The REconomy Podcast™: Tackling the Most Frequently Asked Questions Regarding Economic Trends Currently Impacting Real Estate (Part 1)

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 to tackle the some of the most frequently asked questions they receive on the housing market, multi-family rent dynamics, mortgage rates, demographic trends and more.


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“There's a good chance that we're done with the Fed rate-rising cycle. If not, only one more increase, but possibly not even that now. So, with the combination of the tightening cycle being finished, possible modest loosening ahead, and, as we talked about at the beginning of this episode, a reduction in the spread, than it's quite possible that we could see mortgage rates get below 7% and into the sixes next year.”  – Mark Fleming, chief economist at First American


Odeta Kushi - Hello and welcome to episode 78 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 today we've got a special episode for you because we've got the whole First American Economics team here with us on this episode. You, of course, know Mark Fleming, our chief economist. We've also got Xander Snyder, senior commercial real estate economist, and, of course, Economist Ksenia Potapov. Welcome one. Welcome all. And I'm sure, listener, you're wondering why the whole team? Well, a few weeks ago, Mark and I co-hosted a webinar, and we received hundreds of questions. We only had an hour, so we couldn't answer all of those audience questions and they span topics across both commercial and residential real estate. So, of course, today, we're going to go through a lot of those questions that we couldn't answer. And those questions will go to the whole team. So let's start with Mark, if that's okay? Mark, a lot of folks were asking, how does the federal funds rate relate to mortgage rates. And, as a follow up, is the current spread between U.S. Treasury interest rates and mortgage interest rates is larger than expected? Do we have an expectation that the spread will narrow once the Fed starts reducing rates? That was a mouthful.

Mark Fleming -  We are just going to jump right into this one and start from the top. Hopefully, there'll be some easier questions later on. Okay, so yes, the federal funds rate. That is technically, actually, the rate at which the Fed will lend to banks overnight. But if they increase the cost of borrowing essentially, overnight, then the costs of longer terms, even three months, six months, nine months, 10 years, all have to go up as well. So the most immediate effect of the federal funds rate obviously is increasing short-term borrowing costs, as you might see on your credit card, or an auto loan. But then, if you're going to be charging more for short term, and people need to be compensated in the long run as well, then that pushes the 10-year yield up. And, as we've talked about many times on this podcast, higher 10-year yields, higher mortgage rates, which gets to the second part of the question, which is, what's the relationship? Typically 1.7 percentage points above the 10-year yield is where the 30-year, fixed rate mortgage lands. Right now, it's currently almost three percentage points higher. And the big question that maybe needs to get answered, or maybe will get answered next year is, will it come back down to the long-run average of 1.7%. As we've talked about in some blog posts, and on this podcast, we don't expect that to be the case. We expect the spread, if you will, to be modestly higher than the past long=run average, because people who are lending long on things like mortgages, which are no longer expected to prepay as quickly, need to be paid for that duration risk.  That didn't sound like great news for next year. But maybe better news than this year. Better in the sense that it's not going to be three percentage points over the 10-year yield. It'll be something less than that next year.

Odeta Kushi - We'll take the good news. And since we're on the topic of yields, I'm actually gonna move to the next question, which is for Xander, because Xander, you've talked quite a bit about inverted yield curves. So here's the next audience question. Why do we hear reports about the inverted yield curve being a predictor of a recession? And how does that play into this economy? 

Xander Snyder - Sure, well, yield curve inversion is sort of a peculiar phenomenon. If you think about what it actually implies, it almost doesn't make sense. It means that investors are willing to accept lower rates of return in exchange for locking their money up for longer. And sort of the only thing that really squares that disconnect is if, in the short term, investors are expecting short-term interest rates to not remain high for long. They're going to be cut. And so, essentially, when does that typically happen? It happens during a recession when the Federal Reserve goes "ah, well, now we're going to loosen monetary policy a little bit and bring short-term rates down." So typically, that's how the inverted yield curve acts as a leading indicator for recessions. Now, how does that relate to the current economy? Well, the Federal Reserve has clearly been hiking rates very quickly. The yield curve is still inverted right now. And there's not a lot of ammunition that the Federal Reserve has right now in terms of data prints, to cut rates. I mean, GDP growth was almost 5% in the third quarter, the labor market remains tight, and core inflation remains about twice what the Federal Reserve is aiming for with their 2% target. So, either there is a recession next year, and they cut rates, or there is no recession next year. And, in that case, I think it's more likely that you would see long-term rates rise. Of course, there's a third scenario where there is no recession and they also cut rates, which I think is probably the scenario that everyone's hoping for.

