Moody's Talks - Inside Economics - Mayer on Mortgages and Multifamily

Episode Date: December 1, 2023

Chris Mayer, Professor of Real Estate Economics at Columbia University and CEO of Longbridge Financial, joins Mark, Marisa, and Cris to discuss reverse mortgages and the state of the residential real estate market. While the single-family market may tread water, multifamily may be in for a serious correction. Mark wonders if we can avoid the fallout from this economic meteor. For more about Christopher Mayer, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Chris Doridis and Marissa Dina Talley. Hi, guys. Hi, Mark. How was Thanksgiving? Chris? It was okay. It's okay. Oh, oh, really? What's going on? I don't know. It just seems like a lot of effort for, I don't know. It just everybody got sick at Thanksgiving. Oh, well, okay, that's a bummer. My three-year-old niece threw up in the middle of the floors. We were preparing dinner. My brother-in-law got sick. Okay, I don't want to hear anymore. That's not.

Yeah. Forget about it. Forget I ask the question. Christyredi, do you stay to stick close to home? I was also sick, yes. Oh, geez. So, yeah, just okay. But it was fine.

Did have some time off. I'm sorry to say, but I had a great Thanksgiving. Oh, good to hear. Good to hear. You know what the trick is? The trick is to find someone who can cook. And my daughter has figured that out. She's now engaged to be married to this German fellow.

Not that that, you know, German means anything, except that they don't eat turkeys in Germany, but he cooked the best turkey I have ever had. Really? Yeah, yeah, great cook. So got very lucky there. at least in that regard. We'll see how the rest of it goes. Only kidding.

Only kidding. He's great. He'll be great. And we've got a guest, Chris Mayer. Chris, good to see you. Good to see you, Mark. And kind of happy to join.

And how about was I, we were talking earlier. I guess your Thanksgiving didn't go that well either. You don't have to go into any detail. Yeah. No, I thought the, you know, my back wasn't, wasn't cooperating. But, you know, No, it's always good to get together and see the family. That, of course, being the most important thing, you know, as long as they're not two-year-olds having, you know, stomach issues.

It's good to have you. And, Chris, you're the Paul Milstein professor of real estate at Columbia Business School. How long have you been at Columbia? I have been at Columbia. I spent four years, four years down at Wharton, but other than that in the early two, thousands. I've been at Columbia for for over 25 years now. Oh, I, you know, I forgot the word instant. So you're with Susan Walker and that group. Joe and Todd and Peter, all the, all the crew. Yeah, good, good group. And we just ran into each other not long ago. I spoke at a, I really

enjoyed it. I spoke to, they were business school students, weren't they? Yeah, MBAs, yeah. MBAs, yeah. It was really a lot of fun. It was over. over kind of a dinner and talked about lots of different things and really enjoyed that. And I just kind of sort of ran into you in the hallway as I was going very nigh, very serendipously ran into you going into that classroom. I was a lot of fun. Really enjoyed it. You did a great job.

And actually, you made a great case given the students relative pessimism. And I think you used to talk to people who are pessimistic. That's true. the economy and the labor market is stronger than, than, than, uh, that I think it is.

Yeah, I know. I really enjoyed that. And, um, we've kind of, kind of crossed paths at different points in time over the years, uh,

lots of different points of contact. Uh, you're also, I didn't know this. You emailed this to me. I didn't know that you're the CEO of a long bridge financial reverse mortgage company. I didn't know that.

Yeah. Yeah. That's pretty cool. It is. actually we're now the second largest reverse mortgage lender in the country. And, you know, I would, the thing is how to, you know, I got into this actually with my work, both as a professor. And, you know, I started my career at the Fed. Actually, as a colleague of Chip Cases, back when he was alive and did some stuff with Chip and Bob Schiller. But my work at the Fed pretty quickly became

clear that, you know, Americans have enormous amounts of housing wealth heading into retirement and have not saved enough. And so if you can find a way to help people responsibly use home equity to help in retirement, it's, you know, it presents real opportunity. And I will sort of say that as over time, more and more Americans are bringing debt into retirement, which is tough to have to make mortgage payments into your 70s and 80s. And so we really have to think about how housing can, you know, help people manage their retirement because there are a lot of elderly people who have challenges. So that's how I kind of got into the, got into the business. And, you know, for me, the mix of trying to work in the business side to solve important problems, but also to keep the

sort of the academic perspective on the world. The mix of those things is important. Obviously, that's something you do a lot, Mark, is trying to play between those, you know, between the academic and business audiences. And I think there's a lot of value to that. That's so cool. And I guess the reverse mortgage industry has been under a lot of pressure, right? At reverse mortgage funding is that it's RMF, belly up a little, I think almost a year ago now. they? Yeah. So are you able to navigate? I guess they had kind of some unique circumstances, their portfolio and so forth and so on. But you've been able to navigate through all that pretty well. Yeah. No, look, our company, we're owned by a NYA or a New York Stock Exchange company,

Ellington Financial. So we have the capital backing that puts us in really strong position. And, You know, we took over the servicing of a couple billion dollars of their private securitizations and were able to step in and help some of the borrowers and bring some of their team over. So it was certainly unfortunate for the industry. You know, our company has been able to both navigate and, you know, use that as an opportunity to help kind of grow the scale of what we're doing a little bit. I've always been perplexed. And correct me if I'm wrong, because I don't know this industry well.

it's never really taken off, right? I mean, if you look at the amount outstanding, I don't know, what is it, several hundred billion, something like that. Why? Why is that? Why hasn't? It feels like that, like, as you, when you introduced what you were doing, it sounds very compelling, like, it should take off.

Why not? So I'll do a contrast between the U.S. and the U.K. In the U.K., more than one out of three mortgages for borrowers who are 55 and older is an equity release loan, which is essentially a reverse mortgage. In the U.S., it's about 2%. The difference is in the UK, three of the five largest life insurance companies,

all are in this business originating the product. Legal in general is the largest player in the space. Aviva, some of the very large brand name insurance companies are in the space. In the U.S. Met Life at one time was in it. In fact, one of my business partners was at MetLife Bank and brought them into the space. But MetLife Bank left in 2012, if you kind of remember when the Fed introduced the stress tests

and Prudential and MetLife were G-Siffies, and they failed MetLife and Prudential. MetLife shut down their bank and thus was forced out of the reverse business. Prudential actually sued the government, in fact, won that, you know, it's case that it was not actually failing the stress test. But in the meantime, that life left B of A and Wells, which were both in the business also left for different reasons related to how the FHA at the time ran the program. I think we're going to see this come back, mutual of Omaha's actually. You know, we do have one insurance company. And I think you're going to see next year our company work with another, you know, brand name company who is going to come, you know, who is going to, you know,

and may well come back into the space. And I think as you start to get that broader acceptance, and people feel a little more comfortable with the product, and not just as a stereotypical, you know, late night TV ad kind of product. By the way, nobody complains when Nike runs TV ads. But if you're a financial services firm, not only in reverse in any business,

if you're a financial services firm and you run ads, people are very skeptical of what you've got. But, you know, I think that that acceptance is really, you know, the concern about the companies and the product, really from a sense of not knowing what it is is really the principal challenge that the industry faces. And for me as a, you know, kind of an Ivy League professor running a reverse mortgage company as well. And sort of, you know, the hope is that that provides a little bit of credibility. The academics aren't necessarily, you know, they go up.

