The REconomy Podcast™: Answering Your Top Questions on Real Estate Economics (Part 3)

In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi gather the entire First American Economics team one more time to address your top questions, examining migration patterns, inflation, the rate lock-in effect, maturing office debt, recession risk and more.


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“My own personal opinion is I don't think that there will be a recession in the next 12 months. We have to put some sort of a number on it. Because it's not as if we've broken the business cycle. There will be a recession at some point, but not due to the monetary tightening policy that we've seen on the part of the Fed. In large part because the Fed is likely done at this point, with most of, if not all, of its monetary policy tightening, and the economy has held up extremely well to it.” – Mark Fleming, chief economist at First American


Odeta Kushi -  Hello and welcome to episode 80 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and today will be part three, the final episode of our three-part series where we answer audience questions. And, of course, that means that the whole team is joining us again today. We've got Mark Fleming, our chief economist here with us. We've also got Xander Snyder, senior commercial economist and, of course, economist Ksenia Potapov. First of all, happy new year everyone. It's officially 2024.

Xander Snyder - I thought we'd never get here.

Mark Fleming - After last year, good riddance.

Ksenia Potapov - 
Yes. Oh, no, don't jinx it.

Odeta Kushi -  Please, no unprecedented events in 2024. We're ready for precedented? Yes, exactly. Well, thank you all for joining us again. I'm really excited for today's episode. And today, instead of picking on Mark first, I'm gonna go to Ksenia and Ksenia you'll be answering our first question. And our first question is actually about migration patterns - what markets are experiencing strong net in migration and what markets are experiencing out migration. 

Ksenia Potapov - So I think in a surprise to no one, the cities that experienced the most in migration were in the Sunbelt, at least according to data from 2022. These were cities like Austin, Dallas, Houston, a lot in Texas, Nashville, Raleigh, Jacksonville, a lot of these cities. And the cities that shrank the most were often larger, more expensive coastal cities like New York and Los Angeles are on the list, but not exclusively. There was also New Orleans, Cleveland, Buffalo, some of these smaller cities. But when we're talking about some of these city migration flows, we're actually looking at a very large geographic area. So, for all of those who read our blog posts, we often mention that this is a metropolitan area that we're looking at. So, for example, when we're talking about New York, that is actually the New York-Newark-Jersey City metropolitan area, which spans three whole states. So it helps to break it down a little bit further into the kinds of areas within those metropolitan areas. So, again, in 2022, urban areas in large cities saw the most population decline, which was, I believe, a surprise to no one. Again, this is a trend that we've seen since before the pandemic - decline in urban cores. But it was accelerated during the pandemic. And so it stands apart from the rest of the kind of mid-size, small cities and suburban areas, which all gained population. So this is a trend that's been going on again, since before the pandemic. And it also suggests that, the millennials, who really like to live downtown, and it seems like they would never follow their generational predecessors and move to the suburbs, are actually doing that now.

Odeta Kushi - That's right, we are seeing that quite a bit. It's also interesting that you're seeing these migration flows. I'm assuming a lot of young people moving out of traditionally more expensive areas like New York and LA to Sunbelt markets, where you're seeing not only good weather, but strong job growth, and you know, amenity growth as well, right. So you're seeing that a lot of the Texas markets are booming. And so I find that very interesting. 

Ksenia Potapov - In some cases, you've also got work from home, which allows you to work from somewhere else.

Odeta Kushi - That's absolutely true. I've seen a lot of people move out to less expensive markets because they can at this point. Alright, well, the next question is a little wonkier, which means it's going to Mark. So I took this question exactly as is here. And that the writer wrote, one thing I never hear anyone talk about any more is trade balances and imbalances. Do exports matter? Do imports matter? How does the strong dollar impact inflation for the average consumer? So Mark, put on your macro hat.

Mark Fleming - That's like three or four questions in one and it actually gets to a little bit of an issue or a way in which we measure the numbers. When we talk about GDP, and particularly over the last couple of years, have focused on where the GDP growth has gone negative. And if it goes negative for a couple of quarters, are we in a recession, which we've talked about is not the definition of recession. But, one of the accounting measures is net exports, or exports minus imports. But you have to be careful because actually imports don't matter at all. Imports were not made in this economy. They were made in some other economy. And so, technically speaking, they do not count towards our GDP. The reason they are a negative minus imports in our economic accounting is our consumption numbers. The consumption dollars include the consumption of those foreign cars that we've bought. And, therefore, it's a mere accounting necessity to extract the imports, because they're in the consumption measure. So the answer to the question is no, the trade balance doesn't really matter. It's the export number that matters, because obviously, that is made here and does count as part of our economic activity. And to answer the last part of the question, it matters relative to the price of the dollar, because when we export that good, and the dollar is expensive relative to other currencies, that makes our goods more expensive, relative to their own domestic goods, or vice versa. So exports are not just about us making it, it's about how well we can sell it given the strength of the dollar. So those two things are actually tied in that sense.

