Colyar on CPI, Dietz on Housing

Episode Summary

Executive Summary: The episode centered on a highly distorted November CPI report made unreliable by the government shutdown, missing October data, and heavy imputation, which likely understates inflation and complicates Fed interpretation. The second half focused on housing: builders have cut prices and used incentives to sustain sales, while resale markets are weak due to affordability and mortgage-rate lock-in. Forecasts point to softer pricing, modest single-family stabilization, flat multifamily trends, and continued remodeling strength.

Main Topics: CPI distorted by shutdown and missing data (Priority: 5/5): Matt Collier argued the November CPI is unusually unreliable because October prices were largely unavailable and BLS carried September values forward, creating a false low-inflation signal. Shelter inflation and statistical bias (Priority: 5/5): The discussion emphasized that shelter is a large CPI component, and the shutdown-related methodology likely produced an artificial drop in inflation readings, especially because holiday discounting and late survey timing skewed November data lower. Housing demand: weak resale, resilient new-home sales (Priority: 5/5): Rob Dietz explained that existing-home sales remain weak due to housing lock-in and affordability, while new-home sales have held up better because builders aggressively used incentives and rate buydowns. Pricing pressure and likely home-price declines (Priority: 4/5): The panel discussed that new-home prices have fallen from their 2022 peak and that resale prices may soften in 2026, with some regions like Austin already seeing notable declines. Single-family and multifamily supply adjustment (Priority: 4/5): Builders are cutting starts and permits after overshooting demand, especially in single-family spec building, while multifamily is mixed: completions are down, but permit data suggest some late-cycle stabilization in lower-density markets. Structural housing shortage and policy fixes (Priority: 5/5): The conversation framed housing as a long-term supply problem driven by zoning, labor shortages, materials costs, financing rules, and missing household formation. Policy hopes focus more on regulatory reform than on demand-side gimmicks. Long-run demographics and remodeling outlook (Priority: 3/5): The group noted that shrinking younger cohorts will likely dampen single-family demand in the 2030s, while aging housing stock should support strong remodeling growth over the next decade.

Key Arguments: The November CPI should not be treated as a clean measure of inflation because October data were missing and the BLS substituted prior observations, effectively assuming zero inflation for most components. The shutdown created a downward bias in CPI, especially in shelter, because late November collection coincided with heavy holiday discounting and abnormal seasonal pricing. BLS imputation levels remain elevated relative to normal, making the reported index less reliable even for components that did have some data. Bond markets and Fed expectations did not react as if inflation had truly collapsed, suggesting investors also viewed the report as noisy and not a clean disinflation signal. Homebuilders have protected new-home sales by using incentives, price cuts, and rate buydowns, even though those concessions are not fully visible in median transaction-price data. Existing-home sales are suppressed by mortgage-rate lock-in: households with low pandemic-era mortgages are reluctant to sell and take on much higher financing costs. Resale prices are likely to weaken in 2026 as inventory rises and more homeowners face price discovery, with Rob forecasting outright declines of 1% to 2%. Builders overbuilt single-family homes relative to demand; unsold new-home inventory is high, so starts and permits are now being reduced and completions should fall. The housing shortage is not just a unit-count problem but a household-formation problem, with many young adults living with parents or doubling up because affordability is too low. Regulatory and supply-side reforms—zoning, land use, building codes, workforce development, manufactured housing, and ADUs—are the most credible long-run fixes. Immigration restrictions may matter more for construction labor supply than for immediate housing demand, but the effect is muted right now because construction activity is already slowing. Remodeling is positioned as a durable growth area over the next decade because of the aging housing stock and limited new household formation. Regional variation is critical: stronger, more affordable markets in the Midwest and Northeast are holding up better than overheated Sun Belt markets like Austin and parts of Florida.

Data Points: Headline CPI (year over year): 3.0% to 2.7% - Dropped from September to November in the shutdown-distorted release Core CPI (year over year): 3.0% to 2.6% - Sharp decline in the November release, seen as unreliable Two-month CPI change: 0.2% - September to November combined change; unusually weak and likely biased Typical monthly CPI pace recently: ~0.3% per month - Recent prior trend used for comparison Share of CPI basket with imputed October data: ~88% - Most categories lacked October data and were carried forward November imputation rate: 34% - Still far above normal and lower than September’s 40% September imputation rate: 40% - BLS imputation was elevated before the shutdown Shelter share of CPI: Over one-third; closer to 40% in total CPI - Why shelter heavily influences inflation readings Shelter two-month change: 0.18% - Implied from the distorted CPI report Median new-home price since peak: Down more than 10% - Peak was at end-2022; reflects builder incentives and cuts Builders using incentives: Two-thirds - NAHB survey finding Builders cutting prices: Roughly 40% - NAHB survey finding in recent months New-home sales level: ~650,000 annualized - Rough benchmark for resilient new-home demand Single-family starts in 2025: Down 6% to 7% - Expected full-year decline Single-family starts in 2025 level: Just under 950,000 - NAHB forecast Home price-to-income ratio: About 5 vs. historical 3 - Affordability remains stretched Average existing mortgage coupon: About 4% - Contributes to housing lock-in versus market rates above 6% Market mortgage rate: A little over 6% - Too high relative to existing mortgage coupons for many owners to move Construction workforce share non-native born: About 1 out of 3 - Shows immigration sensitivity of construction labor Building material price growth: Around 3% year over year - Tariff effects measured but so far modest Tariff/duty rate on softwood lumber: North of 40% effective - Includes duties plus Section 232 tariff Residential remodeling growth outlook: Up 30% over 10 years - NAHB long-run forecast due to aging stock Young adults living with parents (25-34): About 1 out of 5 today vs. 1 out of 10 in 2000 - Evidence of constrained household formation Housing deficit estimate: About 1.0 to 1.5 million units - Referenced as NAHB/partner estimate Teardown share of single-family building: About 7% - Expected to rise by 2033 as remodeling/replace cycles grow Single-family built-for-rent share: About 10% - Expanded from roughly 3% historically Potential long-run decline in single-family building: About 25% from peak in early-to-mid 2030s - Linked to smaller cohorts and slower household formation Philly house prices: Up about 6%-7% year over year - Mentioned as a strong Northeast market

Pivotal Quotes: "Basically, I ask you to give me a rundown of the CPI: you know, what's going on with this product, that product, and everything else. But I'm not sure I even want to do that with this data." — Mark Zandi: Opening reaction to the unusual CPI release "It was a very strange report." — Matt Collier: Describing the November CPI as distorted by shutdown conditions "There's no single, simple, scalable solution." — Rob Dietz: Summarizing the long-term housing supply challenge

Implications: Listeners should treat the CPI print cautiously and expect noisy year-over-year inflation readings for the next year. In housing, new construction is adjusting, resale markets may soften, and long-run affordability still depends on supply-side reform rather than short-term fixes.