Welcoming Marisa and What’s Next for Multifamily

Episode Summary

Executive Summary: The episode centered on labor-market cooling, inflation, and the multifamily housing outlook. Guests argued wage and PCE inflation are moderating but still too hot for the Fed, while apartment markets are clearly loosening after extreme tightness. The main takeaway: housing supply is still structurally short, but weaker demand, rising completions, and lagged rent measures should help bring inflation down over 2023-24.

Main Topics: Inflation and wage cooling (Priority: 5/5): The panel reviewed the Employment Cost Index and PCE inflation, concluding both were generally in line with expectations and moving only gradually in the right direction, with wages still too elevated for comfort. Federal Reserve policy and recession risk (Priority: 5/5): The hosts debated whether the Fed risks overtightening. One side warned that aggressive hikes could force a recession; the other argued inflation persistence and wage-price dynamics justify continued tightening. Multifamily market softening (Priority: 5/5): Mark Obrinski’s survey showed a sharp deterioration in apartment market tightness, with rent growth slowing, vacancies rising in more markets, and financing conditions worsening. Housing supply shortage (Priority: 5/5): The discussion emphasized chronic underbuilding across both rental and for-sale housing as the underlying structural driver of recent rent and home-price inflation. Demand shifts and household formation (Priority: 4/5): Participants suggested weaker apartment demand may reflect uncertainty, delayed household formation, and lower mobility rather than immediate affordability stress. Lagged rent measures and inflation outlook (Priority: 5/5): The panel explained why CPI and PCE shelter inflation will respond slowly to current market weakness, but should eventually soften meaningfully as new lease rents roll over into official data. Economic data roundup and recession signals (Priority: 4/5): The group reviewed GDP, ECI, PCE, and yield-curve inversions, concluding the economy may be slowing without yet being in recession, though risks remain elevated.

Key Arguments: Wage growth is cooling, but not enough yet to reassure the Fed that inflation is fully under control. The Q3 ECI and September PCE were broadly in line with expectations, implying no immediate change in Fed tightening plans. GDP growth suggests the economy was still expanding, but the composition hinted at future weakness in residential investment and trade. Apartment market tightness fell sharply, indicating a broad loosening in rents and occupancy conditions. The core problem in housing is insufficient supply, not just cyclical demand. Current rent-to-income ratios for new leases do not yet show a broad affordability crisis; uncertainty and weaker household formation appear more important. More multifamily supply is in the pipeline, and completions should rise as supply-chain bottlenecks ease. Official inflation measures will lag market rents by many months because they capture rent changes slowly and with lease-renewal timing. Yield-curve inversions signal recession risk, but the timing is uncertain and may be well into next year. The Fed faces two-sided risk: overtightening could trigger recession, but under-tightening could entrench inflation expectations.

Data Points: ECI total compensation, Q3 q/q: 1.2% - Employment Cost Index for civilian workers, presented as a key wage/inflation gauge ECI total compensation, Q3 y/y: 5.0% - Down slightly from 5.1% in Q2; interpreted as gradual cooling ECI total compensation, private sector q/q: 1.1% - Down from 1.5% in Q2, showing private wages cooling PCE inflation, September m/m: 0.3% - Reported as in line with expectations and August PCE headline inflation, y/y: 6.2% - Still far above the Fed’s 2% target PCE core inflation, y/y: 5.1% - Core inflation remained elevated and slightly higher Quarterly apartment market tightness index: 20 - NMHC survey reading, down sharply from the 50 breakeven level Apartment survey respondents saying conditions were looser: 66% - Compared with three months earlier Apartment survey respondents saying conditions were tighter: 5% - Compared with three months earlier Lowest prior market-tightness reading cited: 19 - July 2020, during the pandemic shutdown period Peak market-tightness reading cited: 79 - In 2021, when rents were rising rapidly and vacancy rates were very low Average income of new EQR lease signers: $174,000 - Used to argue current renters are not broadly income-constrained at the top end Rent-to-income ratio at Equity Residential: 20% or a little less - For new lease signings Rent-to-income ratio at Mid-America Apartments: Around 22% - For new lease signings Median rent-to-income ratio in RealPage data: 23% - Suggested broad market-rate leasing is not yet under severe affordability stress Case-Shiller 20-city index, Aug m/m: -1.63% - Marissa’s statistics-game pick; every one of the 20 cities declined National house prices, September monthly change: -0.6% - Chris’s follow-up statistic from the podcast’s own data Annualized national house-price change: -6.3% - From the podcast’s housing data, indicating a notable downturn 10-year/3-month Treasury spread: About -0.1% - Chris’s recession-signal statistic; yield curve inversion Multifamily units in pipeline to completion: 893,000 - Mark’s statistic game pick; described as an all-time high Multifamily completions context: 350,000–500,000+ units/year - Compared with current pipeline and historical peaks in the 1970s-1980s Recession probability guesses: Marissa 60%, Chris 70%, Mark Zandi 50% - End-of-show lightning round on 12-month recession odds

Pivotal Quotes: "Monetary policy operates with long and variable lags." — Mark Zandi: He argued the Fed risks overtightening before seeing the full effect of prior hikes "We have not produced anywhere near enough housing of any type, pretty much anywhere in the country." — Mark Obrinski: His central explanation for the housing shortage and earlier rent/home-price surges "The only way to wring that out is a tight monetary policy." — Mark Zandi: His acknowledgment of the counterargument that inflation and expectations may now require continued Fed tightening

Implications: Listeners should expect slower rent growth, delayed but meaningful relief in shelter inflation, and continuing Fed pressure on the economy. The multifamily sector faces softer demand but improving supply, while recession risk remains real if the Fed overtightens.