Odeta Kushi - That's a really good and nuanced point for people who don't necessarily follow the national income accounting methodology.

Mark Fleming - And hopefully they never had to. But it also means that we export inflation, right, which is something we have done historically. Over the last couple of decades, we've been able to export inflationary pressures away by strengthening the dollar, or in the last couple of years I should say.

Odeta Kushi - That's a good point that speaks to the second part of your question on inflation. Okay, thank you for that, Mark. I think the next one is for me.

Mark Fleming - Let's see, it is. Rate lock-in effect, just how rate locked-in are consumers and what could alleviate that effect? Nothing? Haha. 

Odeta Kushi - That's not true. There's one very specific thing that could alleviate it. 

Mark Fleming - Okay, good.

Odeta Kushi - Rates going back down to 3% to 2%. But that's just not going to happen. Odd of that are very, very low. So consumers, existing homeowners rather, are very rate locked-in. So about 90% of existing homeowners are locked into rates below 6%. And it's about 80% of existing homeowners that are locked into rates below 5%. Rates in today's environment are near 7%. And so a lot of these existing homeowners do not have a financial incentive to sell their home. And so they're very rate locked-in. In regards to what could alleviate this, there's a couple things that we like to look at. One is that 42% of owned homes are owned free and clear. So these individuals are not rate locked-in to their homes, they don't have a mortgage at all. And so they're free to move, of course, they would be locking in a 7% or whatever the mortgage rate is - a 7%-8% mortgage rate. But that is one potential way that the market could overcome this rate lock-in effect is through those homeowners that own their home free and clear. The other factor is that existing homeowners are sitting on a ton of equity at the moment. And so, even though there's higher mortgage rates, they could potentially use that equity to bring a higher down payment to their next home, which could, again, mitigate some of the impact from the rate lock-in effect. And, of course, if you move to a less expensive market, you know, Ksenia was just mentioning migration patterns. If you move from my market, for example, Washington D.C. to let's say Buffalo, New York. You know, I can take that equity with me and maybe that can help to mitigate the higher mortgage rate environment as well. So, it's not hopeless, and general consensus expectations are that rates will come down next year, it just likely won't be enough to unlock all of these existing homeowners.

Mark Fleming - Buffalo? Buffalo, Buffalo.

Odeta Kushi - Alright, Xander, this next one's for you. And it's all about maturing debt, specifically maturing office debt. How much risk does it pose to the industry and the overall economy?

Xander Snyder - Right? Well, in 2023 alone, by the end of the year, about $190 billion worth of office debt will have matured and that includes everything - bank-held, non-bank-held, commercial mortgage-backed securities or CMBS, and in '24 and '25, there's an additional $210 billion or so in office that is expected to mature. So I think the consideration is how is this going to impact the lenders. And the first thing to keep in mind is that about half, actually a little bit more than half, of all outstanding office debt is held by non-bank lenders. So life insurance companies, investor lenders, mortgage REITs, for example. Now, the reason that it's important to keep that in mind is because, as it relates to the risk to the broader economy, the systemic risk from a lot of mortgage maturities occurring and then those office owners having to refinance at higher rates and maybe not being able to get that loan, is what happens to the lender. And, fortunately, there's only about a third of all outstanding office debt is held by small banks and the larger banks have actually already pulled back commercial real estate lending meaningfully over the last couple of years. So the takeaway from all of those numbers is that there are risks to banks, and non-bank lenders when these mortgages come due. But they will probably, typically, be at smaller banks, and they probably won't represent contagion risk of the sort that we saw in the Great Financial Crisis. Because you don't have the trillions of dollars of notional derivatives on top of the mortgage, on top of the mortgages that exists. There are new capital requirements in place that didn't exist then. So I don't think that we're, we're free and clear yet. We're not through the worst of it. I think there will be real risks, but I don't see it becoming systemic and widespread to the extent that we saw in 2008 and 2009. 

Odeta Kushi - Alright, some some sort-of good news, and then a lot of bad news. And you managed to sneak in derivatives into the conversation. 

Xander Snyder - You're welcome.

Mark Fleming - Frankly, I think the word notional. I gotta go look that up.

