CJ: Welcome back to the Noyack Expert Series, where financial education meets real-world expertise. I’m C.J Follini, founder of Noyack Wealth Club, and if you’re just tuning in, we are a 501c(3) non-profit with a mission of financial literacy for young adults.
Today is a special day for me as someone who is a fanboy of economists. I’m excited to welcome Mark Zandi, Chief Economist at Moody’s Analytics and co-founder of Economy.com, which Moody’s acquired in 2005, with a PhD in Economics from University of Pennsylvania, and a BS from Wharton. Mark directs economic research at one of the nation’s leading data providers. He’s also a trusted advisor to policymakers, regularly testifying before Congress. Mark, thank you for joining us.
Mark: Thank you.
CJ: Mark, let’s talk housing. You’ve recently escalated to a red flare warning. I’ve listened to some of your appearances, I’ve read your Newsweek article. With mortgage rates in the mid-60s and home prices near record highs, what trends are you seeing? What are evident to you in the millennial, as that’s our target demographic, millennial and first-time buyer mortgage applications? And how do those trends compare to prior rising rate periods?
Mark: Well, CJ, it’s a pretty tough time to try to buy a home, particularly if you’re renting and a potential first-time home buyer. Affordability is about as bad as it gets. You combine the mortgage rate, 6.5%, but even more significantly, the high house prices. House prices have surged in recent years. Going back to just before the pandemic five years ago, house prices nationwide are up, at least by our price measure, 60%. Just think about that for a second. That’s nationwide. If you go into parts of the south and west, the price gains have been even more significant – 70, 80, 90%.
So you multiply a higher mortgage rate with these higher house prices, the mortgage payments are literally out of reach for most people. The other problem that folks are having, particularly millennials, because many of them are renting, is that rents have also risen quite a lot since the pandemic, and so it’s hard to save. You’ve got to shell out all this cash to pay your rent. So how do you save for a down payment on a home?
So you add it all up, it’s about as difficult a time as I think it’s ever been and certainly in my career as a professional economist – 35 years. I’ve never seen anything like it and I think if you look at surveys of folks, people in their 20s and 30s put housing at the top of the list of their concerns. They’re just at this point really wondering can they ever afford to buy a home, ever become a homeowner. And that’s really critical for many Americans. It’s been part of the so-called American dream since the beginning of time to own a home. It’s the best way to build wealth for most people. So it’s quite discouraging, disconcerting at this point. Hopefully we see mortgage rates come in and some moderation in house prices because it’s a very difficult time.
CJ: It’s interesting. There’s a couple points I want to bring up on what you just said. And first, this hits home very personally for me. I just went from being a two-year renter – again, as I mentioned, I have a young family, which belies, given my head, that I do have a three and a five-year-old. We went from being a two-year renter, and because of the landlord not being willing to renew our lease, we went to being a forced buyer. And this was in May, June. In fact, we moved literally this week.
And I can tell you, a lifelong New Yorker, but have lived all over the country, personally, I’ve never seen a housing market like this, both on the rental. Normally, there’s a disconnect where you can sell at a peak appreciation price and then rent, and then wait for the market to get to a new cycle. They’re both running at full speed.
So I see a lot of freeze. No one is moving from rental because they can’t afford the home ownership. And if you’re trying to break into the rental, you cannot find inventory because those same people. So there’s very little velocity from going back and forth. That’s the first thing that I faced. And I had five brokers, two of which were over 60, tell me the exact same thing: worst rental market in New York City history. That’s saying something.
Mark: Oh yeah, and I have my own personal anecdotes. I have a daughter that lives in Hoboken across the river, and talk about rents. Oh my gosh. Just unbelievable, out of bounds.
And you make a great point. One of the problems is the so-called interest rate lock. I’d say housing lock more broadly because there are other housing costs that are locking people in, like capital gains taxation, that kind of thing. If you’re at a 6.5% mortgage rate, let’s say that’s where we are today, and the average coupon on an existing mortgage, so if you look at all the mortgage loans that are outstanding across the country and look at their interest rate and take an average, it’s closer to 4%. That’s a 2.5 percentage point difference, so how many people would be willing or able to go from a home with a 4% mortgage to another home with a 6.5% mortgage. How would you deal with that?
