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Why homebuyers should be cautious despite low rates

New home sales rose 4.8% from July, and 43.2% year-over-year. Lending Tree Chief Economist Tendayi Kapfidze joins the On the Move panel to discuss.

Video Transcript

ADAM SHAPIRO: Let's talk about the need for space, because a lot of people, not only working from home, are looking for either an existing house to buy or even a new home. Sometimes it's because you're the father of triplets, somebody like Tendayi Kapfidze, who's Lending Tree's chief economist joining us now to talk about what's happening with housing sales, but also the fact that if you're about to refinance your mortgage, starting December 1, that's going to become more expensive.

But Tendayi, it's always good to see you. Let's start with home sales. Median price around $310,000. It's going up. And we know new home sales are surging, once again, more than 43% in August. What advice do you have for people who might be trying to get a house but worried about the stampede to do that?

TENDAYI KAPFIDZE: What I would say is that if you had a plan to buy a house this year, say, and maybe you had postponed that plan because of COVID and the upheaval in the economy, you probably want to follow through on your plan. I would caution against rushing in to buy a house, because you see everybody else buying a house. If that wasn't originally your plan, you want to proceed very cautiously.

Of course, rates are very low, so it's advantageous to purchase a home right now because of low rates. But low rates are also driving up prices, which is eroding some of that advantage. So you want to make a very measured and thoughtful decision here, as you always want to do when you're buying a house.

JULIE HYMAN: Hey, Tendayi. It's Julie here. So that new home sales number is pretty eye-popping when you look at the year-over-year number. So the annual pace of new single-family homes 43% higher in August than it was a year earlier. Now, is that a question of pent-up demand from earlier in the year being pushed out, or is that also just straight-up demand here?

TENDAYI KAPFIDZE: It's a combination of both. So you definitely have a lot of demand that's being generated by the low interest rates. But you also have this pent-up demand from earlier in the year that's been pushed later in the year.

And a thing that happens-- let's get into some of the technicalities of how they calculate these numbers-- is a thing called seasonal adjustment, which is what they do to try and smooth the numbers out so that they're comparable over the entire year.

Now, traditionally, your highest home sales months are early in the spring. And August is still a pretty high month. But you're kind of on the tail end of the home sales season at that time. And because we've had these sales pushed late in the year, but we're still applying a seasonal adjustment as if it was a regular year, that's bumping the numbers up.

So a very clear example is today's new home sales number, where if you look at the unadjusted data, they were unchanged from July to August. But if you look at the adjusted data, they were up 4.8%. That 4.8% is entirely because of the seasonal adjustment process. So you want to be a little cautious interpreting these numbers, because they're not the usual type of numbers we'd get in August.

ADAM SHAPIRO: Tendayi, starting December 1, refinances backed by Fannie Mae and Freddie Mac are going to have to pay an adverse market refinance fee, roughly 1/2% of the total loan amount. In some cases, at the higher end, depending where you live, that could add an extra $3,800 to the overall cost of a refi. Do you expect this to have a negative impact, or is this a nothingburger?

TENDAYI KAPFIDZE: I think it will definitely have an impact. It will probably boost rates by about 1/8 of a point, if you translate that fee into an interest rate. There's kind of technicalities of how you do that. But I wouldn't be surprised if they [AUDIO OUT] again. They tried to do it earlier. There was a huge outcry. And they may not end up doing it.

Part of it is that, I guess, Fannie and Freddie are looking at the profits that the mortgage lenders are making, and they say, well, we want some of that. So they're going to impose this additional fee.

BRIAN CHEUNG: Hey, it's Brian Cheung here. So that fee, in addition to a number of other market pressures, I think one being the Federal Reserve's commitment to keeping rates near zero for at least the next two years, in addition to people probably being discouraged by the asset prices themselves, how expensive homes have got as listing prices around the country really go up-- does that mean that we should expect an alleviation of some of this buying or demand pressure for right now, especially now that we're headed into this often quiet winter season? Or do you still expect it to be quite elevated through the end of this year?

TENDAYI KAPFIDZE: I think it's really difficult to say. I mean it's such an unusual year, both in terms of the economy and in the housing market in particular. I think as long as you have the Fed committed to low rates, and they're driving these mortgage rates lower, that's going to create a lot of demand. A lot of people are going to look at those rates and say, that's really attractive.

We think rates could still fall by almost another 30 or 40 or 50 basis points. We could get rates as low as 2.3% if you look at the spread between the 10 year treasury and mortgage rates and take it back to pre-COVID levels. So there's a lot of attraction for people who are looking to acquire assets. There's a lot of attraction for people who have been thinking about buying a house and are looking at these rates.

And some of this is really fundamental. If you look at the millennial generation, a lot of people are getting into those peak home-buying years. So even before these low rates, demographically, housing was set up really well, and these low rates have just added juice into that.

ADAM SHAPIRO: 2.3% is the headline, Tendayi. And I think we want you back as soon as that happens. Tendayi Kapfidze is always welcome here "On The Move." He's Lending Tree's chief economist. All the best to you and your family, Tendayi.

TENDAYI KAPFIDZE: Thank you.