and down in the public standing academic economists. I don't know whether that could be viewed as a good or a bad thing, but certainly, you know, the, you know, the work that we're doing and our team is doing, I think is, you know, we're really making some progress on the acceptance. And in fact, there are a lot of insurance companies now that invest in proprietary reverse products, but they just do it quietly behind the scenes. I think over time we're going to see that acceptance come back. and, you know, so some of it is going to be on the reputation side. But honestly, you know, I'll just give you one example. Harvard did a study a couple years ago and looked at people 55 and older and looked at the

month they made their last mortgage payment. And the month after, people spent increased their spending on pharmaceuticals by 25%. So unless in the month, you know, the month after you make your last mortgage payment, you got really sick. It's just sort of a sign that many elderly Americans are living a lifestyle and living in a way that really is below the standard that they should be living in retirement as Americans and having worked their lives to get to where they are. And so I think people really are in a place where they can and should be looking at home equity. And then the flip side, since 40% of people, Harvard just literally released the study yesterday, since, you know, 40% of people over 65 have a mortgage. They're actually making mortgage payments. Just imagine going on Social Security, trying to work part time, and to continue to make your mortgage payments for 10 or 15 years. It's not a great, that's not a great retirement. And so there really is a sense that we just have to figure out how to help people. understand and be comfortable with the product and recognizing that all it is is just a mortgage. It's not nobody owns your home.

Nobody wants your home. This is just a mortgage where instead of making the payments, the payments accrue. But you can use the cash to live off of. And that allows you to do things you wouldn't be able to do otherwise, maybe even including taking care of your own health or, you know, fixing up your home, et cetera. So anyway, it's a very cool. Yeah. I think it's a valuable product in industry.

It sounds like a man on a mission. And it's very impressive. You're a full-time professor at Columbia Business School and a CEO at the same time. That's pretty cool. So I am kind of a part-time. I still teach at Columbia, but I sort of, you know, I'm part-time. But, you know, we'll talk about housing and stuff. And you'll see I still, you know, we're engaged in the world.

I just want to say, I think. think if they switched you out for Tom Selleck, you do, the industry would do much better. I'm just saying. I'm just saying, I appreciate, let me say, I appreciate it very much. That's all, that's all I say, but there's a reason that TV ads do not include professors. Or do the economists in them. Right, right. Well, I think he did agree. Briefly where Prudential was running ads with Dan Gilbert. Oh, I remember that. Yeah.

The CEO of Rocket, right? No. So this is a different, there's a, Dan Gilbert, there's a professor. Actually, a PhD in psychology who does behaviorally. Oh, I see. I see. Oh, I see.

Who is running, who is running these kind of retirement ads. And let me just sort of say that campaign lasted a very short period of time. So the idea of having professors or PhD people as ad pitchmen on TV, I think you just got to go find, you know, football or basketball players or women's soccer players or, you know, actresses or actors like they're, they're the right people for TV ads,

not, not any of us academics. Don't say never. But we'll come back to housing. There's so much to talk about there. I do, I want to turn back to very quickly to Chris DeRides. And I'm going to say,

sorry, Chris DeRides just to make sure that we don't get confused. Just the Chris's. Yeah. The Chris's. And I can call you Dr. DeRides. Should I do that?

We can keep it informal here. Okay. Keep it informal. I'll just call you DeRides. That rolls off the tongue very easily. Okay. All right. And Marissa.

And I just wanted to talk a little bit about the week in the economy. And because there's a lot of data points that came out and a lot of stuff happening. So maybe I'll just turn to you first, Marie. of all the things that have come out this past week or events that have occurred, what would you single out as most significant? Anything in particular? And I don't mean, I hope I'm not stealing from the statistics game, which we'll play a little bit later. But yeah, that may be collateral damage here. Okay. All right. Go ahead. Fire away. Yeah, you're right. There's kind of a lot that came out. So it's a little hard to pick. But I mean, I guess the most. obvious thing for me to pick would be that we got another read on inflation for October from the personal consumption expenditures and personal income report. And it showed no change in inflation over the month in October. So 0% on the PCE. That sent bond yields down again, a little bit of a stock market rally. Mortgage rates have fallen.

in line with bond yields coming down. So yeah, and at the same time in the same report, we got data on spending that showed spending is holding up among consumers. So I would say those two things are the most important data points of the week, arguably. I don't know, Chris may have, but there's a lot to choose from. Yeah, before I do that, I want to bring Chris back in because this is stylized fact. If you look at consumer price inflation, CPI inflation, excluding shelter, this shelter component, the housing component, or the core consumer price inflation, you know, the CPI, less food,

and energy, and then take out shelter. And you look at the year-over-year growth as of October, which is the last data point. Both are well within the Fed's target. They're actually, I think, below the Fed's target on CPI inflation. So the message is that the thing that's keeping inflation from the Fed's target is the growth and the cost of housing services. And, you know, it feels like to me that given the way that is constructed, it's based on market rents.

And we know that market rents are flat to down, you know, nationwide over the past year, and that will continue, that that strongly argues that inflation is going to come back in a target here kind of in an early way. Not next month, maybe not next quarter, but certainly over the next year. With that as a preface, Chris, does that sound right to you? Does that make sense to you? Chris Mayer? Yeah, it does. Okay. And actually, the way they calculate, you know, that as, as you know, your listeners may kind of, you know, understand is they calculate, They calculate both rents and owner equivalent rent based entirely on the rental market. So when home prices spike up or down, that doesn't drive up or down measured inflation.

And if you look at the rental market, the way they do it is they look at new leases signed relative to the prior year, which embeds in it a lag because new leases today may be being signed where there's no growth in the rents or virtually no growth, which is, as you said, Mark, what we're seeing in the data. But if you look back relative to a year ago, rents may be higher than they were 12 months ago. And so by the way it's calculated to go into the CPI, you do have this lag, which explains what you were referencing,

which is CPI measured inflation. measured delta is still showing some increases. But the rent data we're seeing are really not showing rent increases much at all. And that means that that's going to continue coming down over time with a lag. And so they're actually looking at data that is a little bit old. I mean, there are a number of, you know, there are a bunch of data errors in how inflation is measured. but there is going to be negative momentum of inflation continuing to fall into the future that is already locked in based on where the market is today, where the rental market is today. Yeah, that gives me a lot of confidence inflation is coming in.

Pristurides, anything you want to add there? And then also I'm curious what data point or statistic or event you'd like to highlight for the past week. Yeah, nothing else on the inflation front. Okay. So you're on board with what? That forecast. Okay. Yeah. Yeah. In terms of what, I mean, I think Marissa covered kind of all the highlights in terms of PCE, income spending. They're all. And I might highlight we did get another

read on GDP for Q3, revised up, so 5.2%. Amazing. Amazing. 8.9% nominal, which is, you know, boggues the line too. But again, it shows a lot more strength. I'm, I'm, I point out that we had a read for the GDI, gross domestic income as well. And we've talked about on the podcast before that was one and a half percent, right? So a little bit of a conflict between the two. But even if you average them, what's that three, three and a half percent? So that's still an incredibly strong economy in the third quarter. Now, Chris, Mayor, when we, when I saw you in Columbia and I gave my kind of happy talk.

