Welcome back to Home Economics, a newsletter about the American housing market. This is The Week in Review, my weekly recap of macro and real estate news. Articles with a ◎ are free. Those with a ◉ have free previews but are only accessible in full for paying subscribers. Upgrade your subscription here:

I spent the week running to open houses for rentals on the Upper West Side of Manhattan. The rental market is wild. A shabby floor-through on a relatively noisy street costs $7,000 per month. These open houses have been jam packed—there is clearly plenty of demand, even at current prices (the broker just texted me to say she received “a ton of offers and accepted one close to $8,000”).

Moreover, the process has been insane. On top of the $7k/month, renters are expected to pay a broker fee of 15% of the annual rent ($12,500, the equivalent of an additional ~$1,000 per month). The forms the broker sent me to fill out were presumably made in Microsoft Word sometime around 2003 and full of typos, inconsistencies, and confusing requests.

All to say, this motivated me to wonder what the heck is going on in the rental market—and why I’m not seeing a similar stampede of demand for the home I am trying to sell in Park Slope? Is this specific to New York City?

Earlier this week I published an analysis about how the construction sector is defying gravity. Even as payroll growth slows for the economy on the whole, the construction sector—which is supposed to be highly sensitive to interest rates—is chugging along, adding jobs at a healthy pace.

My sense is that this can’t last. Both residential and non-residential construction should slow. And since construction is an excellent leading indicator for the economy, this should signal the coming of a broader economic downturn.

Read the full report here ◎.

There are two important economic data releases next week.

The NAHB homebuilder survey is out on Tuesday. Homebuilder sentiment has recently been weakening, and new sales have only been sustained with price cuts and sales incentives. Meanwhile, builders are sitting on a large stock of homes under construction (see chart and controversy around it on X, here ◎).

We get home starts and other residential construction data on Wednesday. At the last reading, housing starts had dropped 5.5% to 1,277k (saar) in May, against consensus expectations for a 0.7% increase. That was the slowest annualized pace of starts in four years.

Subscribers can download the housing economic data calendar here ◉

News: Zillow home prices decelerated to an annual gain of 3.8%
Views: Rates are falling but the economy is softening—more deceleration seems likely

The macroeconomic news for home prices is mixed. On the one hand, inflation continues to soften (see below), suggesting more imminent Fed rate cuts, a smaller term premium, and lower mortgage rates. This should be good for housing activity.

On the other hand, incomes look set to weaken. A handful of data points signal this. Consumer sentiment is dropping. Bank earnings calls highlighted a more tenuous financial situation for lower income households. Unemployment is ticking up slowly but steadily, and is approaching a level that is strongly associated with recession (see last week’s Week in Review here ◎ for details).

Historically, incomes have more explanatory power over home prices than mortgage rates. Even if rates continue to fall (I think they will, see my forecast here ◎), a softer economy may be the more important factor.

News: Inflation, as measured by the CPI, fell more than expected
Views: Housing is a cause—and will be a beneficiary—of lower inflation

From Barclays:

By any measure, June's print looks encouraging, with especially favorable developments in the stubborn core services component.

I have been arguing that, over time, lower wage gains will pull down services inflation (and the Fed’s current focus, “supercore” inflation), and that lower rents (as measured by private indices, like Zillow’s) would filter into official measures that go into inflation.

This has been happening, albeit it bumpily, and this week’s CPI print continues the trend:

• Core services decelerated from an average monthly pace of about 0.55% m/m during Q1 to just 0.25% m/m in Q2, The supercore component abruptly shifted to modest declines in both May (-0.04% m/m) and June (-0.05% m/m) after having averaged 0.5% m/m during Q1.

• The pace of increase in both primary rents and OER are now at a post-pandemic low of 0.3% m/m in June.

This opens the door for more rate cuts, sooner. 10y treasury yields rallied 10bp after the CPI report. Even if the impact on home prices is debatable, I think lower rates unlocking sellers and helping with affordability should catalyze transactions, which remain unusually low.

The theme of this week’s Fun Stuff is non-conformity—not necessarily weirdness, just a curation of things that are not often found together (a combination of sounds, a range of political ideologies, etc).

Take, for example, this week’s music recommendations. In an attempt to confound the Spotify robots who compile my weekly algorithmically generated playlist, I am listening to two excellent new albums that I can’t imagine have a widely shared audience.

Charlie XCX’s BRAT. Charlie XCX herself defies categorization (club music? I don’t know, I haven’t been to a club in 12 years). This is very much another recommendation that—like the movies Saltburn and Bottoms—is more typical media consumption for a 20-something woman than for a middle-aged man. Start with 360, before listening to Von dutch.

Johnny Blue Skies / Sturgill Simpson’s Passage Du Desir. I can’t do a better job describing this than Pitchfork: “country music caught between earthiness and spaciness, and it reintroduces [Simpson] as one of Nashville’s oddest artists, who understands and subverts both the square mainstream and the outlaw fringes of country music.”

Away from music, I have a newsletter recommendation for you:

The Tangle. Isaac Saul takes the hot-button topic of the day (eg, Should Biden Drop Out?) and compiles excerpts about it from across the political spectrum, from The National Review on the right to Jacobin on the left. He also offers his own take. Watch his TED talk here ◎, and read this newsletter here ◎.

Have a great weekend,