INSIDE ECONOMICS

Mark Zandi:                     Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by two of my colleagues, Cris deRitis. Cris is of course the co-host of Inside Economics. Hi Cris. How are you?

Cris deRitis:                      Doing well, doing well.

Mark Zandi:                     Yeah, I know your vacation in Abruzzo, Italy, is coming to an end. You must be shedding a bit of a tear as a result of that. No? Got to come back to the reality.

Cris deRitis:                      Yes, of course, of course. But I miss all of you, so I have something to look forward to as well.

Mark Zandi:                     Oh, that's nice of you to say. And we got Bernard, Bernard Yaros. Bernard, you're increasingly a regular on Inside Economics.

Bernard Yaros:                Yeah, yeah, yeah. I've been coming on for CPI week every now and then. Yep.

Mark Zandi:                     And of course everyone knows you as our Renaissance man, the guy who knows 10 languages, ran the marathon in Greece three times, won five squash tournaments, pro squash. Am I getting that roughly right? What am I missing?

Bernard Yaros:                No running. Just squash, languages and traveling.

Mark Zandi:                     There you go. And we're going to have a guest later in the podcast, Lance Lambert. Lambert I should say. Lance is the real estate editor for Fortune. He and I have been chatting quite a bit over the past few years about housing. And great guy to get a sense of the housing market because he talks to everyone in the housing community, all the housers. And so it'd be great to have him on. So we'll come back to that in just a few minutes.

                                           And we are definitely going to talk about the consumer price index, because that came out this past weekend. Really pretty good, huh? Well, I shouldn't put words in your mouth. I'm really curious to hear what you have to say and maybe we should just do that. We should just dive right in.

Bernard Yaros:                Of course, yeah.

Mark Zandi:                     Bernard, do you want to give us a sense of that CPI number? We also got producer price index as well, and that also came in pretty well. So maybe you can cover those two price measures, inflation measures.

Bernard Yaros:                Yeah, I mean, overall, this was a week of disinflation of downside surprises. So to start first with the consumer price index, which I would say is the most important of the three that we got this week, it was a very good report. I'm totally on board with that analysis. The inflation was just less than expected for the month of June. So the consumer price index, which captures the average basket of goods and services that consumers typically spend on rose by only 0.2% in June, whereas consensus expectations were for a slightly larger point 0.3% gain.

                                           And then during, if you look at it year over year, we're seeing a lot of disinflation. So we're back now around 3% year-over-year growth in the CPI. But if we just start looking at the components, let's just start with the most important basic essentials like food and energy. Energy prices moderately boosted the CPI in June. So we saw the gasoline prices rise by 1% after falling by a large margin in May, but the outlook is pretty, at least in the near term, the outlook is pretty benign for energy prices.

                                           If you look at gasoline futures prices, which typically lead retail gasoline prices by a few weeks, those suggest very little change in the CPI for gasoline in July for the next CPI print. And then just over the long term, I think the risks of oil price spike seem a bit less elevated as maybe we thought before, just because of how successful Russia has been in invading the sanctions imposed by Western powers. And if we move on to food, we also found out in the latest CPI print that food prices only rose by 0.1%. But it's important to note that there's been this dichotomy that's been emerging within the food CPI.

                                           So on the one hand, inflation in food at home, or what I like to call grocery store inflation, that has been very weak. And this again speaks to the unwinding of all these supply shocks from Russia's invasion of Ukraine, which last year really royaled global agricultural markets and also sent the price of diesel soaring. And that matters because Diesel, after all, is the workhorse of the agricultural industry.

                                           And then you have another factor that's potentially weighing on grocery store inflation, and that's the end of additional food assistance that the federal government had been providing under the pandemic emergency declaration. And this is also probably weighing on grocery store inflation, at least on the margins. And when I'm talking about this food assistance, we're talking about food stamps, which based on our work is the most effective form of federal spending out there. But on the other hand, you've got inflation in food away from home or restaurant inflation, and that has still been stubbornly strong. It's been growing at about 0.4% or more on a monthly basis over the past several months.

                                           And this probably speaks to the wage growth that we've been seeing in the food services industry. Wage growth in the industry went stratospheric in 2021, 2022, and it's come back down, but it's still much higher than it was. It's still higher than it was at any point prior to the pandemic. So once we see labor market conditions loose and further, I think in the restaurant industry and wage growth normalizes, we should see some less inflation in this food away from home category.

                                           So food and energy prices, they're important. We've got to talk about them because they exert outsize influence on consumers inflation expectations, but they're volatile. These are prices that are largely set in global markets, so they're not necessarily something the Fed has direct control over. So it's important to focus on the core CPI, which excludes food and energy. And here I would say there was way more to like. There was much more-

Mark Zandi:                     Better than even you expected, right?

Bernard Yaros:                Yeah, yeah, yeah, yeah. I was looking. We went back and forth.

Mark Zandi:                     You were going back and forth.

Bernard Yaros:                Yeah, yeah. I was on a razor's edge. I was getting 0.25% for-

Mark Zandi:                     You rounded up.

Bernard Yaros:                Yeah, I rounded up. Unfortunately I should have-

Mark Zandi:                     By the way, I took that number and I rounded down.

Bernard Yaros:                Rounded down.

Mark Zandi:                     The same.

Bernard Yaros:                Exactly. Yeah, no, you were spot on. But there was a lot to like for the core CPI. It was up 0.2% in June. So this again, surprised to the downside relative to consensus expectations for a 0.3% increase. But also if you look at the third decimal point, this was the smallest monthly gain in the core CPI since February, 2021.

Mark Zandi:                     You look at the third decimal point, Bernard? I'm just asking.

Bernard Yaros:                You got to.

Mark Zandi:                     You got to?

Bernard Yaros:                [inaudible 00:06:53] sense of humor.

Mark Zandi:                     Cris, do you look at the third decimal point? I'm just wondering.

Cris deRitis:                      There's an old joke, right, about economists if they use a decimal point, they have a sense of humor.

Bernard Yaros:                That's right. I agree with that.

Mark Zandi:                     Well, Bernard's hilarious then.

Bernard Yaros:                Yeah. So it was even just looking on a sequential basis, this was a very good development and the core CPI, it broke a six-month streak where we were getting 0.4% or more growth over the month. So it does seem that the core CPI fever that we've been feeling is starting to break at least in this past month. And on [inaudible 00:07:37] adjusted basis, the core CPI is up 4.8% from a year earlier, which is also the slowest pace since late 2021 or October 21. So there's a lot of reason-

Mark Zandi:                     Can I just stop you for a second? Going back to seasonal adjustment, one reason I thought, before the number came out, and I haven't looked, so I'm asking, that the increase in inflation, particularly core CPI would be so soft, is so-called favorable seasonals, that prices are very seasonal and because of the pandemic, we saw big price swings when the government-

Bernard Yaros:                Exactly.

Mark Zandi:                     ... when the economy shut down and reopened. And that messed with the seasonal adjustment process at the Bureau of Labor Statistics employees to seasonally adjust the data. And that's flattering this number. Is that right and do you know?

Bernard Yaros:                Definitely, I think on the margins it did contribute or at least-

Mark Zandi:                     Or on the margin.

Bernard Yaros:                Yeah, yeah. Or I would say it probably a 10th of a percent it could have.

Mark Zandi:                     A 10th of a percent. Okay.

Bernard Yaros:                Yeah, so when we're looking at it on a sequential basis, month over month, I think that's a pretty significant or meaningful reason why I think this also surprised to the downside, and it just goes to how difficult it is. The BLS really does an admirable task in trying to capture the seasonality in these prices. But that has been so tough in the past couple of years, especially with the post-lockdown rebound in prices that we saw in the middle of 2020.

                                           I think some of these areas where I see a lot of these are very consumer dependent prices. So if you look at like lodging away from home, that has been extremely volatile, bouncing all around, and it was especially weak. And some things I've read is just, I think in the past couple of years when you had a lot of post-pandemic revenge travel, people were spacing out or were traveling over longer periods of time rather than historically people really will all travel at once on the 4th of July weekend or on Memorial Day. But in the past couple of years they've been spreading out their travel over longer periods of time. And that I think has contributed to some of these seasonal adjustment issues.

