What higher-for-longer rates mean for the housing market

JP Morgan Chase CEO Jamie Diamond is concerned about a number of risks to what he sees as a resilient US economy Diamond voicing some of those issues in a new shareholder letter out today he said the bank is prepared for interest rates going anywhere from 2% up to 8% or more so what question could that raise for mortgage rates here with more is Meredith Whitney CEO of Meredith Whitney Advisory Group and Meredith thank you for being here this morning I'm curious what you think a higher for longer rate environment could do to the housing market if we do see the Federal Reserve not only keep rates higher for longer but also potentially even raising interest rates further well that's a base case scenario that I'm assuming that rates stay higher longer so regardless of what the FED does to the short end I think uh long end rates stay higher for longer um uh so in terms of the housing market you know it has for the little activity that has gone on within the housing Market um it hasn't impacted the housing market that much so 38% of homes were um were bought with all cash last year um according to red fin uh and so you're seeing a lot of activity going on in the housing market regardless of where rates are um certainly if housing if rates come down you'd see uh you know more housing activity I think longer rates Drive uh longer higher rates Drive housing uh uh prices down um but that's in a backdrop of housing uh prices is coming down anyway just because of Supply demand Dynamics so when we take into account some of the Dynamics that are at play right now the likelihood that we actually will see prices either lower or actually move higher if we don't see a significant Improvement in Supply what are the odds of each and I guess how do you see that then overall the impact that that is going to have on the real estate market on generational wealth here for decades to come wait so the odds of what the odds of rate staying higher or the odds of home prices going lower pricing um from a pricing perspective here's how I look at it so you have um a disproportionate amount of housing over 90% of housing is owned by uh by households over 40 and over um 74% of housing is owned by households over 50 over 56% of households of housing is owned by uh uh households over 60 and so you're going to see uh downsizing either because of empty nesting um and that's a natural uh cycle of down sizings over 51% of people over 50 households over 50 downsize according to a ARP but you also see and this is something I've been working on a lot lately which is an increasing Financial strain amongst households over 60 so you've seen a big jump in um overall debt loads carried by households over 60 um and a as a proportion of a total debt um that's doubled over the last 20 years so um I think you're going to see uh due to Financial strain more seniors having to downsize and that's going to put more Supply in the market so what you've seen and what's kept um home prices so high for the last three four years has been uh lack of more demand than Supply and I think you're going to see that invert with more uh Supply than demand over the next 15 years and that's going to start to happen over the next several the next couple of years I'm curious then Meredith what the Catalyst will be for that uh Drive Supply and I want to pull up a quote here from the Dallas fed about the impact of mortgage rates versus prices they said that as of September 2023 the average rate for homeowners was only 3.9% compared with 7% on new mortgages so basically the idea that interest rates are not necessarily having a read through impact to homeowners because they're staying in uh Mort they're locked in on mortgage rates that are a little bit lower so then what would be the Catalyst moving forward to change that dynamic DC is it going to rely just on Supply is there another maybe policy change that could be enacted to change that Dynamic well that's a really good point because a lot of you know the demographic shifts have been um you could see the demographic shifts uh coming from a long way away um and what changed a lot of that um in the 90s so in the you you saw a big uh boom and housing from the Baby Boomers um and what but what CH what really accelerated the housing uh boom was a change in policy by uh by uh Clinton and Frank Reigns during the early 90s so it increased home ownership from what had been historically a 64% rate to almost 70% um and you saw a massive housing boom and a subsequent housing bust um when uh home ownership rate then retraced below natural levels to around 63% we're about up to 65% so I don't know that um there would be any type of regulatory policy change um because the the the scars of the great financial crisis are still very raw for a lot of people so I don't I don't know that there's a policy change Biden enacted or or um proposed a $10,000 uh uh credit to home sellers that that's not really that much when you think of um uh home values average home values well over 400,000 Mar has has there been any sort of policies floated by policy makers recently that you think would better address or how would the administration better address this housing affordability crisis well I mean the letting houses n let letting home values naturally uh to come down so um you could have over a 30% move in home prices and that's just retracing to pre-co levels and without a lot of C collateral damage that certainly would make homes a lot more affordable and I just think you have to let nature take its course and um and again uh the math is I I saw you had Barbara Corker and the grand dama real estate on it's hard to argue with her but I just look at the math in terms of um you know potential home buyers potential home Sellers and it's the math is disproportionately um weighted towards potential home sellers yeah we were going to play a clip because you guys disagree a little bit just in terms of where exactly the market is heading in the short term M real quick before we let you go and I know the last time you spoke to Yahoo finance we asked you about the risk of recession right now you're rather confident that the US economy was going to be ble to avoid a recession here in 2024 is that still the case yeah I break it down to this so uh two over 2third of what drives the overall economy which is 2third of um of GDP which is consumer spending over two-thirds of that is driven by the highend so households that make over 70,000 a year and what you have with the lower end um has been a a really a lack so we're Beyond a year worth uh where where stimulus ran off in terms of um uh extra payments to uh to people on on uh entitlement benefits and so you've already seen that uh pass through the economy and that was really felt by the dollar stores last year that's anniversary in so I think you see a steady state with um households under 70,000 a year and um really no feeling of pain with households above 70,000 a year and in addition we're in an election year where um the administration is incented to uh increase government government spending and they've certainly done that Meredith Whitney always great to get your Insight here thanks so much for taking the time to join us this morning CEO of Meredith Whitney Advisory Group thanks thank you

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Id: sr4wiPY8q60

Length: 7min 48sec (468 seconds)

Published: Mon Apr 08 2024