July. So when it comes to stocks, oftentimes tech stocks and other growth stocks tend to do better. They tend to rally because lower future interest rates or steady current interest rates mean cheaper borrowing costs. So anytime that the Fed either holds rates steady or decreases them. Basically, anytime we know that the cost of capital is at a minimum not going to be more expensive, it will either stay the same or get cheaper. That bodes really well for any kind of high growth company. And so a lot of times in the stock market we see a rally when we think that the Fed is going to, is at least not going to raise rates.

In the bond market, oftentimes treasury yields fall, which means bond prices rise. Again, as investors start pricing out the risk of aggressive short-term rate hikes. And then, of course, for your personal spending, your mortgage rates, your auto loan rates, those are just less likely to experience these big sudden upward spikes. The Fed doesn't actually set those rates. Those rates are heavily, your mortgage rate in particular, is heavily influenced by the 10-year treasury, and the 10-year treasury is heavily influenced by what the Fed does. So anytime we get into a situation where the Fed is either holding rates steady or is going to decrease rates, we see really great news on all of those fronts, great news in the stock market, especially for growth stocks, great news in the bond market, for people who are already holding bonds. and great news for anybody who wants to buy a home or a car.

Now, what have we seen this week? Stocks are kind of mixed. It's a short week. It's a short trading week because of the 4th of July holiday. The Dow had a record closed. The NASDAQ slid. There's a lot of volatility in memory chip stocks. There's some nervousness around AI.

Meanwhile, over in the bond market, the two-year treasury fell. The 10-year treasury stayed pretty much the same. The 30-year treasury edged up just slightly. mortgage rates have been pretty stable. Like this week as compared to last week as compared to the week prior, we're talking a lot of stability, not a ton of change. The 30-year fixed rate mortgage is averaging 6.49% according to data from Freddie Mac,

that is almost exactly the same as last week, which was 6.47%. So zooming out big picture, what we're seeing across all of these domains is a lot of stability. People are not nervous and panicking, and people are not exuberant. We're seeing a pretty even keel across the board. That's what we're seeing here in the U.S. What's happening over in Asia? The Bank of Japan raised their rates.

On June 16, the Bank of Japan raised its short-term interest rate by a quarter of a point. That pushed borrowing costs in Japan to a 31-year high. This is the highest interest rate that Japan has seen. since September of 1995, and the primary reason for it was an energy price shock related to the Iran War. The Bank of Japan, the BOJ explicitly warned that rising global oil and energy costs were leaking into all of their other transactions, and they were worried that underlying inflation would overshoot their 2% target. They also have a 2% target. they raised their interest rates to a 31-year record high. And the Reserve Bank of Australia and the

Central Bank of Norway, they did the same. So the ECB, the Bank of Japan, the Reserve Bank of Australia, Norges Bank, I hope I'm pronouncing that correctly, but Norges Bank of Norway, all of these central banks in the month of June, all raised their rates by a quarter point. So we're seeing that consistency around the world. And outside of the major developed G10 economies, we're also seeing other central banks over smaller economies like Bank Indonesia, the Central Bank of the Philippines, the Czech National Bank, the Bank of Israel, all of them have raised their borrowing costs. And that all happened in late May and June. There's only one exception, and that is the Central Bank of Brazil. That's the only bank that has gone against this

trend and they've actually lowered rates. So on June 17, the Central Bank of Brazil lowered its rate by a quarter point down to 14.25%. So the major takeaway is that the shock to global oil prices and the shock to global energy prices truly is global. And we're seeing central banks around the world raise their rates in response to it because around the world, central banks everywhere have inflation fears. Okay, so how bad is inflation, really? Well, here in the U.S., the latest data is the May numbers, and in May, the consumer price index, that headline number climbed to a 12-month rate of 4.2%.