Mark Zandi:                     Remote work too, probably, right?

Bernard Yaros:                Remote. Yeah, exactly. Yeah.

Mark Zandi:                     I talked to a lot of people that are here, there and everywhere because they're remote working.

Bernard Yaros:                Yeah, yeah, yeah. And I think next month you should also see some favorable ... the number could be a bit more flattering than would otherwise be the case because of this residual. But after this summer, after June and July, I don't think this is really much of an issue going forward.

Mark Zandi:                     So I stopped you in the middle of your rundown. Is there anything else, any further explication you have in terms of the overall number? I mean it feels like you could go down the rabbit hole for each one of these components-

Bernard Yaros:                Yeah, yeah.

Mark Zandi:                     ... into gorey detail, which is great, which is great. But is there anything else you wanted to point out before we move on?

Bernard Yaros:                Oh, I would just say the biggest development was just used vehicle prices that after two months of 0.4% surges month over month, we finally got a decline. And this is something we had expected for a while because a good leading indicator of used vehicle prices are what the prices that car dealerships are paying at auctions for the used vehicles that they sell later. And those, if you look at our wholesale used vehicle retention value index, which really captures this, it's declined cumulatively by nearly 10% from February through June.

                                           So that looking ahead at least for July, that suggests that used vehicle prices are going to be an even bigger drag on the core CPI than they were this month. So it's not just residual since seasonality, but with actual fundamentals I think with vehicles, for example, that's going to really weigh on core CPI.

Mark Zandi:                     What about new vehicles? I noticed this past month they had fallen a couple months and this month they were flat and-

Bernard Yaros:                They were flat. Yeah.

Mark Zandi:                     [inaudible 00:11:37] continue declines as production [inaudible 00:11:38].

Bernard Yaros:                Exactly, because part of the reason that we got an increase in used vehicle ... There was just a lot of some hiccups late last year in auto production. But the auto production numbers have rebounded. So that does auger for lower new vehicle prices. But one thing we've seen is just second order effects from the past increase in new vehicle prices. Because if new vehicle prices rise, that means auto repair costs are going to also go up.

                                           It means the cost to replace a totaled car for car insurers is also going to go up. And if you look at the data, there's almost a perfect 12-month lag between the peak in new vehicle inflation and the peak in auto maintenance and auto insurance inflation. But you're still seeing car insurance inflation is really picking up recently. And I think that has to do with just a lot more accidents on the highway compared to pre-pandemic rates.

                                           And also I think car insurers really got hit with a lot of losses last year that they really underestimated the premiums that they would have to pay out. So they're kind of readjusting. So for now while we're seeing some relief on new vehicles and used vehicles with elsewhere within the vehicle space, motor vehicle insurance has been putting some upward pressure on inflation.

Mark Zandi:                     But just to connect all the dots, I mean now that used and new vehicle prices have rolled over and are starting to decline, that would suggest down the road-

Bernard Yaros:                Down the road exactly.

Mark Zandi:                     ... this time next year, we might see some relief on-

Bernard Yaros:                Oh yeah, yeah, yeah.

Mark Zandi:                     ... on auto repair and auto [inaudible 00:13:18].

Bernard Yaros:                You're already seeing year over year in auto repair, but it's the car insurance that's been stubbornly strong.

Mark Zandi:                     Okay. Here's a test of your detailed oriented understanding of this, apparel prices. They confuse me a little bit. Each and every month they seem to be rising by three tenths of a percent, which seems historically that's high mean because if you go pre-pandemic, probably pre-Trump trade wars, when China was coming on the scene, apparel prices would always fall. They would consistently fall. Now they are seemingly consistently rising. Any color there?

Bernard Yaros:                That is a tough one because we don't have a lot of good-

Mark Zandi:                     Hey Cris, I just found something he doesn't exactly know the answer to. How about that? Pretty amazing.

Cris deRitis:                      There you go.

Mark Zandi:                     There you go. I'm sure next month when we have him on, he's going to go into this very involved discussion about apparel prices. Yeah, that struck me. Here's the other one that I think we might-

Bernard Yaros:                Men's suits are down.

Mark Zandi:                     Oh, is it men's? Oh, there you go. There's an explanation for that. When's the last time you bought a suit?

Bernard Yaros:                And women's wear is up.

Mark Zandi:                     Cris, when's the last time you bought a suit?

Cris deRitis:                      Oh, I had to go to a wedding in '21, 2021.

Mark Zandi:                     What about you Bernard? When's the last time you bought a suit?

Bernard Yaros:                Oh, it's been 2019.

Mark Zandi:                     Yeah, me too. 2019 before the pandemic, right?

Bernard Yaros:                Yeah, yeah, yeah.

Mark Zandi:                     I actually went to a wedding this past weekend and I put on one of the suits I bought in 2019 that I've worn maybe three times or maybe less than that.

Bernard Yaros:                Did it fit?

Mark Zandi:                     It actually did. It fit. Yeah.

Bernard Yaros:                Okay. There you go.

Mark Zandi:                     Yeah, there it go. I've been doing a lot of running during the pandemic, so it fit. Oh, here's the other thing that I think we need to just put on the table. Medical care costs, right? Because medical, the care services, the prices have been declining. Some of that goes back to medical care insurance. But that's going to reverse, isn't it, here later in the year?

Bernard Yaros:                Yeah. So the BLS looks at the retained earnings of medical insurers, and they don't estimate this in real time. They update it about once a year, and during the course of that year, the price, the month-over-month gain is pretty fixed, at a fixed rate. So over the past several months, we've been getting consistent 3.6% declines in medical insurance, which has been shaving off a few basis points off the core CPI. But that's going to end around September, October. And presumably we're not going to have as much of a drag on the core CPI at that point.

Mark Zandi:                     So before I turn to Cris and get his reaction, our expectation, our baseline forecast in the middle of the distribution of possible outcomes has inflation, CPI inflation, consumer price inflation, it was 9% at the peak year over year back June of 2022. With this month's release for the month of June, we are now down to 3%, so nine to three. We basically have inflation coming back fully to the Fed's target, which on CPI inflation is about 2.5% core CPI, excluding food and energy, which is actually right at this point higher than overall, because energy prices, and as you point out, food prices are weak, back to the Fed's target of 2.5%-ish by the second half of 2024. What do you think? Sound good to you?

Bernard Yaros:                It sounds good to me and I think the key point is wage growth. I don't know if you want to get into ...

Mark Zandi:                     Before you do that, let's turn to Cris and see where Cris wants to fill any holes or gaps or pushback or any comments on that, and also your view on our baseline forecast. Let's do it, Cris.

Cris deRitis:                      Yeah, I think Bernard did an excellent job summarizing it all. My points were the base effects, the seasonal effects and the medical care services. So good report overall, but be prepared for some reversal perhaps in the next few months.

Mark Zandi:                     Why? Why?

Cris deRitis:                      Because the medical care services starts to kick in. Some of those base effects, we go from favorable to unfavorable. I'm not calling for this to take off again, but I wouldn't overreact to a single month's report either here. This is a very good report, but if you told me next month inflation could tick back up-

Mark Zandi:                     Totally, right.

Cris deRitis:                      ... certainly well within the normal possibility here before things settle down. That's why I think our forecast is reasonable because we're talking about a low, long, slow period of time here [inaudible 00:18:10].

Mark Zandi:                     Exactly.

Cris deRitis:                      There's a lot of things that have to happen here. We touched on the shelter costs as well, which we know will continue to need some time to work through the entire system here. So I think it's a reasonable forecast, but the direction certainly seems as though it's firmly in place here. But the specific timing and the hiccups along the way, obviously we have to be prepared for those.

Mark Zandi:                     Yeah, I totally agree. So what you're saying is, look, we're at three, target is 2.5 and we're expecting that to get to 2.5 on a consistent basis by the second half of next year. That feels like a long time. But there's a long set of things that have to happen, long winding road as they say, between now and then, as you're saying, there's going to be maybe two steps forward, one step back here. Maybe in some months, maybe two steps back, one step forward, something like that. It's going to be hard, as they say, to traverse that last mile and get inflation back to target. That's what you're saying.

Cris deRitis:                      That's right. Exactly. Exactly.

Mark Zandi:                     Totally agree.