CJ: So, you’re right. There’s an affordability issue for first-time home buyers, especially millennials, and there’s a freeze from going from a lower interest rate to a higher interest rate for second and third home buyers.
Mark: Exactly. Just one quick tangential point. I will point out that if you look across the country, the affordability is a problem but it’s most significant increasingly in the northeast part of the country – places like New York, Boston, down to Washington DC. That’s where you just don’t see any inventory whatsoever for sale and that’s keeping house prices more elevated and it’s very unique to this point in time. I’ve lived in Philadelphia all my life, I’m a Philadelphia native, and I’ve never seen a housing market like this in my life, where house prices in Philly are actually rising and are high and rising, and there’s no inventory. There’s just no inventory.
CJ: No, I think that’s the perfect storm of lack of inventory, interest rate freeze due to lower interest rates for an extended period of time, and now normalizing on the high end, and also my next question – this is a perfect segue to my next question – a coming jobs recession. So the housing prices and gains are far outstripping the income, the per capita gains. And the last time I saw this at this level was 2006, ’07, which I hope we do not repeat.
Mark: No, you mean pre-financial crisis, pre-GFC global financial crisis?
CJ: Exactly, home price increases outstripping, outpacing wage increases, wage gains.
Mark: There are some big differences, mostly in the mortgage market, right? Back in ’06, ’07…
CJ: The structural differences, yeah, the structural differences.
Mark: I think they’re in the same ballpark. I’m not worried about a financial crisis, but in terms of affordability, no doubt, that’s a pretty good analog.
CJ: Could we call it an affordability crisis?
Mark: Oh yeah, that’s exactly what I would call it. It’s definitely a housing affordability crisis, no doubt about it. In fact, it’s so bad, we’ve done some work here, it is causing some households not to form. So think about it, when you form a household, you start a new family, you get married, you have to live somewhere, right? And when the household has to live somewhere, they have to either own a home or they have to rent a home, but rents are so high and mortgage payments are so high, you can’t afford to even start a household.
So we’ve got what economists call pent-up households, kind of shadow households that are sitting out there. The other evidence of that is that you just take a look at the percent of young people in their 20s and 30s, they’re still living with their parents. It’s the highest per capita in history for the millennial generation that we have studied.
And let’s say you’re engaged or you’re married and you’re living with one of your in-laws or your parents. You’re not going to start a household. You really aren’t until you find out. So there’s two or three years of population suppression happening right now.
CJ: Very true. In fact, one of the things that we do at Moody’s is we calculate the so-called housing shortage. How many units are we short from where we need to be to be in a more normal, for lack of a better term, more normalized or typical kind of housing market. And that shortage is about two million homes. Just for context, we produce one and a half million homes per annum in a typical year. So that’s more than a year’s worth of supply.
CJ: That’s incredible. Almost a million, I think a little over a million are just those pent-up households that just aren’t forming because people just literally can’t afford to strike out on their own. They just can’t afford the rent or the mortgage payment.
Mark: That’s an incredible statistic. Really, that’s almost 18 months of backlog or actually time to get to a normal state.
CJ: Speaking of the rates, which we just mentioned as one of the conditions, you’ve mentioned that you think that by 2026, hopefully, because I’m on an adjustable rate in my new purchase, so I’m hoping that this is true. And I’ve never done an adjustable in my life. I’m very old school when it comes to debt, and this is the first adjustable rate mortgage I’ve ever taken in my life, and I sweat about it every night. And then I read that you’ve predicted 3% by the end of 2026. I’m like, maybe I’m okay.
Mark: What’s your ARM tied to? What’s your adjustable rate mortgage tied to?
CJ: It’s tied to SOFR.
Mark: Okay. I think it’s a good bet that short-term rate SOFR is going to go down. The economy is struggling. We’ve seen the recent job numbers. The economy is creating really no jobs. And that’s nationwide as well as a problem across the country as well. And the Federal Reserve is thus now focused on that and worried that the economy might go into recession. There are other issues with inflation and tariffs and other stuff that would forestall, typically forestall rate cuts, but because the economy is so weak, and I think the Fed is most focused on that, that’s their primary concern, they’re going to cut rates.
