Existing and new home market trends are ‘clearly dovetailing’ with interest rates: Expert

SitusAMC Head of Government & Industry Relations Tim Rood joins Yahoo Finance Live to discuss the latest trends in the housing market, the increase in new home sales, and the slowdown of mortgage rates.

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SEANA SMITH: We're seeing some positive signs for the housing market. US new home sales climbing for the third month in a row. New home sales increasing 2.3% in December to 616,000 units sold. In a good sign for buyers sidelined by higher rates, mortgage rates continuing to fall, declining to 6.13%. And mortgage application payments are down nearly 3% in December.

Our next guest has some big predictions for the housing market in 2023. We want to bring in Tim Rood, SitusAMC AMC head of government and industry relations, joining us now as part of our real estate report brought to you by Intuit TurboTax. Tim, it's great to see you here. So it looks like things are trending in the right direction for housing. Those doom and gloom predictions, are they simply wrong?

TIM ROOD: Well, look-- look, we already said the Cinderella story, so I'm already kind of dating myself, so I'll say it this way-- everybody loves a turnaround story, right? The underdog. The epitaph was written on the housing market ad nauseam for the last six months, and you're starting to see signs of both the existing home market and the new home market are coming back. It's not a miraculous thing. It's not an immaculate thing. It clearly is dovetailing right with interest rates, which have fallen about a percent over the last four months after that record high for this cycle and the 7-- plus 7% range come last fall.

So a lot of people were on the sidelines, a lot of people looking over the fence waiting for the opportunity to get into this market. And this drop in interest rates is really giving them the opportunity.

DAVE BRIGGS: I don't want to be the pessimist here, Tim, because I am an optimist when it comes to real estate. But if you're locked into a mortgage, high 2's, maybe low 3's, which most are, is a rate north of 6 going to get you off the sidelines? How low do you think they're going to get this year?

TIM ROOD: It's tough. Look, you're hitting right on the main point, which is you have this locked in effect. So if you're a seller, a prospective seller, I think it's close to 90% have got a interest rate in the 3's. So if you're looking at the sticker shock of a 6% or so, there's both the financial and there's also a psychological barrier to actually doing that.

What you do see is some of the higher end coastal areas where people are actually selling those expensive houses and then going into migrating to areas that are more affordable, lower cost homes and whatnot, and buying those properties with cash. You're seeing about 30% of purchases right now are done with cash, and that means that it's about 10% higher than it had been historically. It doesn't bode well for the first-time homebuyers, though, who have to compete with those all-cash offers with contingencies around financing and home inspections and whatnot. So it's good in one sense, but bad for the first time homebuyers.

SEANA SMITH: Tim, what's your view just in terms of the hottest areas where you think we'll likely see the most activity? It seems like time and time again, people are talking about the sunbelt area, just more specifically, that Southeast region as well. Is that where you're expecting to see the most activity?

TIM ROOD: Yeah, look, the things that are driving, Seana, the affordability are generally about four things. You've got the employment markets. You've got the climate. You've got the-- they're looking at suburbs. They're looking at more space, green space, bigger space. And of course, they have to be affordable. So I mean, those are the markets that tend to be-- historically, has been in the Southwest, but you're seeing a lot of action, particularly a lot of building, in the Northeast and the Midwest, where land is cheap. And again, these economies can afford those sort of opportunities for prospective buyers.

DAVE BRIGGS: Homebuilder stocks have been popping a bit to start the year. Will that continue?

TIM ROOD: Boy, those guys took it hard last year. I mean, it was a brutal market for them. There's no doubt, coming. I think you've had the confidence rate for homebuilders has been dropping for 12 months. It's pretty brutal. So they're coming back. Look, come the first time first of this year, you're starting to see home mortgage purchase applications go up. You're seeing new home sales purchases go up. All of those things are particularly positive.

But there's so many things going on. The government's got its hand in a couple of places and probably needs to get it in a couple of other places. And I'll just hit you with the high notes, and you can tell me where you want to go. If you think about the new home market, which is important because it's 20% of GDP-- yeah, you want to stave off a recession, of course, but also, if you build more supply, you automatically have a market-based solution for bringing down the cost of housing, apartments or single families.

So as you do that, that ultimately-- that impacts the CPI, the inflation, right, because 30% of inflation or CPI has to do with shelter. So you need to get more supply out there. Unfortunately, the government has been focused on the demand side of the equation so heavy and so long that they're now about 90% of all originations are guaranteed by the federal government.

And they've been doing that because, first, they wanted to focus on tax incentives for home purchases. Then they wanted to focus on subsidizing interest rates. Then they wanted to expand access to credit, which has all been great. But if you're not focused on the supply side, then all you're doing is creating more demand. And without a more supply, those sort of subsidies end up ignoring the benefits to higher prices that ignore the benefits to the sellers. So there needs to be something done there.

And also, the government can step in and do things to change input costs. Material costs, skilled labor availability and costs, land costs, and big one has been regulatory compliance costs, which is almost $90,000 before you even drive a nail into a board or a brick into the ground. Those are the kinds of things that the government really needs to be focused on.

DAVE BRIGGS: But are you concerned that that's a bit of fighting the Fed, putting more stimulus out there, kind of what got us into this mess?

TIM ROOD: Yeah, they've got some cognitive dissonance going on in the federal government right now, where you've got, obviously, Jerome Powell, who's trying to raise the cost of home ownership. So that that will ultimately back off demand, but at the same time, now you've got the federal government-- Biden just came out with a plan that says this is their blueprint for a bill of rights for renters. And the idea there is that look, we're going to put rent controls in place. We're going to try to prevent evictions from happening and things like that, that those are working at cross purposes in terms of what the government is trying to do.

One side is trying to make it more expensive to bring down inflation, and the other one is dealing with the reality that says, my god, my constituents are having to pay 40%, 50%, 60% of their income for their house payments, their rent payments, and all of those things. So they're trying to suppress it through these things like potentially rent controls, which are ill fated for anybody who's ever read an economics book. It's a terrible idea that is well intentioned, but I could go on with some of the consequences in the event that you have the time.