And I, you know, I did my one-handed, two-handed economist thing and focused on some downserers. But at the end of the day, it was a pretty upbeat kind of view on the economy. You, you, I think it came up to me at the end and you said that you were more worried, more pessimistic. Are you still more worried, pessimistic about where the economy is headed? Or are you feeling, did I cheer you out? Are you starting to feel any better, given all the data that it's transpired since now, then and now? I think you shared me up a little bit, but I would still have, you know, I think we probably agreed at the end of the day on sort of where we saw the risk factors. The question was the weight

on them. And, you know, we'll go and talk a little bit about it. But I'm kind of worried about both commercial real estate and the banking sector and lending sectors. You know, I'm probably a little more worried than the average person and the average policymaker is about them. And kind of what we're going to see coming. And so that's probably where I see a little bit more risk is on the asset price side. You know, the stock market for all of the strength in the economy is still not really that far above where it was two years ago. We've seen some ups and, you know, we've seen some ups and downs and now it's picked up a little

bit over the last, you know, month or six weeks. So I do think in general, the strength of the economy is going to pull us through all of it. And I don't think what could happen in the financial sector, given how good the economy is right now, I think it's harder and harder for challenges in the lending and financial sector to derail the overall economy. So relative to when we talked, you know, six weeks ago or four weeks ago, I do feel increasingly better that even the risks are likely to, you know, to not derail the overall momentum of where things are. But I think there's going to be, you know, some stories kind of, that may not be the number one story that could, you know, create challenges.

And I also worry about just geopolitical stuff. You know, I'm an economist. So what do I know about that? But, you know, the geopolitical stuff still gives me, you know, still gives me real pause. Got it, got it. Well, we're going to come right back, but I just want to throw out the thing that I found most important in the last week was the continued low oil prices and lower long term bond yield. So oil is now firmly on WTI, West Texas Intermediate, firmly below 80. It doesn't feel like anything's going to push that up to a significant degree because, you know, lots of stuff out there hasn't done it.

Israel Hamas, Saudi cuts, Russian sanctions, Chinese demand. You know, we're getting supply from, more supply from American producers, and that's keeping prices down. Now, I say this, with inflation, I'm very confident in the forecast forecasting oil prices. I am not, but it feels pretty good. And then on bond yields, boy, that feels pretty good, too. I think I was, I think I saw 4.25% on the 10-year yield. I think we're higher than that today, but I think I saw that yesterday or the day before, and that feels pretty good to me as well.

So another week of pretty good news, right, Chris DeReedies? Yep. Chris is the coming. Chris is the local bear, the relative bear. So I'm just making sure it's in the name, I think. It's in the name. All right. We both a little bit worried here.

Okay. All right. We're going to let's turn to housing in real estate more broadly, commercial real estate, which you mentioned. And you mentioned before we got going here, this kind of seeming disconnect that is developing between single family house prices, which, believe it or not, they're rising again. Our Moody's analytics repeat sales index, going back to Case and Chiller and their index, we construct something similar based on repeat sales. I think it's up 5% year over year through the month of October. It's like crazy. And we're like in the middle of the pack of all the price indices out there.

And then on CRE, commercial real estate prices are weakening, particularly multifamily. And we also construct, Chris, Amer, repeat sales index for multifamily properties. And I think our last data point is Q2. Is it? I think it's Q2, Chris. Correct. Yeah. It was down 18.5% from the peak, which was, I think, last fall, some like Q3 last year,

or Q4 last year. So how do you? How do you think about that, Chris? What's going on there? That seeming disconnect between those two things. Yeah. I will sort of say the point you're making, Mark, is right, which is we probably have not in the data seen a bigger disconnect between housing and multifamily markets since, you know,

I've been tracking the data. And it shows up in different ways. The economist headline, you know, the economist had an article this month mapping the country and basically the country used to be, you know, all one color, which is, you know, 2019, writing, you know, buying made a lot of sense. And the whole country turned red. And basically buying is a disaster. New York Times, everybody is sort of writing articles that are saying the same thing.

Yeah. And you see it in the data. We were talking about rent data flattening out. What's interesting is that, you know, it's very hard to think. about a model where apartments and houses trade so differently. But there's been academic research suggesting that there's much less crossover than you might think. And so when I talk to people who are, you know, when you have a family who's, you know, living in a condo in the city and they've got, you know, one kid and a second on the way and you sort of ask them, you know, well, we've decided,

you know, it's so much cheaper to get into an apartment. Should you just go into an apartment or are you going to have the second kid and not move into a home. I think that family's basically going to say, you know what? I'm still going into the home and I'm going to grit my teeth and I'm just going to do it. So some of it is clearly just the lack of supply of houses on the market. You know, 60% of mortgages outstanding are below 4%. And a quarter of them are below 3%. So everybody who's sitting in a home with a mortgage that's at a, you know, with a two handle or a three handle in front of it, to go to a mortgage with a seven handle, even with the 10 year going to, you know, four and a quarter, mortgage spreads. That is the difference between the 10 year treasury and the 30 year mortgage rate. And, you know, even though they're different, essentially the comparison is kind of the right comparison. Because most people don't hold their loan for, 30 years. That spread is close to record levels, almost a 3% gap. And historically, the gap is about half of that. So mortgages are incredibly expensive. Houses have not come down. Rents are

still at relatively high levels, but rents went up, call it 30% post-COVID, plus or minus a little bit. House prices have gone up 40 plus percent. Despite interest rates, the housing market has stayed high. And it really is that there are people who are entering the home buying age where there really no homes for sale. And they have a very, very strong demand to live in a single family home. And so if you look at the vacancy rate for single family homes, going back to the 1960s, it's never been as low as it is today, down to about half a percent of all, you know, what they sort of call owner-occupied type homes and mostly single-family are vacant. In the apartment side, that's not the case. There are, you know, we're probably slightly below average on the vacancy side

in apartments. But whereas for single-family homes, between 2008 and 2020, we built a couple, about two to three hundred thousand a year for a period of almost 15 years. And demand was much higher than that. And so the vacancy rate went from nearly an all-time high in 2008 to an all-time low because we just stopped building single-family houses. Part of not building them has been construction costs rising. one of the undiscussed, you know, the implications of the immigration policy that we've had for the last 15 years has been that people who build single family homes, which has predominantly been an immigrant population. Homebuilders since 2012 have been talking about a hard time finding people to build.

And as economists, I, you know, we're all presumably skeptical. goes like, well, if you raise wages, then of course they will, you know, you will get people to build. But what's happened is they have to raise wages a lot. And people don't really like those jobs that much, sitting outside, working in the cold, working in the rain. It's not a super fun job. And it turns out even raising wages a lot hasn't gotten a lot of people to do it. And there's been no productivity, you know, construction in general has seen really no productivity changes. Maybe will build 3D houses, you know, and at some point that'll change, but you still build houses more or less the same way you did before. It's pretty labor intensive. And materials costs

have gone up a lot. And so the combination of those things has meant that the supply of housing hasn't grown a lot. And if you look post-COVID, construction costs, the PPI for construction is up substantially. And so even the home prices have grown more than 40%, the cost of construction, the PPI for residential, I forget what they call it, the residential materials,

is up 38%. And so if you look on an after-construction cost basis, post-COVID, home prices are up about 1.1% annualized. since March of 2020. And if you look from 1987 to 2020, home prices in the U.S. were up 1.1% – sorry, 1.2% above construction costs for that 33-year period. So in other words, if you index home prices by construction costs, not by the CPI, home prices have grown post-COVID at virtually exactly the same rate as they grew in the third.

33 years before COVID. 33 is just looking at the K Schiller Index, and you should send me the index, and I'll start using the Moody's index for my calculations as well, I promise. We'll do. But one answer for housing, or two answers is we haven't built a lot of it. The cost of building it has grown, and there's not a lot of substituteability between owner-rearmes,

occupied housing and apartments. And those facts together make a case for housing prices where they are. Now, there's a bear case to be made. And in case, Chris doesn't push me on it, we should go to the bear case, but at least start with the bull case. And by the way, none of those facts apply for multifamily. Oh, although on the construction costs, aren't they up as well for multifamily? I mean, builders of that are at our time getting materials and labor costs are up as well, no? So construction costs do not, construction wages do not show the same increases. Is that right?

