First American's Odeta Kushi points to life events, pent-up demand and gradual price rebalancing
After a steady increase in mortgage rates over the past few weeks, there has been a little bit of relief this week.
A selloff of tech stocks has flooded into the bond market, leading to a nearly 20-point plunge in the 10-year Treasury yield on Thursday. While bond yields climbed a bit on Friday morning, mortgage rates should see a slight decline from the mid-7s where they have settled in recent weeks.
The industry is looking for signs of positivity amid tough market conditions. One veteran economist believes that even though significant rate relief might not be in the cards in the near future, other market factors might help get things moving once again.
Odeta Kushi (pictured top), vice president and deputy chief economist at First American, said rates are unlikely to fall far, but the housing market has more support than the rate environment suggests.
"I don't see a scenario where rates move materially lower at this point," Kushi told Mortgage Professional America. "Structurally, I think there's a higher floor at this point for many reasons. I still think there are some reasons for cautious optimism."
Why she's cautiously optimistic
Home sales have run below normal for several years, leaving a backlog that Kushi expects to return gradually. She said the pandemic pulled some demand forward, though the gap is larger than that effect.
"Those aren't sales that will never appear," she said. "I think they'll slowly reappear in the market over time, and that's aided by all the demographics that we see still have a bunch of millennials aging into their prime homebuying years, a lot of them on the sidelines waiting to sort of jump in."
People keep buying homes when their lives change, whatever rates do. She pointed to the oldest millennials, who are now in their early 40s and moving into the move-up stage of buying.
"Even in a really tough market, we're still getting 4 million annualized sales," Kushi said. "I think that's the life events we’re talking about. Even in a tough market, an affordability- and inventory-constrained market, you're still seeing this sort of lower bound of 4 million sales. And that's not nothing."
Home prices are adjusting city by city. Some once-hot metros have slipped while others keep climbing.
"It's not a house price crash, right? It's been a gradual decline," she said. "We've seen in places like Dallas, there's been year-over-year price declines. A lot of the formerly pandemic darling markets are now seeing some house price moderation or declines. But then in Chicago, a top-performing market, 5 to 6% house price growth. But those price declines do help to bring affordability into better balance, even with higher or elevated rates."
What could change
Kushi said volatility is very challenging for the market right now. Some of the jumps in mortgage rates over the past several weeks have been especially large compared with the last couple of years.
"You get the folks that say, ‘Well, mortgage rates are actually at historical averages,’ which is true," she said. "A rate from 7.5% to 8% is the pre-pandemic historical average for the 30-year fixed rate, but it's not the level, right? It's the change. So the change we had in 2022 was very rapid, and nowadays it's the rate lock-in effect and whether it gets worse or it gets better, right? But I think what we're all looking for is stability and predictability, so that buyers and sellers can plan."
The Fed raised rates by a quarter point last time in an effort to bring inflation down. While markets expect a pause next week, another hike is expected in December, and the Fed’s own projections don’t show inflation returning to its 2% target until 2029.
"I think it's going to be a very slow and steady recovery," she said. "Certainly, along with the MBA folks, we're not expecting a big jump or a big return to pre-pandemic normal, but there's quite a bit of pent-up demand out there. I think what we're looking for is stability, slow but steady affordability improvements, which we've been getting for most of this year."
Kushi sees room for rates to drift lower if the war overseas ends and energy prices ease. A big drop would carry its own warning.
"Whenever we talk about lower mortgage rates and faster declining mortgage rates, I always put the asterisk, like, well, something's happened, right?" Kushi said. "If that's the case, the labor market's deteriorated, we're in a job loss recession, something to that effect would cause mortgage rates to sharply decline, and we don't want that either."
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