Mark Fleming - But don't we have a little bit of a chicken and an egg problem here because the yield curve is now more flat because the difference in rates is sort of normalized. And so it's not as inverted as before, which would indicate the likelihood of a reduced risk of recession. But maybe the reason why it's flatter is because people believe there won't be a recession. So which came first?

Xander Snyder - It's hard to say. It's also challenging because in the last three weeks, the 10-year has come down by, I think about 50 basis points, and it was really flat about a month ago. I mean, if you compare, like the yield curve in mid-year 2023, so in June, to say last month, I mean, it was a huge difference. Very flat last month. And now long-term yields are beginning to come back down a little bit. And I think that's probably an indication that the market thinks that the chances of long-term rates remaining high for longer has decreased somewhat. But the fact of the matter is, we won't really know until we get the data prints for next year. We're all kind of prisoners to, you know, the same data releases as the Fed is. 

Mark Fleming - Maybe we should interview some of these elusive investors who seem to be driving all this information. 

Xander Snyder - Exactly.

Odeta Kushi - I think that's the answer here, I think we'll get what we want in that in that scenario. All right, then, yeah, the next question is for you, and it's still in in the macro-economy space. We're going to talk about inflation, specifically shelter inflation. The question we received was, we hear shelter inflation on the news, what is it? And why does it matter to the broader macro-economy? 

Ksenia Potapov - That's a big question. So there's understandably a lot of confusion about shelter inflation and inflation in general. It's a vague economic concept that we have made into tangible numbers. So there are two main reports that measure inflation, the CPI, the Consumer Price Index, and the PCE, the personal consumption expenditures index. They are two indices that, by and large, do the same thing, which is measure price changes month to month, so inflation, and they're built by going out and collecting data on a basket of goods every month from everything from apparel, energy, transportation, and shelter, which is a really big one. So there's a few important things to understand about shelter inflation. One is what it's actually measuring, which is the cost of consuming housing shelter every month. This is why home sale prices are not used. Home sales or a home is considered a real estate asset. And therefore an investment, not a consumption good that the inflation index would measure. So, in reality, the way that shelter inflation is computed mostly relies on rents, and not just new rents. So, when surveyors go out and get information on rent prices, they are looking at, you know, a sample of people and not the entire sample of those people are turning over their lease every month. So, at any one time, a small portion of that sample is people who have signed on to a new lease. And so you see that new rent price that you might see on on the website. And the rest are leases that have been in effect for at least several months, maybe a year. And so this is the reason why we say that shelter inflation lags observed price changes by about six to 12 months. And that's also why shelter inflation decelerating is inevitable. We've already seen it in real-time data. We're just waiting for the indices to catch up. So, year-over-year rent growth was 10%, a year ago, and now it's 3%. And we're just waiting for the data to reflect that for the inflation indices.

Odeta Kushi - And that's a pretty big part of overall inflation, both in the CPI and the PCE. I think it makes up a bigger chunk of CPI and a little bit less in the PCE. Yeah, but still pretty big. And so next year, we should start to see or feel the full impact of that shelter inflation dragging overall CPI lower, which means -- that's pretty good news, right? The Fed will see a CPI number that's closer to its 2% target.

Mark Fleming - Exactly. Good news. We just need to wait for it.

Ksenia Potapov - That's a very low bar for doing something. We just need to sit down.

Xander Snyder - Patience is a virtue. No? 

Mark Fleming - Exactly. Odeta, you know, we're not going to let you get away with not being asked a question. So we're gonna have to go after the 2024 elephant, or shall I say donkey, or both in the room and ask the question during election years, do mortgage rates historically increase, decrease, or stay just the same? I feel like Goldilocks...too hot...too cold...or just right?

Odeta Kushi - I saw this question coming in a lot during the webinar. And, really, I wasn't sure, right. I needed to do the analysis, and so I did just that. I looked at every election year since 1971. And I took a look at what mortgage rates did over time during those election years, and I don't have a great answer for you. Unfortunately, rates don't always go down or don't always go up during a presidential year, it really depends on the year. And that's really because mortgage rates are, you know, loosely benchmarked to the 10-year Treasury, which is much more impacted by all sorts of factors, geopolitical factors, economic factors, depending on the year. And so there wasn't a strict pattern. I do understand why people presume that rates go down during presidential elections, because there's probably a lot of uncertainty around where everything's headed. But it's just not the case that we see that consistently. And I did the same analysis for house prices, in case you're interested, and it was the same result. Prices don't just do one thing during a presidential election year. 