Okay. As construction costs, believe it or not. So if you look at wage increases, wage increases in the construction industry have not been higher than wage increases in other industries. finding people to do them, it's sort of interesting because the cost are high. Essentially, we just haven't built as much, which meant there haven't been as many people in the market, which hasn't then raised wages to the point where you start to see more going on.

But a lot of the construction, a lot of the reason materials cost are higher is because while we saw some increase in single-family construction, we saw historic increases in multifamily construction. And so multifamily construction rates were at the highest levels we saw in 20 or 30 years. And so we saw in the early 2020s and actually even before COVID, 2017, 18, 19, because rents had been growing as home ownership rates were falling. So credit, you know, I think you've written with Lori, you know, at the Urban Institute, about mortgages continuing, you know, credit continuing to be tight in the housing market relative to historical levels. It's kind of been hard for even, you know, people who historically would be good homebuyers to get a loan. Home ownership rates

were declining and had been declining for, you know, consistently. And we went from 69% down, to 64%. So there were many more renters. And that pushed up demand for multifamily and rents. That was happening throughout the 2010s, even before COVID. And so we have seen increasing amounts of multifamily construction. And that construction has really started to impact rents on apartments. And it's been particularly true in some of the hottest markets. in the country, Austin, Nashville, Atlanta, you know, these southern markets where we just saw red spiking and we saw lots of those stuff. Rents are now down 10 or 15 percent. You know, I have a picture from, I have a cousin in Austin who got buried. I've been to Austin several times,

you know, a little bit of a geek that I am. Whenever I see pictures of cranes, I like turn around and I'm snapping, you know, selfies of myself with cranes in the background because, you know, I mean, you are a little weird. Just saying you are a little weird. Yeah. Exactly. No, that's, you know, this is again why you would never put me on TV, right? You know, it's not the, you know, I'm the wrong person for TV ads.

But, you know, I'm snapping selfies with these cranes in the background because of all the apartments that are getting built. And so in many parts of the country, particularly in the south where there aren't the kind of building constraints that we have elsewhere. We've seen multifamily construction. That construction has been at levels that we hadn't seen in decades. It's going to be happening for another year, two, three years. The stuff that people started is still getting completed.

And that's pushing down pressure on rent. That's pushing down rents, gets back to our CPI conversation. Rents aren't going to fall, they're not going to collapse, but we've just built a lot of stuff in apartments. So some part of the decline in apartment, has been driven by construction that we haven't seen in single family. And a segmented market where there are really people who want to live in homes that, you know, who want to live in single family homes and neighbor, you know,

in places where they send their kids to good schools and rents on single family homes have been stronger than rents on apartments. And so some of what we're seeing is driven by, what I'll call supply and demand fundamentals. But where we should come back to after this is what I'll sort of call the investment market. So you have kind of two markets going on for housing. One of them is the short-term market, which drives rents and prices, which is the supply and demand for units.

But there's a second market, which is the valuation market, which is given what rents and prices are today, what do you think they're going to be in the future? and what is the present value of that stuff in the future? And that's what drives prices. And in particular for apartments. So that's interesting. I thought or I had this stylized kind of view that the rental market and the home for homeownership market were more substitutable,

but you're making the point, but maybe not so much. And so they can, they're on their own supply demand dynamics, investment dynamics, and therefore can end up in a different place. Interesting. Well, let me, though, look, let's looking forward, you know, we've had this correction in multifamily property prices down almost 20%. And by the way, they're down 20, but they're still up by our index, 25 from where they were before the pandemic. So there's still, you know, they're still well above where they were just a few years ago. So it's just kind of a retracing of some of the surge in pricing that we saw during the pandemic. Cap rates have gone from being extremely. extraordinarily low to just low, you know, you know, they moved up. What about the single, what I can't get my mind around is how does the, what happens in a single family housing market? I mean, even if mortgage rates come back down to something closer to six, let's say, which in my view is kind is equilibrium, you know, where you might land in the long run. So it's, you know, maybe we come

down a point, a point in a quarter, point and a half, something like that. Even if that happens, even if you assume we avoid recession and people's incomes continue to move higher, if house prices stay where they are, you know, very elevated and rising. What, I mean, it feels like we're never going to get going here. Home sales are going to be on the floor for a long time. No? Yes. Okay. I think, I think the house prices decline. One or the two. So, you know, the stylized fact prior to 2008 that everybody bat, you know, that some large institutional investors who are not in the big, who are on the opposite side of the big short, bad on was we never see nationwide, you know, sharp declines in home prices.

And 2008 proved that that is absolutely not the case. But that was in a market where we had large amounts of distress, four million foreclosures and for sales. I think in the housing market, and I, you know, my most cited academic paper of everything I've written is a paper on loss aversion. which makes a fairly straightforward point, which is people just don't sell stuff at nominal losses. It's not only houses, it's stocks, professional traders,

all sorts of people. People don't like to solve things at nominal losses. We could debate whether that's rational or not, as long as we want. It just turns out to be factually true of markets and of homeowners and of stock buyers and of professional commodities traders and everybody else that anyone's ever studied. That certainly applies to me.

I can, I can, I can't tell, I can't tell, I can't hold on to stuff forever. Yeah, even if, yeah, because I just don't want to admit I was wrong, you know, so. People just don't want to admit the wrong. Yeah. It just, it just is a fact of human, right. It's a fact of human behavior. Chris is definitely like that. He'll never admit he's wrong.

He kind of, you know, smiles, never, never, never admit. It's the wrong. Just waiting for the clock to. Sorry. I'm going to admit, but I make mistakes, except by the way, I have three daughters, except when I'm talking to them. Good strategy. Yeah.

Yeah, with my wife, it's, you know, I can never hold that position. I'm out immediately. With my daughters, I still try and hold up that. I still try and hold up that view. You know, it doesn't really, they don't really believe that, of course. But, you know, they, I'll try. So what happened, for example, in, you know, the late 80s through the late 90s, when home prices kind of the previous peak before 08.

And you kind of, you know, you remember those, you know, those times, Mark, where, you know, the largest, you know, Bank in New England, Bank of New England failed in the late 1980s, we had rolling recessions, you know, wasn't correlated with rolling recessions in different parts of the country. If you looked, nominal home prices were flat for 10 years after that period. And that was a period where we went into a recession. So that's not an August to this, right? Because we just started with the economy's strong and GDP just got revised off and the labor market is strong. And, you know, we haven't even mentioned AI yet and, you know, the productivity gains. darn, I thought we'd get through this without mentioning AI somehow.

You're going. I'll go. I'll only do it. That doesn't have to be the last time. That could be the last time. It's okay. But, you know, in the face of a strong economy, we don't have to live in a world where nominal home prices collapse.

