The REconomy Podcast™: Answering Your Top Questions on Real Estate Economics (Part 2)

In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi once again gather the entire First American Economics team to address your top questions, this time digging into house prices, office-to-multifamily conversions, demographic trends, inflation, and the impact of work-from-home on housing demand.


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“What we did see when house prices were the softest is that the west coast – your traditionally more expensive markets and then markets that really overheated the most over the pandemic – experienced some of the most severe price slowdowns or price declines. In the case some very expensive California markets, we actually saw year-over-year price declines. Again, these are traditionally more expensive markets. So, the increase in mortgage rates disproportionately impacted these markets and resulted in price declines, but we're seeing a re-acceleration as demand continues to surpass supply across most top markets.” – Odeta Kushi, deputy chief economist at First American


Odeta Kushi - Hello and welcome to episode 79 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 in this week's episode, we once again have the whole team together to answer audience questions. We've got Mark Fleming, our chief economist here with us. We've also got Xander Snyder, senior commercial real estate economist, and of course, economist Ksenia Potapov. Happy Holidays team. And, of course, Happy Holidays to all of our listeners. We're very grateful for you and we wish you all the very best this holiday season. All right, well the gang's all here. And we answered a lot of questions in Episode 78. But we've got plenty more left for today's episode. And just like in last week's episode, we'll take turns answering questions. So, Mark, we're gonna start with you again. And the first question is very macro. Is it possible that personal savings decline and unemployment rises, which will put pressure on the economy?

Mark Fleming - Is it possible in the coming year, I think is the presumed suggestion for the time? 

Odeta Kushi - I think so, yeah. 

Mark Fleming - As we've talked about before, the personal savings rate right now is actually lower than the historic average. But that's largely because so much of the fiscal stimulus spending was sort of put into our proverbial piggy banks. And so we're saving less now because we have a lot of money in the piggy bank. We also all know that the U.S. economy is largely a consumption-based economy. So the consumer is more than two-thirds of the overall economic activity. And they are drawing down that savings. That's been one of the strong points in the U.S. economy over the last couple of years is the ability to sort of draw down all of that savings to continue to create consumption. There's still a fair amount of money left in that piggy bank to continue to drive consumption into next year, but in all likelihood, it will run out at some point next year. That said, it's still strong, the unemployment rate is still very low. And, even if it went up by a couple of decimal points on the percentage, we're still talking about historically, very, very low unemployment rates. So does it put pressure on the economy? Yes. Does it kill the economy or cause a recession? Unlikely.

Odeta Kushi - Well, that's good. I'll take that as as optimism for 2024. All right, moving on to another topic. Well, similar topic in a potential consumer headwind and this one goes to Xander Snyder. There were a lot of questions about student loan debt repayment, auto loan, delinquencies being on the rise, and higher credit card debt. All of those are potentially consumer headwinds. Do you have any data or thoughts around this?

Xander Snyder - Yeah, I'll try to knock out each of those types of debt one at a time, starting with student loan repayments. Estimates really vary here, so it is important to keep in mind because you can kind of select what sort of repayment plan you want. So whatever estimate exists for how much money is going to be flowing into student loan debt service is a big estimate. But, that said, there are estimates that suggest that student loan debt will cost about $75-$100 billion a year in debt service, so money that's flowing to student loan debt service. Now, one way to think about how that could impact the spending economy that we just talked about, is looking at that student loan repayment relative to retail sales. So how much money in retail sales right now that could potentially be redirected to student loan repayments. And that works out to about 1% of total retail sales. So, not trivial, but not huge either. However, Odeta, as you mentioned, there are several other elements here. So credit card debt, we're at an all time high. As far as the series goes, we're at almost $1.1 trillion in credit card debt, as of the third quarter, and delinquencies have really been on the rise. And the third quarter credit card delinquencies stood at about 9.4%, which is almost 2% higher than a year ago. So a meaningful increase and credit card delinquencies, of course, due in part to higher interest rates, because people spent and now they have that debt and interest rates are higher. 

