U.S. housing: Homebuilders try to find silver-lining between mortgage rates

U.S. housing data revealed permits and home completions rose in August, while housing starts dropped month-over-month and year-over-year. Jessica Lautz, National Association of REALTORS Deputy Chief Economist and Vice President of Research, provides insights into homebuilder and consumer sentiment, between supply conditions in the housing market and mortgage rates above 7%.

"At least we're not looking at last year's really strong demand, that frenetic activity that was going on in the real estate market where we had actually had 5.5 offers for every... [listing]," Lautz states. "If you're a consumer you have an opportunity to tour a home. — you are buying it at a higher interest rate, you may have the opportunity to refinance that in the future. So that could be the silver lining."

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Video Transcript

- All right. Well, it is day two of a busy week in housing data. Building permits and housing completions were both up on a monthly basis in August, but housing starts, well, they took a dip. Construction on new homes falling to the lowest level since 2020, a sign that higher mortgage rates are a growing challenge to the sector.

For more on this, we want to bring in Jessica Lautz, National Association of REALTORS deputy chief economist and vice President of research. Jessica, it's good to see you. So let's talk about some of the pressures that we're seeing in housing, clearly higher mortgage rates, rates above 7% proving to be a real challenge for the sector. Any relief in sight?

JESSICA LAUTZ: I mean, I think that we all hope that there is going to be relief in sight, but it's really difficult right now. It's difficult for consumers, but it's difficult for builders to bring products to market. I think seeing that housing permits were actually up could be some indication that even builders are hoping that interest rates will go down in the next few months because there's about a two-month lag between permits and starts.

BRAD SMITH: It's interesting because we had heard from the NAHB yesterday, the chairman, Alicia, who was saying that the two month decline in builders sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power here. So for buyers who are continuing to evaluate this market, Jessica, what silver lining could they possibly take away from even this week's Fed meeting and any commentary that they hear about policy decisions from this point?

JESSICA LAUTZ: Yeah. It's really hard right now. I mean, I will say for a silver lining, if you're a consumer out there and you're trying to purchase a home, I mean, at least we're not looking at last year's really strong demand that frenetic activity that was going on in the real estate market where we actually had 5.5 offers for every existing that was listed. If you're a consumer right now, you have the opportunity to actually tour a home.

You are buying it at a higher interest rate. You may have the opportunity to refinance that in the future. So that could be the silver lining. As we expect the interest rates will drop, that's going to mean more demand in the housing market for this limited inventory. I wish that housing starts had gone up because we really truly need that demand, we need that supply right now.

- Jessica, what level do you think rates need to fall to in order to see a little bit more inventory in order to move some of those potential sellers to actually list their house?

JESSICA LAUTZ: Well, when we saw that rates went into the 6's, we actually saw that housing starts went up. So it's possible that builders would actually feel more comfortable if housing-- if interest rates went down, that housing starts would go up at that range. It's also very possible that consumers themselves will feel more comfortable in that 6% range.

Once you're above 7, where we have been for the last several weeks, I think it makes it very difficult for a consumer to imagine jumping into the homebuying market, even among home owners who are locked into lower interest rates as well.

BRAD SMITH: Jessica, what is the likelihood that builders would begin reducing prices in order to spur some of that demand?

JESSICA LAUTZ: Yeah. And that's something that we're already seeing, is we're seeing that they were having great buy downs, they were definitely having incentives to bring into these new housing products. And so consumers were actually finding that quite attractive, and we saw that new home sales were actually up. So it is possible that some builders are still going to offer those types of incentives to bring consumers into the market, especially if they've already dug in and that ground is already gone, they're going to want to bring a consumer into that house.

- Jessica, are you seeing a little bit of a different picture when you looked at various parts of the country because, yes, the Northeast there's not a heck of a lot of homes for sale, but we have seen a little bit more activity when you look to the South and when you look to the Midwest?

JESSICA LAUTZ: Yeah. Absolutely. And those have always been pretty attractive places to build. Traditionally, we do see more building in the South, that traditionally has been a place to do so. In the Midwest, I would say that that also has been very attractive for consumers in recent years as we look at affordability, and a lot of people have relocated into those sunbelt areas.

So building there not surprising as we look at where it is attractive to move to right now. A lot of people are attracted not just to favorable job markets, good weather, but also, where are my friends and family, where is my support system, especially if I don't have to be close to a workplace right now.

BRAD SMITH: That's what I'm trying to get all my friends to move to Seattle with me, Jessica, maybe one day.

- You can't us here.

BRAD SMITH: Yeah, I won't actually. But at the end of the day, Jessica, when you think about how this is also continuing to perhaps overflow into the renters market right now. Is there any persistence that we're seeing from the housing market starting to-- and not just starting to-- but continuing to put pressure on renting prices?

JESSICA LAUTZ: Well, as a native Seattleite, I will say that I will be first to move there. But yes, as we look at multifamily, that's a big concern because we do see that homebuilding is down there. What I would say, too, is that when we look at last summer, we know that there were multiple offer situations when it comes to existing home sales, but there were for rental units.

And that's a big concern as we know that there's a lot of young adults who are trying to have their own place, not to have a roommate, not to live with family. They want to find a rental unit, and affordable rental unit is very hard to find today.

BRAD SMITH: All right. Let's perhaps do this next interview from Elliott Bay out there sometime, Jessica. Much more environmentally-friendly, perhaps some crisp air, we'll get all the foliage, I guess, at this time of the year start to come out. Jessica, great to have you on here with us today. Appreciate it.

JESSICA LAUTZ: Thank you.