I grew up in the 80s, a time when inflation and recession were common language. In the late 70s inflation was rising and the Federal Reserve raised interest rates, a recession followed. My memory of 1982 includes endless reports about layoffs and economic problems and a huge victory for the Democrats. Then things changed. Today, the story is not easy, and it is not the way things are going. The Ringer has a great podcast called Plain English and I found their episode The Housing Recession Coming very informative and interesting. I speculated last month on what’s happening with the housing economy, but the podcast got me thinking about what could happen to housing in 2023.
Host Derek Thompson starts with the amazing indicators that come from the data center that describes various economic activities especially housing. Other measures show that house prices and rents have been falling since the beginning of this year while so-called “head inflation,” which the government says shows rising prices, is largely driven by rising housing costs. The main group called “sleeping” is one-third of the CPI index, and the hotter the indicator, the higher the inflation rate. Meanwhile, in the broader economy, Gross Domestic Production (GDP) has declined for the second consecutive quarter, yet labor force numbers are strengthening.
Thompson welcomes Mark Zandi of Moody’s Analytics to pick his brain on what’s going on, especially with housing. First, there is a good discussion on the method. Renter tracking platforms like Zillow need to be quick with their rent surveys, while the Bureau of Labor Statistics is slow, using a search tool that uses a unique screening method. The point that Zandi is making is that the BLS numbers lag behind rents, so rents probably, all in all, started falling at the beginning of the year and continued to fall or fall. These changes won’t show up in BLS statistics until later, possibly slowing inflation later in the year.
Zandi takes Thompson’s question as “this is 2007 again,” housing is on the brink of a major disaster. I found Zandi’s answer very clever. Maybe not. We are not near destruction but restoration; due to the housing shortage in the last decade, supply has not yet been met after the housing crash of 2008. Therefore, even though housing prices have increased significantly, the lack of supply is leading to a ceiling. He echoes my point about people who may have bought homes in places like Boise and Austin at the top of the market for cheap money, but are now seeing the value of their purchase plummet.
He also shares my concern that if there is a real recession, families who have gone out to buy a home will face serious problems. If a Fed-driven recession hits as early as 2023 to fix inflation, and hours are cut or jobs are lost, debt repayment could become more difficult, leading to foreclosures. All of this depends on the depth and duration of any recession, and Zandi is confident that we are not in the bottom right now and given the current level of employment, it may not be as deep and lasting in 2023.
To Thompson’s question about construction and whether there will be a flood of jobs there, Zandi is betting on multi-family construction to remain flat as the housing sector appears to be doing well even as single-family housing lags. I have no doubts about the reasons for Zandi’s view of the majority of families than I think it remains to be seen what happens with the growth of jobs and income and growth.
And that’s where I’ll jump in with my thoughts as we approach the end of 2022. I’m not an economist, but I’ll review my initial thoughts and think we’ll be entering a 2023 recession. , which will see more home buying in 2021 looks like a big mistake. I also think that building multi-family projects, especially townhouses, which are for sale, will see an increase in employment. Many townhouses and condominiums will be on the market for several months before being put on the market or sold at a significant discount. Interest rates are up, and I think people – investors and consumers – won’t be in the game until the first quarter of 2023.
The psychology of 2023 will be important because it will always be financial. Will people be happy that we have passed 2022 without Covid, and will this lead to the excitement that leads to increased production? Doesn’t this lead to inflation and more pressure from the Fed on interest rates? How will those things fit together? How will all this affect the housing policy, which I know a lot about economics?
This last question is based on what Thompson and Zandi discuss, how we measure monthly housing costs. Unlike oil, housing prices do not go up and down daily, weekly, or even monthly. Usually, if the news shows that rents are going up, the rents for most people stay the same. And mortgages never move. If the market remains unstable, with “corrections” or “falls” or “spikes” (choose an adjective or an adverb), people will have to compare their actions with financial indicators.
I often think we’d be better off if rent and mortgages were paid weekly or daily, or withheld from every paycheck. This can reduce price volatility, making it less visible. If people had to write a monthly or quarterly tax check like small business owners do, the perspective on taxes would be different. I wonder if people might be a little scared and less interested in rent control if they don’t have to write a big rent or house check every month. At the moment, the wide economic crisis in the housing economy does not seem to be unreasonable; it makes people worry and want things like rent control.
Housing volatility will continue through 2023, and depending on the outcome of the election, there will continue to be pressure on policymakers to curb the ups and downs in the market. Whether this pressure pushes us toward more government intervention or better policy will depend on whether policymakers can keep their heads and whether they can find better alternatives such as less regulation and subsidies.