Mark Fleming - But can I ask a quick question there? So I just have to interject. So credit card debt is at an all-time high, but that's measured in dollars. And, unfortunately, we've had a pretty significant bout of inflation over the last couple of years. So, is it really fair to sort of, I guess assert that this is a problem when, and in essence, it's not necessarily representative if we control for, or inflation adjust if you will, that dollar level?

Xander Snyder - You're right, the $1.1 trillion, that is a nominal amount. It does not control for inflation. I can go back and take a look at that.  It would probably be a slightly different answer, but the trend has been up over the last year in terms of credit card debt. It's gone from about $770 billion, I think at the trough over the last couple of years, to $1.1 trillion. Now, some of that, of course, is due to a general rise in prices across the entire economy because of inflation. However, the delinquency rate is normalized across periods, and that rate has gone up. So that's a more real metric we could look at.

Odeta Kushi - So there are some meaningful consumer headwinds going into 2024. 

Xander Snyder - Yeah and just lastly, on the auto delinquencies, the number that has been circulating is about over 6% of sub-prime auto loans are now delinquent, which is also about a 30-year high. We haven't seen that number, that high since the early '90s. So there are, you know, meaningful debt-driven consumer headwinds going into next year.

Odeta Kushi - All right, well, well. Count on Xander to give you the bad news. Okay, moving on to Ksenia, hopefully, with some better news. We're moving from the general macro economy to the labor market. Ksenia with Boomers retiring and continuing to exit the workforce, and more millennials coming in, how do you think that's going to affect the labor market and the overall economy? Again, this question doesn't have a specific time point. But let's just say the next couple of years.

Ksenia Potapov - Okay, I'm prepared to give you the answer up to 2040. 

Odeta Kushi - There you go. 

Ksenia Potapov - So, again, with demographics, I don't know if I can give be the sunny, silver lining to Zander's comments. 

Odeta Kushi - We’re counting on you, Ksenia.  

Ksenia Potapov - That's a lot of pressure. So, by all accounts, by 2040, we are expecting more young people and also more old people -- more people in general, actually -- so by 2040, it's expected we'll have about half a million more 20-to-29 year olds, and about 2.5 million more 30-to-39 year olds. And that's a lot of those millennials aging into their 30s. The older population, that will increase faster, so we're expecting about 15 million more people over the age of 80 by 2040. So, on the whole, the population will get older. Now, that probably also means that labor force participation, at least adjusted for demographics, will go down. Older people tend to not work. And so we'll see less participation in the labor force. That has a couple of implications. So, one, labor force is closely correlated with wage growth. We've done this analysis multiple times and what we call our new Phillips curve. So, you can see that whenever participation increases, so does wage growth. And so, if we're likely to see lower participation, we're also likely to see somewhat lower wage growth. To add on to the inflation train a little bit as well, there are impacts of demographics on inflation. So, there is evidence that a population that is made up of more very young people and children who are not in the labor force yet and older people who are retired is typically inflationary, and this trend holds consistent across multiple countries. So, in reverse, prime age, working age cohorts are disinflationary. So, as the population ages, we are also likely to see some more pressure on inflation. These are all very long-term trends. And so this will not happen overnight. But, at least over the next decade or so, these are some of the factors that are likely to come into play. Sorry for more doom and gloom.

Odeta Kushi - Maybe, maybe the next question will be positive.

Mark Fleming - I think this one's for you, Odeta. The next one, right.

Ksenia Potapov - Alrighty, Odeta, so do you think refinancing is past the trough point?

Odeta Kushi - I do have good news. I do think it is past the trough point.

Mark Fleming - Is that because it could just go down lower? I mean, like you go from zero to one. That's still an improvement, right? 

Odeta Kushi - Still an improvement. 100%. So, exactly, it's good news and bad news. Good news in that, a lot of people refinanced over the pandemic. Rates were sub 3%. And so the people who wanted to refinance, refinanced. And, so we're seeing in the mortgage applications data from MBA that refinancing has sort of hit that trough point and it's sort of sitting there. We get some week-to-week variations, but it's really at the bottom of the hill. Now, people are still buying homes in today's higher mortgage-rate environment and those people, when rates come down and we hope that they do, will presumably refinance. There's some rule of thumb out there on when it's advisable to refinance. You know, when your mortgage ate hits 50 basis points below your current mortgage rate that you locked into. And so I think that we will see refinancing activity increase next year, if mortgage rates come down. But with that said, it will pale in comparison to what we saw over the pandemic period. So higher, but still pretty low from a historical perspective.