Mark Fleming - I'm surprised, Odeta. I was waiting for like the three significant digit answer here.

Odeta Kushi - I do have a regression result for you, if your interested? But it's not statistically significant? So I can't, you know, I would rather not share it with you.

Mark Fleming - And, of course, as economists, it's a legitimate answer to say, it doesn't do either one either way, with any significance.

Odeta Kushi - That's still an important outcome. Okay, I'm, whew, done. Well, I'm actually not done, because I'm hoping to get one more question out of each of you. And I'm actually going to go back to Ksenia because we get a lot of questions around demographic trends. And, specifically, how will demographic trends impact housing supply and demand over the next decade or so? And I know that's looking out long term. But that's the thing about demographics.

Mark Fleming - What a softball, Ksenia. How easy is it to forecast how much older someone will be?

Ksenia Potapov - As we like to say, they will be a year older. Yeah, they will have aged by 12 months. Yeah, so there's, as you know, a big reason for the surge in in house prices over the last couple of years has been the wave of millennials aging into homeownership. They have been making the same lifestyle decisions that are correlated with homeownership and hired and finishing up education, getting married, having kids, they've done those things later than previous generations, but they are doing them now. And that's mostly in their 30s. And so this is going to have a big impact on demand. So, first, approximately 50% of millennial households are now homeowners. For reference, baby boomers peaked at about 80%. So there's a ways to go. Add to that the fact that millennials are the most educated generation in history, and homeownership is highly correlated with education. So you should expect that millennials will continue to make the decision to become homeowners, to a large degree, and that will continue to drive demand over the next 5-10 years. And, actually, when you're talking demographics, a decade out isn't even that much, because you could go two decades or three decades out. Now, on the other end, of course, you're looking at baby boomers and people aging out of homeownership potentially. So you know, typically as people age, they will downsize. Maybe as children move out, they don't need all the space anymore. Eventually, maybe they transition out of homeownership entirely. And, usually, a pretty good benchmark for when that happens is around the age of 80. And we'll see baby boomers kind of entering their 80s, slowly at first, in the late 2020s. And then more people around the mid-2030s. And over the next decade, as that happens, we should expect to see more inventory come on the market. Some of that inventory might need serious repair, and upkeep. But, based on where those houses are, people are going to be willing to pay for them, especially considering that we're in a housing shortage right now. Now, over the next 10 years, that shortage might actually narrow and disappear entirely. But now we're talking like 10 years out.

Odeta Kushi - Can you imagine a housing market without a supply shortage?

Ksenia Potapov - No, I've never lived in one.

Odeta Kushi - All right, Mark, back to you. This was by far the most asked question. So I'm pretty sure I don't even need to say it. But I will. Where do you see mortgage rates headed next year, and maybe in five years?

Mark Fleming - I suppose I should start by owning up to my ability to forecast mortgage rates. I was predicting that they would go up for probably a decade before they actually did. I stuck to my guns. And I did finally get it right. I would suggest there's a strong likelihood, dare I say on the one hand, that mortgage rates will actually come down next year and largely because there's a good chance that we're done with the Fed rate-rising cycle, if not, only one more increase, but possibly not even that now, and beginning to slightly ease the federal funds rate next year. So the combination of the tightening cycle being finished, possible modest loosening, and, as we talked about at the beginning of this episode, a reduction in the spread, and it's quite possible that we could see mortgage rates get below seven and into the sixes next year. 

Odeta Kushi - And in five years?

Mark Fleming - Unlike Ksenia's demographics, that's like a mortgage rate eternity. But we could go with something we talked about, which is the just right rate and the not too hot, not too cold. Just right rate is probably somewhere in the high fives to low sixes.

Odeta Kushi - I'll take it. Okay, so we've talked a lot about residential, but we actually received a ton of questions relating to commercial real estate. That's why Xander is here. Many of them pertaining to the fate of multifamily. What's the outlook for multifamily rents? And does it vary significantly by geography, Xander?