And this is September, they’re meeting soon. They’re going to cut the rates this month, probably next month when they meet, and in December. And then perhaps a few more times next year. So everything sticks as scripted. Now obviously all forecasts are pretty intrepid, but this feels like a pretty good forecast. Rates should be a lot lower and that should help you out.
CJ: I’m feeling it. To pat my own back, but I do a prediction, 10 predictions at the end of every year, every December. I went back, I had forgotten this. One of my staff members said, Steve, do you remember in December 2023 you predicted stagflation? I’m like, really? Wow, that was a pretty negative view at that point. So what are you predicting now, CJ? Give me a hint there.
CJ: By the way, that’s why we’re talking because it is as opaque as I’ve ever seen. I have no clarity right now. I really don’t.
Mark: Can I ask, are the Phillies going to win the World Series?
CJ: I can assure you of that. They’re definitely not going to do that. And neither are the Yankees, unfortunately. And it’s something that’s near and dear other than the New York Rangers beating the Philadelphia Flyers.
Mark: They looked pretty good last night. I watched them play the Mets and they look pretty darn good, I’ll tell you.
CJ: They do. But they don’t have the pitching, unfortunately.
Mark: You just touched on jobs recession, and this was actually my second question. And I think there’s a tale of two markets here – healthcare, hospitality, it’s really driving the bus, and then everything is lagging. How does this, if you can walk us through the diffusion index and how you analyze the sectors, how do we look at a bifurcated jobs market, and how does someone look at it in a holistic way to see how it affects them, especially if they’re not in the healthcare or hospitality sectors?
Mark: The job market is struggling. As we were just discussing, no job growth is basically flat here. And that means that some industries are adding to payrolls, others are cutting, right? Because if you’re at zero, somebody’s cutting.
It turns out that the Bureau of Labor Statistics calculates, you mentioned diffusion index, so that’s the percent of industries that they cover in their survey. I think it’s a little over 300 industries. The percent of those 300 industries that are adding to their payrolls in a consistent way, let’s say over the last six months, or reducing payrolls in a consistent way over the last six months.
And right now, only 48% of the industries are actually adding to payrolls in a consistent way. And you mentioned healthcare, that’s number one by orders of magnitude. Leisure hospitality two, state and local government three.
CJ: Actually, I didn’t know the third one. Interesting.
Mark: A little bit of educational services, and then outside of that, everybody else is either adding to payrolls or cutting payrolls. So particularly on the goods side of the economy. These are industries that are less important in New York, but very important to other parts of the country in the Midwest and agricultural areas. So manufacturing is reducing payrolls, agriculture, even construction despite the boom in data centers that we’ve all been reading about related to artificial intelligence. Housing construction is actually falling. Mining, transportation distribution because of the tariffs and the impact on trade.
So there are a lot of industries that are laying off. In fact, historically, when you have such a high percent of industries reducing payrolls, that would be a signal of recession. So we’re right on the edge of an economic downturn. Nothing else can go wrong. We need a little bit of luck here to avoid one.
CJ: Well, then you’re definitely not going to like my next question. But before, I want to ask one question to distill it for our audience. If you’re a 35 to 40 year old, maybe a little bit younger, 30 to 35 year old, and potentially with a young family, and hypothetically, you have pure geographic mobility, you can go anywhere. Looking at what, listening to what you just said, looking at the job growth, what would you do? And you’re saying I’m not tied down because of family. You can pick up with your one-year-old and go wherever the jobs are.
Mark: I mean, there are a few boom towns that are doing quite well. They go up and down and all around, but generally the trend line is very positive. Places like Atlanta, Georgia, Raleigh, North Carolina, Nashville, Tennessee, I’m kind of moving east, Dallas, Texas. Houston, I forgot, like Orlando.
CJ: Orlando. Interesting.
