Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss the U.S. housing market with Cortland Chief Economist, Brad Dillman.
ALEXIS CHRISTOFOROUS: The housing market not showing any signs of slowing down. We've got existing home sales for August up 2.4% to a seasonally adjusted rate of six million units. Let's bring in Brad Dillman, Cortland Chief Economist, to discuss this. So Brad, I don't know, I feel like we're getting some mixed signals here on housing. I mean, we've got these strong existing home sales numbers coming off of a strong July as well, but yet, home construction surprisingly slid more than 5% in August after three strong months, so what do you make of the housing market at the moment?
BRAD DILLMAN: Well, when I look at existing home sales, they came right in on expectations, so that's certainly a positive. When it comes down to housing starts, you know, we have one month that kind of poses a problem. That's not the end of the world. We do know that some of the construction materials costs and some delays in getting certain materials has been a bit of a problem, and I think we may see that turnaround in the near future. We do see the homebuilders do talk about lumber in particular as being a little bit of a challenge for them. But when we look at this existing home sales print, it still came in right on expectations, so that's nothing to complain about.
BRIAN SOZZI: Brad, I continue to be blown away by a lot of these numbers. It's not just homebuilders, it's Home Depot, it's Lowe's, it's just all these companies that are tied into this ecosystem, but aren't we in a recession? Who, what people, what households are driving some of these mindblowing sales results in housing pretty much across the board?
BRAD DILLMAN: So we had seen the first time homebuyer, and this is according to the NAR Existing-Home Sales report, the first time buyer has come down a little bit, but the investors have also come down a little bit in terms of the proportion of the overall existing home sales. So what that means is really we're seeing the move up buyer, as we call it in housing, taking up a larger proportion of the overall market. So earlier in the year, we probably saw some people, you know, sell their first home, maybe go rent for a bit, and then now they're turning around and they're charging up some of these existing home sales. Again, when we look at the unemployment, we've got a lot of people who are already in white collar jobs who haven't really been affected by current conditions in the recession that we're in.
ALEXIS CHRISTOFOROUS: Is there any sign that inventory is going to start to loosen up, we're going to have some more homes come on the market? And I'd imagine that there have been some price wars because of such tight inventory.
BRAD DILLMAN: Yeah, there's anecdotes over the price wars, and the NAR's metric of unsold inventory month to month has actually declined yet again to just 3%, so that's a really low figure. Other metrics put out by the government for months of supply show a similar dynamic, and that's this decline in inventory that's listed for sale. And so yeah, I wouldn't be surprised there's going to be some price wars out there, but the interesting thing is if we look at the Case-Shiller National Home Price Index, year-over-year appreciation is slowing, so we kind of need these low mortgage rates to sort of keep the ship in order as it were.
BRIAN SOZZI: Brad, if the recession hasn't slowed the momentum down in housing, what would? What derails housing, to a certain extent, looking out over the next six months?
BRAD DILLMAN: I think an increase in long-term interest rates, namely, and there's a lot of work that's been put out on this. But right now, you've got 10 year inflation expectations that are much higher than the 10 year nominal treasury rate. And so what we're looking at in that circumstance is basically a negative real 10 year interest rate in real terms, right?
So when we tack on mortgage rates on top of that, you're looking at mortgage rates that are extremely low, and they do have the potential to increase if treasury rates kind of right-size and get back to normal. That's to say, you know, a zero real term treasury rate or even something more positive. And if mortgage rates do go up as a result of that, you're definitely going to see housing affordability reduce on the margin and probably a re-channeling of demand, housing demand, generally, back to multi-family.
BRIAN SOZZI: All right, we'll leave it there. Brad Dillman, Cortland Chief Economist, always good to see you.
BRAD DILLMAN: Likewise.