I think the disproportionate evidence we have over the last 40 years in U.S. housing markets on the academic side is that when you see nominal price decline, you know, it is associated with distress selling. And I think I would argue more broadly that you could look at commercial real estate, you can look at other asset markets for some of the same reasons related to the view on losses, but for some others as well,

where you see sharp asset declines, you have somebody who's distressed, who is forced to sell an asset into a market where there's not a lot of demand. And that is, you know, and by the way, you see run-ups, you know, more and more research on bubbles and work that I've seen and done over time suggests that over-exuberance on one hand and distress on the other. And the over-exuberance

is by people who are non-experts. So it's when the people from somewhere else come into the market and start buying it up like crazy, whether it's biotech stocks, whether it's, you know, AI, you know, whether it's chip manufacturers of AI companies, when somebody who never buys chip manufacturers say, oh, AI is going to take over the world. I'm going to go buy that stock. That's what causes prices to get disconnected on the upside, and on the downside, it's distressed selling. So it is perfectly reasonable, unfortunately,

that we could be in a market like this for a long time, where you have a lot of people who are the opposite of distressed. They're living on three or four percent mortgages. They can continue to sit in those homes for a long period of time. They'll renovate them and do anything they can to avoid selling. And you have a demand of people coming in. I think we're going to continue to see elevated levels of single family construction. But given interest rates, the demand for all that stuff is going to be somewhat limited

because most of the demand for houses are still by people who are selling a home. So most transactions are trade-up buyers or trade-down buyers, but mostly trade-up buyers, who are selling an existing home and buying a new home. So that transaction, both sides of it are gone, are mostly gone, and are going to be gone for a while. And so it's going to be five, seven years before people pay down those mortgages to the point where they may think about pulling equity out to fund growth or to do other things. And I think a very reasonable forecast for housing is that the people who are buying today are not getting a great experience. expected return. That is, if you take the present discounted value of the rents they're giving up, relative to the price they're paying, it's not a great deal. But it doesn't mean the prices fall.

Nominal prices may even rise a little bit if construction costs are higher. So you get some nominal price growth. You probably don't get the real price growth that we've seen historically. Real home prices have grown, you know, again, you know, a little bit north of 1%, you know, 1.4, you know, 1.2, 1.3% a year going back to 87. So maybe we don't get a lot of real price growth, maybe only a little bit. And we look back 10 years later and say prices are a bit higher than they were. The people who bought really needed to buy, they probably could have got a better investment return. But the problem is they needed a place to live for 10 years. So only on paper was that a bad deal because they actually got a place to live they wanted to live in. And so that's a perfectly

feasible scenario. That scenario relies on two things. It relies on inflation remaining in control in the economy, you know, and rates kind of staying where they are in the economy growing. I can give two possible bullish cases where things could be a little better than that. And they both rely on mortgages. So your kind of equilibrium mortgage rate in the sixes suggests that spreads on mortgages come down. I'd say five and a half to six. Yeah, that spreads five and a half to six. Yeah. So that's where I was going to go with the five handle on it, which is.

It could be lower. It could be lower if spreads come back to the one and a half versus three. Right. But I will say that bond buyers have been burned by what we will technically call negative convexity. Yeah. A negative convection, which makes bond buyers hate owning mortgages, is what all of us homeowners love. Yep. which is the ability to refinance a loan and rates fall.

Right. And the problem is when rates are sitting at historically high level. Yeah, they don't want to buy, you need a premium to own a mortgage bond because you realize if rates come down into the upper fives, all those mortgages at seven are going to refinance. And so I'm not willing to lend at lower levels because I'm afraid that there's going to be a refy wave of those people. And so in a world where interest rates are high and spreads are high, that is likely to keep spreads high in mortgages, if you think there's some scenario where rates come down, that's one thing. And the second is, where do we think real rates should be?

And this is a subject on which, you know, if you go back and look back to the beginning of the tips market. So, you know, measuring real rates was hard. The Treasury Inflation Protected Securities Market, the tips market. That's right. So I can buy a bond, which gives me 10 years of real returns. So the federal government is going to pay me, is going to pay me based on inflation. And so what I can go and figure out on the market is if I can buy a bond that pays me an inflation indexed return, And I can compare the yield on that to a nominal treasury bond.

I can impute out what expected inflation is going to be. And if you look at the 10-year treasury, which is around four and a half, expected inflation is about 2.2 and a little bit less, actually. I think now it's closer to 2. And the real rate, which is the non-inflation portion of returns, is about two and a half percent. By comparison, in January of 2022, it was minus 1%. I point to January 2020, because if you go back in the record and look,

you will see a number of Fed officials say, whoa, what are we doing buying all these bonds? We're not only going to stop buying them, we're going to start redeeming. And when those comments came out, there was an immediate, incredibly sharp increase in real rates. And the last time we saw that was back in 2013 when there was something called the taper tantrum. And the taper tantrum in May had exactly the same effect.

At that time, the Fed said, we're going to start pulling back on the bond portfolio. And real rates went from minus 0.5% to over 0.5%. within weeks. And so the Fed's portfolio, if you go back before QE existed, and you go back and look in the mid-2000s, the beginning of the tips market, real rates were pretty close to 2.3 to 2.5%. Today, real rates are about 2.5%. So the question is when the Fed and the Fed has trillions of dollars of stock to still

offload, but they've said they're going to stop buying, they're going to let it run off over time, and I believe them because of all their concern about inflation and everything else. So as the Fed offloads that, they don't actually have to do it. Financial markets look at what's going to happen in the future. They don't price what's happening today. So they price the Fed's willingness to let their bond portfolio run down by trillions of dollars. There's a case to be made that real rates really should be in the twos absent these multi-trillion dollar interventions. And if we think the productivity growth in the future is likely to be higher because of technology, I won't use the A word, the two-letter

a word. You know, if you think that productivity growth is going to be moderately higher, if we think that we're not going to see a lot of immigration and wages are going to go up. Maybe real rates should be back at that level. And if so, that means that when you discount future rents to prices today, if you own a long-lived asset like real estate, those discount rates should be higher and have to be higher because you've invested in real estate. You have to earn a return relative to inflation,

that's the same return that you invest in stocks of technology companies or stocks of regular companies that are benefiting from productivity gains. So, okay, so to connect that back to where we started on prices, what are you saying? Now you're talking about multifamily, trying to... So multifamily and single family. Yeah, well, in the single family, my interpretation, what you said on the single family side is, of course, things can go in lots of different directions, but most likely, we're just going to go flatline here for a long time and let incomes and we get incomes catch up.

Interest rates come in and maybe a little bit. And ultimately, over time, we're going to see more transactions. The markets normalizes. But hey, that's not going to happen next year. That could be five, seven years down the road. You mentioned New England's circa the 1990s as your case study, which, you know, makes a lot of sense. By the way, that has true. tremendous all kinds of implications, you know, gazillion implications, most obvious being homeownership is going to be a problem. It's not, it's going to be very difficult to get first-time homebuyers into homes. And that means home ownership is not going higher. Maybe it may even start to go lower. But anyway, then you went on about real interest rates.

Is that now you're tying that back into the multi-term? Now I'm getting to multi-fut. So you're exactly right, Mark. Okay, I see. Other than the fact that when I buy a home in principle, I should get the same return as other stuff, I think in practice, we're just not going to happen. It doesn't matter. Yeah, it doesn't matter. Right. In multifamily, if I put a dollar into an apartment reed or if I put a dollar into an apartment building, I have to earn the same rate of return as if I put a dollar into Microsoft who owns an AI, you know, who has the AI stock. or I put a dollar into, you know, a consumer goods company or an airline, my dollar has to

earn the same rate of return. If we think that AI is going to help some of those consumer goods and travel and financial services companies improve productivity, they're going to see potentially stronger returns on equity, which is what many equity analysts are saying. and the AI and the chip and the other companies, you know, the software companies, et cetera, are also going to see benefits from that. And my dollar in real estate has to earn the same rate of return as those other investments. Yeah.

