U.S. housing starts dip ‘not unexpected’, economist says
First American Deputy Chief Economist Odeta Kushi joins Yahoo Finance Live to discuss the housing market, rising mortgage rates, home builder confidence, and the rental market.
Video Transcript
- Another big story that we're watching this morning is also housing data. We got a slew of new numbers this morning, housing starts and building permits. Fewer houses started than expected on the starting side. Building permits, we got more than expected. So this really doesn't entirely point to a brake check on the housing market.
But when you consider we got NAHB data yesterday, homebuilders saying they saw the largest-- second largest decline on record, that's not because of higher mortgage rates. A lot of that is also because of the cost inflation that led to a lot of pauses on construction. So you would think it's a complicated picture, right? More supply might mean that prices could come down because there's just more buyers able to absorb-- or rather, supply able to absorb those price increases. But a very noisy market right now.
- Well, also it's the outlook, right? I mean, the thinking here is that, yes, I mean, if we have more inventory, prices come down, but the rates are higher, so the monthly mortgage rate that homebuyers are looking at are going to cost more. And then there's the question of where is the economy headed and is that demand going to continue. If that's not the case, we might see housing starts go down even more.
- Well, and this is the kind of song and dance that, you know, mortgage rates and the homebuilders and the homebuyers are all playing right now. So let's get a little bit more of an expert analysis on what's going on in the housing market with Odeta Kushi, First American Deputy Chief Economist, joining us live this morning. Thanks so much for hopping on.
Want to ask you about what your read was on the data. Again, fewer houses started than expected, but also more building permits than expected. Does that tell you anything about what's happening here? Is the housing market still trying to readjust in this rising rate environment?
ODETA KUSHI: Housing starts are behaving just as we expected them to, particularly after seeing that builder sentiment data come in, seven months in a row of declining builder sentiment. Builders are responding to declining affordability, predominantly. So those housing starts numbers coming in low was not unexpected. Permits coming in higher than consensus, that was primarily led by multifamily permits. So the rental market continues to show some strength.
But by and large, the housing market is slowing Homebuilding is a leading indicator of housing activity, and the housing market is slowing. The federal tightening-- the Federal Reserve tightening is having its intended effect on this very interest rate-sensitive sector.
- Yeah, Odeta, when you talk about declining affordability, I mean, certainly a concern for builders, but also buyers, as well. I'm curious how you're looking at the demand picture in light of rising rates, even if the inventory is starting to expand a little.
ODETA KUSHI: So affordability is actually down 50% year over year. And that's really being led by the rapid increase in mortgage rates. There remains a deep-seated desire for homeownership, and from a long-term perspective, the demographics support more homebuying demand. But there's a portion of potential homebuyers that simply cannot afford to buy in this market.
And then there's another portion of homebuyers that are hesitant to buy in this market, simply because of the uncertain economic environment. Buying a home is the largest financial decision that someone will likely ever make, and you need consumer confidence for that. And certainly, right now, there's a lot of uncertainty in the economy.
- Odeta, when you look at the overall kind of just slew of home-related data, right, I mean, it's very different, and it's not as binary as maybe the Fed would like to see in inflation reports, right? You want to see inflation go down. You don't want to see it go up.
Whereas if you're looking at these starts and permits, it's not as clear if higher or lower means something from the Fed's perspective. So how do you think they're reading these reports? Are they saying, well, the housing market is too hot, we've got to get more aggressive, or things are cooling, demand's softening, maybe that's good for us to do a little bit of stepping off the pedal in terms of rate increases?
ODETA KUSHI: I think the Fed's looking at some of the higher frequency measures. So we look at mortgage applications data, and we're seeing that that is coming down. So certainly demand is softening in the housing market. Refinances are down, of course. And so, you know, the Fed is having its intended effect on the housing market, but for prices, house prices, those tend to be downside sticky.
So it will be a while before we see the softening in demand reflected in house price moderation. We're seeing it a little bit, but again, house prices are downside sticky. Home sellers would rather withdraw from the market, rather than lower prices. And so it will take some time before we really start to see some strong moderation in house price growth.
- You know, Odeta, in terms of buyers, you know, we keep hearing that those buyers who are still in the market and looking are increasingly moving away from the 30-year fixed mortgage to an adjustable rate. And I wonder, when you look at that, the shift that's happening, what concerns does that raise for you?
ODETA KUSHI: I know that, you know, ARMs were-- adjustable rate mortgages, otherwise known as ARMs-- are really-- they tend to trigger memories from the Great Recession, but today's ARMs are not the same as those in the mid 2000s. And so for some buyers, ARMs offer a lower interest rate and allow them to afford that home. And so it could be a viable option for some potential homebuyers, particularly first-time homebuyers.
- And then I want to ask just about the rates themselves on 30-year fixed. We've noticed that there's been a reversal of that over the past few weeks. Kind of ticked back up again, but kind of unclear where we go from here.
The big argument is that we still don't know exactly where the Fed is going to be able to stop on its interest rate hikes. That, perhaps, is a reason behind some of that volatility there. Do you have a call on where we could see the 30-year going in terms of the rate and what impact that would have in terms of the overall trends we were discussing in the last few minutes?
ODETA KUSHI: Interest rates are notoriously difficult to forecast, particularly the 30-year fixed rate mortgage, because it's tied to the broader economy. And so you have recession fears, and they might be playing against inflation. And so I think that we'll probably see rates go a little bit higher.
A lot of those rate increases from the Fed have already been priced into that 30-year fixed rate mortgage. I don't think we'll see the 30-year fixed rate mortgage go much lower. So it'll bounce around a little bit.