That's up from 3.8% in April. So 4.2% headline CPI, that's way higher than we want it to be. Now, there's another measure of CPI called core CPI, and that strips out two major factors. It strips out food and energy. A reason for that is because those are very highly volatile and often impacted by things like natural disasters, et cetera. So if you strip out food and energy, then core inflation rose 2.9% year over year. What that shows you is that it's food and energy that's driving a lot of the inflation.

It's kind of straight from the school of duh, but now we've got some numbers to it. There's also a different measure of inflation. It's called the Personal Consumption Expenditures Price Index or PCE Index. This is the one that the Federal Reserve prefers, and that's what they use in their decision making. So headline PCE reached a three-year high of 4.1% year over year. That's its fastest pace of growth since April of 2023. That's a lot. Remember, this is the number that the Federal Reserve uses, so they want to see inflation at 2%,

and they're seeing that headline number at 4.1%. And now, core PCE, which of course strips out food and energy, rose by 3.4% year over year. The big categories driving all of this, of course, is the energy shock. The war with Iran created a lot of volatility, big shipping disruptions, and overall energy costs are up 23.5% annually. Gas prices have really, you know this already, gas prices have spiked quite a bit. The retail prices at the pump rose 7% in May alone. And overall, retail gas prices are up 40%, actually a little over 40%, 40.5, if you want to be specific, more than 40% increase over the last 12 months. Food prices are up 3.1% annually. Shelter and rent inflation is up 3.4%.

Now, the good news is because global oil and gas prices have recently tumbled, they tumbled in June after the peace talks in Switzerland, it's likely that June's numbers are going to show a significant improvement. Again, all of the data that we have so far reflects the month of May. The BLS is going to release the June number, on July 14. That's the day that the June numbers will be ready. That's for the CPI. And for the PCE, those numbers will be released on July 30. So next month's first Friday episode, we'll have June numbers and likely those are going to be a lot lower than May on the prediction platform

Kalshi. Market speculators are betting that inflation peaked with May's 4.2% reading. So that's what the betting markets have predicted. we will find out on July 14 and on July 30, CPI and PCE. We'll find out if they're right. Let's talk about what consumers are doing, and we'll actually start in China, and then we'll move to the U.S. We're starting in China because we're seeing something really unusual there, which is Chinese consumer spending has dropped for the first time since the pandemic.

So China's retail sales fell 0.6% year over year. This is its first absolute decline in consumer spending since the end of the COVID lockdowns in December 2020. It's notable because it doesn't usually happen. It's an aberration from the norm. And so it kind of creates the question, what's going on in China? And their consumer economy is not doing well. So number one, they've had a big multi-year real estate crash and falling home prices. And that destroyed a lot of middle-class household wealth.

So that has left families really, really reluctant to spend. And we see that expressed in large part in the Chinese auto market where sales of cars in China have dropped 16.1% year over year. Households in China are not doing well. They're reluctant to spend. There's data from the National Bureau of Statistics that really highlights that China's right now having what they call a two-speed economy, meaning their exports are booming, industrial exports are totally booming,

but domestically they've got a totally frozen domestic consumer market. And their real estate crash is behind, and all of the wealth that that wiped out is behind a lot of this. In the U.S., of course, we have the opposite of a real estate crash. We have home prices that have gone up so much that housing now feels unaffordable to first-time homebuyers. We're going to talk more about housing, and specifically we're going to talk about New York City's rent freeze later in the show. But before we get to that, let's talk about how consumers in the U.S. are feeling.