Cris deRitis:                      The trend is there, things are going down, things are moving in the right direction, but the specifics could vary.

Mark Zandi:                     But you would say, wouldn't you, that you're ... aren't you surprised at this? I mean, this was really, really good report, wasn't it? And it feels like it's something fundamental disinflation because it's broad base. It's not one, two things. It feels like pretty much everything is dis-inflating, right? Wouldn't you say?

Cris deRitis:                      Yeah, everything that, well, I don't want to say that matter, like shelter, right? Shelter, we know it's going to come down, but just because of the mechanics of how we calculate it, it's artificially in some sense keeping it up. But yeah, otherwise certainly it's a good report. Yeah, surprising how robust it i or high widespread the declines are, I'd agree with that.

Mark Zandi:                     And here's the other thing. It's happening without higher unemployment. This so-called sacrifice ratio that we got to have much higher unemployment, much weaker economy, even a recession for many people think recession to get inflation back in, that narrative feels much like almost blown apart by these numbers. No?

Cris deRitis:                      Let's wait a minute here.

Mark Zandi:                     I'm going ahead of my ...

Cris deRitis:                      Employment's the lagging indicator, right?

Mark Zandi:                     Okay, got it. All right.

Cris deRitis:                      These rate hikes could still make their way through the economy here. But yeah, everything right now, taken at face value looks as though the slow session is in place. The soft landing is certainly higher probability than it was a few months ago.

Mark Zandi:                     Right. And maybe there needs to be some sacrifice. I mean, I'm not arguing that, because in our baseline we have unemployment going from 3.6% to over four. I think that's right. But feels like it isn't like we have to go into recession. We don't have to sacrifice the economy to get inflation back in. I mean, again, a lot of script to be written here, things can happen, but that's what it feels like pretty strongly, I would say, at the moment. No?

Cris deRitis:                      Yeah, no, I think there was some analysts calling for a 6%. We needed to have 6% unemployment to get inflation down to target. And that seems, I think, it's pretty clear that wasn't necessary.

Mark Zandi:                     We don't need that. Right. Yeah.

Cris deRitis:                      Right.

Mark Zandi:                     Okay. Even the 3.6%, I'm becoming increasingly of the mind that maybe we don't even need four, that 3.6 feels like full employment because this is where I cut Bernard off around wage growth. I guess we need to get more data in, but that also feels like it's moving in the right direction, not where it needs to be to get inflation all the way back in. But pretty close. And actually, if you look at so-called super core inflation, that's services excluding housing services and energy service, that's the measure that Jay Powell, the chair of the Fed put forth as what he's looking at. Correct me if I'm wrong, Bernard, because those are labor-intensive activities that-

Bernard Yaros:                Yeah, it was at 3.8% year over year in June. So that's down significantly from the peak of 6.6% in September. So it's come down a lot. Yeah.

Mark Zandi:                     And on a three month, if you look over the last three months and annual analyze that, I think it's in the 2s.

Bernard Yaros:                It's even lower. Yeah, it's even lower.

Mark Zandi:                     Like at 2.3, 2.4, 2.5. Now some of that goes back to the medical care. So maybe that is overstating the case, but feels like-

Bernard Yaros:                No, but you've seen a lot of weakness in these consumer, like travel or-

Mark Zandi:                     Yeah, exactly.

Bernard Yaros:                Airfare has plummeted by 8.1%. That's dragging on it and lodging away from home, rental vehicle prices. All of these have been really weighing on super core.

Mark Zandi:                     And I guess my broader point is that we could get service price inflation back into the bottle, back consistent with the Fed's target, without wage growth actually going down much more. Maybe we don't need much further deceleration of wage growth because it's already happening. Part of that may be because for many companies, margins did widen out during the pandemic. Their profit margins got juiced and now on the other side, as competitive pressures start to kick back in and supply chain issues are no longer an issue, labor market issues, the disruption is no longer an issue, those competitive forces are driving those margins back into something that are more typical pre-pandemic.

                                           And so you could actually get inflation coming back in even if you don't get wage growth all the way back to something that we think might be longer running consistent with the inflation. Am I making sense there or?

Bernard Yaros:                That I don't know.

Mark Zandi:                     Is that Cris? Okay.

Bernard Yaros:                Yes.

Cris deRitis:                      You must be arguing then the productivity kicks in or [inaudible 00:24:08].

Mark Zandi:                     No, I'm saying we ultimately have to get wage growth back down to say 3.5%. That's our bogo, right?

Cris deRitis:                      Yeah.

Mark Zandi:                     2% inflation, 1.5% underlying productivity growth. But in the immediate near future, in the next 12, 18, 24 months, maybe not. Maybe businesses take it on the chin, their margins come in from where they were. They bloomed out, now they come back in. So therefore we can have a period of price inflation that is more consistent with the Fed's target with wage growth that's a little bit more inflated than what you need over the longer run. So you see what I'm saying?

Cris deRitis:                      Maybe marginally, maybe marginally, right? If we're at 3.7, 3.8.

Mark Zandi:                     Yeah.

Cris deRitis:                      Is that what you're arguing?

Mark Zandi:                     Well, yeah.

Cris deRitis:                      That could be consistent, but.

Mark Zandi:                     Well, I think on average earnings we're at 4.5. Maybe [inaudible 00:25:01] point over what we think. I guess I'm saying we could get inflation back into target over the next year, even at a 4.5% wage growth because margins could come in over that period. That's what I'm saying.

Cris deRitis:                      I guess it's possible.

Mark Zandi:                     Okay. Okay. Okay. Very good. So anything else you want to point out on the ... We also got the producer price measure. Anything there that you want to-

Bernard Yaros:                Yeah, I mean it rose less than expected. Going back to the food prices, you saw some weakness there, and that's a good leading indicator. Wholesale prices for food, that's a very good leading indicator for overall consumer prices on food. We also got the import prices that fell a bit more than expected according to today's report. So it does suggest that the US is importing some deflation from abroad. But all of these, I don't think the implications from these, I mean for at least monetary policy are not as big as the consumer price index.

                                           I guess just going back to the whole wage growth conversation, the one reason why I think we're not going to get as much ... wage growth will come down in the next year is that I think a lot of the strong wage growth that we've seen has been a product of employees clamoring for higher raises to compensate for the really strong inflation that we've gone over these past two years.

                                           And this goes back to some of the work that we've done that it's the direction of causalities, not from wages to consumer prices. It's the other way around. It's from consumer prices to wages. And I think beyond margins and other behaviors by businesses, I think employers over the next year, they'll probably push back against employees who are asking for higher raises because they'll be able to point to a lower rate of inflation and they're not going to acquiesce to some of the high raises that people were asking, justifiably so, over the past couple of years.

Mark Zandi:                     Did you see that San Francisco Fed paper on this issue of wage prices, prices, wages?

Bernard Yaros:                Yeah.

Mark Zandi:                     I mean they came to basically the same conclusion that it's inflation driving wages, not wages driving inflation. So this dreaded wage price spiral has none-

Bernard Yaros:                We're not there. If anything, high wage growth is slowing the descent in consumer prices, but they're not self reinforcing into an upward spiral.

Mark Zandi:                     Okay. Let's play the statistics game because I'm afraid if we keep talking, we're going to take all the statistics of the way Bernard's thrown out these numbers. He's going to take all the statistics, and I got a really good one, I think, that makes a good point. The game is that we each put forward a statistic. The rest of us tries to figure that out through clues, deductive reasoning, questions. The best statistic is one that's not so easy. We get it immediately, not so hard that we never get it. And one that's apropos to the topic at hand or a recent statistic. So with that, Bernard, what's your statistic?

Bernard Yaros:                My statistic is 6.7% and it's a combination of a statistic that came out this week and another one that came out last week.

Mark Zandi:                     Oh. Oh my. So is it related to the CPI number this week?

Bernard Yaros:                Yes. Yes. It in includes that.

Mark Zandi:                     Is it related to the job number last week?

Bernard Yaros:                Yes. Yes.

Mark Zandi:                     Okay. So Cris, some combination of two things.

Cris deRitis:                      Is it a real [inaudible 00:28:35]? Some type of ...