Xander Snyder - Cautious optimism?

Odeta Kushi - I think that's the theme of our whole conversation today, hopefully. Okay, so actually, this is a good transition from what Ksenia was talking about, because the next question is around the neutral rate. And Mark, this one is for you. What is the neutral rate? And is a higher neutral rate the new normal? And I think this question comes from the fact that there's been a lot of chatter in the news about this elusive neutral rate. So, it's all yours, take it away.

Mark Fleming - I don't think most people even knew what the neutral rate was prior to this inflationary cycle. And the idea that economists stare at the stars, if you get my drift, because there are actually a number of neutral concepts in economics -- the neutral rate of unemployment, which is known as u-star, the neutral rate of inflation, which is 2%. And the neutral rate of interest is r-star. And the reason that's important is essentially Fed monetary policy is sort of geared towards that target rate. R-star is about the right level -- we'll talk Goldilocks, not too hot, not too cold, but just right -- level of short-term interest, including inflation. So if you assume an inflation rate of 2%, and we estimate that r-star, or the neutral rate of interest, is another say 1-1.5%, then that would imply that the fed funds rate should be about 3.5%. The fact that the fed funds rate is currently higher than that -- a little above 5% -- means that monetary policy is tight. That's intentional, because we're trying to get rid of inflation. The good news is that means that in the long run, the Goldilocks rate should come down, which is why we believe that the Fed -- ultimately once inflation is taken care of -- will begin to reduce the federal funds rate to get back to basically the r-star rate of somewhere around 3-3.5%. Now, that said, the estimates of r-star, the neutral rate, vary quite widely. So, we're not really sure where it is, and we might get it wrong in our efforts to get monetary policy just right.

Ksenia Potapov - That's right. And, you know, the stars, they do move.

Mark Fleming - They do, that's a great point.

Odeta Kushi - And the second part of that question was around, is the higher neutral rate the new normal, but higher relative to near zero? 

Mark Fleming - Yes, for much of the past decade prior to the pandemic, the neutral rate was estimated to be just about zero, which is why a fed funds rate would be equal to essentially the inflation expectation of about 2%. And what we were actually doing is having accommodative monetary policy because, remember, the fed funds rate was even below that mark. The neutral rate has now risen, in large part because of the dynamics of savings internationally, and the supply of money relative to demand. We've got some good blog posts and REconomy episodes where we've talked about the neutral rate. In fact, we were talking about the neutral rate back in 2019, if I do recall.

Odeta Kushi - Yeah, we were cool before it was cool. Isn't cool?

Mark Fleming - Is it cool? Staring at the stars as economists back in 2019. Exactly.

Odeta Kushi - We might need to redefine Cool. All right. The next question is for you. I know you've written a lot about this. And this is a question that comes up at, not just at work events, but I would say in social events, right? Everyone's looking around and saying we're all working from home. All of the offices are empty. There's clearly a housing shortage. I've got the answer. Why can't we just convert more offices to apartments? And I think you've got the answer for us. 

Mark Fleming - Yeah, it's easy peasy.