We have some good news. The University of Michigan, which tracks consumer sentiment, found that in June, consumer sentiment actually improved relative to where it was in May. Now, when I say improved, I'm talking about improved from a record low. So May had this record low floor, but there was a 10.5% monthly bounce from May to June. May was rock bottom, and then there was a big rebound in June. According to the University of Michigan, the primary catalyst for this rebound was the fact that gas prices finally dropped below $4 a gallon. And that means that households' assessment of their immediate personal finances improved modestly. Meanwhile, there's a different consumer survey. It's called the Conference Board, Consumer Confidence Index. They paint a fairly nuanced picture, so they show that consumers' view of their current reality

is actually dragging downward, but consumers have higher expectations of their future. So we're seeing the assessment of today's reality as worsening, while simultaneously consumers are more optimistic about the future. So the conference board has a couple of different sets of numbers that they tally. One is called the present situation index. That is the view of current reality. This actually dropped the sub-index called the present situation sub-index. That dropped, which indicates that people feel like their real-world environment is for households, is still

tough. The share of consumers who state that jobs are, quote, hard to get, that jumped significantly. That jumped up to 22.5 percent. And that marks the highest difficulty reading for employment seekers since January 2021. So people's view of their present situation is pretty negative. But there's this other set of readings. It's called the Index of Economic Expectations. It's a future view, a forward-looking view, and that actually surged. So there's a lot of optimism over the U.S. Iran ceasefire and falling gas prices. And consumers in the Index of Economic Expectations, consumers said that they felt a lot better about where the economy will be in six months. The forward-looking surge, the optimism, the data shows it's quite high. So big picture,

if you take a look at all of this, there is a month-over-month, bounce, particularly when it comes to people's hopefulness about the future. But contextualize that with overall sentiment is still pretty depressed. So current levels are 13% below where they were prior to the Iran War, 13% lower than where we were back in February, and 18 and a half percent lower than where we were at this time last year. We're going to to take one final break to hear a word from our sponsors. And when we return, let's talk about the New York City rent freeze. Welcome back. Now for the thing that's been on my mind all week, the New York City rent freeze. We're going to talk about what just happened, what its implications are. We're going to

discuss the fierce debate around it, and then we're going to talk about potential solutions. Buckle up. All right. What just happened? New York City's Rent Guidelines Board, which is a board that sets the rent for rent-stabilized apartments, and we'll talk about what that means in a moment, the rent guidelines board just passed a measure that freezes the rent, meaning landlords cannot raise the rent. For technically, the passage was up to two years, but depending on how your lease is timed, you might be able to actually get that to three years. We'll talk in a moment about how you can do that.

So that means that your rent is locked at a zero percent increase for up to three years. 36 months. This is despite the fact that the water board is raising the water rates by 6% this year, that property taxes have doubled in the last five years, that insurance costs have skyrocketed, that the wages paid to contractors, plumbers, electricians, flooring installers, drywallers, painters, many of whom are union. Those wages have increased and continue to increase. But the freeze means that none of this can get passed on to renters for up to three years. We're going to talk in a moment about who these costs get transferred onto because the costs have to get transferred on to someone.

So we'll talk in a moment about who's going to pay that bill, but first I want to lay out the way that New York City rent works because it's very different than the way rent works and a lot of the rest of the nation. New York City has a total of about 3.7 million housing units. Of those, about 2.3 million units are rentals. Now, of these rentals, there are around 177,000 that are public housing units, about 16,000 that are rent-controlled units, and one million that are rent-stabilized apartments. The rent-freeze does not apply to rent-controlled units or to public housing units.

Those are separately managed. The freeze applies specifically to the 1 million rent-stabilized apartments. So again, 1 million rent-stabilized apartments out of a total of about 2.3 million rental units across the city. So about 40% of rental units in New York are rent-stabilized. Okay, so what does rent-stabilized mean? Well, it was created by the rent-stabilization law of 1969 and reinforced by another law called the Housing Stability and Tenant Protection Act, the HSTPA of 2019. And it creates a legally protected class of rental units in which annual rent increases

are very, very strictly capped and determined by a board, which is called the Rent Guidelines Board. It also guarantees lease renewals and prohibits any eviction unless there's legally recognized what's referred to as good cause. So again, to summarize that, there are about one million rent-stabilized apartments, and if you live in one of those apartments, you have a guaranteed lease renewal, you can't be evicted unless there's quote-unquote good cause, and there is a board that meets every year and determines what your annual rent increase will be, what your maximum annual rent increase is allowed to be. Okay, so who's the board that makes up all the