Odeta Kushi - Thank you, Xander. Mark, this one goes back to you. And the question simply asks, recession risk? I assume that's asking you if you think that recession risk is higher or lower.

Mark Fleming - So I think we need to talk about wisdom of the crowds and cows in this particular answer. There is this belief that you can gain more by asking from the wisdom of predictions from the crowd than from experts. And a study was famously done where you ask, at the Iowa State Fair, a bunch of random people how much the cow weighed. And they gave a variety of answers, from one pound to hundreds or thousands of pounds, because who knows how much a cow weighs? I don't really know. And then they asked a bunch of the farmers who should know how much cows weight. And it turned out that the average answer from those who had no expertise was actually more accurate than that of the so-called experts. So now we will turn to the so-called experts on recession risk, a.k.a., all of us economists. And the odds are suggesting that when you survey them, they say yes, it's less likely or there's a lesser chance of a recession in the next 12 months now - 12 months from now - as there was say, six or nine months ago. But I must caution that we have been notoriously bad at predicting recession risk. My own personal opinion is I don't think that there will be a recession in the next 12 months. We have to put some sort of a number on it. Because it's not as if we've broken the business cycle. There will be a recession at some point, but not due to the monetary tightening policy that we've seen on the part of the Fed. In large part because the Fed is likely done at this point, with most of, if not all, of its monetary policy tightening, and the economy has held up extremely well to it.

Odeta Kushi - So a soft landing next year is what you're predicting?

Mark Fleming - I suppose if you have to put the label on it, they are saying it's a soft landing. Yes.

Odeta Kushi - All right. Well, that's a good one. We'll take that. And this next question. I actually would love to take this next one. It's an interesting one. It is, how do you explain new homebuilding as the bright spot? At the same time there is lower builder sentiment, there seems to be a disparity there. That's a really interesting question, because we saw in, you know, the latter half of 2023. We saw homebuilder sentiment, stay quite low and decline, whereas single-family permits and starts were indicating cautious optimism. So what's going on? Well, one thing that might be going on is that the survey for the builder sentiment is a survey of smaller builders, so the median number of housing starts for builders was six. And so this survey of smaller builders, but it's really the big builders that are outperforming in today's market due to their ability to offer incentives. And so, you know, you're seeing housing starts and permits do quite well, you're seeing builder sentiment very, very low. Part of that discrepancy could be due to the methodology behind the survey, which is survey in smaller builders compared to the larger builders, which, as I mentioned, are faring better in today's market.

Mark Fleming - Sample design. 

Odeta Kushi - Sample design exactly. But, you know, it's important to note that traditionally builder sentiment does track quite well with housing starts and permits, but this market of 2023 has been anything but normal. Okay, Ksenia, this is a great question as well. There's a lot of talk of how it makes more financial sense to rent versus to own in today's market. Do you agree? What is the value of homeownership?

Ksenia Potapov - So, as we all know, part of the decision to become a homeowner is financial. So there's a couple of ways to look at the, be a renter or be a homeowner, which one is better, question. So one angle from which you can look at it is, you know, this is a financial decision. And it's mostly based on your monthly payment, can you afford to pay a mortgage and everything associated with owning a house month-to-month and what is it in relation to what you might pay for rent. And so in our rent-versus-own analysis, we do just that. We compare the monthly cost of renting and the cost of owning. Now, mind you, this is not the cost of buying a home or any of the closing costs associated it. This is just the cost of living in that home month-to-month, so the mortgage payment taxes, homeowners insurance, repair costs, etc. And so, according to this analysis, in the third quarter of 2023, it was better to own nationally. So it meant that it was actually cheaper month-to-month to own a home than to be a renter. Of course, this depends wildly city-to-city because real estate is local. So what we saw in the third quarter was actually that cities where it was better to own were those where house price appreciation was relatively high and high enough to offset the cost of a 7% mortgage rate. And, also, generally, these were cities where house prices were already relatively low. So we're talking about cities like Buffalo again, Cleveland, St. Louis. Yes, Odeta.  Yes. And, on the flip side, it was cheaper to rent in cities that were typically more expensive and also had low or negative house price appreciation. So these are places like Phoenix, Austin, Denver, Seattle. And now an important part of that calculation is actually the house price appreciation bit. Because it is something that the renter does not have. If you own a home, you also benefit from equity gain as your home appreciates. You own an asset that appreciates. And this is a large reason why homeownership is touted as one of the most effective ways of building wealth, especially for low-income households. We see this in some of the wealth data in the survey of consumer finances that recently came out in October with a 2022 update that homeowners on whole have 38 times the wealth of a renter and homeowners are also wealthier than renters at every income category. So, if you take a homeowner household and a renter household who earn the same income, the homeowner household will be wealthier because they own an asset that is steadily appreciating. So it's not surprising. So, all in all, the evidence points to homeownership as being an incredibly beneficial financial decision. I say that as the only renter here.