Xander Snyder - The really short answer is because it's hard. A little bit of a longer answer is that it's costly to renovate and rehab office buildings into multifamily properties. Sometimes the cost can only be slightly less than the cost to build ground up, depending on where it is. It really depends on the building. More generally, oftentimes, office buildings have a floor plate -- by floor plate, I just mean design of the floor -- that's very deep. So there's a lot of interior space in that office building. And typically in apartment buildings, you don't want that much depth because you want a window, for example, and that's just not a desire, in a lot of cases it is a regulation so that you have an ability to escape in case of a fire, so on and so forth. But beyond that, in an office building, you might just have one restroom per floor. And that's clearly not going to suffice in an apartment building, right. So you will need to install plumbing and plumbing is expensive. The cost of plumbing has gone up. And it's, it's also sometimes difficult to know exactly how much plumbing is necessary until you do really in-depth surveys and sometimes tear the concrete out. So, all of that said, there are a lot more office conversions going on right now than pre-pandemic, but if you look at those conversions, relative to the stock of office space, it only works out to about 1 percent or less nationally. So there's more going on, but it's not really enough to change the supply and demand dynamics for office or multifamily. And it's just because it's hard to do. I imagine that given that the housing shortage is a national issue, and the White House recently released a paper basically saying, hey, here are all these Federal programs where we already have money available for these sorts of subsidies. I imagine that, next year, we may begin to see more public-private partnerships, because this issue is kind of creeping into the realm of political or social concerns related to housing shortages. So I can imagine that happening, but that's why it's not happening more right now.

Odeta Kushi - All right, well, we've all got our boilerplate answer for all the holiday cocktail parties now, right? On why can't we just simply convert all of the offices to multifamily.

Mark Fleming - I am wondering what kind of cocktail parties you go to where this is the kind of conversation that we have. But we've talked about that before. 

Odeta Kushi - I live in D.C., Mark. This is the exact conversation that occurs at every cocktail party. And speaking of work-from-home and office demand, Ksenia, the next one's for you. This is a tough one. What is the outlook of for work-from-home? And how might it affect housing demand?

Ksenia Potapov - Yeah. So we've had a couple of years of work-from-home now, and that's been enough time to actually get some evidence. So it's not that tough to answer this question. So, as of mid-2023, I think, in a surprise to no one, work-from-home remains pretty dominant, a lot more dominant than it was pre-pandemic. So, in June 2023, the share of days worked from home was about four times the 2019 rate, which is about 7%. So pre-pandemic 7%. Now we're at about 28%. And that has held steady for a while. Of course, it depends on the industry, a lot of say information tech industry businesses, those sorts of industries, have a higher share of work-from-home. But the average is pretty high. Now, in terms of what's going to happen to work-from-home, we have some indications. So there's a survey by a couple of researchers that is called the Survey of Working Arrangements and Attitudes, which indicates that employers are actually expecting to see a small increase in fully remote or hybrid jobs in the next five years. So it seems that work-from-home is not going anywhere, it will certainly remain higher than it was pre-pandemic. I guess people have come to like it. I'm looking at all four of us sitting in our homes.

Odeta Kushi - As Xander always says, you can't uninvent zoom. 

Mark Fleming - Yes, it seems counterintuitive to much of the media coverage, which is suggesting that the employers are really pushing employees to come back more. So is this sort of an admission that maybe they'll just have to give in a little bit?

Ksenia Potapov - Yes, it seems like there's some high-profile cases that do tend to end up in the headline, but, overall, work-from-home remains strong. Now, on to the impact on housing. So, the evidence that we have so far suggests that higher work-from-home rates actually increase housing demand. Now, this happens through two pathways mainly. One is the increase in the sizes of housing demanded. So, if your home serves as your home, your gym, and your office, then you're probably going to want more home, or at least more space. And a recent paper by Osmek and Carlson found that remote work increases the willingness to spend on housing by between 10%-20%. And this evidence is also consistent with spending on home improvements. So, you know, if you can't move to a new home that is larger, you might just add square footage by adding an addition. And that's one way. The second way is that remote work also increases the, what we call the units of housing demanded, by increasing household formation. So say you're living with your roommate, and all of a sudden now you work from home, you might want to have an apartment of your own. So, whereas, before you had one apartment and one household, now you have two households. And so this is why we don't really see price declines in urban centers, actually, because a lot of the population loss that you would have expected to drive prices down in urban centers has been offset by more household formation. So, in terms of residential housing, the evidence is pretty sunny. It seems to suggest that housing markets and city centers will remain strong, and house prices and rents will continue to be pushed up by demand for more and larger housing. On the flip side, on kind of a little bit of Xander's point, the loss of population, especially day-time population -- all these people that all of a sudden aren't commuting to offices and aren't spending on coffee and lunch in those downtown areas -- that's going to have a negative impact on retail spending on commercial real estate, especially office. And it's kind of what we call the doughnut effect. So a lot of that spending that used to come into this urban city center in the middle of the day is going to be moving back to the suburban, kind of, donut around the city, where, you know, people are now spending most of their day. So that's where they more often spend some of their retail money. And as Xander mentioned, it's incredibly hard to convert some of those office buildings into residential buildings. So this will also impact likely tax bases in a lot of these cities. So overall, good news.

