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Housing: Higher mortgage rates driving ‘a great market renormalization,’ economist says

Angi Chief Economist Mischa Fisher joins Yahoo Finance Live to talk about real estate market growth, mortgage rates, inflation impacting homebuilding labor, and construction projects as more homeowners opt to remodel.

Video Transcript


RACHELLE AKUFFO: Welcome back. Mortgage rates reversing their recent downward trend, with the 30-year fixed rate rising again to 5.51% today, according to Freddie Mac. Now, this follows consumer prices hitting another 40-year high at 9.1% in June. Mischa Fisher, Angi chief economist is here with a new report on how homeowners are faring in this difficult environment. So, Mischa, what can you tell us? What are their primary concerns in this environment?

MISCHA FISHER: Hi, Rachelle. Thanks for having me. There's a lot of things going on. The primary concern, I think, for people in the market right now is, what's the best way to get a good value on the dollar? And what we're seeing right now in our research that we just released this morning is that the overall market grew by about another-- a little over 10%, about $62 billion over the last year. So that's still pretty robust growth for home improvement and home maintenance spending.

And the reason why is because if you're out there shopping for more space right now, if you've got a great mortgage right now at 2.8% to 3.1%, and your option on the market for switching to a new place is a 5 and 1/2% mortgage, all of a sudden, that overall calculus of, do I want to move, or do I want to stay in place and remodel, the remodeling just gained a really big competitive edge.

And so that's why even though, traditionally, you've seen home service in terms of maintenance and improvement, in particular, tied to the housing market, they are two distinct markets. And so even though you're seeing a slowdown in the housing market, which is very predictable, given what interest rates are doing, the home service market is going to behave a little bit differently right now, because the calculus for consumers is pretty different, as they're shopping around for how they want to get more space.

DAVE BRIGGS: Of course, in the face of that is the cost of materials spiking. Have they peaked, and how have they impacted home services?

MISCHA FISHER: Yeah, certainly, the cost of materials is a big part of it. They have peaked. If you look at the height of the inflationary period for materials, it was over 30% growth year over year. We actually have new price indices out this morning that show that it's down to about 10% inflation in construction materials. That's a 1/3 drop just from last month where it was about 15%.

So they are coming down quickly. This is another area where home services is kind of distinct from home construction. And home construction, the materials are a big, big part of your sticker price. In home services, the labor is a big part of your sticker price. And the labor inflation rate hasn't been nearly as high as for construction materials. So it is coming down. That will help the consumer on the backend. But overall, people have been spared the worst effects of inflation in home improvement and home services because the labor rates have not risen as much as the construction materials.

SEANA SMITH: Well, Mischa, what about the fact that it's just hard to find those workers? We've been talking about the labor shortage for so long. This is an area of the economy that has certainly been affected when you take a look at those housing numbers. Where does that stand?

MISCHA FISHER: Seana, you raise a really, really important point. And overall, we saw-- and we were tracking this before the pandemic. And you're right. People were saying, hey, this is a crisis level of labor scarcity in terms of the market. And that got about 10% worse at the peak of COVID. So that's why we think that this 10% growth rate is actually a great market renormalization. At 20%, that's more than tradespeople can keep up with. That's certainly more than you can train under the best of circumstances. It's more than manufacturers can keep up with and supply chains.

So I think that those pressures are going to ease somewhat in this coming year as demand normalizes, because 10% is still-- that's still a hot market, but at least, it's a sustainable market, whereas 20% is just more than most markets can handle, independent of a pandemic.

RACHELLE AKUFFO: So as homeowners are looking for people to provide some of these services, which are the biggest growth drivers that you're seeing within the home services categories?

MISCHA FISHER: There's a couple of growth drivers. So on the consumer side, we've got demographics as one of the biggest growth drivers. We're all sort of primed to think about this in the context of the last recession, the Great Recession.

And at the time, the typical millennial was early 20s through middle school. Right now, they're late 20s through 40. And so that's a very, very different stage of life in terms of you've got the largest generational cohort hitting those peak family formation years, hitting their peak earning years, getting their careers in stride. And so that's really driving one side of the market.

On the flip side, we still have baby boomers, who are the second largest cohort. And they're all starting to hit the stage of life where kids are well out of the house, and they're trying to decide, do I want to age in place, or do I want to downsize? All of that requires a lot of work in terms of either transitioning a home to a new buyer or in terms of making a home sustainable for somebody who's in those 80 plus years.

And then, on the flip side, you've also got a lot of trends culturally around the value in the home. If you look before the pandemic, we were tracking it, and people were saying that the main reason they were doing projects were financial reasons. They wanted a good ROI, as they increased the size of their home and they padded their net worth.

Right now, the primary reason why people are remodeling, over a quarter of remodelers are saying that it's the lifestyle that's driving the reason for it. And so that's a big driver because it means people are more willing to pay for premium product. They're more willing to pay for some of the new technology that's coming out.

You can get pretty fancy with a kitchen and a bathroom right now in terms of all of that's coming online and available. And all of that is complex and requires a lot of work to get it done. So those are all pretty fundamental drivers in terms of what's really pushing the market.

DAVE BRIGGS: How about the greater trend towards working from home? How has that changed the remodeling industry?

MISCHA FISHER: That's changed it for a couple of reasons. The first is, I think it's giving a lot of people, a lot of segments of the market, a more predictable pathway to saying, I'm going to be in this house longer. And that means I get better value about spending on quality products. If you're only going to be in a house for one to three years, your calculus on how much you're willing to spend on that really nice kitchen countertop or that premium flooring, you're less willing to spend on that, because you're not really going to enjoy it for its whole life.

But if you look at, well, because I work remote, I can be in this home for 10 or 20 years, and I really like this location, then all of a sudden, you're more willing to spend. So that certainly impacts it. It's also impacted in terms of overall space needs. If you think about how much space you need when you're at home more, you just need more of it. The kitchen in particular has been serving triple duty for a lot of families and a lot of households. But people have also needed more office space, more home gym space, because they're just spending more time at home in that sense.

SEANA SMITH: Mischa, what about on a regional basis? Certain areas of the country where this is more prevalent people aren't moving because of the high cost of homes compared to others?

MISCHA FISHER: The big regional variation comes in terms of what labor costs and in terms of what the overall improvement market looks like. So you've seen a lot of variance in terms of growth in house prices around equity gains. And equity gains can really, really act as jet fuel for this market. That's why we're pretty bearish about the market-- or pretty bullish about the market, rather, because consumers gained $6 to $7 trillion in new equity over the course of the pandemic. But that does vary a lot by region.

If you bought a house just before the pandemic in Phoenix, then you're doing a little bit better if you bought it just before the pandemic in Chicago. In both places, you're doing great, but the overall price increases have been different in those two areas. And so, the overall leveraged return on that down payment investment that the typical consumer has gotten really varies. And so I think that's the most interesting regional variation in terms of the finances that we see.

But there are also regional variations in terms of project need. If you're talking about people moving to more temperate areas where you can sort of live year round-- so we've seen a lot of that, people moving from the Northeast and the Midwest to the South and the Mountain West-- then all of a sudden, that outdoor living space, you get to use it year round.

And so one of the most interesting rises in terms of trends we've seen over the last couple of years is the importance of things like outdoor gardens and the outdoor kitchens and grilling stations, pergolas, arbors, pools. All of those things have risen in terms of their proportional use because we've shifted people from cold climates to warmer ones.

SEANA SMITH: Mischa Fisher, thanks so much for joining us, Angi's chief economist.