Mark Zandi:                     Yeah, yeah. It's got to be something to do with-

Cris deRitis:                      Real wage gain. But that's-

Mark Zandi:                     So average hourly earnings-

Cris deRitis:                      That's not it.

Bernard Yaros:                No earnings. No

Mark Zandi:                     No earnings, okay.

Cris deRitis:                      No. Okay. All right.

Mark Zandi:                     Is it something per employee or per-

Bernard Yaros:                No. No.

Mark Zandi:                     No. So it has to do with the consumer. Is it a ratio? It's a ratio, obviously. It's a percent. So in the numerator is something related to prices and the denominator something related to jobs?

Bernard Yaros:                No, no. It's a sum.

Mark Zandi:                     Oh, it's a sum. Oh, sum. Oh, goodness. Is it a sum of inflation, CPI inflation and something?

Bernard Yaros:                Yes. Yeah.

Mark Zandi:                     Okay. So CPI inflation was three. So the other thing is 3.70.

Cris deRitis:                      Oh, this is the-

Mark Zandi:                     Oh, the misery index.

Bernard Yaros:                Yeah, the misery index, yes.

Mark Zandi:                     Oh, yeah.

Bernard Yaros:                So the misery index is the sum of the seasonally adjusted unemployment rate and the annual inflation rate. And it's just an economic indicator that economists, to use to measure just the economic malaise or the stress that everyone is feeling. I mean, it's actually the lowest since March, 2020, and even lower than its average over the 20 years prior to the pandemic, which was about 8%. But even still, I mean, whenever I'm talking to the media about inflation, the rate of inflation falling, people still say, "Well, the level of prices are still much higher."

                                           And I think this really speaks to why people are still feeling really down in the dumps. You look at gallop polls, everyone really thinks inflation is still a problem. And I think it's because they probably look at economists look talking about falling inflation rates, but they're looking more at the level of prices. And if you just calculate, the consumer price index is still about 10% higher relative to where it should be.

                                           During the pandemic, the CPI had increased at roughly its average pace over the prior decade. So people see that 10% difference between where they think prices should have been and where it is now. And they're saying, "Well, I'm 10% poorer as a result," and as a result they feel pretty crummy. So I think even though we're seeing the misery index, I think that that might have done a better job explaining consumer sentiment or confidence in times past.

                                           But I think since people just got so used to the low inflation that we had and really liked it, that even though we're seeing an unwinding of this consumer price shock over the past couple of years, they're still not feeling happy. And this just speaks to a lot of research, like Robert Schiller had his famous, "Why do people dislike inflation," piece a few decades ago, and people would even prefer a high more joblessness compared to inflation. So it's always been top of mind for people.

Mark Zandi:                     The other way to make that point is we calculate the increase in what the typical American household has to pay to buy the same goods and services as they did a year ago and two years ago. So based on, because of the inflation, right now, as of June, they have to pay almost a couple hundred bucks more a month than they did a year ago to buy the same goods and services. But they have to pay $750 more than they did two years ago per month to buy the same goods and services.

Bernard Yaros:                Exactly.

Mark Zandi:                     That's a big ... and the typical American household makes, I don't know, it's 65, 70K, something like that. So that gives you a sense of the financial pain that you're describing.

Bernard Yaros:                Yeah. And also, I mean people focus only on the negative. They don't think about that wages have also gone up a lot, obviously not as-

Mark Zandi:                     Yeah, that too.

Bernard Yaros:                But I think people are singularly focused on the negative and not some of the results of high inflation, which has also been high nominal wage growth.

Mark Zandi:                     Yeah. Cris, what's your statistic?

Cris deRitis:                      This is a number that isn't directly related to inflation or housing, but it came out this week and it caught my eye. It's $7.2 billion.

Mark Zandi:                     Billion dollars. 7.2 billion is statistic that came ... is it government statistic?

Cris deRitis:                      It is a government statistic. Came up early this week.

Mark Zandi:                     Oh, I know what it is.

Cris deRitis:                      All right.

Mark Zandi:                     It's the increase in consumer credit outstanding.

Cris deRitis:                      You got it.

Mark Zandi:                     Bernard, you see how that's done?

Bernard Yaros:                Yeah, yeah.

Mark Zandi:                     I'm an old guy, but I'm still quick with the numbers.

Cris deRitis:                      Well, below expectations.

Mark Zandi:                     Bernard is ashamed. Look at him, he's slinking in his chair back. There's the old [inaudible 00:33:25] guy got it. You want to explain, Cris?

Cris deRitis:                      Yeah. So that's an estimate of the total amount, the change in the stock of consumer credit in May. This is related to the May number. $7.2 billion is well below expectations. Expectation was for about 20 billion or so. That's what we had in April, kind of the trend level we were at. So clearly consumers are not borrowing as much. Revolving credit actually increased 8.5 billion and non-revolving credit actually fell 1.3 billion. That's student loans and autos for the most part. So that's interesting.

                                           So then the question here is, well is this because of a voluntary pullback, consumers don't want as much credit, maybe they're not taking as much out? Or is this, in my theory, more likely the case that lending standards are pulling back and consumers can't get all the credit they otherwise might desire. So I think this is something to watch if indeed consumers are not able to access credit because of the tightening standards, you could see that pullback on spending going forward. So again-

Mark Zandi:                     Yeah, good one.

Cris deRitis:                      ... it's one data point you don't want to-

Mark Zandi:                     Let me ask you a couple of things, one question, one comment. On the question, this is data from the Federal Reserve. We get our own data based on Equifax credit files, all the files in the country, and often I view our data as the Bible, right, because it's a full census of the credit file. So we get all of the files. Do you happen to know, did we have the same kind of weakness in our June data based on Equifax files?

Cris deRitis:                      Oh, you know what? I did not check that.

Mark Zandi:                     Yeah, because I'm always suspicious of that Fed data month to month. And a lot goes to seasonality too, seasonal adjustment.

Cris deRitis:                      Yeah. For sure. For sure.

Mark Zandi:                     And here's the question.

Cris deRitis:                      Yeah.

Mark Zandi:                     So here's the question.

Cris deRitis:                      It's possible that it's not a real number.

Mark Zandi:                     The question is, what about student loan debt forgiveness? Because I just saw that President Biden, here we are July 14th, Friday, announced as part of the income driven repayment plan, that there will be about almost $40 billion forgiven for those people who are still paying on their debt for 20, 25 years and they get debt debt forgiveness. That presumably would be a deduction from non-revolving credit outstanding. Correct?

Cris deRitis:                      Yes. But that wouldn't have hit this number yet.

Mark Zandi:                     No, but maybe some of that's going on though. I'm curious. I wonder if, yeah, you're right. That would be more of probably a July, August, September thing, but something to watch. Yeah. Good. All right. Well, very good. I'll give you a statistic. It's related to inflation. It's not the CPI report, but it is related to inflation and it goes back to the discussion around wages and wage growth. 3.8%. 3.8%. And it's something that came out this week. And to be precise, because I am a little weird like Bernard, 3.83%. I don't know the third significant digit though, I don't think it was published. Any ideas? [inaudible 00:37:04].

Cris deRitis:                      Not an expectations.

Mark Zandi:                     Oh, it is, very good. Excellent.

Cris deRitis:                      Okay. But it's not University of Michigan because that was 3.1.

Mark Zandi:                     No.

Bernard Yaros:                New York Fed survey of consumer.

Mark Zandi:                     Yes, yes. Very good, guys. That's great. Excellent. Yeah, the New York Fed has a monthly survey of consumer expectations. And as part of that inflation, expectation's one-year ahead, so near term inflation expectations by consumers, that fell to 3.8%. The peak was 6.8% back, I believe, last summer. Not surprising. That's when gas prices hit their all time high, and they're still high. I mean before the pandemic, they were hovering near three, but clearly moving in the right direction.

                                           And this goes to one of the theories I've been espousing for a while, and that is the high wage growth that we've seen is not so much the result of the tight labor market, although that certainly must be contributing. It's the surge in inflation expectations that occurred back when Russia invaded Ukraine. Oil and gas prices went skyward, and nothing plays more central of a role in people's formation of expectations than what they pay for a gallon of regular unleaded.