It's almost like the way, another way of interpreting what you're saying, I think, I'll just say and see if you agree, is that you've got two different types of buyers in the sellers. In the single family housing market, it's mostly us as individuals. And there's all kinds of, we're not basing it on relative returns. We're not doing this careful calculation between rent, buy, and investing in stocks and everything else. We're not doing that because we've got to live somewhere. And, you know, we like where we live.

But in the multifamily side, not so much, a lot of institutional owners. And they're certainly driving the prices up and down and all around. And they are looking at the relative returns. And in this context of higher real rates going forward, prices. have to be lower. Multifamily price have to be lower. Yes. And quite a bit lower. Quite a bit. Which is what we've seen. But 20% isn't nearly enough. Yeah. Oh, interesting. On the multifamily side, it's not enough? On the multifamily side, not even close. Oh, interesting. So real rates went from minus one to two and a half. Right. And that was the peak of the multifamily market. If you do the math and ask,

I need to earn a real rate of return that's 3% more than it was at the peak. And you ask how much the prices have to fall for that real return to be there? It isn't 18%. It's 30 plus percent. Okay. So if you look at use a different index, and I hate to refer to indexes that are not, the Moody's index, of course, but let me just point to Green Street. By the way, no worries.

By the way, I use other indices too. So I'm sure. I know. It's sort of a little bit like, you know, there's, you know, what do you admit to in, you know, in the privacy of your home or, of course, in a podcast. You know, so if you look at the date of the Green Street have, they suggest that multifamily prices are down closer to 25 to 30 than down 18. And Green Street has prices close to the level they were at the beginning of COVID. If you use that NAV estimate, if you use that cap rate and look at apartment REITs, as of last Friday a week ago, we're recording this, Green Street's estimate of NAV,

and I look at the share price of multifamily companies. And I de-lever the whole thing, and I ask, what is the premium to asset value that REITs are trading at? rates are trading about 15% below the asset value mark to market relative to Green Street's price estimate. So if you combine- Is the Green Street also based on actual transactions, or is that market-based? Or is it-green-street? They use market transactions, but Green Street takes a heavier pen to those transactions than other people. do. They are more careful about how they look at future NOI. So they're really careful in calculating how they calculate cap rates. And they are, I would sort of say they use a sharper pen than other

people do in calculating their cap rates, which is why they're more volatile up and down than other measures are. But Green Street puts more resources into studying commercial real estate than any other analyst by a factor of three. Yeah. Like they have three or four X the number of people relative to any other job that does this. So, you know, I don't own, you know, they're privately owned. I don't own stock in the company. I'm not a paid spokesperson.

But I tend to look at their data because they just put so many resources into what they do. And if you combine them relative to the 18% number you talked about, you could easily see a 20 to 25, the stock market as a Friday is predicting another, call it 20 to 25 percent decline in multifamily prices relative to where they are today. And the math on that is not hard to go to. So that would wipe out all the gains that are in our index going back. And thus your concern about the banking system, the defaults, the delinquencies. Correct. Correct. Got it. Got it.

So just to give you the simple math mark, if you go from a 5 to a 7% cap rate and nothing else that changes. Uh-huh. Well, how for you? The cap rate is just a multiple, right? You're going to explain the cap rate? I was going to. The cap rate is just the inverse of the price earnings ratio. Right.

So if you think that interest rates, the required rate of return goes up 2%, going from a 5% cap rate to a 7% cap rate, is the equivalent of a 40% decrease in price. And that is the difference in the PE ratio. And that's what you're seeing in the stock market from peak. The stock market's pricing more than that decline. And by the way, whether one, you know, how one thinks about it, the single family reeds are trading about a 16% decline in home prices. So the public markets are predicting apartment prices using Green Street's data have another 15% to go.

And single family home prices got to drop another 16%. We talked about why I don't think that's actually going to happen. But the difference, as you described completely accurately, between owners of single family homes in the stock market and people who buy a home is owner. of single-family homes in the stock market have to actually get a competitive rate of return of their capital for them to invest in the asset, whereas people who are buying homes have to own the home, and their return comes from living in it. So I don't think the stock market is predicting that housing prices are going to fall that much. What I think the stock market is saying that the price-to-rent ratio in single-family homes is not enough to justify where prices are today. And

And stock market investors need to buy housing at a lower price to get a competitive rate of return. But in multifamily, stock market investors are no different than private equity buyers of real estate or institutions like Columbia in their endowment. They need to earn a competitive rate of return across the capital markets. and now we get to the, now we get to your point, which is the distress in banks. So just let me frame that for a second. Okay. So the concern, the kind of the hand-wringing here has been CRE prices are coming down, multifamily.

We've been picking on multifamily, but, you know, some of these other office, the fundamentals are even worse. And prices feel like they can buy your calculations. I'm sure they're going to be down 50, 60 percent, something like that. retail, industrial, maybe less so, but still some price declines. So the concern is those price declines combined with the possibility interest rates remain very high. Owners of these properties now face higher interest costs as their mortgages start to roll over and they get refinanced into a higher rate. So now you have less equity, no equity because of the price

declines. On top of that, you have higher operating expenses. And, and there are, Then on top of that, the fundamentals look iffy, remote work for big urban office towers and all that space coming, all that multifamily space coming online in big urban areas, so forth and so on, you add all that up. That sounds, that feels like a lot of defaults. And then when you get defaults, that gets into your point about distressed sales. And you get into this kind of self-reinforcing what has been dubbed the doom loop, the doom loop. Is that correct by my colleague, Stan Van Nuolk.

He's talking about the office market. I'll stay away from office, both because he's the expert, but also because office is obvious. You don't have to have anything to do with real rates to be pessimistic about office. But multifamily, the fundamentals are fine. If rent growth peaks it, you know, with the, you know, if rent growth sort of stops at zero and then goes to one, two, three percent a year and future years, because we, you know, supply growth comes back to normal levels and demand continues to grow. You know, we're not looking at declines in apartment rents of anything of the order of magnitude that we're describing. But I'll give you

one quote that came from data looking at Trap and Goldman in their, you know, their latest housing report. If you look at CNBS originations, commercial mortgage back securities, CMEBORs back security, thank you. You keep making me explain acronyms, which is good. new loans today are happening seven and a quarter plus percent. If you look at loans that are rolling over in 2024, the average interest rate is around 4.5 percent, commercial loans. Commercial loans rolling over in 2025 are going to be 4.4, and in 2026, they're going to be 4.3 percent.

And they're going to roll over into a world where they're going to have to finance those new loans at two to three percent higher rates. And you could have exactly the same rents that you had before. You could have higher rents. But to pay a two or three percent higher interest rate off of a base of four and a half, if your interest rate goes from four and a half to seven, your interest costs are going up 40 percent. Unless your rents are 40 percent higher and remember your costs,

we start talking insurance costs and inflation, those have real effects on the cost of operating apartments and property taxes and wages and all that stuff are high. So your costs are not flat. Your costs are rising faster than inflation, particularly insurance, which is going to get worse. It is very tough for many units to pay those increases, even if you have a perfectly fine building. And if you look at who holds those loans, by the way, the number of bank loans rolling over in 2024 is higher than 2023. In 2025, it is higher than 2024. And in 27, it is even higher. Because all the loans that were made in 2020 and 2021, when rates were at incredibly low levels, they roll over in 27. And that is a...

a slow-moving crisis that unless we get real growth in rents, which I'm not seeing, is going to be hard for a lot of those loans to roll over. Let me, let me, I hear you. And I think we're going to end on the stats game because I think we need something uplifting after this conversation. So, and I know you're running out of time. We're all running. We will complete this part of the conversation and then do the stats game.