Odeta Kushi - It is. And I think, you know, a lot of those papers sort of speak to a long-term view of what might occur. Of course, we know that economic uncertainty plays into household formation. And so, over the near term, we may see household formation -- I think we are seeing -- household formation slow. A lot of that is just simply in response to a lot of the uncertainty, the inflationary environment we find ourselves in. But I think the theory behind the paper still stands. And, you know, I've never subscribed to the death of the city narrative. There will always be interest in living in the big cities, you know, right behind the millennials or the Gen Zers. And I'm sure they'll behave in a similar way to millennials.

Mark Fleming - But, you know history, in a way, well, as they say, rarely repeats, but often rhymes. Because it wasn't that long ago, in the '70s, and '80s, when most large urban cities were not particularly nice places to live, and they were struggling with their tax bases. And most of the people were moving out to the suburbs in the doughnut effect. Maybe for different reasons at that point in time. But we've got this rhyming effect now, the renaissance of the urban cores that happened in the last 20 years is fading again.

Odeta Kushi - Thanks, right. There has been. All of us probably residential, and Xander, I'm sure, in commercial saw the increase in suburban prices, both in multifamily office space retail, as people sort of moved out to the suburbs over the pandemic.

Xander Snyder - One interesting point that I just have to point out, because it's an opportunity to make a nerd comment. In economics, there's this concept of a substitute good, right? You can substitute one thing for another, if it's sufficiently similar. And, for much of history, you couldn't really substitute office space with residential space. And now, you kind of can, in part because of the rise of remote work technologies. So, I think, while this will probably rise, there will be more people moving back into the urban cores like there was after the hollowing out in the 80s. You certainly didn't have Zoom back then. So I think there will be different dynamics, in part because of that substitution that's now available to people.

Mark Fleming - I'm just thinking good luck talking about substitute goods at a holiday cocktail party, Xander.

Odeta Kushi - Challenge accepted.

Mark Fleming - Extremely well taken. Absolutely.

Odeta Kushi - Why are we always ending on a mention of the '80s?

Mark Fleming - Just so good. Oh no, it's the Mark effect.

Odeta Kushi - The Mark effect. The doughnut effect and the Mark effect. Okay, I think that we've answered enough questions for today's episode. Thank you, all of you for...

Ksenia Potapov - Odeta, we're not going to go on to you? 

Odeta Kushi - Oh, did I note answer my second question?

Ksenia Potapov - Yes, there's a second question for you about, so what's happening with house prices? And is there a geographic trend?

Mark Fleming - Oh, that's a softball, you can answer that in no time.

Odeta Kushi - So the short answer is house prices, according to our First American Data & Analytics House Price Index, have really accelerated and that trend is pretty universal. We're actually seeing it across most top CBSAs. In our latest report, there were two exceptions, I think it was Austin was one exception. And then San Antonio experienced modest declines in house prices on a year-over-year basis. But, generally speaking, we're seeing a re-acceleration in house prices. What we did see when house prices were the softest is that the west coast, your traditionally more expensive markets and then markets that really overheated the most over the pandemic, experienced some of the most severe price slowdowns or price declines. So, in the case of some of our very expensive California markets, we actually saw year-over-year price declines. Again, these are traditionally more expensive markets. So the increase in mortgage rates disproportionately impacted these markets and resulted in price declines, but we're seeing a re-acceleration as demand continues to surpass supply across most top markets. All right. Well, thank you all so much for answering these questions today. And thank you to the listeners for joining us on today's episode. 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. Happy holidays and we'll see you 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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