Residential Magazine

Odeta Kushi, First American Financial Corp.

Interest rates have cooled but not stymied demand

By Jim Davis

Mortgage interest rates rose so quickly this past year that it’s been like a splash of cold water on the housing market. Homebuying demand slowed almost everywhere as rates grew from less than 3% to more than 6% for a 30-year fixed mortgage.

Still, the fundamentals of the market haven’t changed, said Odeta Kushi, deputy chief economist for First American Financial Corp., a national title and settlement company. She expects elevated home purchase demand to continue for years.
“From a long-term perspective, demographic tailwinds favor homebuying,” Kushi said. “The largest generation in history — millennials — are continuing to age into their prime homebuying years. When the economic dust settles, there will still be quite a bit of demand.”
Kushi spoke to Scotsman Guide about her expectations for the housing market in the short and long term. She also discussed whether she expects a recession, how student loan debt may factor into the homebuying equation and why builders remain so pessimistic.
Do you believe we’re in a housing recession?
There’s no single definition for housing recession. Certainly, we’re seeing a slowdown in the housing market and that’s by design. The (Federal Reserve) is intentionally trying to slow the economy to tame inflation. Prices are decelerating, but they’re still positive.

Mortgage rates at or above 5% are kind of our new normal in the near term.

Have there been markets where prices have declined?
We’ve seen strong deceleration across many markets, but we have not seen negative year-over-year prices. That’s not to say it won’t happen, particularly as rates continue to go up. At a national level, there still is this fundamental supply-demand imbalance, which should keep house price appreciation positive.
Do you expect that there will be a house price crash or recession?
I don’t expect a house price crash; I think more of a moderation. The last couple of years have been the exception, not the rule, in the housing market. Double-digit house price growth is not sustainable.
We haven’t found a way to escape the business cycle, but the question is when and how bad. Recessions can vary; they come in all different shapes and sizes. The Fed’s top priority right now is to tame inflation. And that might come at the cost of a recession.
You have called the historically low mortgage rates ‘golden handcuffs.’ What do you mean by that?
The majority of homeowners have locked into historically low mortgage rates, below 3%. That is nearly three full percentage points below the current level for mortgage rates. Those homeowners who have locked into these low rates have a very limited incentive to sell.
Are the 5%-plus interest rates just the new normal or will they come down?
For rates to come down significantly or to get back to where they were at their low point over the pandemic, that kind of implies a recession to me, because the Fed is so focused on taming inflation. Mortgage rates at or above 5% are kind of our new normal in the near term. Still historically low. We need higher mortgage rates to bring house prices to a more reasonable level.
Do you believe that skyrocketing rents will lead to more first-time homebuyers despite higher costs of borrowing?
One of the biggest hurdles for potential first-time homebuyers is saving for a downpayment. You have skyrocketing rents, and then you have high home prices and higher mortgage rates. Student loan debt forgiveness might help for those potential first-time homebuyers to save for that downpayment. That might be a boon to homebuying, but that remains to be seen.
Why are builders so pessimistic if there’s been such a shortage of homes built for so long?
We are not out of the woods yet when it comes to supply-chain headwinds. Builders are still grappling with material shortages, a lack of such things as garage doors or windows, to really bring that home to the market. At the same time, they’re grappling with higher interest rates that caused demand to pull back. So, builders are having to offer incentives to potential buyers to kind of bring them back.
Fundamentally, the housing market is still undersupplied, but we’re at a point in the cycle when affordability declined so quickly that it really caused demand to pull back very quickly. That’s what builders are having to deal with right now. ●


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