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'The housing market may not be as hot in 2021 as it was in 2020': Economist

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Lending Tree Chief Economist Tendayi Kapfidze joins Yahoo Finance Live to discuss the rapid rise in home prices despite COVID-19.

Video Transcript

[MUSIC PLAYING]

ZACK GUZMAN: Welcome back. Home prices are on the rise with many beginning to mention the bubble word. And we are seeing home prices outstrip the 20% jump in incomes and 30% jump in rental prices. So maybe that could be true with home prices up 60% since 2012. But just because prices are moving higher doesn't necessarily mean we are in a bona fide bubble.

Here to discuss that with us is our next guest, Tendayi Kapfidze, who is the chief economist at Lending Tree joining us now, alongside Yahoo Finance's Jen Rogers here to chat all of this. And Tendayi, I mean, when we look at it, you guys were kind of posing this question in a new survey. And I was surprised to see about four in 10 Americans believe that we are on track to maybe crash here, the real estate market set to crash at some point in 2021. How realistic is that in your mind?

TENDAYI KAPFIDZE: Yeah, I mean, I'm not surprised that people have that expectation, especially considering the rapid increase we've seen in home prices over the past year and just how busy the housing market got, despite COVID. I do think those expectations are a bit overblown.

You know, there's a lot of factors that are supporting these high housing prices. One is really low mortgage rates. Another one is a lack of inventory. And the third one is, you know, a bit of shifting in the mix of things that people desire from their homes.

But I think, fundamentally, when you look at the state of the housing market, let's say, compared to 2007, 2008, which is what a lot of people think of when they think of a bubble bursting, it's in a far healthier place. Lending standards have been much tighter over the past 10 years or so than they were prior to the last crisis.

And then, importantly, the government has much more experience, and there's much better place to do interventions within the housing market to kind of stem any potential bubble popping, things like forbearance and loan modification. So while I do expect that the housing market might not be as hot in 2021 as it was in 2020, I wouldn't expect that we're in a bubble that would burst.

AKIKO FUJITA: One of the things that struck me about your study is this number you had. A quarter of consumers no longer want to live the big city life. We've been talking a lot about this shift that has happened during the pandemic. How much of that do you think is a temporary shift? And how much of that you think is a permanent one?

TENDAYI KAPFIDZE: Yeah, I also think this kind of-- this idea of people leaving large cities is a little bit overplayed as well. We actually looked at the data, and what we found is that most people who move, move within the city that they already live in. That's about 85% of people who move. And then about another 15% move from one big city to another big city.

The proportion of people who move from a large city to, say, a small town is really small, at around 2%. And so, you know, this idea that people are leaving large cities in droves for smaller towns, one, is not borne out by the data, and, two, is just not realistic because those small towns really just don't have the inventory or the capacity to absorb all these people who live in large cities right now. So it may be something that people are expressing as a desire because of the coronavirus. But it's certainly not something that people are acting upon in a meaningful way.

JEN ROGERS: Following up on Akiko's question, just the geography of what we're seeing across the country, I mean, looking around what's happening in New York versus what's happening in South Florida, could we be seeing microbubbles certain places? Maybe it's not overall, you know, going back to '08, but South Florida is seeing huge appreciation in the last few years.

TENDAYI KAPFIDZE: Yeah, absolutely. I think the possibility of microbubbles is certainly higher than the possibility of an overall bubble within the United States. And I think South Florida also has a very kind of special risk. People are getting more and more concerned around, you know, risks of climate change, risk of flooding, and so on.

So a lot of these homes that are getting bid up in a place like South Florida, if we continue to see bigger and bigger weather events, I think that could certainly put a damper-- you know, excuse the language-- put a damper on some of that hot growth in areas that are at risk from climate change, whether that be floods or fires, as we see in some of the western states.

ZACK GUZMAN: Yeah, and Tendayi, I mean, another one of those markets, you know, Texas might be overlooked, as we've learned in prior discussions on real estate. But Austin certainly another one of those markets seeing a big boost here. In terms of that bubble question, though, I feel like there's a point to be made about maybe the pull forward of some of the levers that get pulled in easing some of the buying demand here.

And I imagine, you know, Goldman Sachs out talking about the real estate impact of interest rates may be rising sooner than some people expect. What's the impact on first-time buyers that you would see come through there if we do see rates rise sooner than expected? And what are maybe some of those first things you're watching to see if we're in a cooling off period?

TENDAYI KAPFIDZE: Yeah, I mean, it's a bit of a mixed bag, right? So the challenge with, you know, really low interest rates is that they kind of get capitalized into home prices. And they end up with home prices rising faster and faster. And we've seen home prices rising since 2012 about three times the rate of income.

And that is not great for first-time home buyers because they don't have another house that they already own to sell to enable them to buy the next house. And so, you know, if we see rates kind of start to increase sooner, and that puts a damper on home prices, strangely enough, that might actually be a little bit helpful to first-time homebuyers.

But the biggest challenge for many first-time homebuyers is really not the interest rate. The bigger challenge is the down payment. And I think this is where some of the policies that have been proposed by the new Biden administration might be helpful, including a $15,000 down payment assistance that comes up front, instead of as a tax benefit a year later, as historically these things have been done.

So, you know, there's some hope I think for first-time homebuyers in some of this new legislation that might pass from the Biden administration. But the current state of the market makes it really difficult for them because there's so much demand, and there's so many wealthier buyers, I guess, who are in the market as well.

JEN ROGERS: You seem pretty optimistic overall and with our ability to deal with anything that comes our way. Do you think we're done with the boom bust cycle in real estate?

TENDAYI KAPFIDZE: No, I think a bit of it is, you know, that's kind of the nature of the market. You kind of-- you know, you get periods of acceleration and deceleration. You know, the question of whether it's a bust really has to do with whether you get widespread price decreases, right? I think, certainly, we're going to get a deceleration in home price increases, you know, if not this year, then most likely next year.

But whether we get a bust, I think it's quite unlikely. There's other demographic factors also that are supporting the housing market in terms of millennials getting into their peak home buying age. Gen Z is coming up hard on their tails, also starting to get into home buying. So there's a lot of fundamental demand in the market. And then the swings up and down are a lot of them driven by interest rates, and then, you know, unusually, last year, this pandemic effect.

AKIKO FUJITA: Tendayi Kapfidze is chief economist at Lending Tree. It's good to talk to you today.