decisions. So the New York City Rent Guidelines Board consists of nine members, all of whom are appointed directly by the mayor. These include five public representatives, two tenant representatives, and two landlord or property owner representatives. And depending on which role you fill, whether you're representing the tenants, the owners, or the public, your term length is staggered. It could range anywhere from two years to four years, unless you're the chairperson in which which case it could theoretically be infinite. If you're the chair, then you serve at the pleasure of the mayor. That is the nine-member mayor-appointed rent guidelines board, and they set the criteria for how much a one-year lease can go up or how much a two-year lease can go up. So, for example,

they might determine, based on a review of operating expenses, they might determine that a one-year lease can be raised by 3% and a two-year lease can be raised by 4.5%. And then the tenant has the option of choosing either a one-year or a two-year lease. And the tenant knows that they are guaranteed a lease renewal, regardless of which one they choose. So they'll never be pressured into choosing a two-year for the sake of keeping the lease. They've got the lease for as long as they want it, as long as there's no, quote-unquote, good cause.

examples of good cause would be chronic non-payment of rent, grossly negligent physical damage to the property, illegal activity on the property, like running an illegal gambling den. As long as there is no good cause for eviction, then the tenant is guaranteed a lease renewal and that maximum is capped by the Rent Guidelines Board. Now, in theory, the board is supposed to look at the operating expenses. they're not just looking broadly at the inflation rate in a generalized sense. They're looking specifically at New York City water, New York City sewer, electric gas, prevailing wages for contractors. They're looking deeply at the operating expenses on buildings.

And in theory, they're supposed to be taking that into consideration when they're setting their guidelines around how much, if at all, the rent can be raised. So, for example, in 2015 and 2016, under Mayor Bill de Blasio, the Rent Guidelines Board voted for a 0% increase on one-year lease renewals, meaning a rent freeze on one-year lease renewals. They passed that vote on June 29, 2015, and they voted for a 2% increase on two-year lease renewals. Now, in 2015, that was based on a review of the actual operating expenses. You'll recall that this was a time when we were in what's called the ZERP era, the zero interest percent era. This was a time of historically very low inflation. Operating costs were not rising.

And therefore, particularly for a one-year lease, there was no reason that was grounded in operational cost to raise the rent. For two-year leases, they put a 2% increase because, you know, with a longer duration, you've got a bit more risk. But the following year in 2016, based once again on a review of the actual operating costs, they repeated a near identical structure. So in 2016, they voted again for a one-year lease renewal of 0%, which is a rent-freeze, and a two-year lease renewal of 2%. This happened again in 2020 during the COVID pandemic, when the RGB voted for a rent-freeze for a one-year lease renewal.

and if you did a two-year renewal, they voted 0% for the first year, followed by a 1% increase for the second year. Again, 2020 was a year of very low inflation. Inflation didn't kick in until the spring of 2021. If you recall, a lot of people associate the peak inflation shock as 2022. But according to the Congressional Budget Office, inflation really began. Gian in the spring of 2021. So as of January 2021, the CPI was 1.4%. And between March to May of 2021, that was when inflation jumped and actually reached 4.2% by April. So what we saw was that in the spring of 2021, we went from 1.4% to 4.2%. We saw a dramatic increase in inflation in the spring of

