Cooling Inflation and Confounding Housing Riddles

Episode Summary

Executive Summary: The episode covers a sharp but likely temporary easing in inflation, with gasoline declines driving flat July CPI while sticky shelter and services inflation remain a concern for the Fed. The second half focuses on housing: John Burns argues the market is correcting, not crashing, mortgage rates should stay near current levels, long-run housing demand remains supported by demographics, and the biggest near-term risks are recession and opaque financial leverage, not housing fundamentals.

Main Topics: July inflation cooldown and CPI composition (Priority: 5/5): The hosts discuss July CPI being flat month-over-month and up 8.5% year-over-year, with energy, especially gasoline, driving most of the relief while food and shelter remain stubbornly hot. Sticky inflation and Fed policy risk (Priority: 5/5): They argue that if inflation settles around 4% to 5% because rent and services stay elevated, the Fed will likely keep tightening even at the cost of recession. Alternative inflation measures and core PCE outlook (Priority: 4/5): Ryan explains core CPI, median CPI, and trimmed-mean CPI, and forecasts core PCE inflation at just 0.1% month-over-month, suggesting some moderation in pipeline inflation. Housing market correction versus crash (Priority: 5/5): John Burns frames the housing downturn as a steep but manageable correction after extraordinary price gains, with builders financially stronger and more disciplined than in past cycles. Mortgage rates, recession risk, and demand outlook (Priority: 4/5): The panel expects 30-year mortgage rates to hover around current levels, while warning that bank-CEO recession warnings and hidden credit risk could undermine the soft-landing case. Demographics, household formation, and long-run housing supply (Priority: 4/5): The discussion centers on a structural housing shortage of about 1.5 to 1.7 million units, but also on a longer-term decline in construction demand as household formation slows after the millennial wave. Rents, migration, and institutional ownership (Priority: 4/5): Burns argues rent growth was boosted by pandemic-driven household decoupling and migration to lower-cost markets, and that single-family rental institutions are still a small share nationally despite local concentration.

Key Arguments: Inflation relief is real but limited: gasoline and other goods are easing, while shelter, rents, and service inflation remain sticky. The Fed is unlikely to tolerate inflation stuck at 4% to 5%; if that happens, it will likely tighten into a recession. Alternative measures like median and trimmed-mean CPI suggest price pressures are broadening, but also moderating from earlier extremes. Core PCE likely rose only 0.1% month-over-month, implying some pipeline disinflation before shelter effects fully show up. Housing is declining rapidly, but the correction is manageable because prices rose so much and builders entered the slowdown with strong balance sheets. Mortgage rates should be modeled off the 10-year Treasury plus a spread; the most prudent assumption is roughly current rates, not a return to ultra-low levels. Housing demand is still supported by a structural undersupply of roughly 1.5 to 1.7 million units, based on vacancy rates and household formation trends. The long-run housing growth story fades after the millennial cohort; future construction needs may trend below current levels as household formation slows. Rent inflation was amplified by remote work, household fragmentation, and migration into cheaper metros, and should moderate as those one-time effects fade. Institutional single-family rental ownership is concentrated but still small nationally; it may reduce some flexibility for buyers in specific zip codes but is not endangering national homeownership rates.

Data Points: Headline CPI month over month: 0.0% - July consumer prices were unchanged, signaling the first notable inflation relief in months. Headline CPI year over year: 8.5% - July CPI was still elevated but down from June's 9.1% annual gain. Gasoline prices month over month: -7%+ - Falling gasoline prices were the main driver of July disinflation and are expected to continue lowering CPI. Food at home inflation: +1%+ - Grocery inflation remained strong even as diesel costs began easing. Core CPI: 0.3% - Ryan’s core inflation statistic for the month, excluding food and energy. Median CPI: 0.4% - Atlanta Fed median CPI for the month, another measure of underlying inflation. Trimmed-mean CPI: 0.5% - Atlanta Fed trimmed-mean CPI, indicating persistent price pressure after trimming extremes. Core PCE forecast: 0.1% month over month; 4.6% to 4.7% year over year - Ryan’s estimate based on CPI and PPI data. 30-year mortgage rate: About 5.25% - The level discussed as the approximate current market rate, after being near 6% earlier. Mortgage delinquency rate: 3.64% - MBA Q2 data showed an all-time low delinquency rate. Homeowners in forbearance during pandemic: 9 million households - Rough estimate of households that used mortgage forbearance at some point. Remaining in forbearance: About 500,000 households - Current number still in forbearance, suggesting the tail end of the program. Fannie Mae housing sentiment index: 62.8 - July reading, described as the lowest since 2011 and a sign of weak sentiment. Housing units needed over next 10 years: 15.5 million to 15.5+ million - Burns’ demographic estimate of housing demand over a decade. Annual housing need: 1.5 to 1.6 million units per year - Long-run demographic need once undersupply is accounted for. Current undersupply estimate: 1.7 million units - Burns and the hosts converge on a shortage estimate grounded in vacancy rates. Current housing starts pace: About 1.6 million - Latest pace cited while discussing near-term construction. Millennials entering prime first-time buyer age: 40 million - Cited as a housing demand tailwind, though Burns said the wave is partly behind us. Single-family rental institutions share of U.S. homes: Less than 3% - Large institutional owners collectively remain a small share nationally. Homes recently purchased by big institutions: About 6% of all homes recently purchased - Burns noted this activity is concentrated in specific markets and zip codes. People per apartment at AvalonBay: 1.8 down to 1.6 - Illustrates household decoupling during COVID and its effect on rent demand. Institutional apartment leasing growth: Almost 700,000 in 2021 - Compared with a historical ceiling of roughly 300,000 annual increases, showing pandemic-era demand shock. Inflation-sensitive sectors' price moves: Used cars declining; apparel prices falling; rental car prices down sharply - Examples of disinflation expected to continue feeding into CPI.

Pivotal Quotes: "For the first time in a long time, consumers got a little bit of relief on the inflation front." — Ryan Sweet: Opening summary of the July CPI report. "If you have to give some back right now to keep moving forward, that's fine." — John Burns: Burns describing the housing correction as manageable after huge price gains. "I worry about what I don't know." — John Burns: His central concern about recession risk and opaque leverage in the financial system.

Implications: Near-term inflation should keep easing, but sticky shelter costs may keep pressure on the Fed. Housing looks like a correction, not a collapse, with rates and jobs as the key swing factors; long-run supply needs remain high, but growth will likely slow after the millennial wave.