Odeta Kushi - Woo, Buffalo.  One day, Ksenia, one day.

Mark Fleming - When we miraculously find all of that new supply as people become unrate locked-in.

Ksenia Potapov - Thankfully, I can wait 10 years.

Mark Fleming - Or wait 10 years. Yes, exactly. 

Xander Snyder - That sounds a little like 'un-inversion.'

Mark Fleming - Reversion. Reversion. 

Xander Snyder - Reversion, yeah.

Odeta Kushi - This is your episode of First American grammar. Xander, the last question goes to you. What do you see as the timeframe for price discovery in commercial real estate? And will it vary meaningfully by asset class?

Xander Snyder - Great question. I think this is tied closely to the question that I just answered a little while ago about mortgage maturities. And the basic reason is that, right now, there's a big, big disconnect in terms of what buyers think properties are worth and what sellers think properties are worth. And that's basically why transaction volume is very low, right now. If you are a prospective seller, if you are an owner that doesn't have you know, great refinancing options right now and your mortgage isn't maturing for a year or two, you might just wait and see what happens, maybe rates will come back down in the future? Who knows? It is when those sellers or prospective sellers, the owners, no longer have that wait-and-see option when they are forced to come to market and they become what I like to call a motivated seller. They have some motivation to actually sell. So a lot of the deals that are happening right now, there might be seller motivations. For example, a high net-worth individual might just be not interested in owning a building or fund might be closing. So these are the sorts of deals that are occurring right now. Now, as these mortgage maturities happen, and essentially remove that option to wait and see from a lot of the existing owners, that's when we're going to begin to see transaction volume pick back up. And, if you look at the pace of maturities over the next year or two, as I mentioned, there's a lot coming in 2024 and 2025. There's even more in multifamily than in office. I think it's about $500 billion in multifamily mortgages come due in '24 and '25. But multifamily is a much bigger market than office, so that's part of it. But as those come due, a lot of owners are gonna say, okay, well, what are my refinancing options? Do I have refinancing options? And, if they don't, then, you know, they might hand the keys back to the lender, they may try to restructure. But it's that pace of mortgage maturities plus whatever the lag time that follows to work out the loan, or for the bank to sell the property, the collateralized property. You figure, we will probably see transaction volume begin to pick up towards the end of '24 and into '25, factoring in that maybe six-to-12-month lag period after when the mortgage maturities occur. So it's closely related to when a lot of the debt comes due, unless rates come back down, in which case, I imagine that would be the primary driver of volume picking back up.

Mark Fleming - And I think you suggested that faster in multifamily, than say office, because there's more loans coming due in that asset class.

Xander Snyder - Yeah. And, additionally, I think the quality of distress that we'll see in multifamily is quite different than in office. Because, if we're heading towards a recession, and multifamily prices correct meaningfully, then, you know, there's still demand to have an apartment and live. We need places to live.

Mark Fleming - We need places to live. But we've already established we may not need those places to work in those offices. 

Xander Snyder - And therein lies the problem. Supply, demand. It comes back to supply and demand dynamics. For office, it has really meaningfully changed, not as much for multifamily. That doesn't mean people won't lose money. But it means that people might be able to get in at a good cost basis for apartment properties at the beginning of a new cycle. That sounds more like an end of a business cycle problem, than what office is facing.

Odeta Kushi - That's a good point. It's, you know, commercial real estate is not a monolith. And so it's always important to look at these dynamics by asset class. Thank you, Xander. All right. Well, that's all the time we have for Q&A today. I know. I hope we were able to shed some light on a number of different topics ranging from residential to commercial real estate. Thank you all, Mark, Xander, Ksenia, for being on this series altogether. We'll have to do this more often. I had a lot of fun. I don't know about you guys. And to the audience, thank you for joining us on this episode of The REconomy Podcast. You can check out our blog posts on all of these topics on And, as always, if you can't wait for the next episode, you can follow us on X, formerly Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark and @XanderSnyderX and @KseniaPotapov for Ksenia. Until next time.


Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at This episode is copyright 2024 by First American Financial Corporation. All rights reserved.

This transcript has been edited for clarity.

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