This Is What an 8% Mortgage Means For the Housing Market

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, did you see that National Association of Home Builders survey?

Joe Weisenthal (0:22)

It was bad. I actually didn't see the number, but I think it was bad, right?

Tracy Alloway (0:26)

Yeah, it wasn't great. So the sentiment of the home builders is falling, which is kind of noteworthy, because towards the beginning of the year, we saw a little bit of a pickup, a little bit of optimism, and we did see some new construction, and that started to feed into overall housing supply. But fast forward to October 2023, rates are going up again, and it seems like this is finally starting to have something of a negative impact on how home builders are actually feeling.

Joe Weisenthal (0:59)

Well, we are recording this, as you say, rates going up. We are recording this on October 17th.

Just today, we have the 10-year yield back over 4.8% right at the time we're talking. That is basically at the highs of the cycle. We had dipped for a little while.

And yeah, you mentioned that home builder sentiment number, and that was like the interesting story with housing has been resilience, right? Resilience in prices, et cetera.

Even the home builders had like picked up a bid in the second and the first half of the year, but we were actually really heading back down not far off those lows that we saw at the end of 2022

Tracy Alloway (1:34)

Yeah, and meanwhile, mortgage rates, which of course are sort of priced off of treasuries, are getting close to 8%.

That's the highest level, I think, since something like 2000 So we have to discuss this. And the last couple of times we dug into the housing market, we spoke with Morgan Stanley's US housing strategist, Jim Egan. In fact, we spoke to him for the first time in October of last year in an episode that we called, here's what 7% mortgage rates will do to the housing market. So now 12 months later, we're just gonna do, here's what 8% mortgage rates will do to the housing market.

Joe Weisenthal (2:08)

Here we go, yeah, we just got 1% at a time. We'll just keep having Jim back on.

Tracy Alloway (2:12)

That's right. But actually on a serious note, one of the reasons we like talking to Jim Egan is that he was a bit of an outlier when we first had him on. When mortgage rates were shooting up, a lot of people were predicting this really big housing crash.

And meanwhile, Jim was forecasting a slight dip basically followed by a rise, which is exactly what we saw happen. And he was kind of early to that whole lock-in idea that you see everywhere now. So the notion that people who are lucky enough to have locked in mortgages when rates were at essentially zero are now going to be very reluctant to move and take on a higher mortgage cost.

And so that basically helped provide a floor on prices. So we like talking to Jim and we thought, even though we spoke to him once over the summer, given that rates are shooting up even more, we should definitely do it again.

Joe Weisenthal (3:04)

I'm excited about it. Let's do it.

Tracy Alloway (3:06)

All right, Jim, welcome back to the show.

Jim Egan (3:08)

Thank you so much for having me. It is an honor to be asked back.

Tracy Alloway (3:12)

Third time's the best time. Okay, so we've spoken a lot to you about what higher rates mean for housing in the short term. And as I said in the intro, you were early to that whole lock-in idea, but I guess let's just jump into it.

If we assume that higher for longer is here to stay for the foreseeable future, what does that mean for housing over a longer term horizon?

Jim Egan (3:37)

Sure, and I think that the way that you're characterizing this is important, right? We have to disaggregate the short term impact of this most recent increase in rates versus a longer term impact here. Now, what I will caveat some of these comments by saying is that currently we're not forecasting rates to remain at these elevated levels for the longer term. We do think that the 10 year will come down through the middle of next year, and we think that mortgage rates will come down as part of that. But given what's happened to rates, that is a very important question right now.

And I think this starts with affordability, right? We talked about affordability on this podcast when I was able to visit. Previous to this, and one of the things that characterized 2022 was just an historic, at least through the history of our data, a decline or a deterioration in affordability that we hadn't seen. Year over year changes were three times worse than what we witnessed during the great financial crisis. And earlier this year, affordability stopped deteriorating at those paces. Some shorter term affordability metrics, if we look at it over three months, over six months, affordability was actually improving.