Mark: Denver, it’s less vibrant, but it’s a strong city with a very diverse economy. Phoenix, Vegas if you’re into leisure and hospitality and I do think those are areas that are generally going to continue to attract older folks like boomers like me who are going to continue in that direction and so that drives a lot of healthcare, health services, personal services, financial services, those are the industries that are going to be creating jobs.
Now, obviously layered on all of that is the prospects of artificial intelligence having an impact, and we can talk about that, but broadly speaking, those would be the industries that I’d be focused on in the areas of the country that I’d be focused on. But that’s a little bit of a parlor game because most people have other constraints. They can’t literally pick up and move.
CJ: It is. It’s a pure hypothetical setup. However, it does get the sound bite for this podcast.
Mark: It kind of gives you a sense of where the strength is, where the jobs are. And that’s a great title, where the jobs are. That would be a whole other segment.
CJ: Now, what could go wrong? You mentioned that, tariffs. A little different than maybe a couple weeks ago when we were going to speak or three weeks ago, but your models show that tariffs could push inflation from 2.5 to 4%. Do you still feel that way and which employment sectors? I mean you mentioned healthcare, hospitality, tech, finance, healthcare face the greatest risk from these combined tariff and also the uncertainty effect.
Mark: Yeah, inflation is going up. I mean the inflation rate has, I was going to say, I was going to give you some nerdy answer, but I won’t. I’ll say the inflation rate at the start of the year was coming into this year was around 2.5%, and now it’s 3%, and the direction of travel is for it to go higher.
The tariffs are now just starting to be passed through by businesses to consumers. There’s been a, it’s taking a bit of time, one, because the tariffs are all over the place, they’re up, they’re down, they’re all around. There are still more tariff hikes coming in all likelihood. And businesses are reluctant to kind of raise prices before they have a sense of where those tariffs are actually going to land because they don’t want to raise them and get wrong footed and lose market share, that kind of thing.
The other thing is, I think a lot of businesses, particularly larger retailers like a Walmart, I just call out to give you a sense of it, don’t want to get into the political limelight here. They don’t want to get called out for raising prices because of tariffs, and that’s happened to a few of these companies and the CEOs really just don’t want to go down that path. So they’re being more circumspect in passing those higher tariff costs through to consumers, but they will, it’s going to happen. They’re going to protect their margins, it’s just taking a little bit longer time.
CJ: So you call it a corporate subsidy, a temporary one-quarter corporate subsidy?
Mark: They’re eating some of it, the margins are down as a result. Smaller businesses are struggling more as a result. They don’t have the cash cushion that a big retailer might have.
CJ: And the price inelasticity from their customers. Their customers can walk.
Mark: Exactly. So yeah, I think we’re going to see higher prices, further increase in inflation, which will bite into people’s purchasing power, which is for lower middle income households, particularly for a lot of younger households, is already under a lot of pressure for obvious reasons. And that’s the reason why recession risks are as high as they are and why the economy is as vulnerable as it is to anything else that could go wrong.
CJ: You talk to policymakers on both sides of the aisle. Do you think there’s any surprise about the time lag of the flow-through of tariffs from anyone, especially from policymakers? Did they think that this was going to be a much quicker read and then a pivot?
Mark: Yeah, I think broadly speaking, I think there was a sense that the tariff hikes would get into consumer prices a little bit more quickly than they have. And that goes, but we’re talking months, we’re not talking years. So maybe we’re a little behind what most folks thought was going to happen, but only a little bit at this point.
And that, again, goes to the unique kind of circumstances that we’re in in terms of the ups and downs and all arounds. The tariffs are all over the place. The other thing is businesses may be waiting because a big chunk of the tariffs have been done under one aspect of the law that’s now being challenged in the courts. The Supreme Court has decided to take it up and the Supreme Court could strike these tariffs down by the end of the year into next. And so again, if you’re a business person and you say, oh, well, okay, these tariffs are going away, I don’t want to raise prices now, lose market share, and the tariffs just go away. So I think that’s delaying some of the pass-through to consumers. But it’s, again, months, one, two, three months, no more than that.
CJ: Do you believe, I’m not asking to be a Federal Reserve soothsayer, but do you believe that because of all this uncertainty, their dual mandate of inflation target has been discounted in their priority because they’re not really sure what is real structural and what is temporary tariff driven?