Xander Snyder - So, we'll start off with the second part of that question. Yes, it varies significantly by geography. And the high-level trend nationally is there is a lot of apartments under construction, about a million, which is an all-time high, if you look at the series going back to the 1970s. Now, it's a little bit different because the population now is much larger than it was then. But still, we're at all-time highs in terms of apartments under construction. So there's a lot of new supply coming to market across the country. That new supply is not going to be delivered equally in different geographies. And what you're beginning to see now is some of the places that saw some of the most remarkable rent growth during the pandemic, like the Sunbelt cities, for example, that saw double-digit rent growth, maybe even up to 20%. And some cities, that drew a lot of new capital to start new construction projects, because there's demand for that housing. And in those locales, where there's a lot of new construction coming online, you're beginning to see rent declines, or in some places rent deceleration. But, really, we're more into decline territory, and a lot of places have a lot of new supply coming on the market. So some of the places that are holding up in terms of rent growth right now are the Midwest, and the Northeast, where there's been a more limited construction pipeline. And some of the places where you're really starting to see some of the big declines from peak rents, like 5%, 6,% 7% are in mountain and desert locales. So, for example, Las Vegas is one location, Austin had a huge construction boom, and now they're beginning to be impacted with declining rents. So a lot of the answer to that question, in terms of how it varies by geography, will come down to how much construction is underway right now. And that will be determined in part by, you know, how much construction began during the pandemic. Now, given where we are with interest rates, and the cost of financing construction, construction itself has become more expensive. I believe we're going to, well, we already are beginning to, see a slowdown in starts of new construction. So the trend will probably be a lot of new supply coming into the market first. But then there'll be less new supply coming to market, despite as Ksenia mentioned, still having a national housing shortage. So I imagine we'll see rents come down, decline, moderate, and then they'll probably turn back around starting in maybe mid-to-late 2025 into 2026.

Odeta Kushi - Classical economists always bringing it back to supply and demand. Can never escape it. All right. Is that, oh, no, it's my turn. 

Mark Fleming - Yes, it's your turn. Xander, you want to tee up the question for Odeta?

Xander Snyder - I always love asking you a question. So, Odeta, do you see foreclosures rising in 2024? How are we going to end up there next year?

Odeta Kushi - So I would say the short answer is yes. But I don't think it's as scary as as a foreclosure wave. As we know, foreclosures are a result of a dual trigger -- economic hardship and lack of equity. In today's market, most homeowners are sitting on a significant equity cushion and unemployment rates remain near historic lows. And so we're not seeing a lot of foreclosure activity. Next year, I think the general expectation -- and this isn't just from us, it's also from the Fed and from from other economists -- is that the labor market will continue to slow and, as a result, the unemployment rate will increase. House prices generally are expected to remain strong. Of course, there are geographic differences. We know we've seen our traditionally more expensive markets experience price declines. So, in situations where the labor market softens, unemployment rate increases and you've got price declines means you might see a little bit of a pickup in foreclosures. But that's relative to historic lows in foreclosure rates, right. We had the foreclosure moratorium. And then, of course, we've had a little bit of an increase in foreclosures this year, but still below the pre-pandemic levels. I expect that foreclosures will probably continue to increase a little bit into next year, but still remain historically low. And certainly not a foreclosure wave. Certainly nothing like we saw during the Great Financial Crisis. So, yes, but don't get too worried.

Xander Snyder - That was my follow-up question. And it's something that I've gotten a lot at talks. I'm sure you have, too. How does this compare to the Great Financial Crisis? And we're coming across several slivers of good news for next year.

Odeta Kushi - I think so .You know, I would say this time is different, or rather last time was different. That's probably the better example.

Mark Fleming - And what time might it be more like, Odeta? 

Odeta Kushi - Oh my goodness. He just wants me to bring up the 80s. 

Mark Fleming - My favorite decade of the 1980s.

Odeta Kushi - The most educated generation.

Xander Snyder - Burn. 

Mark Fleming - Isn't it time to wrap this? Saved by the bell. All right.   I think there is an 80s reference there? Saved by the Bell?

Odeta Kushi - Oh no! Unintentional...We will stop there for today's episode. We'll answer more questions in the next episode. Thank you, as always for joining us on this episode of The REconomy Podcast. You can check out all of our blog posts on 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 2023 by First American Financial Corporation. All rights reserved.

This transcript has been edited for clarity.

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