July new home sales rose 13.9% vs 1.4% estimated as the housing market continues to boom. Tim Rood, SitusAMC Managing Director weighs in on current market
- Housing sales continue to accelerate. We got July new home sales this morning. They were up by nearly 14%, to an annual pace of 901,000. Remember, new home sales a smaller section in the market than existing, but existing we've already been-- also been seeing some big increases. Also, we heard from Standard & Poor's the S&P CoreLogic Case-Shiller National Home Price Index was up 4.3% on an annual basis in June. So seeing increases in prices, increases in sales.
Let's make sense of all of this with Tim Rood. He is SitusAMC Managing Director. He's joining us from Washington, DC to talk about this. Formerly an executive at Fannie Mae, as well, so longtime mortgage industry veteran. So Tim, what do you make of these numbers here? We have this pandemic going on. We have what appears to be, from-- on an anecdotal basis-- personal experience included, by the way-- a bit of a migration. What are you seeing?
TIM ROOD: Yeah. Thanks, Julie. So I mean, you're seeing not just resilience, but you're seeing really unequivocal strength coming out of the housing market. It's a textbook Cinderella story. It took a huge pause in March and April, and it's come pretty much roaring back. And you know, it's this simple economic story. You've got incredible demand. Right now, you're seeing things like-- you know, we've always talked about the millennial population. They're coming, they're coming. Well, that eagle has landed, and now they're contributing to about 5 million households getting started in 2020. That's about 2 and 1/2 times the pace of 2019 and 2018. So it's pretty significant.
The other part of this has to do with interest rates. So interest rates have dropped 2% over the last two years, 1% over the last year, and it's aided the affordability of purchasing a home. Think about this way. Two years ago, your income would have bought you a $300,000-- or would've gotten you a $300,000 mortgage. Today, that same amount of income would get you a $380,000 mortgage. It's almost like getting a raise of $30,000 or $40,000. So it's having a huge impact in terms of the wealth effect and people feeling confident to buy.
The other aspect, of course, as you mentioned is, you know, there's more than anecdotal evidence that people are leaving the dense and expensive urban centers and looking to the suburbs, the exurbs, in terms of, you know, putting down roots, dealing with any of the risks of quarantine, social distancing and so on and so forth. So demand is actually up about 28% year over year.
JARED BLIKRE: Jared Blikre here. I wanted to ask you about the effect, if you're seeing any, on forbearance, and that kind of leeway just being reeled in here. We saw a lot of people who weren't able to make their mortgage payments or were afraid to were given extensions, and a lot of those are rolling off right now. Is there any indication of that in the data that you're seeing?
TIM ROOD: Yeah, no, it's a great question. And look, people are always trying to juxtapose basically the last housing crisis to what we're currently dealing with. You look at the last housing crisis, it was really plagued by three things that we don't really have going on today. And that will tie into the forbearance discussion. One, in the last housing crisis, you had a market that was terribly overbuilt, it was overvalued, and it was underpinned by fraud and speculation. Pretty bad combination. In this market, you've really got anemic supply, you've got pretty fair values, and you've got a book of business that was really underwritten to the most rigid credit standards. So it's a very different environment.
That's relevant because you look at the foreclosure or the forbearance issues, we're still trying to figure out what's going to be on the other side of the forbearance crisis, if you will. Fortunately, foreclosures usually follow not just an economic hardship, but also need to be coupled with a lack of equity. We clearly have an economic hardship for a lot of folks, 4 million or so that are in forbearance today, but you don't have the same issue related to equity. You actually have a substantial-- you have record-level equity, much less tappable equity, which is the amount that you can draw down if you just tap 75% of the home equity.
So it's a very different market. But again, it's still to be seen exactly what the other side of this forbearance crisis is going to look like, and politicians are going to have to weigh, you know, these things around looking uncharitable, which would, you know, reflect people with evictions and foreclosures or whatnot, and then just the reality is that you can't have a zombie housing market. You're going to need to find a way to get markets to clear. You want to do things in a way that's-- you know, default with dignity, and you spend a little bit more time, of course, this crisis focusing on taking care of those that are, you know, displaced from their homes.
BRIAN CHEUNG: Tim, it's Brian Cheung here. Everything you just said is acknowledging the hardships that homeowners and borrowers are experiencing right now. So then help me reason through why Fannie Mae and Freddie Mac had that price adjustment, where they added a 0.5% fee on the loan amount to the consumers' cost, both the agents saying that this is to shield on any sort of additional risk as a result of this pandemic. But it does seem a bit counterintuitive to be increasing these costs during this time. What's your response to that?
TIM ROOD: Yeah, no, that's a great question, as well. So the issue is, look, Fannie Mae and Freddie Mac are private companies. They're obviously in government-managed conservatorship. They need to build capital. They've got a capital framework that they're trying to satisfy to get them out of conservatorship. And then you throw on that you've got a pandemic, and all of the credit risks, default risks and loss associated with, you know, that book of business. They're taking the opportunity, and according to the CEOs, look, interest rates are already at record lows.
Margins, in terms of origination profit margins, are blowing out. So clearly, there's a little room to give. And if you can't do it now, when can you do it? If you can't raise rates at a modest amount, which is about an eighth of a percent of interest rates, you know, when you've already got rates below 3%, in order to build up, you know, really critical reserves, then when the heck are we supposed to do it? So I think as a-- you know, as instruments of public policy, it might seem a little tone deaf, but as private entities, it seems perfectly reasonable.
- Tim, I'm trying to figure out sort of what this housing cycle is going to look like, because it feels like we're right at the beginning of it, right? As someone who's been doing this for a while-- and I know that these times are unprecedented, et cetera, et cetera, but what do you think the next six months, a year, two years are going to look like for housing?
TIM ROOD: Well, all the signs point to a positive outcome for the housing market. The things that could derail housing would be, one, a resurgence of the virus and hospitalizations and more concerning deaths. A foreclosure crisis. So if you see these 4 million homes that are in forbearance today en masse defaulting and flooding the market with inventory, then that would be a problem. The other would have to do with interest rates spiking. And you know, you can't, you know, essentially create $8 trillion worth of liquidity and print another $3, $4 trillion worth of, you know, dollars out of thin air for stimulus and relief spending without having some inflationary impact. And you're already seeing that play out with the dollar. So you do run the risk that interest rates go up, and that would certainly clear the housing market.