                                           And so that caused expectations to jump. And then they went to their employer and they said, "Look, you got to pay me more because I just can't come to work. I can't afford it." And then Porter said, "Fine, we'll do it." But now oil, gas prices are back in and expectations are coming back in. Goes to your point, Bernard, that I do think we are going to see wage growth moderate here. And all this happens without any change in unemployment or any other measure of labor market tightness, that this goes to inflation expectations. So what do you think, reasonable theory?

Bernard Yaros:                Yeah. Yeah. And I mean, already we've seen just the complete breakdown between unemployment and job openings.

Mark Zandi:                     Yeah, exactly.

Bernard Yaros:                Which job openings I think are down 15% year over year. And historically, or at least in the little history that we have, normally when that's the case, the number of unemployed persons is also surging by a commensurate amount or a magnitude. I think we've gotten a lot of reduction in excess labor demand. We've gone a fallen quits, but without any really real labor market stress.

Mark Zandi:                     Yeah. Okay. We're running along in the tooth here because we do have a guest and I want to bring him into the conversation. We're going to talk about housing. But before I do that, quickly what's your thinking around probability of recession? But based on all this great data that we've gotten over the last couple three weeks? Bernard, what probability do you put on recession? NBER, National Bureau of Economic Research defined recession beginning at some point in the coming year. Maybe by next year.

Bernard Yaros:                Yeah, still 35%.

Mark Zandi:                     35%. And it's where you've been?

Bernard Yaros:                Yeah, I've been there. I'm not going to move it lower just because of one month of data, but I think this reinforces where I've been at.

Mark Zandi:                     Yeah, you feel better about that 35%.

Bernard Yaros:                Yeah. Yeah.

Mark Zandi:                     Cris, you were at 50% I believe last week.

Cris deRitis:                      Yep.

Mark Zandi:                     Any change because of these numbers?

Cris deRitis:                      Nope. Sticking with 50, 50/50.

Mark Zandi:                     Oh, what's it going to take, my friend-

Cris deRitis:                      Too much uncertainty in there.

Mark Zandi:                     ... to get you coming in.

Cris deRitis:                      One report is not enough.

Mark Zandi:                     Okay. I'm at 40. 40% is where I am. Although I'm leaning towards Bernard. I'm leaning towards him. I might get there. Let's see how the data play out here going forward. Okay. We're going to call this part of the podcast to a close, and then we're going to now turn to our guest. And I'd like to welcome Lance Lambert to our podcast. Hey Lance, how are you?

Lance Lambert:               Hey, doing good, Mark. Thanks for having me on. Housing, housing, housing. Always a lot going on in the market right now.

Mark Zandi:                     And you are the real estate editor at Fortune?

Lance Lambert:               Yeah, so watching the commercial side and also the housing side where they're both kind of reacting to these high interest rates.

Mark Zandi:                     Oh, I didn't know that. So you cover commercial real estate as well?

Lance Lambert:               Well, with my own writing, it's mostly residential, but kind of building out a team and some of them work on the commercial stuff.

Mark Zandi:                     Oh, okay. And on the residential side, is it mostly single family or are you also on the multifamily as well?

Lance Lambert:               Yeah, it's single family. Yeah, that's where my-

Mark Zandi:                     Got it.

Lance Lambert:               ... focus has been.

Mark Zandi:                     And we've gotten to know each other over the last couple, three, four years. We've been chatting a lot about the housing market since the pandemic really.

Lance Lambert:               Yeah, and a lot has happened during that time. We had talked right at the very bottom of the deepest part of the pandemic. And then as the boom kind of took off and housing and the economy started to recover, and then into the quantitative tightening and the mortgage rates. So it's been really interesting to see it all play out very fast.

Mark Zandi:                     Now, do you say Fortune Magazine or do you just say Fortune now? Is there a magazine?

Lance Lambert:               Yeah, there is still a magazine, six issues a year. I think I write usually one article a year. But we've really grown beyond that and we're really known for our conference side. So it's still Fortune Magazine, but a lot of people just know us as Fortune.

Mark Zandi:                     I got a great Fortune Magazine story. You want to hear it?

Lance Lambert:               Hit me.

Mark Zandi:                     So back could be 25 years ago now, maybe longer, I don't know, when I was a young economist, Fortune Magazine had a piece, the Sexiest Economist in the Country, no lie. I was one of the sexiest. Obviously the bar is incredibly low to get over, but actually my mother was so proud of that. She took the picture, put it in a frame, I've got it somewhere. Yeah.

Lance Lambert:               And back in the eighties and stuff, Fortune used to do the list of the toughest CEOs and it was something that these CEOs wanted to be known for. And then now you fast forward to 2023 and it's just a very different environment. CEOs don't want to be on that.

Mark Zandi:                     They don't want to be tough. I'm not sure economists want to be sexy either. I'm not sure. I was okay with it at the time, but I don't think economists would want to be called ... Cris, what do you think?

Cris deRitis:                      Absolutely not. Absolutely not.

Mark Zandi:                     Absolutely not. Now, Bernard, Bernard movie star quality, wouldn't you say? I don't know. Anyway. Anyway, that's my story. So let's talk about housing. And this is going to be a lot of fun because I'm turning the tables on you, because more often than not you will call up and quiz me. I'm going to quiz you because you talk to everybody in the industry. So you have a really good feel for ... I follow your Twitter feed and you're prolific. I don't know how you do it, but you are prolific with your Twitter feed, so you have a good sense of what's going on. So what is your sense of the market right now, the single family housing market right now? How would you characterize it?

Lance Lambert:               Yeah, so last year into the spring, the market was overheating in a way that we hadn't really seen since the bubble. It was so dramatic that it was actually a little bit faster when you just look at the two-year timeframe. And that coincided with the Federal Reserve moving into quantitative tightening mode and mortgage rates going from three, four, five, six, to even kind of seven there into the fall, we saw a very kind of dramatic move in the market with home sales going into free fall.

                                           And then out West, the markets like Austin, Boise, Las Vegas, we saw initially in summer 2022 inventory started to build very quickly as demand pulled back and absorption was broken temporarily. And then we saw corrections out West too with prices moving down and builders across a lot of the country having to pull down profits to do the incentives, to do the mortgage rate buy downs, the cash at flows, and to cut price in some of the new communities.

                                           And then you take that, and then into 2023, we had a bit of a shift again, where we went from the correction mode at the end of the year into some resiliency. And as we're starting to see this data roll in the spring, what we've seen is that house price growth at a national level looks kind of normal, maybe even a little above normal. And a lot of that is led by the markets that aren't as high cost, the Scranton's, a lot of parts of the Midwest.

                                           And then also some of the parts that to them locally, like in the Northeast, it feels expensive, but it wasn't quite as separated from fundamentals in terms of rent to price or price to rent as the western peers. So we've seen some resiliency with some of the existing house prices this spring. On the builder side, given their adjustments that they made last year, they were in a good position to grow sales this year.

                                           They kind of went out and they met the market and some buyer acceptance too as we moved into the year and they were kind of like, "Okay, I'll on board with the 6% mortgage rate," a little bit of that. And then on the existing home sales, we're still not getting a lot of volumes. It's very low, it's very constrained. The churn side of the market is really just knocked off. You're not going to go out and sell your home and give up your 2, 3, 4% mortgage rate and then go buy something new at a 6, 7% rate.

                                           And plus, if you did that, there's not a lot of existing inventory out there. So you would have this price shock, affordability shock on the monthly payment. And then, oh, by the way, you probably wouldn't get what you wanted too, because there's just not a lot out there. So existing inventory very constrained, house price growth this spring looks kind of normal. New sales rebounded a lot. And then on the institutional side, a lot of those people that I talked to, they were kind of hoping that house prices would come down more or that rates would come down more.

                                           Their cap rates are in a tricky spot. So yield street, which span like 1,000 homes, nothing too crazy, but they haven't bought a single home in the first quarter of the year. Nothing. They didn't add anything because the cap rates are so out of whack. And if you look at the earnings reports for the beginning of the year for invitation homes and for American homes for rent, they were actually net sellers, those quarters, it just doesn't make a lot of sense to go out. The returns just aren't there right now for the really big guys.

