In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi share three trends they are thankful for in the broader economy and housing market.Don’t miss a single REconomy episode, subscribe today.

Listen to the REconomy Podcast™ Episode 52:

“We're very far away from being able to declare victory against inflation. But, again, silver linings. Goods inflation, which drove the initial surge of overall inflation has moderated in recent months and is likely to slow further. The reasons include a shift away from consumer demand for goods to services, rising inventories at some retailers, and improving supply chains.” – Odeta Kushi, deputy chief economist at First American

Transcript:

Odeta Kushi - Hello and welcome to episode 52 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. Happy belated Thanksgiving to you and to all of our listeners.

Mark Fleming - Hi, Odeta. Yes, happy belated Thanksgiving to all. Better late than never.

Odeta Kushi - Yes, our bi-weekly cadence means that we didn't put out a podcast on Thanksgiving week. But that doesn't mean we don't have a lot to be thankful for. First and foremost, the opportunity to be recording this podcast with a great co-host. And, of course, we are thankful to everybody who listens.

Mark Fleming - Aw, shucks, Odeta. I'm thinking, like Bashful, the dwarf. The great co-host and listeners feeling is absolutely mutual. But, that's right, there's quite a bit to be thankful for from the REconomy perspective. Didn't we do a Thanksgiving episode last year?

Odeta Kushi - We did, episode 26. And I specifically remember it because we talked about meat inflation, and specifically that the price of a frozen, whole-body turkey was over 20% higher compared with the previous year. So, when we recorded that episode, prices for meats, poultry, fish and eggs had increased by nearly 12% on an annual basis in October of 2021. So I decided to look at that same data for October of this year, 2022, and found that prices are still up, but that the yearly pace of inflation was a bit slower, about 8%.

Mark Fleming - And I think I read the other day that over the last year turkey, or as you say frozen, whole-body turkey -- because we must be specific here -- was up 14% this year. So, in this case, less is more in the case of slowing inflation?

Odeta Kushi - Something to be a little thing for, I guess. And that brings us to today's topic, three things were thankful for in the economy and housing market.

Mark Fleming - I think for some it might be hard to believe that anything could be going well in the economy, and especially the housing market. There is a lot of doom and gloom news out there.

Odeta Kushi - But there's always a silver lining, or almost always a silver lining. You just have to know where to look. So, let's start with the macro-economy. Mark, what are you seeing out there that you're thankful for?

Mark Fleming - Okay, yes, I am pretty thankful that we've seen some relief in recent inflation data. We'll need to see a lot more before we breathe a collective sigh of relief -- and certainly that's what the Fed is suggesting -- a lot more before they breathe the sigh of relief that inflation is truly behind us. But recent data is very promising.

Odeta Kushi - That's right. We've had a couple of promising reports starting with the October Consumer Price Index report. The CPI increased 0.4% for the month and 7.7% from a year ago. Respective estimates from the Dow Jones were for rises of point 6% and 7.9%. So actual data came in below expectations. This is movement in the right direction and likely an inflection point for inflation. It also gives the Fed a reason to move away from the supersized 75-basis point rate hikes. But we'll find out in a couple of weeks about that.

Mark Fleming - That's right. And, in this case, most of the time coming in below expectations is not a good thing. But, this is good when we're talking about inflation. The report told us a few things that are important to note. In categories that are necessities -- shelter, food and energy -- there continues to be large increases, whereas the categories that posted the biggest declines were goods and services of the more discretionary nature -- airfares, used car prices and apparel. Food and energy are tough to predict. But there's reason to believe that the goods and shelter inflation, which accounts for more than half of the overall total CPI combined, will continue to decelerate next year -- check out our last episode for more on that -- which will put further downward pressure on inflation going into next year.

