'Not Rocket Science': Peter Linneman On CPI, Interest Rates And Immigration’s Impact On Economy

A pressing issue echoing throughout the commercial real estate world is how inflation will continue to impact day-to-day activity. The latest Consumer Price Index Report seems to offer little reassurance for those worried that the economy may be at risk of a recession — but is the reality as the government paints it? 

On this week’s Walker Webcast, Walker & Dunlop CEO Willy Walker said that “it clearly seems like we’ve got a Fed misreading the data,” suggesting that housing inflation isn't growing as fast as the Fed claims. According to the government, housing, which represents the largest component of the CPI at 36%, experienced a 5.7% price increase for multifamily rents and a 5.9% increase for single-family rents, Walker said. 

But rather than raw data, the reported 5.9% hike for SFRs was based on a survey of what people would charge to rent their home, he said. Walker & Dunlop’s research group crunched the numbers and found there was only 3.3% in SFR rent growth across the country, a stark difference from what the Fed report suggests.

“You would hope the Fed could do the math that a couple of broken-down guys could do,” said his guest, Peter Linneman, economist and former professor at the Wharton School of the University of Pennsylvania. “This is not rocket science.”  

Linneman said that since about two-thirds of the housing sector experienced little or no price inflation because they’re owned, and current market rent is down 4% in the past month, inflation should align with other metrics in the report at about 1%. 

Walker and Linneman agreed that this new report is “something to shake our heads at.”

“The problem the market has is when the government does dumb things, it has big repercussions,” Linneman said. 

Despite this week's concern that the inflation report will keep the Fed from cutting rates, Linneman is still confident that there will be a 75 to 200 basis point rate cut in 2024.

“At some point, they have to be smarter than just looking at a headline number,” he said.

The two also discussed immigration’s impact on the economy, specifically its impact on multifamily occupancy and gross domestic product.

Linneman said that while not always perfectly captured in statistics, undocumented immigrants are represented in jobs data, demand for multifamily units and demand for groceries — in other words, in all things that consumers do. In turn, they show up in output. He added that contrary to what some may think, he believes they work at higher rates than the rest of the American population. 

“[Undocumented immigrants] show up everywhere in groceries, gasoline and so forth, to push GDP” he said. “That's one of the great myths about ‘they take our jobs.’ I always love that people say immigrants take our jobs and they just collect welfare. Well, make a choice. They can't be doing both of those, right?”

Walker pivoted the conversation to unemployment and consumer debt. He said that one of Linneman’s recent economic analyses set unemployment at 6.6%, far higher than the Bureau of Labor and Statistics’ estimated 3.8%. 

Noting that consumers aren’t as confident in the economy as they were in 2019, Walker asked whether the government’s data is missing a significant segment of the working-age population.

Linneman said the statistics don’t account for people 62 years and older who have not returned to the workforce at their pre-pandemic level.

“They're basically saying ‘I'm done,’” Linneman said. “You can find it in every age category, but it's basically concentrated in the 62-and-over group. The 70-year-old worker eventually was going to retire. They did it a few years early, is what we've seen, and they've not come back.”

Walker said that the real household net worth stands at $154.5T, which equals about $461K per capita, much higher than it has ever been. He questioned if retirees think they have enough household net worth to live the rest of their lives comfortably once the country’s 813 billionaires and top 1% are pulled out of the equation. Theoretically, the average net worth per capita would sink.

“Are we fooling ourselves by looking at these big numbers on a per capita basis, rather than really looking at income disparity and therefore getting fooled that the consumer is doing a little bit better today than they actually are?” Walker said. 

Linneman said that the Fed puts out a median number every so often, but they don't put out the median number every time, even though it would be a more indicative metric.

“Remember that most people who are young have never had any wealth,” Linneman said. “The fact that young people don't have wealth is kind of an unchanged phenomena. The fact that some people who aren't young don't have wealth has not changed.” 

Discussing the federal deficit as it relates to household wealth, Linneman said that the current national debt of about $18T could theoretically be eliminated by taking 10% of total household net worth. There is a contrast between public perception of the debt’s magnitude and the country’s capacity to address it.

“I keep telling people I don't care how big the deficit is because it's small compared to our capacity,” he said. 

Walker expressed concerns about the practical application of what Linneman suggested, but Linneman pushed back, citing that the country could absolutely take 10% of its wealth to cover its debts.

“The debt is a problem because it's a political nightmare of how to deal with it, it's not an economic problem,” he said. “Don't confuse an economic problem with a political problem. It’s a massive political problem and a trivial economic problem because we have the resources.” 

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This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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