Mark: Well, I think the Fed’s been sitting on its hands and hasn’t changed policy since the end of last year, and that goes to the uncertainty created by the policy because the tariffs are up and down and all around. There’s also the immigration policy, highly restrictive, how restrictive is that policy going to be and what kind of impact, very hard to figure that out. There’s all the fiscal policy that’s tax spending, the one big beautiful bill that was passed recently, that interjected, introduced a lot of uncertainty, lack of clarity.
So because of that, the Fed said, Hey, I don’t know how this is all going to play out, therefore I’m not going to do anything. The natural instinct is to kind of freeze. By the way, that’s not just the Fed, that’s consumers, that’s business people. And as you mentioned, the businesses with the uncertainty has caused paralysis there as well.
Right, but I think we’re at a point now, the economy’s weakened to such a degree and there’s no job growth and recession risks are so high, that that’s going to win the day and the Fed’s going to start cutting interest rates. Despite the higher inflation and the prospects for it to go higher, they’re more focused on trying to avoid an economic downturn.
And part of that is there are concerns about Fed independence. It would be kind of existential for them if we actually went into a recession in terms of maintaining that independence. And they’re also of the view, and I think it’s appropriate, that the inflation may be more one-off. You get the tariff hike that translates through in terms of higher price and that’s it. The price level is higher, people are paying more, that feels uncomfortable, but it’s not a one-time bump to inflation to price is not a sustained situation. And therefore they’re more focused on growth, therefore we’re going to cut interest rates.
So going back to your mortgage, I think you’re in a good place. You should start to benefit from lower rates.
CJ: Definitely hoping so from a personal point of view. When you have two young kids like that. Oh my God, private schools are draining me. I used to have hair before I slept in the private schools.
Mark: I can imagine.
CJ: All right, wrapping it up with a reference to the great wealth transfer. 69 trillion, at least in one subset of older millennials, in the next 20 years, by 2045, 69 trillion you can go up, you add Gen Z, it’s 81 trillion, et cetera. I’m sure you know all the numbers.
All of this inheritance, how do you, especially in that generation, and the millennials, not me, I’m not a millennial, but in our viewers and members.
Mark: Are you an exer or what are you?
CJ: I’m an exer, yes. 58, 67.
Mark: 67. Right.
CJ: So, how do we reconcile the long-term prospects for growth and wealth growth, personal wealth growth, given the great wealth transfer, with the current somewhat negative, uncertain, definitely environment. How does that, if you were putting yourself in the millennial’s shoes who might inherit something, how does the present reconcile with what could happen from an inheritance standpoint, affect your wealth-building decisions?
Mark: Well, CJ, you probably thought about this more deeply than I, and may have a different perspective, but I’d say it shouldn’t affect your financial planning and the way you behave. I would operate in a way that I’m assuming I’m not getting any inheritance or there’s no transfer. And I think that makes for a more disciplined kind of financial plan.
And it’s basic stuff, I think. You got to save, you have to make sure that you save, your savings is on autopilot, a certain percentage of your earnings every pay period goes into your 401k, hopefully it’s matched by the employer. You’ve got to assess your risk tolerance and your age, but a lot of it should go into equities and stocks and take more risk when you’re younger.
Unless you’re taking risks in other aspects of your life. Like when I was 30 years old, I started a company and I was taking a boatload of risk. I wasn’t going to take any risk in my portfolio. I wasn’t going to do that. But if I were working for a large company, I felt solid in my job, I’d probably take a little bit more risk in my portfolio. That means more equity.
And by the way, don’t look. Markets go up, they go down, they go all around. That shouldn’t influence your saving. Owning a home, if you can find the window to walk through, and that means you gotta be prepared, which means, what I mean by that is you’ve gotta make sure that you pay attention to your credit score and that you’re doing all the things that are necessary to keep that credit score up. Know the markets that you’re interested in. Think about the type of housing you need so that, again, when the window opens or interest rates come down, you can kind of step through and make a purchase at the right time. But you can’t do that quickly. You have to be prepared for that.
