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Housing: It’s ‘a tough time’ for home buyers, analyst says

Deepa Raghavan, senior equity analyst at Wells Fargo Securities, joins Yahoo Finance Live to discuss the housing market, rising mortgage rates, as well as home and rent affordability.

Video Transcript

AKIKO FUJITA: Well, mixed signals from the housing market this morning. New US home construction unexpectedly surged in August to its highest level in two months to 12.2% while building permits fell 10%. This data comes as rising interest rates and high construction material costs continue to affect the housing market. Let's bring in Wells Fargo Securities equity analyst Deepa Raghavan. Deepa, good to talk to you today. Let's start with that unexpected spike that we saw in construction, certainly a reversal given the steep fall that we saw back in July. What do you attribute that to?

DEEPA RAGHAVAN: So right now, first of all, thanks for having me over. I definitely attribute the spike in starts right now to the multifamily. It's not the single family that actually saw the big spike up. Single family was up only 3% month on month. It's the multifamily that was up 28%, 29% month on month basis. So much of it is being driven by that at this point in time.

And just to put it in perspective, the 1.5 million starts that we are talking about is just the cycle average. It's not the 2 million, 2.2 million we saw during the height of last cycle peak. So 1.5 is average. Another data point I will give you is just talking to the field and some private builders, the expectation is for those starts, especially the single family starts, to fall maybe as much as 20% by end of the year.

AKIKO FUJITA: I want to get to the single family in just a bit, but picking up on that point about multifamily units, apartments, any gains there, certainly good news when you consider just that the crunch we're seeing in inventory and the rents that are rising at a very rapid rate, how sustainable do you think this is?

DEEPA RAGHAVAN: So yeah, rent is definitely-- rents have gone up pretty tremendously, right? But it's always good to have inventory. And I think it's from that perspective that you want to see the multifamily growth is people still need places to live, either in single family or multifamily. If multifamily is the only option, even at higher rates, higher rents, that is what it is.

AKIKO FUJITA: So let's talk about the single family homes. You say in your notes here that we're in the very early innings of a housing downturn. And while you're quite skeptical of this ability to basically, any kind of momentum to keep up here, you think it could be even worse than what you're forecasting right now. I mean, what are you seeing right now?

We realize mortgage rates are going up. Certainly, we've seen the demand easing in the housing market. But talk to me, talk-- walk me through your thesis.

DEEPA RAGHAVAN: Sure. So June is when many builders will tell you that they have seen an inflection in the housing market. Their metrics started going down from June. What we will tell you is July and August, those metrics actually took a turn for the worse. In talking to people on the field, it feels like cancellation rates have spiked tremendously.

The builders have just now started to get on the price competition bandwagon. Incentives or discounting has increased tremendously. Just to give you an example, in some communities, in a median community, builders are incentivising or discounting to the tune of 15% of list prices. Now, in some communities, although it is still at the margins, it could be as high as 25%. Now, those are some aggressive discounting numbers. Price competition looks like it is just starting to get heated, and therefore, we feel we are still in the early innings of this down cycle at this point in time.

AKIKO FUJITA: I will tell you, from a buyer's perspective, I was out looking at some homes last week, it is incredible to see how quickly this has turned. You're looking at homes being on the market for much longer, prices dropping at a rapid rate. From a buyer perspective, does that change the tide even with higher rates? Is it still a good time to be looking?

DEEPA RAGHAVAN: It is still a tough time to be looking, and the reason is if you think about it from a bias perspective, the mortgage rate has almost doubled since the beginning of the year. And what that means is probably paying a lot more than he had initially planned beginning of this year. If you find the inventory that you like, you're paying a lot more.

Another side of that psychological argument is would you want to wait for prices to fall further even if you could afford it? So I don't think right now it makes-- it could actually stem the bleed. The buyers definitely have been hurt. The mortgage rates are actually trending higher. There's a lot more pressure coming in from the Fed, granted that we-- some of it is priced in. But you know, I don't know how we get to see any respite between now and Super Bowl.

Traditionally, we are going into the seasonally slow housing market, and the buyers tend to really come out during the spring season. So 2023 spring will be more telling, but between now and spring, I just think it's pretty tough for the buyer out there.

AKIKO FUJITA: More telling as in you think that's when things are going to turn because it's traditionally that season where buyers start looking again or nothing says right now between now and then that the Fed's actually going to pull back on rates, right?

DEEPA RAGHAVAN: Yes. That's a good point. So if rates, the 30-year mortgage rate stays at six point-- I mean, stays above six, even heads to 6.5, I think it's going to be a very tough situation for the buyer. But if the 30-year mortgage rate somehow is at six or below, it gives enough time between now and spring for the buyers to recalibrate their affordability levels and probably then step in the market at that time.

You know, but at this point in time, even spring looks tough. 30-year, again, mortgage rate is just one of the metrics. There's a lot more that needs to actually go in the buyer's favor. We'll see, but right now I don't see any inflection happening in the coming spring.

AKIKO FUJITA: Yeah, I'd imagine inventory expected to get tighter, too, with sellers now saying, well, maybe I don't need to put my home on the market right now. Wells Fargo Securities senior equity analyst Deepa Raghavan, appreciate your time today.