2021. And by October and November of that same year, inflation had topped 6%. In December, it closed out at 7%. And then by June of 2022, it hit its peak at 9.1%. Those are nationwide numbers. They were all pulled from the Congressional Budget Office, the CBO. That's not specific to New York City. And of course, as I said earlier, the RGB considers New York specific price increases such as water. insurance rates, many price increases are highly localized. I lay that groundwork to illustrate that there are many people who say, well, we've had rent freezes before. Yes, that's true. We have. But the rent freezes that we have had in the past were based on an analysis of the numbers. They were based on the actual operating realities at the time. And so after a thorough review,

of all of the operating expenses, there was no justification for raising the rent because the operating expenses had not gone up. The situation today is very different. Again, I know I keep bringing up water, but particularly water, property taxes, insurance, these three numbers in New York City have skyrocketed. All three are paid by the landlords. We're still not done laying the groundwork, because the part that I have not explained, so before we get to some of the arguments around rent stabilization, which is kind of where we're drifting, let's finish laying the groundwork because the part that I have not yet explained is how a person can get a rent-stabilized unit. The key thing to know is that rent stabilization is not based on the individual, it's based on the unit. So you as an individual do not get designated as a rent-stabilized tenant.

it doesn't transfer with you as a person, it sticks with the unit. And so if you happen to get a lease on a rent-stabilized unit, you have that lease. The rent-stabilization sticks to the unit, not to the person. Now, and this is a really critical thing for people to understand. There is no means testing for rent stabilization. There is no upper-income limit. And that is perhaps the craziest piece about it. The fact that it is not means tested, it is not distributed according to any set of calibrated criteria.

In fact, 30% of tenants who live in rent-stabilized apartments have six-figure incomes. There are people who argue, yes, but, you know, there are many people who, you know, the other 70% don't earn six-figure incomes. That's true. but a policy in which there is no means testing and there is no upper income limit is, by definition, a policy that excludes a lot of the people who need it because those units get taken by the people who are better at navigating the system and better at having the connections to be able to find those units. So who tends to be the best at navigating the system and having connections? Typically, white-collar knowledge workers. College-educated suburban transplants tend to have better literacy

at navigating the system, better connections. They've got the WhatsApp groups with their college alumni where, and I'm in many of these WhatsApp groups where rent-stabilized units get passed around. Like, it's the network effect of, hey, I know of a unit that's opening up. it's the people with connections that get it. And meanwhile, it's the person who works the cash register at the bodega. It's the pothole filler. It's the forklift driver. It's the person who stands in the middle of the street or waving construction flags.

They're the people who could use it the most. And oftentimes, they're not the ones who are getting it. And so, yes, there is an argument that, sure, 70% of the people are not six-figure income earners. That's true. According to the data, that's true. If 30% earns six-figure incomes, then the other 70% earn five figures. But to set a policy that essentially randomizes the benefit based on who you know, that creates a regressive system in which the DoorDash delivery drivers and the porters and the TSA workers are paying market rate rent, while college-educated suburban transplants with white-collar jobs, are living in rent-stabilized

units. Not everyone, but 30%. So to have a system in which rent stabilization is distributed through sheer luck and happenstance rather than through some qualifying criteria is a highly suspect system. That's the way the system works. And now, to talk to the through what's happening now that the RGB has frozen the rent for up to two years, but the way it works is those two years can be signed in a lease starting October 1st, 2026 through September 30th of 27. Let's say that your lease renewal date is December 1st. What this means is that on October first, 60 days prior to your lease renewal date, on October 1st, you sign a lease in which you lock in a 0% rent increase for one year. So you sign that lease on October 1st, 2026. The new lease term

goes into effect on December 1st. The following year, in September of 27, you renew your lease for another two years at a 0% increase. So remember, this applies to all leases that are signed between October 1st, 26 and September 30th of 2027. This allows you to lock in three years with a zero percent rent increase. Even though the RGB governs one-year lease renewals and two-year lease renewals, you can make it a three-year benefit by renewing first for one year and then during that window, renewing again for two additional years. Owners of rent-stabilized units have to plan for a sizable proportion of their tenants

to be locking into three years of benefit, three years of capped rent, frozen rent, at its current rate. Now, the core problem is that rent is frozen but costs are not. someone has to eat the costs because there's an operating budget. The operating budget gets paid from the revenues. When revenue is frozen, there are only two options either make up that revenue in a different way or cut costs or some combination of the two. Some buildings have a mix of stabilized units and market rate units.