All those kinds of things I think are basic. Owning a home is really, I think, everyone should strive for that. It’s a levered investment because you’re taking on a mortgage. So there’s no better way for most people to kind of generate wealth. And house prices, they may go up, they may go down a little bit all around, but generally they head north, they grow at the rate of overall income and inflation. So it’s a pretty good bet. I think if you’re in those places I just mentioned earlier, like in Atlanta or Dallas, you do quite well. So those are the kinds of things I would do and I wouldn’t count on the inheritance, I wouldn’t be thinking about it.
Now, if you come from a wealthy family, that’s probably a different story. Then you need to be thinking about, hopefully your parents or the guardian is thinking carefully about what happens when life events occur and life changes.
CJ: Would you change any of these decisions if we do trip into recession, if that one thing happens and who knows, exogenous shock, you wouldn’t change any of those?
Mark: No, because you have to, I think, the long-term horizon, you’ve got to be thinking out decades, not next. Now, part of financial planning, though, is being prepared for whatever happens in terms of your job and the kind of livelihood that you have, and you really need to think about, in the context of artificial intelligence, AI, what’s coming. And what does that mean, really mean for the work that I do? Am I vulnerable? And how can I take advantage of this?
CJ: That’s interesting. Know AI, understand AI. Really, there’s, you don’t need to go back to university to do this. There are a lot of ways of doing it, and you really should, because your job could easily be disrupted in the next five, 10 years because of this new technology, and that’s really going to be important for a lot of millennials.
Mark: You’re evaluating career vulnerability. And different prospects. There’s a lot of debate about how disruptive AI is going to be, but for prudent planning, I’d count on it being disruptive and thinking about what it means for me and how I can be prepared for it and take advantage of it.
CJ: Interesting. That is a great takeaway from this, absolutely. I’m going to finish with one quick personal question that wasn’t prepared by the team. Have you noticed, speaking about housing, have you noticed all of a sudden, I mean now that I’m doing what I’m doing and educating, I pay attention to a lot of the content that’s out there, both from learned sources like you and also from influencers who do a little bit of repurposing. So you can always get a sense of the general zeitgeist of what people are thinking, especially if the people you’re listening to, these influencers, are of a certain age.
I am sensing that the American dream of owning a home as the foundation of wealth building is no longer thought of the same way by younger generations. And there are a lot of people influencing them through content and online, talking about just that. I’m not in that camp, not remotely. I think you mentioned it a couple times. Have you noticed that there’s sort of some blowback against home ownership as a foundation of the American dream?
Mark: I hadn’t noticed that, no. I think that could be born out of necessity, CJ, because affordability is such a problem, maybe it’s just impossible to even think I’m going to become a homeowner, so therefore, I got to think about some other way to build wealth. So that may be born out of necessity as opposed to that’s a good idea.
CJ: And then promote the counterfactual because they can’t do the opposite.
Mark: That’s interesting. It’s been surprising. I’ve noticed it over and over, and I thought it was just me. So I wanted to check in with you, especially someone who has the housing economy so closely analyzed as you do.
Mark: Well, I’m gonna start listening. You gotta give me your social media. It’s amazing.
CJ: I will. And by the way, I can’t help myself but respond and commenting about it. I think it’s so ridiculous. Anyway, that’s a subjective comment.
Listen. I just want to say, Mark, this has been fantastic. Thank you for sharing your valuable insights with us today. It is a real honor for me to be speaking with you. And I know that those who are going to be watching this, and we do have a very large newsletter, and this is going to be sent out to, I think, what was our last, like 120,000 subscribers? Surprisingly. We’ve been doing, we haven’t missed a week in about 90 weeks. So we’re 90 weeks and counting. We’re going to do 100 weeks soon, a little event. And yeah, this is going to be promoted in there, and I know they’re going to learn. So for younger generations and their financial literacy, Mark, thank you.
Mark: Well, hey, thank you, CJ. I really enjoyed the conversation, and really, best of luck with your endeavor. I think it’s a really important one, and I wish you the best in all of that. And congratulations on the success you’ve already had.
