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The Housing Recession Is Coming

Derek and Mark Zandi break down the state of the housing market, the prospect of a correction, and how China’s extremely bizarre year is affecting the U.S. economy

Photo by Justin Sullivan/Getty Images


While the broader economy is almost certainly not in a recession, the U.S. housing market is facing a painful reset. As the Federal Reserve raises interest rates to reduce inflation, the most rate-sensitive sector of the economy—which is housing—is taking it on the chin. Today’s guest, Mark Zandi, the chief economist of Moody’s Analytics, breaks down the queasy state of the U.S. housing market, the prospect of a correction, what nationwide falling housing prices will mean for the broader economy, the global synchronized decline in housing, and how China’s extremely bizarre year is affecting our economy.

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Derek and Mark peek under the hood to make sense of the concerning numbers in the most recent inflation report.

Derek Thompson: I suppose we should start with the inflation report this week. I’ll begin here with a confession: I got this totally, dead wrong. I was looking at gas prices and assumed that we would get the second consecutive month of headline inflation essentially being zero or just under zero. We did not get that. Instead, we got core inflation heating up. What was the most concerning thing that you saw in this inflation report? What surprised you?

Mark Zandi: Well, headline inflation was fine. It was up 0.1. That’s victory, if that’s where we’re at. That goes to the lower oil, gas, and energy prices. All good there, no problem. The real problem is core inflation—ex energy and food. Economists tend to look at that because that’s a very good forecast of future inflation, because energy and food prices, as we’ve seen, go up, they go down, they go all around, but core inflation gives you a better sense of where we’re headed. That was high. Uncomfortably high, 0.6. My guys who do this for a living were expecting 0.3. That doesn’t sound like a whole lot, but that’s a big difference. Annualized, that’s a difference between 7 percent inflation and 4 percent inflation, so that’s a big deal, and certainly moving in the wrong direction. It means that the Federal Reserve’s got a lot of work to do in raising interest rates. Obviously, markets didn’t like it. Nobody should like it. It’s pretty disconcerting.

Thompson: And just to be clear, because this got a couple people in trouble last month, we’re reporting here both month-to-month numbers and annualized numbers. There was this whole rigamarole a month ago where Joe Biden said, “Inflation is 0 percent.” And some people said, “No, that’s the month-to-month number. You need to report inflation as an annualized number.” So 0.3 is what you were expecting or what your guys at Moody’s were expecting for the month-to-month inflation number, and it came in at double that for month-to-month.

Zandi: Yeah. That’s exactly right, 0.3. And then to annualize, a poor man’s way of doing that is multiply by 12, 12 months, and you can get a sense of what inflation would be for the entire year if it continued to increase at that month-to-month rate. Which if it was 0.3, it’s 4 percent-ish, if it’s 0.6 that’s 7 percent-ish. That gives you a sense of the difference between them.

Thompson: The shelter index is a key part of why core inflation continues to rise faster than people like you and I were expecting. It increased 0.7 percent in August compared to 0.5 percent in July. The rent index also rose 0.7 percent in August. Something a little bit confusing that maybe you can help me clear up: If you ask Zillow, if you say, “Hey, what’s happening with rent inflation on Zillow?” They’ll say, “We saw national rent prices peak around February, March.” But you call around to a bunch of other sites that are listing new rents of apartments that are ready for people to move into. And they’ll say, “Yeah, we saw rent inflation peak around this spring.” But now you ask the government and the government is telling you that rent CPI is still accelerating. Why are we seeing this discrepancy?

Zandi: It’s just the way that the Bureau of Labor Statistics does this. It surveys renters in groups of one-sixth. So one-sixth of renters one month and then subsequently for six months after that or five months after that. When you get a rent increase in the marketplace, say back in the month of February, it takes about six months for that to translate through into what it means for rent inflation as measured by the BLS. It’s just methodologically how the BLS is doing it.

And in the case of measuring the cost of housing, there’s a lot of non-intuitive things here that go into this. One really important point, interesting point is, for most homeowners, their cost of housing is increased according to the Bureau of Labor Statistics because of this increase in rent. But that doesn’t mean the cash they’re shelling out is increasing, right? Because they’ve got a 30-year fixed rate mortgage, 15-year fixed rate mortgage. Nothing’s changing for them. But the BLS says, “Oh, your inflation rate just rose.” So from a cash perspective, an income perspective, it’s not as bad as it sounds. It’s bad. I’m not saying it’s not. It doesn’t mean quite the same thing as if food prices rise 8-10 percent, because you’re actually shelling out more cash to buy those groceries.

Thompson: It just seems to me that shelter inflation, experientially, is very different than energy inflation. When gas prices change, everyone, two weeks later sees a higher price at the pump. And when they have to refill their cars, they have to pay more money for that same amount of gas. But with rent inflation, a lot of people, most people who are renting, are in contracts that are already locked in. If they are homeowners, they are paying mortgages that are probably locked in. And so it’s a little bit funky how rising shelter inflation should make us think about the fact that everyone’s paying higher prices because most people who are paying for shelter are not paying higher and higher and higher prices every single month. That’s a very strange situation.

Zandi: Well, that goes back to your Zillow point. Zillow, that increase in rent is for people who are moving into new apartments or someone who’s renting and their lease came up and now they’re renewing their rent. But as you point out, that’s a small part of the population. For most of the population that doesn’t happen for a period of time. The Zillow rent increase is not representative of the rent increase that most people are facing at any given point in time. But, there’s broadly speaking, that’s actually good news that Zillow is reporting market rents aren’t rising as fast. That will ultimately start showing up in the Bureau of Labor Statistics’ measure of consumer price inflation. Probably, my guess is very late this year, going into next year, we’ll start to see that roll over. We need that, because right now it’s adding a lot to overall inflation.

This transcript was edited for clarity.


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

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