Odeta Kushi - That's right and it is important to acknowledge that prices for necessities are still high. Costs for staples, such as eggs, bread and milk, remain elevated. Eggs were up 43% year over year. For bread, it's nearly 15%. And for milk, it's 14%. So we're very far away from being able to declare victory against inflation. But, again, silver linings. Goods inflation, which drove the initial surge of overall inflation has moderated in recent months, and is likely to slow further. The reasons include a shift away from consumer demand for goods to services, rising inventories at some retailers and improving supply chains. I don't know about you, Mark, but I am getting tons of emails about discounts on furniture and all sorts of stores throwing their discounts at me, and I'm kind of glad to see I've been holding off on spending until I get some of those discounts.

Mark Fleming - They say this is going to be a good Christmas season for the retail buyer because of those reasons. And it's not only just slower inflation but, in some cases, straight-out deflation, relative to recent months, on the prices of some of those goods. And we also know that shelter inflation lags observed rental and house price increases in both indices by as much as 12 months. So, the deceleration we're seeing in house price growth and rental appreciation today will start to show up next year, and add a very important component of downward pressure on inflation.

Odeta Kushi - And this isn't the only report indicating a deceleration in prices, the Producer Price Index, or PPI, which measures the average change over time and the selling prices received by domestic producers for their output, also indicated some cooling in the October report.

Mark Fleming - That's right, wholesale prices increased less than expected in October, adding to hopes that inflation is cooling, but maybe a short explanation of the PPI and wholesale prices is first in order.

Odeta Kushi - Yeah, that's a great idea. Care to do the honors?

Mark Fleming - Um, I was trying to get you to do it. I tried to put you on the hook to "econ-splain." Get it, "econ-splain."

Odeta Kushi - Yep.

Mark Fleming - Okay, you deflected well. We'll move on. The PPI differs from the CPI in then it measures the prices that producers receive at the wholesale level. In other words, what the manufacturers are charging, while the CPI reflects what the consumers are actually paying. In other words, what the retailers are charging. So, in that way, it's a good leading indicator of inflation because it reflects the pipeline of price pressure that eventually makes its way to the consumer.

Odeta Kushi - All right, so then the first thing that we're thankful for is early signs that inflation may have peaked, and we're trending in the right direction. But I guess it's my turn for the second thing we're thankful for. And I'm, of course, going to shift to housing and say that the second thing I'm thankful for is that homeowners today are in a good financial position to weather any potential price declines. And, of course, I mean on average here.

Mark Fleming - Yes, you are definitely going to have to elaborate because I don't think most people see any good in today's housing market.

Odeta Kushi - Of course, today's housing market is incredibly challenging, given the rapid decline in affordability and very swift pullback in home buyer demand. But there are a few things to point out in our latest Real House Price Index or RHPI report reflecting September data. We find that out of the top 50 markets that we track, 15, as of September, were experiencing price declines from their respective peaks.

Mark Fleming - So wait, hold on. 15 markets in price decline, and this is something to be thankful for? I'm missing something. This doesn't sound like very good news.

Odeta Kushi - That part is not the good news. I'm all about silver linings in this episode. Price declines are particularly concerning in housing markets where most homeowners don't have a significant equity cushion. You know, what happened during the housing crisis in the Great Recession is that job loss was paired with a significant share of homeowners who didn't have much, or any, equity in their homes.

Mark Fleming - Oh, yes, the dual trigger of foreclosure, that economic shock of job loss combined with the lack of equity.

Odeta Kushi - Yes, you make a good point there. If you only have one of those triggers, for example, job loss, but you have significant equity in your home, then you can choose to sell your home. Conversely, if you don't have sufficient equity, but you also don't have an economic shock, then you can just continue to make your payments and wait for your home to appreciate once more.

Mark Fleming - Ah, ha, so great "econ-splain-nation." Get it? Get it? Ugh, so back to your point about the silver lining.

Odeta Kushi - Right. Okay, silver linings. So, in today's housing market, we are seeing many markets experiencing price declines from the peak. But let's take, for example, the market with the biggest decline, which is San Francisco. In San Francisco, nominal house prices peaked in March of this year, but have since declined by 6.8%, as the housing market rebalances. Yet, much of the price growth that was gained during the pandemic remains in San Francisco. House prices increased 29%f from February 2020 to March 2022.