                                           Some of the small players have stayed out there because they don't kind of live in that same cap rate world that the institutional guys do. So some of them are still playing. But in terms of the institutional side, I consider that constrained right now. And then of course, you look at the mortgage side of the market, they're still paying there. Rocket Mortgage, they were like a top 250 company on the Fortune 500 last year. And then this year we just put out the new report. They completely fell out because the re-fi market has just dried up. So re-fi is very, very weak, and that's expected when you go from 3% mortgage rates to six.

Mark Zandi:                     So just to summarize, in terms of home sales and mortgage originations where you just ended weak, some stability, I guess the free fall is over, but the level of activity remains very low, and that just goes to continued high fixed mortgage rates and still high house prices. Affordability is still really poor.

Lance Lambert:               Well, that's what I didn't get to is that yes, so you look at house price growth, it looks kind of resilient somewhat this spring. But on the other side of it, affordability is just in the toilet when you take-

Mark Zandi:                     I was going to say ... I paused because I was going to say that same word, but then I said maybe I shouldn't say, but then you go ahead and say it, so that's fair. Yeah.

Lance Lambert:               So that's the big question here with house prices. It's kind of like okay, a lot of people are saying that we're in the clear now. You look at CoreLogic's forecast, you look at Zillow's, they're like, "Hey, we bottomed. It's up from here." And you look at the house price skirt this spring, okay it looks kind of normal, but then you look on the affordability side and then we're in a very bad spot and there's just not much ... And yes, prices are kind of moved up this spring, but it's happening on very, very low levels of volume.

Mark Zandi:                     Right. Okay. And then on the new home side, builders, you kind of alluded to this, just to make it concrete, what you're saying is they've been more aggressive and effectively cut price. Right?

Lance Lambert:               Yeah.

Mark Zandi:                     I mean, interest rate buy down would buy downs would be a good example of that. So they've helped to restore some level of affordability, so they've been able to keep sales up. Is that fair way of describing it?

Lance Lambert:               Correct, yeah. If you look at it at the pandemic peak, their profit margins were off the charts. They had pretty much had all the pricing power during the pandemic as the market overheated and there wasn't enough existing inventory out there to meet demand. A lot of that demand poured over into the new home market and they kind of had their way with it. And so when the correction happened, they just went right to pricing adjustments and mortgage rate buy downs. And so you're starting to see some builders raise some prices.

Mark Zandi:                     Is that right?

Lance Lambert:               Keep in mind is that when a builder raises a price, okay, maybe they go up 2%. When a builder cuts a price, it's often on a new community and they're going down like 10%. They just rip that bandaid off. So it's not like a V-shaped recovery for new house prices. And new house prices are really tricky to measure. John Burns real estate consulting has a few different things they do. And then you do have the medians, but those also can get moved by just the shifts and mix too. But yeah.

Mark Zandi:                     We know John really well. John was on ... actually been on our podcast a couple times. Really [inaudible 00:52:12].

Lance Lambert:               I listened to that one. When I said that I've listened to a few, that was one of them.

Mark Zandi:                     That was one of them? Yeah, he's really-

Lance Lambert:               It's one of my favorite ones I've listened to.

Mark Zandi:                     Yeah, he's really good. He's very good. Have to have him back on. And then in terms of house prices, just to round out the summary, there was some real weakness back about a year ago when the interest rates first kind of hit the market, the higher interest rates, but more recently, so far this year, more stability and pricing, actually, as you pointed out, some price increases that are occurring.

Lance Lambert:               Yeah, that's what I'm seeing when I look at the month-over-month data from Freddie Mac and from Case-Shiller, Zillow home value index, the Black Knight ones is that ... It's a pretty normal level of month-over-month gains for the spring. And if you seasonally adjust it, it's still fairly normal. But the big question mark is what happens in the second half of the year as we move into the seasonally slow window? Does the balance shift a little? Does the strained affordability gain more of an edge on the market, where it's like spring what happened is the tight resale inventory gained the edge. And so it's like, okay, what happens in that second half of the year.

Mark Zandi:                     That's a good way of thinking about it, framing it. So you're saying you've got these two different cross currents, one supporting prices, and that's the lack of inventory. People are kind of locked into their home. They don't want move because they got to go from a 3, 3.5% mortgage to a 6.5, 7%. And then the countervailing is kind of the affordability issue, which is really weighing on the ability for transactions to kick in. So that's the balance between those two things.

Lance Lambert:               I think that's right. And so I was looking back at the Case-Shiller data since 1975, and in the Case-Shiller data on a year-over-year basis, you've only had three periods in that series where we've gone negative year-over-year, early 90s, the 2000s and just now. And the interesting thing about this one that we just had is that this happened while inventory was still down, active listings slowed down like 40% from pre-pandemic levels. So I think that what that kind of tells us, and then if you also look at the markets where the price cuts have happened, I think if there was even 10, 20, 30% more inventory, I think this could be a whole different game in terms of what give up could have happened over the past year.

Mark Zandi:                     Well, I want to come back to the outlook in just a second, because that's obviously very key here. And I think there's a wide, and you'll tell me because you know this better than I, but it feels like there's a wide disparity in people's expectations about where house prices are headed. But before we do that, Cris, let me just quickly turn to, you heard this characterization of the market, where we've been and where we are. Any pushback there or would you characterize it any differently? Anything else you would add?

Cris deRitis:                      No, I think you nailed it. I would say to me it's-

Mark Zandi:                     Meaning you agreed with him. You agree with him, that's what you mean when you say you nailed it.

Cris deRitis:                      Yes. That's right. That's right. The only thing, given all that that's been discussed here, is that's a very unhealthy market.

Mark Zandi:                     Are you in Italy still? Because your connection-

Cris deRitis:                      Is not good?

Mark Zandi:                     It's not that great. Are you in Italy?

Cris deRitis:                      Yes, I am. I am.

Mark Zandi:                     Okay. Everyone's abandoning me, Lance. Cris is off in Italy. Marissa, our other cohost-

Cris deRitis:                      I'll go off video.

Mark Zandi:                     Yeah, where's she? She's like in Hawaii or something.

Cris deRitis:                      Hawaii. Yeah.

Mark Zandi:                     Am I the only guy? I'm the only guy who's working. Yeah. What's that all about? I guess I deserve it. Okay. So Lance, looking forward, so let's think about the outlook and one of the key ... there's a lot of different components to determining the outlook for housing. The obvious is mortgage rates. You and I have been talking about this for quite some time and my sense is that fixed mortgage rates, right now they're hovering around 7%, probably will continue to do so. Somewhere between, yeah, I think for the year we have 6.5% for the 30-year fixed on average. And that feels kind of roughly right to me. Do you have a sense, Lance, do you have a view on that, and what is the consensus view on that from your perspective?

Lance Lambert:               Yeah, so the consensus view, a lot of it's actually kind of gravitated a little bit more to your model and Goldman's model, which you and Goldman were both came into the year and were like, "Okay, we're going to stay probably in these mid 6s. The 10-year is not going to give up a lot this year and it's going to be more of a slow grind down for mortgage rates."

                                           Heading into the year, there were still a lot of the places that thought it'd be low 5s this year, a little more of the optimistic crowd. So as the years went on, a lot more of these have kind of gravitated to yours, which is the higher for longer. I think some of those thought the economy would weaken much faster than it has. There's been a lot of resilience in the labor market, a lot of the resilience that you've kind of talked about, that you were kind of optimistic that we might be able to avoid a recession, whereas that recession camp got really big last fall.

                                           So now I think a lot of them still have a slow grind down into the 5s into 2024, 2025. Your outlook is 6.5 this year, 6 next year, and then 5.5.

Mark Zandi:                     Yeah. Right.

Lance Lambert:               Right. Yeah.

Mark Zandi:                     Wow. That's really good.

Lance Lambert:               I think. Yeah. Well-

Mark Zandi:                     Hey, you know the numbers okay. Very good.

Lance Lambert:               And Goldman's kind of around that range.

Mark Zandi:                     Are they? Okay.

Lance Lambert:               The outlier that just came out last week is that Morningstar said they think that 2025 would average 4%, and so the average 4%, you would have to have a three handle for a lot of a year. And that's probably a dramatically weaker economy.

Mark Zandi:                     Recession it sounds like. Right?

Lance Lambert:               Yeah.

Mark Zandi:                     Deep recession.