And I'll let you get back to your two very significant jobs. But the pushback on what you're saying is, and when I say pushback, the more optimistic perspective on what you're saying is that everything you're, everything you've said is well known. You know, it's not, we know all this. is embedded in prices and the arithmetic is very clear. The regulatory regulators and the banking system and other investors in the marketplace see this coming.

So it's not like it's going to take them by surprise. Not that that doesn't mean there isn't going to be a lot of financial pain in defaults, but it means that they can be managed. And moreover, if we look at the banking system, just distracting a little bit from the not. bank part of the system, but the banking system, and you look at the exposure of the banks, particularly the big SIFI banks, large banks, it feels pretty small, right? I mean, if you look at the total commercial real estate assets on their balance sheet,

then that's mortgage, that's loans, that's that's securities, that's, you know, C&I loans to REITs, you know, just add it all up. It's five, 10 percent of their asset base, and it's actually lower than it was 10, 15, 20 years ago. And then I'll say one more thing and then I'll stop and get your reaction. They're capitalizing to these incredibly large loss rates. I mean, I think in the CCAR, that's the annual stress test that the large banks take every year for capital planning. They are assuming overall commercial estate values peak to trough are going to decline. I believe, Chris Dr. Reeves, correct me if I'm wrong, 40%. I believe that's 40% all in, you know, across all CRE.

So, okay, I said a lot there, meaning that, yeah, I hear you, the meteor is coming. I know it's up there in the sky, but I'm getting, I have ways to mitigate the damage is going to do to Earth. Does that resonate at all? Yes and no. Okay. This is not a big bank problem. This is not a G-Sifi problem. And the reason is actually exactly what you just said, which is the bank's drafts,

have heavily penalize real estate lending heavily. Yeah. They run, you know, incredibly harsh scenarios. And by the way, they have to run rate increases on top of the scenarios you just described. So if you hold fixed rate loans of five to seven to 30 years, the stress test has crushed those loans. And so large banks have gotten out. for the most part of real estate lending.

So where are those loans sitting? They're not sitting with the G-CIPIs. They're sitting with small and regional banks, and they're sitting with life insurance companies. And they're sitting in the hedge fund and the investment-based space. That's where the loans are sitting. They're not sitting with the large banks. So I'm not predicting in any way that these are going to be problems.

Many of those institutions are not marked to market. They're either privately how a lot of that stuff is in private, privately held institutions or small mid-sized banks. And some of, you know, regional bank index is not a lot above where it was in March. Despite the improvements in the economy, the regional bank index for regional banks is pricing in continued concerns. And every time rates go up a little bit, you see the regional bank index just get crushed. When it went up to 5% briefly, the regional bank index was bouncing around the March lows.

And so the market does see this and does see where it's sitting. And it's not all regional banks. Some regional banks don't have this exposure. Some of them have a lot of it. And it's a real problem for those institutions. But it's going to sit in lots of other buckets in the economy, not in those places. But if you look at new lending, the problem is going to be when you get a credit crunch, a credit crunch is historical lenders take losses.

and as a rolls of the losses don't want to make new loans. And so what I worry about, look, capital markets are efficient as ever. If you give somebody the opportunity to make a buck, somebody's going to jump in and want to make a buck. This is not like, you know, the late 80s when they were given away real estate by the federal government and, you know, people could make fortunes. But I still say that when I look at the people who make commercial real estate loans, new loans are hard to get everywhere and standards are very tight. and I think we're just going to have a bunch of challenges I had in the commercial real estate side. If real rates come down and if spreads and mortgages come down and if the tenure comes down, that stuff gets better. But I will say that, you know, Federal Reserve officials may not give themselves a lot of credibility when they say there are absolutely no problems.

because I don't think it's really true. The G. Siffies it is. And the really puzzling thing to me is why they keep pointing to real estate and pushing to Titan standards here and there, you're not going to be able to roll over these loans without extending them for years. And I think it's going to get hard to do it across the board. And I think we're in for a period that could just be

a few years of prices, continuing to fall and things are kind of rough. And that's the good scenario. And the bad scenario, we have some element of distress. But when you're talking about the markets, I think apartment reits and the reed market in general is pricing in a moderate level of distress in commercial real estate. In other words, I think their prices are overshooting fundamentals by a little bit. I don't think apartment prices should fall quite as much as I was describing earlier.

And so I think the REIT market at the moment is pricing some distress that is, you know, that is in addition to the other stuff we're seeing. And I think the banking sector, there's some individual bank stocks that are pricing in some level of that. But there are a lot of other holders of these assets that we could go look at. And the great thing about global markets is they're held globally, not just in the U.S. so that spreads the pain over a lot larger base. I do think it may not be a great time for a while for, you know, folks on the commercial real estate side. And I do think there's likely to be some elements of distress that are not just in,

in office that are really kind of across the board. Well, okay, under that, with that sobering assessment. It is. I wasn't so bad, right? Housing prices don't collapse. They kind of stay where they are. commercial real estate. I could be much worse.

The meteor is coming, guys. It's going to hit, but it's going to be okay. Under most scenarios, you know, maybe one or two scenarios. It could be bad, but okay. All right. I hear you. And it makes a lot of sense. There's definitely a lot of risk there.

But let's end the conversation playing the game. Just liven it up a little bit. Lighten it up, I should say, a little bit. And Mercer's tradition, has it, then Marissa goes first. I don't know how this tradition came to be, but it is. It's a good one. Yeah. And I should remind everyone the game. We each put forward a statistic. The rest of the group tries to figure that out through cues and deductive reasoning and clues. And the best statistic is one that's not so easy. We get it immediately. One that's not so hard

that we never get it. And if it's apropos to the issue at hand, all the better, but not necessary. Marissa, fire away. Okay. So my statistic was taken during the course of this conversation. So I was scrambling a little bit to come up with something. I could see it on your face. I could see you scrambling over there. You see the panic.

Yeah, the panic set in. Okay, so I'm going to do something a little bit different. I'm not going to give you a statistic. I'm going to make you guess some geographies. Okay. So we got a lot of house price data. This is on the single family side, moving back to the single family side. So we got a lot of house price data this week.

Our data? We got our data. We got the K-Shiller data. We got FHA data, right? So in the K-Shiller and the Moody's Analytics house price indexes, if you look at the biggest metro areas in the country, say the top 25 metro areas in the country, there are three metro areas where house prices and only three where house prices are down over the year. In the FHFA series? in the well now i'm i'm looking at the the k schiller right now but this is also yeah but this is also true of our moody's analytics house price index too okay you're talking about the big metro areas

then yes what's the universe of metro areas the top 25 the biggest 25 metro areas in the country okay okay where they're by population okay yeah okay what chris san francisco hold on hold on oh what So, and these are metropolitan areas, not metropolitan divisions. Okay. Okay. Okay. Okay. So there are three warehouse prices are down over the year.

Can you guess which three they are? Not San Francisco? That would be one, I would say. No? Austin. Is Austin in the list, though? No. No.

Top 25? Okay. Top 25. So San Francisco, I'll give you partial credit for. It's actually up in the K. Schiller, but it was down in the Moody's analytics. So that was the one where there was some disconnect. Oh, you're saying across all three of these measures, house price measures, no. No.

That's not what you're saying. They're down year over here in both of the MA Moody's and the Kay Schiller. Moody's and Kay Schiller. Okay. There are three. Okay. that are down in both of those. San Francisco was down in one, but not the other.

