Homeowners hesitant to sell, enter new mortgage: Economist

In a slew of US housing data, housing starts, building permits, and housing completions all fell below estimates in the month of March. Middleburg Communities Chief Economist Brad Case sits down with Yahoo Finance to expand upon the significance of these latest housing prints and what they mean for housing market inventories.

"I think it's difficult for the single-family owner-occupied market because so many people don't want to get out of their current mortgage because they plan to buy a different house and they'll be moving into a different mortgage, so it's going to take a long time for the single-family market to get out of that," Case explains, also discussing how Federal Reserve officials are watching shelter costs and rent inflation.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Luke Carberry Mogan.

Video Transcript

- New data out this morning showing that new home construction slipped in March. Housing starts falling 14.7% on a monthly basis, while building permits fell just over 4% from the month prior. Now, this comes as homebuilder confidence remained flat in April, amid rising mortgage rates.

Joining us now, we want to bring in Brad Case. He's Middleburg Communities' Chief Economist. Brad, it's great to have you here on set. So interesting numbers coming out on the housing front today. What does this tell you? Is it a bit surprising? And I guess, what does this tell you about maybe this recovery that we've seen losing a bit of steam?

BRAD CASE: Yeah, it was surprising to me. I expected the starts numbers to be up. The permits, I wasn't surprised by the fact that they were down at all. What we've seen in news residential construction is an increase in the employment of people working on these projects, and that's why I expected a bump up in starts, we didn't see that.

More generally, what we've seen over the past few years since the COVID pandemic started, it was first a huge surge in demand, and then a huge surge in supply, and then that is pretty much over. What, what surprised me this morning was that it was such an emphatic this is over. I expected it to be just a more moderate pace of construction from here on out.

- What does that set up for the spring buying season that we were expecting to see really commence?

BRAD CASE: Well, I think it's difficult for the single family owner occupied market because so many people don't want to get out of their current mortgage, because they plan to buy a different house, and they'll be moving into a different mortgage. So it's going to take a long time for the single family market to get out of that.

For companies like mine that are engaged in the rental housing side of the market, it's actually good news because it means that people who, who are trying to make the choice between buying and renting their next place to live, they're, they're not finding what they want in the owner occupied market, so they're very happy being in the rental part of the market.

- Brad, let's talk about the rental side of the market, specifically the rental component of the CPI print. Because it has been improving coming down just a bit, clearly not at the rate that the Fed would like to see. What does that then do? I guess, how do you think the Fed should look at this number, is looking at this number? And what does it ultimately tell us, if anything, about maybe inflationary pressures to the upside still?

BRAD CASE: So the most important thing to keep in mind is the Fed is not fooled by the fact that the CPI rent component or shelter component is coming down so slowly. It has been coming down more slowly than I and other people expected. And that is something for the Fed to pay attention to. What that means is, that the demand for housing is stronger than anyone thought it would be. That's both the owner occupied, but as we were saying, there's a plug-in that part of the market, and it's also the rental side of the market.

The Fed is not going to make their decisions based on, based on the shelter component of the CPI. They're going to make their decisions based on what's actually happening out on the market for rents. And what happened is, after a big surge because of that demand surge during COVID, rent growth over the past year has been very close to zero.

It's actually, again, been a little bit stronger than we thought it was because demand has been stronger than we expected it to be. So that's actually, that's of course, good news for anybody who's providing housing, whether it's rental or owner. But, but the CPI rent component is not going to drive the Fed's interest rate decisions.