Lance Lambert:               Yeah. Mortgage Bankers Association has been a little more of the optimistic side, and Fannie Mae and Freddie Mac have just been a little bit under yours and Goldman's, but they've kind of had to come up this year and get a little closer to you and Goldman.

Mark Zandi:                     Well, that's good. I mean, our thinking is that we are able to skirt recession 10-year treasury yields upon which fixed mortgage rates are ultimately related to, pegged, about 4%-ish. We're kind of hovering around that at this point. And that spread between the fixed rate mortgage and the 10-year treasury yield, which is extraordinarily wide. Right now, fixed mortgage rates are seven, 10 year yield is four. That spread is 3% or 300 basis points. That's about double what it is historically, that that spread will narrow over time. That's our forecast and that's how we go from kind of a 6.5, 7% down to something closer to a 5.5%. That spread normalizes, gets back down to-

Lance Lambert:               Well, that's been interesting to watch. This year it started to maybe come down a little bit early in the year. Then we had the banking crisis. It kind of expanded again, and then it came down just a little bit. The debt ceiling stuff came back up and now I think it's still in like 300 basis points, 3%.

Mark Zandi:                     It is, yeah. It's still 3%. And I think a lot of that goes to the shape of the yield curve. I'm not going to get ... there's a lot of nerdy things to talk about there, the shape of the yield curve, prepayment risks, so forth and so on. But over time, if we skirt recession, inflation comes in, the Fed can start taking its foot off the brakes, lowering rates, that yield curve will start to become more normally shaped, more positively sloped.

                                           And then the result will be that spread will slowly normalize over time, but it'll take a little bit of time for that to happen. So we'll get back to, in the long run, abstracting from the ups and downs in the economy. I expect the 30-year fixed to be around 5.5%, something like that. But we won't get there for a while. It'll take some time, kind of the thinking.

Lance Lambert:               Yeah. Interesting.

Mark Zandi:                     Yeah. So, okay, in terms of the house price outlook, let me try something out on you, kind of my pet theory as to how this is going to play out and get your perspective on this. I'll have to say I have been surprised that we haven't seen more house price weakness. I expected more, given the current mortgage rates. I think you're right that it's the lack of housing inventory, going back to the interest rate lock. People just like their mortgage, love their mortgage, may not like their home, but they love their mortgage so much they're not going to move, at least for a while.

                                           But here's the theory. The theory is that life happens. There are life events, death, divorce, children, job change. And over time people have to move. They can't stay where they are forever. And as they move and we get more transactions, those transactions have to be at a lower price. Because these mortgage rates at these house prices, people can't afford it. They just simply can't do it, can't get the mortgage. So prices have to come in.

                                           And so right now by our house price measure or repeat sales index tracks the same homes over time, so it abstracts from the measurement issues you mentioned earlier around mix. They're down maybe one 2% from the peak a year ago, year-over-year, as you say, they're down. But I still expect prices to be down when it's all said and done, peak to bottom, down in the mid to high single digits, something like that.

                                           Which means some markets are going to be down. They're already down double digits, but in California and parts of the Mountain West, maybe Florida, you'll see some bigger price declines. Okay. That's the theory. What do you think?

Lance Lambert:               Well, I think, like we talked about earlier, affordability is just terrible right now. And even if mortgage rates come down a bit, I mean it's still not great affordability. And that'll happen when you have 40% run up in national house price in two years and a three percentage point move up in mortgage rates. And so the thing that I'm really interested in is just to see how the market reacts in the second half of the year.

                                           Does that strain on the affordability start to pull down on the price in the second half of the year? That's the part that I really want to see. And then also what happens to active listings? Because when mortgage rates spiked, we started to get active listings moving up fairly fast, some velocity in some of the markets like Austin and out West. And then all of that is really tightened up.

                                           Now, Austin, of course, bottomed for active listings in January. And if you look at their house price data, they look like a market that's still very much in correction mode. Very little appreciation this spring. If you seasonally adjust it, they're still down. But then you look at Phoenix and Vegas and they still haven't even bottomed for inventory. So it's like, are they still tightening? So it'll be interesting to see what happens with the active listings too.

                                           Now, in terms of the forecast, a lot of the forecasts have revised upward a bit for the year. Fannie Mae thought we would be down four something for the year. Now it's like one or two. Goldman thought we'd be down six for the year. The one they put out last week is now 2.2 for the year. Freddie Mac, I think, still thinks down one or two for the year. And then you have CoreLogic, which never went negative, and they think it'll be four something over the next 12 months. Zillow-

Mark Zandi:                     Positive four. Positive four.

Lance Lambert:               Yeah.

Mark Zandi:                     Oh, interesting.

Lance Lambert:               [inaudible 01:04:45] five over the next 12 months. AEI, American Enterprise Institute, they think that it'll be six for the year and then seven next year.

Mark Zandi:                     Oh, wow. That's Ed Pinto. We've had him on as well.

Lance Lambert:               Yeah. Pinto went from, he was kind of a holdout last year going negative. And then right in December, January he went, okay, 10, 15% peak to trough, which then he went past a lot of people and he's at six for the year and then seven for next year plus. So they've had a very big reversal over the past six months. And for the ones that are down for this year to be right, you need the seasonality to hit hard in the second half of the year, blow off the gains, and then be down a little more.

Mark Zandi:                     Yeah, I think we're kind of more in that camp. We get some additional weakness, but in our thinking, this weakness plays out over the next couple, three years. There's no cliff event here. It's more of a slow grind lower. Hey Cris, obviously we're on the same page here with regard to the house price outlook, because we talk about it all the time and it's what our modeling would suggest. If we're wrong and prices end up being stronger than we anticipate, how would you square that? How would that happen? Under what conditions would that happen?

Cris deRitis:                      Well, you mentioned that you have this tug of war between the inventory because of the lock-in effect and the affordability issues. So under this scenario, it must mean that the inventory, the lock-in effect wins. People just hunker down, they don't sell. And that lack of inventory continues to sustain the prices or actually pushes the prices up. Because there's just nothing available. So the few buyers that are out there, they're competing with each other and continue to cause the prices to rise.

Mark Zandi:                     Okay. So if that's the case, we're wrong in two regards. One, the house prices are stronger, more resilient than anticipated. And the other is that home sales are weaker than we anticipate.

Cris deRitis:                      Yes, that's right.

Mark Zandi:                     And origination volume is obviously weaker as a result also.

Cris deRitis:                      That's right.

Mark Zandi:                     Yeah. Okay. All right. Okay. Well Lance, we'll see how this plays out. So far I feel pretty good about our forecasting track record, but this is going to be a real test because there's a lot of differences out there with regard to house price growth. Let me ask you this, we're coming to the end of our time. You talked to a lot of sources, and other than me, I'm sure I'm one of your favorite sources, I'm just guessing, and you mentioned John Burns and Ed Pinto at AEI. Who else do you really pay close attention to?

Lance Lambert:               Yeah, so I really like people who are really close to the builders. I think those people are interesting, like Alec Wolf over at Zelenda. I think that's really interesting because the builders react very quickly and they really have that pulse there because they're in a vulnerable spot in the market at all times. So Ally is really great. And for data sources, I really like all the public data that Zillow puts out too, because they're a little ahead for the monthly data. They do it for a lot of regional places. So I think that's great. And then my other favorite source is just the tenure and just watching how the [inaudible 01:08:23] market and financial markets are reacting to everything.

Mark Zandi:                     You're a weirdo then. You're watching the click, click, click, watching that 10-year move up and down, huh?

Lance Lambert:               Well, yeah. And every day I tweet out the new mortgage rate that Mortgage News Daily does.

Mark Zandi:                     I love that too. I click on that several times a day.

Lance Lambert:               [inaudible 01:08:39] right there. Yeah.

Mark Zandi:                     Yeah, very good.

Lance Lambert:               Now, one thing that we have seen lately is that we've seen the financial markets tighten up a bit over the past couple months. Now, I know this week they've loosened a little more, but we have finally been over 6.8% in the Mortgage News Daily tracker every day since May 18th. So we've had a couple months where we've started to firm as we've kind of went into that slower seasonal window. And I think that's something interesting to watch and to see if that can move up inventory at all while [inaudible 01:09:21] window.

Mark Zandi:                     Oh, sorry, go ahead Lance.

