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Mortgage rates turning housing market into 'world of two buyers and two sellers': Expert

SitusAMC Managing Director Tim Rood joins Yahoo Finance Live to discuss the housing market amid current mortgage rate projections, inflation, the Fed's interest rate stance, and the environment for homebuyers.

Video Transcript

- All right. Fed Chair Jerome Powell telling us housing has weakened significantly. And it appears there is more weakening ahead with the third straight 75 point hike. Mortgage rates today increasing for a fifth straight week to 6.29% on a 30-year fixed. With more on housing, we're joined by Tim Rood, SitusAMC managing director. Tim, nice to see you. So mortgage rates, where are they headed? And what does it mean for the correction that the Fed chair talked about?

TIM ROOD: Well, I mean, we all heard the expression, I mean, the punch bowl, I mean, Powell is obviously taking the punch bowl away from the housers in this market. So I was thinking about it this morning. If you were trying to buy a house last year or you were taking out a $450,000 mortgage, that same payment right now would only buy you a $315,000 mortgage.

So, I mean, that doesn't even take into consideration the fact that the properties have appreciated pretty measurably since then as well. So, yeah, it's a world of two buyers and two sellers. You have your discretionary buyers and sellers, which tend to be on the luxury market. They're pulling back the reins a lot faster than the non-discretionary buyers.

The luxury ones are looking at, hey, look, can I raise my family in this dumpy one point whatever million house and I have to move up? No, I'm fine perfectly here. But for the folks who are in the non-discretionary, say a young family in Hoboken, New Jersey in a 700 square foot apartment, man, those guys are thinking I've got to get out of here. So those ones-- the lower end of the market is certainly a lot stronger. Both are softening. But the lower end is definitely stronger.

- Tim, you're hitting close to home here. I have a family of four in Hoboken. I know what you're talking about. But so when we talk about rising rates here, now we are well above 6%. To what extent is this going to exacerbate the supply problem that we have?

TIM ROOD: Yeah. The problem is is that sellers get pretty indignant about these things, right. So instead, you have the people who are non-discretionary sellers who are lowering their prices on the properties that they have listed. But then you have the others that are like, you know what, I'm just going to, again, pull back the reins. I'm not going to list my property now.

The market's terrible. We'll be fine. And it doesn't help, of course, that the low interest rates-- right now, you have about 6 and 1/4, 6 and 3/8 of a percent a 30-year fixed. 90% of the population homeowners have a rate below 5%. And then 2/3 actually have a rate below 4%. So some of its financials. Some of it is just you're kind of in an emotional, a visceral reaction. It's like, what? I'm not going to buy a house and pay 6% when I've got a 2 and 3/4. We'll be fine. Do an addition, something like that.

- Keeping a lot of buyers, potential buyers on the sideline. Mortgage-backed securities came up yesterday. And Powell, of course said, nope, we're not even close to beginning to trim them from the balance sheet. Once they do so, what's the further implication on an already cooling market?

TIM ROOD: I just think inventory is going to dry up. I mean, inventory is up. But you can see it's up from a very, very low base from where it has been. So you're up maybe 15% from the historical low. That's hardly time to celebrate. And now as sellers are backing off, then you're going to have more and more-- you're gonna have fewer and fewer homes on the market. So it actually makes the price points sticky because you still have a ton of demand even with the higher interest rates.

But you don't have enough supply. Then you look over to the builders. And the builders are like, hey, man, I've seen this play out before. In the early 1980s, when I was a loan officer in the early 1990s, if you were doing a loan for a builder, you just had to ask, hey, what year was your bankruptcy anyway? Because everybody went bankrupt because they just couldn't believe that the interest rates would stay up that high.

They overbuilt. And they all got washed out. Well, builders are a heck of a lot more savvy. And they've seen this playbook before. So they're just halting building right now. And they're slashing prices on whatever they've got because they've got all the carrying costs, all the tail risk associated with it. So don't expect them to help out next year.

- What's the timeline on all this? I guess, how long do you think it's going to take in order for us to see a significant decrease here in both rental prices and also in home prices?

TIM ROOD: Boy, renters is a difficult one. You're seeing the momentum kind of slow down there. But I kind of think about renters right now as like those are those non-discretionary buyers in a lot of senses because they're sitting around like they're in like a Bond movie or something like that and the water just keeps rising and rising, right. So you've got inflation costs. You've got rent costs that are going up 10% to 15% a year.

And then finally, it's just going to kill them. I mean, financially. So they have to do something. So I think that you're going to see-- 2023 is going to see a correction in probably 50% of the markets. Moody's just did a great study on that and arguing you're going to back off first and foremost on some of the luxury markets. But, mostly, the markets that had the most migration.

So you saw a ton of migration to Phoenix and Tucson. You saw a lot of migration to places like Tampa and Miami, Las Vegas. A lot of those markets-- Boise, Idaho. That's going to be a mess. A lot of those destinations for people migrating out of their current address or zip codes, those ones are going to get hurt bad. I think you're going to see a sticky markets, resilient markets in like the Rust Belt, the Northeast, some of the Southeast. Any of those markets that have property values that are below the national average should be pretty strong.

- It will be interesting to see what happens in some of these pandemic boomtowns. That is for sure going to be the case. All right. Tim Rood, thanks so much for joining us. SitusAMC managing director.