And in the buildings that have a mix of different types of units, the market rate rents go up, which means that rent in New York City gets more expensive, not less. And so in those buildings, in the buildings that have a mix of both stabilized and market rate units, freeze the rent really turns into a cost transfer from one set of tenants to another, which means one group of tenants is subsidizing their neighbors. Now, in buildings that do not have that mix, in buildings that are predominantly rent-stabilized, the owner doesn't have the option of increasing revenue by raising the market rate rents. So the only option that the owner has to keep up with rising costs is cutting expenses.

That means deferred maintenance, substandard repairs. It means reducing the hours of staff like the general. janitors, the porters, and there are people who say, well, maybe the owners should just not take as big of profits. Real estate investing, particularly in an expensive city like New York, is not a high margin activity. I have spent years telling people don't invest in New York City, telling people if you live in a high cost of living city, buy your rental properties in a place that gives you better returns. Why do I say that so many times? Because the returns in New York City, suck. The price-to-rent ratio here is not landlord-friendly, and that's in an open market.

That's why if you live in New York City and you want to own rental property, your best bet is to own rental property in Indiana or Georgia or Nevada or Tennessee or Alabama or Arkansas. Why? Because that's where you find much, much better price-to-rent ratios. That's where you find much better returns. For years, you've heard me say, over... over and over, that if you live in a high cost of living area, it's a fun place to live. It's a great place for many opportunities, career opportunities, for the network effects of the people that you meet when you're out and about. It's great for many things. It is not a good place to own real estate. For rental property owners in New York, even without an artificial

cap on their revenues, the market fundamentals of New York already mean that they've got margins that I would never want, margins that are already way, way, way too tight. And as we've just talked about, we are currently in an environment of high inflation and rapidly rising prices, particularly with regard to energy prices, gas prices. The water board is raising the water rates by 6% this year. So the 6% increase for fiscal year 2027, it went into effect July 1, 2026. The prior year, water went up 3.7 percent, and the year before that, fiscal year 2025, water went up 8.5 percent.

And the year prior to that, it went up 4.42 percent. Actually, the year before that, it went up 4.9 percent. So over the last five years, the cost of water has increased every year from a low of 3.7 percent to a high of 8.5 percent. That's the annual increase. And again, to emphasize, you know, a lot of people find it difficult to shed a tier for owners. So to emphasize, the owners who can pass these costs onto their market rate tenants are going to do so, which means the people who endure that cost burden are going to be tenants who pay market rate.

And in a system in which rent-stabilized apartments are given out with no quality, qualifying criteria, no means testing. It's essentially a lottery. It's not technically a lottery, although the city does have a lottery, but it's essentially randomized and distributed by luck rather than by need. We end up in a situation where the people who get hurt are the market rate renters, the maintenance staff, because operating budgets are made up of human labor. The human labor is the maintenance staff. The small owners. And the tenants, particularly in the poorest communities who are going to be forced to live in bankrupted or substandard housing, because violations, property violations will spike. Housing standards will go down.

The quality of repairs and maintenance will go down. And the people who are affected worst by this are the lowest income tenants because they have the least amount of flexibility to be able to move from a substandard location. So essentially what's happening is the city wants affordability, but instead of either encouraging new building, encouraging new supply, or funding affordability directly through the budget, it is essentially forcing private buildings to carry the subsidy through frozen, suppressed rents, while costs keep rising, which means legally the landlord remains private, but the revenue line remains set by the city, government mandated. and that has an effect on the boilers, the roofs, the elevators, the pipes, all of the things that require cash. Those things become under-maintained and eventually become distressed. And when the buildings degrade, it's the tenants who live in those buildings who suffer. The other piece of this, of course, is that the shortage just gets worse. So on the topic of the shortage, here's another stat, and this one comes to,

with some controversy, so I want to couch this. There's some nuance to this. As of April 1st, 2025, there were 57,421 vacant units in New York City. Now, I want to be really careful about the way that I talk about this, because here's the way that that count is made, and here's how the system works, and here's the nuance around tracking that number.