I got it. So it's given partial credit for that. Is Phoenix in the... Yeah, Phoenix is one of them. Vegas? Is that... That is one of them. So we have one more to go?

Yep. Is it... Dallas? Dallas, yeah, I was going to say Dallas. No, but Dallas is on the border. barely positive growth over the year. L.A.? Nope.

Denver. No. Denver, not Denver. It's not in the north. It shouldn't be in the northeast. You're in the, it's in the same region of the country where you're guessing. Yeah.

Boise, it can't be Boise. That's too small. Can't be Salt Lake. That's too small. What's the other big metro area down? Seattle. Seattle.

Seattle. No. No. Not Denver. We should get this. Yeah, you should get it. What are we missing in that? Portland?

No, no. Sorry? Portland? Yes, Portland. Okay, Portland. Okay. Yeah, Portland. That's a good one, though.

Biggest Phoenix in Portland is where house prices have fallen over the year, among big metro areas, and those are the only places where we're measuring declining house prices. I just want to point out that my home in very large. Beach, Florida, way up, according to our index. And Billy, Billy's booming. We got like 9% year-over-year growth. What's that all about?

I don't know. He's looking good. That's right. I, by the way, Florida, I, if you ask me where I'm most nervous about, Mark, you probably didn't want to hear me volunteer of Florida, but I'll volunteer in Florida. Insurance costs, that kind of thing. Climate insurance. When we talk about things that force people to realize problems, they're negative things.

and high growth of insurance, if God forbid, we have the next storm, et cetera. Yeah. But if you go through the area, you know, south of Fort Myers, between Fort Myers and Naples and the wreckage there, and you then say, I'm an insurance company, you're going to be pretty nervous. Yeah, I hear you. I love that. For my mom lives.

All right. Chris, you're up next. Chris, Mayor, you're up next. All right. You're playing the game, right? What is it? Yeah, 6.5 years. Six.

Five years. Yes. That's not the average duration of a mortgage, is it? No. It is not. Because it's longer than that now, right? It's like, and it's going to extend way longer further. You're right.

Six point five years. Six point five years. Is this something to do with multifamily? No, it is not a real estate statistic. It's not. Oh, it's not. Oh, okay. That's what my mind was.

But you'll see what you'll see my linkage in a second to, real estate um but it has to do with where you started mark on the economy where did i start oh boy the the when you and i started which was the labor market has been really strong and we're not going into a recession um you know we're we're going to we're going to you know keep it going six and a half years bummer uh a recession recession is a key part of this statistic. We get a recession every six and a half years. Correct.

In the post-war period. Oh, okay. Yeah. And the linkage to real estate is all of what we've been talking about assumes a soft landing. Yeah. And if we don't get that, then all the bets are off in terms of what we were, all of our discussion, because things could look very different if we have a recession. and negative growth in terms of how to think about both housing and real estate and banking, et cetera.

Yeah, we should have- That was my statistic. That's a good statistic. We should have gotten that right away because it's consistent with that 15% unconditional probability everyone uses. Yeah. Chris Reedies, you're up. 71.4. Is it a statistic that came out this week? It did.

Government statistic? No. Not a government statistic. Is it from a conference board survey of consumer confidence? No. Nope. It's a trade group. It is from a trade group.

Housing related? Yes. It's housing related. Oh, is it NHB? No. Is it? Percentage of purchases by new home buyers? No, it's an index.

An index. Portability? Trade group. Nope. 71.4. It's not a sentiment index. No. A trade group related to housing.

It's related to housing. And it came out this past three. And it's not the NHB. No. Should we get this, Chris? I thought you would get this, Mark. Ah. Now he's trying to embarrass me.

Yeah. That's only because I'm the housing guy. That's only because I'm the new guy at the podcast. They didn't want to embarrass me. The National Association of Realtors. Okay. Oh, okay. Did they come out with anything this week?

Yeah. Index of home sales. These are pending home sales. Oh, pending home sales. Yeah. You know what? For some reason I thought that was home builders, the NHB. That's how I got full.

That's an art? It's an art. It's an art. National Association of. No, no way. And they are, yeah. Depending. Oh, you're right.

That's a, that's in a near all-time law. Yeah, right. That's at an all-time low. At an all-time low. Yep. That's going back to 2001. That's when they started. Lower than it was in the great recession,

lower than the early days of COVID when we couldn't actually transact a lot of houses. So just a- There's nothing that says it can't get lower. That's true. There's that meteor. 71 has a lot of numbers between that and that. and that at zero. You remember the old spinal tap, but it goes to 11.

It's not just 10. It actually goes to 11. That's right. I'll give you the one. It can go lower. This figure is from October, though. So I'll give you a little, if you want more of an optimistic view. This was October, very high mortgage rates.

And mortgage rates have come down. So we could see a little bit of pickup. Right. I predict going lower. Okay. All right, I got one. What's yours? Two numbers.

And we did talk about this earlier. 3% and minus 0.2%. 3% is the PC year over year. No. It's year over a year percent change in something, but not the PC, not the consumer expenditure deflator. But that is true. It is the PC. It is.

actually correct. Oh, okay. Okay. Another 3%. Okay. That's funny. Oh, that's true. It was.

Yeah. Yeah. Overall inflation, 3%. You're right. Yeah. Oh, that's interesting. Yeah. No, this is another 3%.

It's housing related. No. It goes to not housing related. But a statistic that came out this week, a government statistic. Okay. Oh, is it disposable income? No. In that ballpark, though.

Spending income. It came from the BEA. It's a saving rate of GDP. That's your real GDP growth on the nose. Real. Real. Three. That's right.

Oh, okay. That's pretty impressive. What's the minus point two? Chris Deereides, you should know this. You brought this on your order. I brought this up earlier. You brought up the statistic earlier, yeah, in the context of GDP. Oh, GDI.

GDI, gross domestic income. Yeah. So that gap is pretty large. The so-called statistical discrepancy, which is the difference between gross domestic income and gross domestic product is 2.5% of GDP. It's been higher only one other quarter in history since World War II. Wow. I mean, that something, which one's right?

I don't know. I mean, something's going to get revised. But I think, though, the rule of thumb, the advice you get is, as you said earlier, average the two. So three plus minus point two divide by two. It's about one and a half is. That actually feels like the economy to me, doesn't it? I mean, if potential growth in the economy is two, and we've been growing. growing one and a half, that explains the kind of the modest easing up in the labor market that we've

been observing over the past year. So it feels like that might be actual reality here, but we'll see with the revisions. Anyway, okay, that was great. Hey, Chris, you took a lot of time with us under significant duress, so I really appreciate it. And we didn't cover a lot of ground. I had so many other things I want to talk to you about, and maybe we can get you back on to talk about them. And maybe by that point in time, you'll be even cheerier than you are now. Good. Well, I appreciate it.

It's been a lot of fun. The great group to talk to, and I really enjoy the podcast. Well, thanks so much. I'm honored to be on. Thank you. And just before we go, I want to call out one of our listeners, Milan Tom and Milan is a avid inside economics listener, Spotify. It produces these statistics that show you, you know, what is your number one podcast, number two, number three, how much you're listening.

And Milan is, you know, I think what was it, Chris or Marissa, in terms of almost like 4,000 hours of listening on the inside economics podcast. Real fan. So I think he's in the financial, in the financial services industry in London. So thank you, Milan. I really appreciate your dedication to our podcast. And hopefully it sounds like you found it of some values. So thank you for that. And with that, dear listener, I think we're going to call it a podcast.

Take care now.