7% Mortgage Rates Are Here To Stay, Bank of America's CEO Warns As Warren Buffett Sells Out Of This Homebuilder Stock
First-time home buyers worrying about housing affordability face two obstacles: high home prices and high mortgage rates.
Home prices have continued to rise in over 85% of U.S. cities, and according to a recent Redfin report, a homebuyer must earn $115,000 to afford a typical home, which is $40,000 more than the average American household earns.
One way for this gap to correct is for mortgage rates to go down, but this is something that Bank of America Corp. (NYSE:BAC) CEO Brian Moynihan does not foresee anytime soon.
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Compared to historical mortgage rates today's rates might not be so bad, Moynihan said. People likely will get used to mortgage rates of 6% to 7%, given that mortgage rates were over 18% in the 1980s during the Federal Reserve's inflation-fighting efforts, he told CNBC.
Given this backdrop, Moynihan argues that today's mortgage rates are more normal than during the unorthodox rate policy in the 15 years after the Great Financial Crisis, saying, "For 15 years, we had no real rate structure, you know, rate structure in the United States and around the world."
For consumers hoping to catch a break with lower mortgage rates, Goldman Sachs signals caution as well.
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It extended its first expected rate cut past the Fed's May meeting after Federal Reserve policymakers have pushed back on the market's expectation of rate cuts this year, citing a need to see more consistent evidence of inflation stabilizing around the 2% target.
However, lower mortgage rates influenced by future Fed cuts aren't the only way buyers can hope for a lower rate.
U.S. consumers have been able to afford homes by purchasing newly built houses from home builders that have been willing to buy down buyers' mortgage rates to allow them to afford them. Homebuilders cannot wait for the Fed to lower rates to continue their business in the same way an individual homebuyer might be more willing to wait.
About 75% of homebuilders are offering mortgage rates lower than a homebuyer could get from a traditional financial institution, according to John Burns Research & Consulting. Whether the trend of homebuilders aggressively buying down mortgage rates to encourage home sales is set to continue is up for debate, but one big investor has shaken up his portfolio regarding homebuilder stocks.
Warren Buffett's Berkshire Hathaway Inc. has recently been optimistic about the prospects of U.S. homebuilders, disclosing its stake in three major companies in the second quarter of 2023: D.R. Horton Inc. (NYSE:DHI), NVR Inc. (NYSE:NVR) and Lennar Corp. (NYSE:LEN).
However, Buffett switched course quickly on D.R. Horton, which was once his largest homebuilder stock. In the fourth quarter last year, Berkshire Hathaway announced it sold out of D.R. Horton while keeping both NVR and Lennar.
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