Owners of rent-stabilized units are required to register the status of their unit with the state housing agency each year. And it's the status vacant or occupied as of April 1st. That way there's no seasonal variation. By virtue of tracking this number, we get important information about the trend in vacancies around rent stabilized units. Sorry, I think when I first said the number 57,421, I don't think I've specified the rent stabilized. I'm talking specifically about rent stabilized vacancies. So again, as of April 1st, 2025, there were 57,421 rent-stabilized units that were vacant. One of the major criticisms of this number is that people argue that number is too flat because it co-mingles multiple causes of vacancy.

So, for example, that number includes newly constructed buildings that are not yet fully leased. It includes buildings that are empty due to bureaucratic delays in the city's, housing lottery system. And it includes normal tenant turnover. And then it also includes units that the owners have decided to keep vacant due to a 2019 law. I mentioned this earlier briefly in passing, but we're going to go into it in more depth right now, a 2019 law called the Housing Stability and Tenant Protection Act, or the HSTPA. Now, the HSTPA requires owners to maintain apartments up to a certain standard, but it restricts their ability to raise the rent enough to be able to recoup those turnover renovation costs.

So if a long-time tenant moves out, a unit might need between $50,000 to $100,000 in lead abatement, wiring, all of the costs required to get it ready for the next tenant. But because the HSPTA, HSTPA does not allow for the rent on the apartment to rise enough to be about to recoup those costs, what owners are faced with is a situation where they literally cannot afford to renovate those apartments because if you're an owner, you've got one of two choices. You either take out a loan or you pay out of pocket. If you want to apply for a renovation loan, you're going to get denied by the bank because the bank is going to ask for proof that you can repay the loan.

and because the HSTPA does not allow you to raise the rent enough to be able to recoup the renovation costs, you can't prove that you can repay the loan because you can't. And so then the bank rejects you for the renovation loan as they should because you have no way of repaying it. So owners who need a renovation loan are denied that loan, rightfully so. And then any owner who wants to pay out of pocket, well, they're never going to recoup that money. they would do better putting their money in a U.S. Treasury. So why wouldn't you just put your money into a 10-year treasury? As a result, there are a number of units that since the 2019 law, the HSTPA, since that was passed,

there are a number of units in which the owners have determined that it is more cost-effective to just remove those units from the market than it is to renovate those. Now, it is true that we do not know precisely how many units are empty due to the HSTPA because the number of vacant units commingles the ones that are empty due to the HSTPA with the ones that are experiencing normal turnover. And that's why what we want to do is measure the trend line. And what we saw is that between 2024 and 2025, the number of vacant rent-stabilized units in New York, in New York City, increased by 16.18%.

16.2, if you're on around that. 16.2%. In 2024, as of April 1st, 2024, New York City had 49,426 rent-stabilized vacancies, and that number jumped by 16.2% to a total of 57,421 by that same date the following year. That cannot be explained by normal turnover, right? If these units are just transitioning between tenants, a normal turnover explanation should produce a relatively stable number. Again, particularly because there's no seasonal variation

because this is everything is benchmarked on April 1st. So normal turnover does not explain a double digit percentage jump in one year. And when that trend line keeps rising, then the question becomes why. What is causing the increase? What has changed in order to cause that increase? One obvious answer is that New York City has created a system in which keeping an apartment empty is more rational

than bringing it back onto the market. And heck, I say rational, but even if you, as an owner, even if you don't want to do it, even if you want to put it back on the market, you're not going to get approved for that loan. So your intention might be to take out a renovation loan, but no bank will approve it. And that highlights how these policies create a destruction of supply in which more and more rent-stabilized units are getting taken off the market, curtailing supply, which is the opposite of what we need.