Lance Lambert:               Well, yeah, we're still in the seasonal window where inventory does move up, but active listings have not moved up that much this year compared to last year. Last year there was more of a break upward for active listings, and that was really just the market's reaction to spiked mortgage rates and that initial demand pullback.

Mark Zandi:                     Just for the listener out there, Mortgage Daily News is a website and it feels like almost real time they're publishing mortgage rate information, and it feels like that's kind of the Bible for rate information. Is that fair to say?

Lance Lambert:               Yeah, they're always a little higher than that weekly average that Freddie Mac puts out, but I like it because it's daily and yeah, I think it's great. And you can see on a daily basis when that 10-year moves up or goes down and then it reacts to it. So I think it's really interesting.

Mark Zandi:                     Right. Hey, Cris, any questions you want to pose to Lance? Did I miss anything? Anything we should touch upon that that you feel is important?

Cris deRitis:                      I don't know if you want to get into some regional trends. Do you want to talk about some spots, Lance?

Mark Zandi:                     Yeah, why don't we quickly do ... You mentioned Austin, Lance. What other areas are you noticing some real weakness in some perhaps on the other side of it, some surprising strength in the market?

Lance Lambert:               Yeah, so last year the initial weakness was out West and obviously Texas, Austin, although Texas was still kind of bifurcated in parts. And then places like Raleigh too kind of fit into that. And the Southeast was kind of a little patchy. And then the Midwest last year. In the Northeast, when you seasonally adjusted the price declines, there wasn't a decline with seasonal adjustments.

                                           So I think that kind of was telling us even last year that those places were probably going to be a little more resilient. Some of the places this year that have been weaker than expected maybe, New Orleans keep showing some seasonal adjusted declines and that's been interesting. And then there's parts of Florida, I don't know if it was the hurricane that rolled in last year, but like Cape Coral, and I don't know if I'm pronouncing that right, but some of those areas have been weaker.

                                           I think what that tells us is that the market is so unhealthy right now that it's vulnerable in ways that it's not normally. And yeah, if you look at like Hurricane Harvey, there was an impact in Houston a bit, but not as much as you're seeing in these parts of Florida this spring. And so I think that tells us that this is just a very unhealthy market. I do think even though prices haven't declined this spring, I think there's some vulnerability depending on how things play out.

Mark Zandi:                     Very interesting. Just a sidebar, you've mentioned seasonal adjustment a few times. And I guess the important point is that housing activity is very, as one could imagine, if you think about it for a second, is very seasonal, and prices reflect that. So if you're selling in the wintertime in the Northeast or Midwest, prices are seasonally weak. And then if you're selling in the spring/summer, they're seasonally strong, and you need to correct for that if you're trying to get a sense of real time what's going on with the prices.

Lance Lambert:               Exactly. And so Cris, I would love to know a couple of your thoughts on the regional stuff, and then also are you watching the global stuff? Because one of the things I'm starting to see is that some of the global markets that last year corrected kind of hard, harder than us, and then this year had to bounce, are actually starting to fall again. And then the other rate sensitive and asset class autos last year corrected kind of hard this spring, saw a bounce, and then now is seeing some corrections. So I'd love to know, Cris, your thoughts on the regional differences across the country right now, and then if you're kind of what you're seeing in some of the global markets if you're tracking them.

Cris deRitis:                      Yeah, sure. So on the regional side, kind of share what you've you outlined in terms of the Northeast, Midwest showing some resilience. And I point to, we have an index of valuation or overvaluation that we produce from all the different markets. And those were areas where we didn't see a lot of excessive appreciation, let's call it. Right? 40% appreciation over two years was high for the nation as a whole, but it was really concentrated in the West, parts of the South, the Northeast, and the Midwest because of some of the demographic trends as well without migration actually held up pretty well from a valuation standpoint.

                                           So those are areas where especially with work from home, young buyers who are looking to buy a home can find some values there. So I'm not at all surprised by what you mentioned in terms of those areas holding up a bit better.

                                           And then conversely, some of the other areas like a Boise where we had such tremendous run-up in prices, actually giving back some of those gains. So we see those similar patterns in our data, and I do expect that to continue. The other key regional aspect I'd emphasize, and it was interesting that you picked out New Orleans and parts of Florida, areas that obviously are hurricane prone, I suspect that we're going to continue to see more and more of an impact from insurance-

Lance Lambert:               Good point.

Cris deRitis:                      ... prices on house prices, right? The availability of insurance is going down in a lot of areas. Insurers are pulling out of parts of California and Florida. Insurance is very expensive in New Orleans especially, and I think that now we're seeing homeowners or home buyers facing more of the reality of the total cost of ownership. They can't rely on appreciation. So I suspect that might factor in more into their decision. So those areas certainly could be more vulnerable to some house price corrections in terms of the more ... yeah, go ahead.

Lance Lambert:               No, no, keep going. Sorry.

Cris deRitis:                      I was going to move on to the global-

Mark Zandi:                     Yeah, I do want to point out one thing. Lance, I believe, is from New Orleans. Is that right, Lance?

Lance Lambert:               No, Cincinnati.

Mark Zandi:                     Oh, Cincinnati. Okay. But I don't think saying New Orleans. You say New Orleans, right? Aren't I right about that?

Lance Lambert:               New Orleans.

Mark Zandi:                     New Orleans. Yeah. Okay. Just saying.

Speaker X:                        But only if you're from.

Mark Zandi:                     Oh, is that right?

Cris deRitis:                      I was about to say it, I think, right? It's like Boise. I don't know.

Mark Zandi:                     Boise. Okay. Anyway-

Lance Lambert:               I see the part where you're getting the Lambert thing from. My Zoom doesn't have the T at the end of it.

Mark Zandi:                     It doesn't. No.

Lance Lambert:               It's missing.

Mark Zandi:                     Yeah. Anyway. Okay. So we're going to talk about global prices. Go ahead, Cris.

Cris deRitis:                      Global prices and autos, I think we're going through-

Mark Zandi:                     Why autos?

Cris deRitis:                      [inaudible 01:16:31].

Mark Zandi:                     Why are we talking about autos? I thought we were talking about-

Cris deRitis:                      Just in terms of seeing similar type of pattern of strength and weakness.

Mark Zandi:                     What about those anchovy prices? No, nevermind. Go ahead. Go ahead.

Cris deRitis:                      No, I've lost train of thought, but yeah, I think we're seeing-

Mark Zandi:                     That's what I do to people. I do that to Lance all the time. What the hell were we talking about?

Cris deRitis:                      You're throwing me off the track here.

Mark Zandi:                     Okay, go ahead. Fair enough.

Cris deRitis:                      Yeah, I think the other thing that, or the other factor here, both for the US and then externally as well, is just what's going on with foreign investment. There was certainly a lot of cash flowing around over the last few years looking for a home and real estate seemed like a good place to park some money, both in the US in certain markets. I think that's part of the reason why you might have seen some of the appreciation we did in certain markets, particularly if you think of Miami or parts of California, but then also in other global cities as well.

                                           And now I think that ... I suspect some of that is weakening, given some weakness in China, other parts of the world, you may not have that foreign market support that we had previously. So all of these markets now are adjusting. I'm a firm believer that price to income ratios have to come back to some type of affordable equilibrium. And I think that price process is underway.

Mark Zandi:                     Well, Lance, I think we're at time. We covered a lot of ground. We're all on the record, including you. Congratulations, you're now an economist with a record, and we'll look forward to having you back on and reprising the market at some point down the road here. So thanks for taking time out with us. We very much appreciate it.

Lance Lambert:               Yeah, this was a lot of fun.

Mark Zandi:                     And to the listener, we're going to call this a podcast and we will talk to you next week. Take care now.

Lance Lambert:               One last plug I want to put in.

Mark Zandi:                     Oh yeah. Fire away. Go ahead.

Lance Lambert:               People can find me on Twitter @NewsLambert.

Mark Zandi:                     Say that again.

Lance Lambert:               People can find me on Twitter @NewsLambert is my handle.

Mark Zandi:                     And I'll testify you have a great Twitter feed. I follow that regularly, so I think listeners should definitely follow because it's very informative. Okay, with that, we'll call it a podcast. Take care, everyone. Bye-bye.