Mark Fleming - I see. So, in other words, even if house prices turn negative, which we see in some markets right now, the decline would have to be substantial to eat away at all that equity that many homeowners have accumulated over the last few years during the pandemic.

Odeta Kushi - Precisely. And if you want to read more about the markets that made up that list of 15, you can find the latest RHPI report on our blog at firstam.com/economics. But this does beg the question, what about those in San Francisco -- and I'm just gonna stick with this example here, I'm not trying to bully San Francisco -- who purchased at the quote top of the market. Those buyers may not have much of an equity cushion anymore. Well, that's where another piece of good housing news comes into play. But I'm not going to count it as one of the three things I'm thankful for.

Mark Fleming - What? Why not one of the three?

Odeta Kushi - Well, because thematically it falls under two and three is just a nice number.

Mark Fleming - Okay, so the three -- no, no, but really four things -- to be thankful for.

Odeta Kushi - Anyway, in addition to that equity, the vast majority are also locked into 30-year, fixed mortgages, most likely having refinanced during the recent period and have historically low interest rates. And we know that the mortgage debt-to-income ratio is near a four-decade low. So, with a low interest rate and affordable monthly payments, most homeowners are in a good place if the economy slows. All right. What?

Mark Fleming - No, keep going.

Odeta Kushi - On to number three. Mark, your turn, what are you thankful for?

Mark Fleming - Yes, but I think I counted another hidden benefit in there. Not only our debt-to-income ratio is low, as you said, but they have a fixed-rate mortgage, meaning...

Odeta Kushi - You're trying to turn this list from three to five. Okay, so, roughly two-thirds of American households have an inflation hedge when it comes to their biggest monthly expenditure, which is housing, I think this is what you mean. And many homeowners locked in sub-3% mortgage rates on 30-year, fixed loans, keeping the bulk of their housing expenditures flat. So, there's a homeowner's hedge against inflation. This is very different from other countries that are more likely to use shorter term adjustable-rate mortgages that force borrowers to refinance into higher rate mortgages more quickly.

Mark Fleming - That, Odeta, is an excellent point. And one of the main reasons why there's going to be a lot less downward pressure on prices in this country as compared with many of the other industrialized nations in the world today. But let's get back to it. This last one is a classic, on the one hand, and on the other. The third -- or is it, I guess, the fifth now -- thing that we're thankful for is the strength of the labor market. And the reason I say, on the one hand and on the other, is because on one hand, a strong labor market means a financially healthy consumer. That's good for us. We want to make sure that everyone who wants a job, has a job. That's good too. That's pretty straightforward. No "econ-splaining" necessary. Too much?

Odeta Kushi - Yeah, I wish you could see the eye roll, listeners.

Mark Fleming - But, I can see, I can see. But, on the other hand, the labor market, in some sectors, services in particular, is so tight and putting lots of upward pressure on wages that the Fed is afraid of this wage-price spiral, resulting in entrenched inflation.

Odeta Kushi - Right. But the super-tight labor market has also been allowing the Fed to aggressively fight inflation by raising the federal funds rate without increasing the unemployment rate too much. There's so many job openings relative to hires that the Fed is hoping that companies will just cut job openings, rather than lay people off. Now, we do see some pockets of weakness in the labor market today, with parts of the housing sector and tech announcing layoffs. But, as long as the labor market remains strong, the hope is that those people are quickly able to find other jobs.

Mark Fleming - That's right. And bringing it back to your earlier point about the people who bought at the top of the market in areas that are experiencing house price declines from the peak. Having steady employment means that even if your house does depreciate in value, you can keep making your payments and sit tight until the market regains its strength.

Odeta Kushi - Good point. All right. Well, those are the three, or maybe five, things that we're thankful for when it comes to the economy and the housing market. For those that celebrated, we hope you had a wonderful Thanksgiving. And to all of our listeners, thank you for joining us on this episode of the REconomy podcast. If you have an economics-related question you'd like us to feature on a future episode, you can email us at economics@firstam.com. We love to hear from our listeners. And, as always, if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

This transcript has been edited for clarity.