Homeownership Becomes the American Dream Deferred for First Time Buyers

SPEAKER_1 (0:00)

For more on that, let's bring in our panel, Mischa Fisher, Zillow's Chief Economist, and Jeff Ostrowski, Bankrate Housing Market Analyst. Great to have you both on. Mischa, I'm just looking over the reaction to KB Home. I mean, they did beat on earnings and revenue. We've seen them see-saw around the unchanged line. The commentary was negative, but I can't say anything was particularly surprising to me in what was said on the call and in the report.

What's concerning here to you, even though we got a headline beat?

Mischa Fisher (0:31)

Well, so I mean, I think taking a step back and really looking at the macro is what's setting up the concern for a lot of people.

I think that's more broadly applicable to the entire housing sector, not just to any one particular builder. Right now, you've got pretty high overall interest rates interacting with home prices that have remained relatively flat year over year, but that combination of moving up in rates from the low sixes, now the low sevens, is really putting a break on overall demand conditions. And so, you know, when we're looking ahead at the fourth quarter, we had a pretty strong second quarter in terms of, or in second and third quarter in terms of overall existing home sales, but we're actually expecting the fourth quarter to go negative. So I think that's, you know, what's driving a lot of the concern across the sector.

SPEAKER_1 (1:17)

And Jeff, I mean, affordability remains the biggest obstacle here, the biggest part of the conversation when anyone's talking about housing. I mean, at the current rates, I mean, we've got the highest rates since 2024 We're north of 7% with home prices where they are. What needs to change here to pull some of these sideline buyers back into the markets?

Jeff Ostrowski (1:38)

Yeah, it isn't really a challenging market, not just for KB Home, but for first-time buyers. About half of KB's customers are first-time buyers, and it's just a really tough market for those folks. I mean, that combination of 7% mortgage rates and home prices is still at record highs.

KB was reporting their average home price is still in the 470,000 range, so all the other numbers have come down, but prices have stayed high. That just makes it difficult for buyers, and especially for the first-time buyers that KB is targeting.

SPEAKER_1 (2:12)

Mischa, you argue that the Fed raising rates could actually help the housing market recover by reinforcing confidence that inflation is under control. So if you wouldn't mind, take us through how that transmission mechanism works.

Mischa Fisher (2:28)

So I think right now, if you look at the overall market for the 30-year mortgage, and if you look at that medium to longer-term debt, a lot of investors in that space did not do very well in that area, looking back during the pandemic years. We had inflation that was significantly higher than those overall rates. So looking at what that's been doing to the market, you've seen rates rising independent of the Fed's announcement. We already had mortgage rates drifting up and 10-year treasury rates drifting up. So I think that what the market needs is a little bit more confidence, and that will give investors a little bit more demand. We'll come back into that market for 10-year debt, and as a result, we'll see more downward pressure put on mortgage rates coming out of it. So as painful as it is to see rates rising and to see mortgage rates higher, at some point, you need to have confidence in that area in order for the market price of that debt come down.

SPEAKER_1 (3:31)

Jeff, how are you looking at these sidelined buyers right now? Are they just waiting? Are they waiting for things to come down a little bit, for it to become a bit more affordable month to month? Or are you seeing an actual shift where they're making decisions that home ownership and affordability is not going to be an option for them, and seeing a more permanent shift to renting?

Jeff Ostrowski (3:52)

Yeah, I think it's really the former. I mean, every time bank rate does a survey, anytime anyone else does a survey, Americans still say that home ownership is very much part of the American dream. It's just that it's a dream delayed, a dream deferred for many Americans. Because of this combination of very high home prices, first-time buyers are dealing with things like student loan debt, credit card debt, and then mortgage rates above 7 percent are just really hampering a lot of these first-time buyers. So I think if either first-time buyers are going to have to get used to this idea of higher mortgage rates and higher home prices, or mortgage rates are going to have to come down, I think in the long run, the home ownership rate will stay high. I think Americans still want to buy homes. They're just taking longer to do that.