What we need is to flood the market with so much supply that landlords have to compete against one another. Okay, so we've talked about the problems. What are the solutions? number one, increase supply, which means decrease all of the friction around creating new supply. That means ease permitting restrictions, expand zoning, deregulate setbacks, deregulate the parking requirements, and repeal or amend the 2019 HSTPA. I will say of all of the objections in the debate that's happened in the past week, among all of the people who say, oh, this rent freeze is no big deal. The one argument that they have made that I do agree with are the people who say, the rent freeze is no big deal because the HSTPA of 2019 was the real change. Yes, they're actually correct on that one.

The passage of the 2019 HSTPA was the real change in New York City, and this rent freeze is just a cherry on top of that. That is, in my view, absolutely correct. this rent freeze is the salt in the wound, but the wound was the HSTPA. So again, looking for solutions to New York City's rent problem, repealer amend the HSTPA, ease permitting restrictions, expand zoning, deregulate setbacks, deregulate the parking requirements, create means testing around rent stabilization, create an upper income limit. If there's going to be rent stabilization, it should go to the people who need it, not the people who happen to get lucky, because they were on the right way.

WhatsApp thread at the right time. So that's the situation with the New York City rent freeze. I am feeling very fired up about this because a lot of anti-landlord sentiment has really come up in the last week as people have discussed this issue. And I think it's important to make more landlords because when people feel pushed out of the system, when people feel like they cannot become landlords, then the conversation becomes very us versus them. But if people are able to get on the property ladder, if they want to, and are able to become

landlords, even if you have one unit, you buy a duplex and you rent out the other side, or you buy a single family home and you rent out the detached garage or the basement or an ADU, when people gain the ability to become a landlord, it no longer becomes us versus them. And I'm a big believer that, A, we need more house. supply, and we need more housing supply in the right places. Austin, Texas has done a great job of creating a housing supply. Central Florida has done a great job of creating housing supply. That supply is not here in New York City, where I live. And there's not enough entry-level

housing supply. So, you know, the supply, the housing supply that we do have nationwide is misallocated. It is both geographically misallocated and in terms of entry-level versus luxury misallocated. So we need the right type of housing supply in the right location. And we do that by decreasing the friction around building, around renovating, and around becoming a landlord because if you want your landlord to lower the rent, make more landlords and make them compete with one another. Because landlords, if there's a lot of landlords, if there are more landlords than there are tenants, the landlords are going to compete. So I'm feeling very, very fired up about the mission of making more landlords. We need more landlords. The more rental

units we can put into supply, the lower rents will drop. So the objective is to flood the market with as much supply as possible. Now, if you own any units, that comes from increasing the density in the units that you already own. If you have a basement or attic or detached garage that can be converted into an autonomous living unit, it comes from creating that unit, it comes from building an ADU in places where your municipality allows you to do that.

And it comes very much at the local level. Housing density happens at the local level. That's why I as a New York City resident and fired up about what's happening in New York, but my hope is that all of you get fired up about increasing housing supply in the places where you live. And after the events of this week,

I see this very much as a mission, and I am all in. Thank you for being part of this community. Thank you for your commitment to making housing more affordable by increasing supply, teaching the economics of housing in plain English to as wide of an audience as I can

because I think that that is critical. So thank you for being part of this. If you got value from today's episode, please share this with friends, family, neighbors, coworkers, colleagues, share this with the people in your life. These are important messages to pass along. So thank you so much for sharing this with the people around you. This is the first Friday economic update of the Afford Anything podcast. Happy 4th of July.

Can't believe I didn't say that yet. Happy 250th birthday to the United States. you have a fun and safe Fourth of July, enjoy your time with friends and family. And thank you again for being an afforder. My name is Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode.