The REconomy Podcast™: Examining rising mortgage rates, housing supply, student loan debt and the future of office space

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi field questions that are top of mind among REconomy listeners – what to expect from rising mortgage rates, the ongoing housing supply shortage, ballooning student loan debt and the future of office space.

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Listen to the REconomy Podcast Episode 26:


“One of the root causes of rising mortgage rates, as I just mentioned, is an improving economy. And an improving economy often leads to higher wage growth. So those rising household incomes can help to mitigate the impact of rising rates on affordability. Alright, so rising mortgage rates, that's forecast number one for 2022.” Odeta Kushi, deputy chief economist at First American


Odeta Kushi - Hello, and welcome back to another episode of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, Deputy Chief Economist at First American and here with me is Mark Fleming, Chief Economist at First American. Hey Mark, you know, this is our 26th episode. And we're recording it a little bit before Thanksgiving. So I was thinking this may be a good episode to thank our listeners for tuning into the REconomy podcast. And what better way to thank them than by answering their questions.

Mark Fleming - Hey, Odeta. Wow, 26 episodes goes by so quickly. And yes. What a great idea. It's Thanksgiving. And let's give thanks for those who listen to us. Because sometimes we make these recordings. And we do wonder, is anyone listening? Anyone out there? Yep, we're always the ones picking the topics. But this time, let's give the microphone to our listeners. So these are going to be a set of questions that come from not just us, but interesting things for everybody. I should mention, we're always open to ideas for our podcast. In fact, sometimes the most challenging part of the puzzle is what are we going to talk about this week? So not just on a special Thanksgiving episode, feel free at any time to send us your ideas on Twitter and LinkedIn. So, without further ado, Odeta. What's the first question?

Odeta Kushi - The first question is pretty timely, given the holiday. First question is, what's going on with the price of turkey these days. And, just to give you a little bit more context, the Department of Agriculture recently released some data that shows that the price of a frozen whole-body turkey is over 20% higher than last year, and about 35% more than the prior three-year average. So, what's going on with this meat inflation?

Mark Fleming - Okay, meat inflation. I see where we're going with all of this. And I didn't even know there was such a thing as a frozen whole-body turkey, but a 20% increase? That's a lot. It all comes back to higher inflation in general. Although meat prices seem to be rising much faster than inflation overall, it's 5% to 6% right now, compared to you know, 35% over the last three years and 20% in the last year. That's that's certainly a lot for turkeys. Prices for meats, poultry, fish, eggs, they increased collectively by 11.9% on an annual basis, this past October. And the reason is the same story we've always been telling - strong demand, of course, especially for turkeys in the two-to-three weeks leading up to Thanksgiving. Labor shortages, specifically in the meat processing facilities themselves, because of the potential for COVID outbreaks. Supply chain disruptions, like shortages of truckers to get things moved around and high feed and other input costs. Meat inflation is just one of the many forms of inflation that consumers are actually experiencing these days.

Odeta Kushi - Well, since this episode is airing after Thanksgiving, I hope everyone listening was able to get whatever it is they needed for their Thanksgiving dinner. Whether it was the traditional turkey, or perhaps it's vegetarian cousin, tofurkey. I hear that's a pretty good substitute.

Mark Fleming - Fine, I'm all for veggie burgers, but a veggie turkey. I'll stick with the real thing, thanks. But let me ask you the next question, which is right in our real estate wheelhouse. What will the 2022 housing market look like?

Odeta Kushi - Yes, the question that is on everyone's mind, well, let me mention a couple of things. We're pretty sure mortgage rates will rise. And that's due to a couple of factors, including the Fed taper, continued inflation and, of course, the ongoing economic recovery that puts upward pressure on the 10-year Treasury. And it's likely that mortgage rates will follow suit. Consensus forecasts put rates at about 3.7% by the end of next year. So, that's still historically low, but certainly higher than they are today. And as we know, rising mortgage rates impact affordability. But, of course, one of the root causes of rising mortgage rates, as I just mentioned, is an improving economy. And an improving economy often leads to higher wage growth. So those rising household incomes can help to mitigate the impact of rising rates on affordability. Alright, so rising mortgage rates, that's forecast number one for 2022. The other thing we're fairly certain about is that house price growth is likely to remain positive. Now, it may moderate some from the double-digit house price growth we've experienced in 2021, but still remain positive. Consensus forecasts indicate that we will have moderating, but still high house price growth through 2022. Those forecasts indicate the moderation will actually begin at the end of this year and continue through the end of next year. But house price growth is remaining positive because of the severe shortage of homes for sale relative to demand. That is the primary driver of continued house price growth. And that demand is largely coming from, you guessed it, millennials aging into their prime home-buying years. So rising demand against limited supply, and still positive house price growth is what's expected for 2022, which is a little bit more of the same that we experienced in 2021. But is there an unknown factor?

Mark Fleming - Yes, there is one very big one. Inventory of both existing- and new-homes for sale, or shall we say lack of inventory. The shortage of new-home completions and existing homeowners staying put is going to keep inventory in short supply next year. That's not going to change. In fact, that was something we were talking about in 2019, and it was even more so in 2020. And it's likely to remain so in 2022. We've been underbuilding to the tune of a few million housing units relative to demand for about a decade now, as millennials have aged in and wanted to, you know, not only just get shelter in general, but also homeownership more recently. So building will have to exceed household formation for a number of years to come to reduce that housing debt that we've accumulated in terms of increasing the size of the housing stock in general. But homebuilders, hopefully, might be able to solve this in the short run because they have a lot of homes in the backlog right now that they haven't been able to complete. Partially finished. Missing appliances. Windows. Those last few things to bring it across the finish line and bring those homes to market. If the supply chain issues are resolved, that might create some relief. But it may not really be enough because new homes generally don't make up a significant share of the total inventory of homes for sale. So, when we turn to existing homeowners, most of whom were able to refinance into rock-bottom rates, 3% or even less than 3% in the last year or two, this creates a disincentive to sell. It will cost you more each month to borrow the same amount of money when rates go up. That increase in mortgage rates leaves existing homeowners feeling a rate lock-in effect, a disincentive to selling their homes. So, whether the supply shortage gets better or worse, and it would need to get significantly better to really make a difference, that will depend on how rate locked-in existing owners feel and if all those pent-up new home completions can finally come to market. Next question, please.

Odeta Kushi - Alright, a great one here, is house price appreciation correlated with interest rates? Well, we could just look at the Pearson correlation coefficient to answer that one, right?

Mark Fleming - Yeah, let me try and explain that without using the Pearson correlation coefficient, which by the way is negative.

Odeta Kushi - Fine, fine. We'll go easy on our listeners on their holiday break.

Mark Fleming - Right, so the non-technical answer. First, we have to look back at the long-run decline in the 30-year, fixed-rate mortgage. In 1981, it was 18%. And so for the last 40 years, that's right 40, it's been declining. And you know how we love our history lessons here on this podcast. If you hold incomes constant, lowering mortgage rates, relative to the time that you last purchase, so you buy a home in 1981 with an 18% rate, and three years later, it's 12%. Well, that means you can refinance, and borrow the same amount of money for less per month, or you could buy more home for the same amount per month. So, this historically long-run decline in mortgage rates has driven the market for 40 years now. Move-up buying, housing market turnover, increased mortgage finance, refinancing activity, all of that, in part or largely due simply to the fact that in the long run rates have been declining. Of course, on the flip side, higher rates mean home-purchasing power, how much one can afford to borrow based on mortgage rates and their household incomes, goes down. And that means it will cost more per month to buy your I'm err, air quoting here, your same home, back from yourself on a monthly basis when you go to a higher rate. Who would do that ? That's the rate lock-in effect we were just talking about. But here's the important key. It's not just about rates when it comes to what will happen to prices. Because lower rates do prompt more demand for homes, you can buy more, your purchasing power has increased. But that's not alone what will cause prices to rise or fall. If demand increases, when there's lots of supply, you don't see a price effect. But, when demand increases in the scenario we're in now with limited supply, oh boy, you sure do see a price effect. So, in essence, lowering mortgage rates recently, increasing home purchasing power has been one of the main reasons why prices have gone up by so much because, as we've already said, there was a lack of supply. No supply, you increased purchasing power. What else happens? Prices rise? Alright, so my question for you Odeta. And we talked about this a lot in years past, but it's still an important issue about student loan debt. Will student loan debt prevent millennials from buying homes?

Odeta Kushi - You know, I get this question a lot. And really, the concern here is that student loan debt prevents millennials from saving for a down payment, which will prohibit their ability to buy a home. So we did some research using the 2019 survey of consumer finances data, which is the latest available year for that data. And we found that, in fact, between 1992 and 2019, average student debt increased from just over $12,000 to just over $40,000 in inflation-adjusted dollars. So that's a lot. But the percentage of income dedicated to student loan debt repayment each month has, in fact, declined for the average young household. So, between 2016 and 2019, the average payment-to-income ratio of a family with a household between the ages of 25 and 34 declined from just over 7% to about 5.5%, while the median remained nearly unchanged at 4%. So, how can that be? You have higher student loan debt, but that payment-to-income ratio is remaining stable. A couple of reasons. First of all, incomes have increased over that same timeframe. Secondly, longer repayment terms. For those of you who listen to this podcast, I assume you have some background or interest in real estate. So, think about what happens when you go from a 15-year mortgage to a 30-year mortgage, it allows you to borrow a lot more money for the same monthly payment and so that's what's happening here. We have longer repayment terms, higher incomes. And, by the way, lower interest rates, which actually goes back to Mark's point that he just made about the relationship. Lower interest rates allow you to borrow more money. So, student loan debt has increased over time, but student loan-buying power, there was some air quotes there, has increased sufficiently to keep the monthly payment burden from increasing. So, this is one of the reasons why student loan debt is more likely to delay, rather than prevent homeownership. And we're seeing exactly that with this generation. Millennials are buying homes, but later in life compared with their generational predecessors. So that was a really good question. Alright, let's do one more, Mark. The final question is actually related to commercial real estate. With more work-from-home options, what does the future of office space look like?

Mark Fleming - That might be the existential question in commercial real estate circles at the moment. What happens to offices? I will point out that for the last year or so we have been doing this podcast from our home offices, but today, we happen to be where, Odeta?

Odeta Kushi - We are in the office today. Right next door to each other.

Mark Fleming - In the office. Exactly. So sort of an anecdotal point of what we're about to talk about. It's true that increased working from home has untethered us from the urban core. We don't necessarily have to live as close to that urban office as we did before, because we don't have to do that commute every day. But that's clearly also being reflected in prices, according to the commercial property price indices that we watch. Car-dependent suburban office properties. So think about that. This is sort of the outer suburbs, if you will, posted an 8.7% annual growth rate in the third quarter of this year. That's impressive. Meanwhile, office prices in the core business district in the center of the cities where all the office high rises are, remained flat, barely budged, 0.3% After actually declining on an annual basis for the three consecutive quarters prior. But it's not just about office space, it's really more generally about where people work. Because where people shop or eat during the work week shifts along with where you're working. So you move your office to your home and you move your coffee purchase from the inner core, also to the home.

Odeta Kushi - Yeah, I mean, we were actually just discussing that we're going to lunch downtown, and we don't really know what's open anymore, because we haven't been eating lunch near the office for a year.

Mark Fleming - That's right. But we have been eating lunch near our homes. So, it's a shift, not in the total amount of demand we suspect, but where that demand is coming from. We also see in retail property prices, highly walkable, central business district prices declined on an annual basis. While car-dependent suburban retail property prices increased 15.2% year over year in the third quarter. There's probably going to be the same overall amount of demand for office and retail space, but in the long run, the difference is where that space will be demanded. It's much less likely to be so concentrated in the urban core. And then in addition, remember all those millennials that we talked about moving and buying homes, they were already moving to the suburbs, even prior to the pandemic, but now that we can work from home, and that's being accelerated due to the untethering, I think there's gonna be a big shift in where that commercial real estate demand occurs. So, Odeta, are you gonna move to the suburbs anytime soon, like the rest of your millennial colleagues?

Odeta Kushi - You know, it's still the city for me for now. There are still plenty of millennials living in the urban core. And then, of course, we have Gen Z, a smaller generation, but closely behind them, they're likely to gravitate towards the city as well at first. Cities still offer, you know, we have walkability, we still have amenities and, of course, the office space for those hybrid work arrangements. Not to mention, there's actually a cohort of younger households that may want to move out to the suburbs, but can't really find anything to buy right now.

Mark Fleming - I just want to make one point before we finish up because I know that's where we're headed. I am thankful for one other thing. And that is Odeta, the opportunity to record these podcasts with you. Always a highlight of my work week. Thank you, Odeta.

Odeta Kushi - Thank you, Mark. It is a pleasure doing this podcast with you. And we just we have so much fun. And we really hope that our listeners can hear us having fun and are enjoying tuning in. And that's a great place to end today's episode. Thank you. Thank you for joining us on this episode of the REconomy podcast. Be sure to subscribe on your favorite podcast platform. You can also sign up for our blog at And if you can't wait for the next episode, please follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

This transcript has been edited for clarity.

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