Housing: Fed’s Powell ‘gambling with at least 20% of population’s capital,’ expert says

SitusAMC Managing Director Tim Rood joins Yahoo Finance Live to weigh in on the state of the housing market and how Fed policy has impacted mortgage rates.

Video Transcript

JARED BLIKRE: US pending home sales fell in November, with contract signings declining in all four major regions, according to the latest data from National Association of Realtors. But with mortgage rates falling throughout December, is a housing market rebound coming in the new year? We're joined by SitusAMC managing director and former Fannie Mae executive, Tim Rood, to discuss. Tim, thank you for joining us here today. Your overall assessment of the US housing market. It's been depressed this year. What's the outlook for the new year?

TIM ROOD: Yeah, well, good to see you, and happy new year. So 2022, I think we often forget, came in like a Lion King. I mean, we were crushing it on every level in terms of existing home sales, record low interest rates, record low originations, even record-- near record, for the last cycle at least, existing new home construction. So I mean, everything that we talk about when you start hearing things that say are down below, that's off of a trend that was incredibly high.

So I think it's important that as we hear like, oh, my God, month over month so-and-so is down, or that's down, it's really down just in terms of its trajectory. You're still going to end the year, both from an existing home standpoint and from a new home standpoint, fairly strong in the sense that you still had home price appreciation in both categories. The volume of each is down, 39% for existing homes, and then for new homes, it's down around 15% or 20%.

But to your question, that leads to that flywheel going into 2023. What you're seeing now, the best leading indicator that we have is that mortgage originations for purchasing a house are down about 40% for the year, right? So we're ending at a low point, 40% lower than it was last year.

We kick that into what would be pending home sales, which is the next leading indicator. It's down about 35%. So you can see you're heading into 2023 softer. And it's really up to really Jerome Powell, I would say, the large part right now. How's his hand? Is he feeling lucky? Are we feeling lucky? Because he's gambling with at least 20% of the population's capital right now.

SEANA SMITH: So, Tim, 2023, lots of debate out there about whether or not it's going to be the great housing bust, how significantly the market is going to weaken. Is it safe to say that won't happen? And then I guess, going off of that, if it doesn't happen, in terms of the drop that we could see in home values, what does that more specifically look like heading into the new year?

TIM ROOD: It's a great question. Look, it's something everyone's trying to figure out. And I think the easy way to look at it is probably following the track of interest rates. If interest rates continue to go-- or go start going back up towards, say, 7%-- right now, they're at 6 and-- 6 and change, 6 and 1/2%, it seems to be that if they get closer to 7, that's when things really start to break down. As interest rates got back to the lower sixes, you saw far more buyer enthusiasm and energy.

So if interest rates go up, this is that one track. You're going to ultimately see prices soften. And you're going to see the amount of inventory increase because there'll be fewer transactions. I don't take softening as a 15% to 20% collapse for a number of reasons we can go into later if you have time.

But the other trajectory, which is really where places like Fannie Mae, Freddie Mac, the National Association of Realtors, people who are really in the know are saying, hey, look, we're seeing a trajectory that looks closer to 6%, 5 and 1/2% interest rates. If that were to happen, then you're going to have far lower amount of inventory because you're going to have more sales happening. And you're going to have property values that are going to seem much more sticky, and in some places in the country, particularly on the East, probably go up in 2023.

JARED BLIKRE: And when it comes to the supply of new home sales, where are we? Because it looks like there might have been a bit of overbuilding. But I think we're still at historically lower levels, at least in terms of the historical range. Can you update us on that?

TIM ROOD: Yeah, the problem is that it's certainly gone lower. Look, builders learned a lesson in the 1980s. They learned them in the mid 2000s, that when they get over their skis and they overbuild basically for anticipated demand, then whatever the exogenous event is, the black swan event, they found themselves overcommitted with too much production, too much unfinished production, too much inventory. And quite frankly, a fair number of them ultimately go out of business.

This time, however, as soon as they start seeing interest rates go up and demand go down, they pull back. You saw permits drop by 70% this year by the end of this year. So they pulled back. They're like, guys, let's just get rid of the stuff that we've got in the pipeline. Finish building it. Let's get out of this. Put our hands in our pocket and see what 2023 has to bear. So don't expect the builders to bail us out of this predicament, I think, in 2023.

JARED BLIKRE: All right, we've got to leave it there, but great information there. Tim Rood, thank you.