Mayer on Mortgages and Multifamily

Episode Summary

Executive Summary: The podcast focused on the macro outlook and housing markets, featuring Columbia real estate professor/CEO Chris Mayer. The panel agreed inflation is cooling and growth remains strong, but Mayer warned that commercial real estate, especially multifamily, faces substantial repricing and rollover risk from higher real rates and refinancing costs. Single-family housing, by contrast, is constrained by low supply and may stay elevated rather than collapse.

Main Topics: Inflation easing and resilient spending (Priority: 5/5): The hosts highlighted flat PCE inflation in October and continued consumer spending strength, reinforcing the case for a soft landing and lower bond yields/mortgage rates. Single-family housing shortage and sticky prices (Priority: 5/5): Mayer argued that low inventory, high construction costs, and the lock-in effect from sub-4% mortgages are keeping single-family prices elevated even as affordability worsens. Multifamily and commercial real estate repricing (Priority: 5/5): Mayer said multifamily prices are still too high relative to higher real rates and should fall further; he also warned that CRE loan rollover at much higher rates could create prolonged distress. Banking system exposure and credit tightening (Priority: 4/5): The discussion stressed that large GSIB banks have limited CRE exposure due to stress tests, but small/regional banks, insurers, and private lenders are more exposed and could face pressure. Reverse mortgages and housing wealth in retirement (Priority: 3/5): Mayer discussed his role at Longbridge Financial and argued reverse mortgages can help retirees responsibly tap housing wealth amid inadequate retirement savings. Labor market and recession odds (Priority: 3/5): A statistic on recession frequency and the revised GDP/GDI data framed the ongoing debate over whether the economy can sustain growth without a downturn. Home price dispersion across metro areas (Priority: 2/5): A closing game used metro-level housing data to show only a few major markets still have year-over-year price declines, underscoring broad national resilience in single-family prices.

Key Arguments: October PCE inflation was flat, and spending remained solid, supporting the view that inflation is moving back toward target without a sharp slowdown. Core inflation excluding shelter is already near or below the Fed’s target; shelter’s lagged calculation is the main reason measured inflation remains elevated. Single-family housing is undersupplied because construction has lagged demand, labor/material costs are high, and owners with very low mortgage rates are unwilling to sell. Apartment and single-family markets are not perfectly interchangeable; multifamily prices respond more directly to capital-market discount rates and investor return hurdles. Multifamily values should be materially lower than current levels because real rates moved from around -1% to about 2.5%, implying cap rates and prices must reset further. Commercial real estate distress is likely to be slow-moving, driven by refinancing at much higher rates and rising operating costs, even if rent growth stabilizes. Large banks are relatively insulated due to strict stress tests and lower CRE concentration, but regional banks and nonbanks hold a lot of the risk. If the economy avoids recession, single-family prices may mostly flatten or rise modestly rather than collapse; a sharp decline would likely require distress selling. Reverse mortgages could play a larger role in retirement finance because many older households have significant home equity but insufficient savings and still carry mortgage debt.

Data Points: PCE inflation (October): 0.0% month over month - Marissa cited the latest PCE report showing no monthly inflation increase. Consumer spending: Holding up - Same report showed consumers continued to spend despite slowing inflation. CPI/core inflation excluding shelter: Within or below the Fed's target - Mark and Chris discussed that shelter is the main component keeping measured inflation elevated. Moody's repeat-sales home price index: ~5% year over year - Mark said single-family prices were rising again through October. Multifamily repeat-sales index decline: 18.5% below peak - Chris discussed the latest multifamily price data relative to the prior peak. U.S. reverse mortgages in the market: About 2% of mortgages for borrowers 55+ - Mayer contrasted the U.S. market with the U.K.'s much larger adoption rate. U.K. equity release share: More than 1 in 3 mortgages for borrowers 55+ - Used as a comparison to show reverse mortgage adoption potential in the U.S. Homeowners with mortgages over age 65: 40% - Mayer cited a Harvard study indicating many seniors still make mortgage payments. Spending on pharmaceuticals after final mortgage payment: +25% - Harvard study finding used to illustrate cash-flow relief after mortgage payoff. Q3 GDP growth: 5.2% revised up - Chris D. highlighted the strong third-quarter GDP revision. Q3 nominal GDP growth: 9% - Same GDP revision discussion. Q3 GDI growth: 1.5% - Highlighted as a weaker companion measure to GDP. 10-year Treasury yield: ~4.25% to 4.5% - Mark and Mayer used it as a benchmark for mortgage pricing and real rates. West Texas Intermediate crude: Below $80/barrel - Mark said lower oil prices were supportive for inflation. Mortgage-rate spread vs 10-year Treasury: Near 3 percentage points - Mayer said the spread is near record levels and much wider than historical norms. Share of mortgages below 4%: 60% - Illustrates why homeowners are reluctant to sell. Share of mortgages below 3%: 25% - Further evidence of mortgage-rate lock-in. Single-family vacant rate: About 0.5% - Mayer described historically tight supply in owner-occupied housing. Apartment construction pace: Highest in 20-30 years - Explains ongoing downward pressure on apartment rents. Rents in some hot Sun Belt markets: Down 10-15% - Mayer cited Austin, Nashville, Atlanta as examples. Construction materials PPI (post-COVID): Up 38% - Used to explain higher replacement costs and housing price support. Home prices vs construction cost since March 2020: ~1.1% annualized - Mayer argued price growth above cost has been modest after adjusting for construction inflation. Historical real home price growth (1987-2020): ~1.2%-1.3% annually above construction cost - Benchmark for long-run housing appreciation. Real rates at the housing peak: ~ -1% - Mayer tied the multifamily peak to very low real rates. Current real rates: ~2.5% - He argued higher discount rates imply lower asset values. Multifamily price decline implied by higher real rates: 30%+ - Mayer said the observed decline is not yet enough to reprice the sector. Green Street estimate vs peak: 25%-30% down - Mayer cited a more bearish commercial real estate benchmark. REITs vs asset value: ~15% below NAV - Public market pricing implies further downside. Potential additional multifamily downside: 20%-25% more - Mayer said public markets may be anticipating another leg down. CRE loan rollover rates in new lending: 7.25%+ - Current new loan pricing cited from industry data. Average rate on loans rolling in 2024: ~4.5% - Shows refinancing shock versus existing debt. Average rate on loans rolling in 2025: ~4.4% - Indicates persistent rollover pressure. Average rate on loans rolling in 2026: ~4.3% - Further evidence of slow-moving refinancing risk. Recession frequency: Every 6.5 years on average - Chris D.'s statistic to remind listeners that a soft landing is not guaranteed. Pending home sales index: 71.4 - Chris Dorides's statistic; cited as an all-time low for the NAR series. Top metro areas with year-over-year price declines: 3 - Marissa's game on major metros with falling home prices.

Pivotal Quotes: "There are three metro areas where house prices, and only three, where house prices are down over the year." — Marissa Di Natale: Intro to the closing stats game on metro-level home price performance. "The meteor is coming, guys. It's going to hit." — Chris Mayer: His shorthand warning that CRE distress is real and may still worsen. "People just don't sell stuff at nominal losses." — Chris Mayer: Explaining why homeowners can delay selling and keep single-family prices elevated.

Implications: Listeners should expect inflation to keep cooling and the economy to remain resilient, but housing will likely split: single-family prices stay sticky, while multifamily/CRE face further downside and refinancing stress. Regional banks and nonbanks are the main risk channels.