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Homebuilder confidence rises in April amid rising lumber prices

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Jeff Taylor the Co-Founder & Managing Partner at Mphasis Digital Risk breaks down what's next in the housing market.

Video Transcript

- Homebuilder confidence rising in the month of April, despite those record high lumber prices. We want to talk about this and what we could expect from the housing market with Jeff Taylor. He's the co-founder and managing partner at Mphasis Digital Risk. And Jeff, it's great to talk to you. When we take a look at that homebuilder confidence number, I think a lot of people were expecting that record high lumber prices to weigh on confidence this month but that doesn't seem to be the case. Why is that?

JEFF TAYLOR: It's this dynamic we're in right now. So it's up 1% but homebuilders have an incredible amount of runway over the next couple of years as far as being able to maybe 13% or more of the existing home sales sold. It's because they know they have all the business out there. Yes, commodities continue to be a little bit higher. That's been the issue for the last 18 months. It will continue to be the issue.

But they know they've got solid home buyers. They know that millennials are extremely active in the marketplace right now. And they know that as quickly as they can build the homes, they're going to have buyers. So overall, home builders segment is still one that is my longest best, the thing I'm most confident about over the next 24 months in the housing market.

- Jeff, we just heard from a previous guest about the net interest margins and banks being still under pressure. And banks have tightened their lending standards, even with this pent-up demand by people who might be qualified for a loan making it harder to get the loan. And if housing prices are at all time highs, why two years out, do you think the homebuilders still have a good run?

JEFF TAYLOR: So I think there's two issues let's talk about there. Why right now have they put more overlays and they tightened some of the credit policy. A lot of it still is the policy that we have because of the pandemic. Still there is the, do I want to lend to somebody who could still potentially opt in day one into a forbearance program. So I think that's a big consideration still in the market today.

But besides that, the risk. One thing that we are, we're the largest residential mortgage services provider. So we do a lot of the lending, the process, under, and closing on behalf of big banks. So they have very healthy pipelines and they're willing to lend but the thing the most careful about right now is am I lending to a borrower who is not going to immediately go into forbearance and that is something that has been top of mind for over the last year.

- Jeff, home prices, we've seen them climb pretty dramatically over the past year and clearly, that's not a surprise to anyone when you see the demand that's out there for homes. But is this a trend that you see continuing here at least for the year?

JEFF TAYLOR: I mean, I do. You want to hear a crazy number? There currently only-- last year there were 700,000 residential homes available for sale that weren't under contract this month. This year there's 320,000 homes ready for sale. It's 50%. And here's another dynamic putting into place.

The biggest drivers of the housing market are the millennials and that's defined by age 27 the 41 years old. But the difference with this group that's actively looking to buy houses right now is unlike the baby boomers who had probably bought that first house in their 20s and the late 30s or 30s, early 40s, looking to buy a second house, the millennials were renters so they're looking to buy it but they're not putting a house on the market as they're looking to buy their house.

So you've got this group that were renters looking to buy, no new inventory coming into the market. That's another factor really creating this pent up supply demand and I don't think we're going to see any relief there probably for at least the next year or so.

- So when we talk about this shortage of housing, in big cities where prices for apartments have fallen, in some places like 20%, do you see a recovery in purchases there? Would millennials consider apartments? Especially those with families. I mean, it doesn't matter if it's an apartment in Chicago or New York, an apartment still smaller than your house.

JEFF TAYLOR: You know, I do. And it's because I think obviously, the pandemic and people moving out to the suburbs to have more space for the kids, the home offices. But look, the great cities of this US, San Francisco, Chicago, New York, you just named a few. Those are incredibly resilient cities and I do think that you'll see those apartments, the pricing, probably in about a year down the road level off to where they were, probably call it January of 2020.

So it might take another year or so but I absolutely think that you're going to have a recovery for prices there. Just too great of cities and too great places where people want to live and we come out and we're all vaccinated, I think it's going to be a big driver.

- Jeff what about the impact that forbearance, homes that are in forbearance right now, that's about 2 and 1/2 million homes in forbearance, the housing market, despite the fact that it's in really good shape, that could potentially change the dynamic. How do you see that playing out?

JEFF TAYLOR: Such a great question. So let's think about this. In the financial crisis it was driven by all these houses that were in foreclosure that just really kind have decimated the housing market and home prices for several years. Here is a nuance difference of this. You have 2.7 million houses in forbearance. 95% of those houses have positive equity.

So that means that if the person in that house either now or six months down the road or whenever they decide to opt out of forbearance, they're most likely going to put that house on the market and sell it versus having it foreclosed on. That's a completely totally different dynamic than what we saw 10 years ago. So versus having 2.5 million houses hit the market where nobody wants it, which would be devastating to the market, 95% having equity, that's going to be a completely different dynamic going forward as far as people selling their houses, putting a few bucks in their pocket. If their lives have been dramatically changed and going to rent so they can save up enough money to get back into the homeownership avenue.