First American’s Odeta Kushi talks April housing starts

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

Victoria Jones: Hello HousingWire listeners. Today, I’m joined by First American Deputy Chief Economist Odeta Kushi. Listeners, today, Odeta will be speaking to us about the latest Housing Starts report for April. Odeta, thanks for joining us again on “HousingWire Daily.”

Odeta Kushi: I’m so happy to be here.

Victoria Jones: Glad to have you. Well, let’s get started by discussing the latest Housing Starts report by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The report indicates single-family housing starts dropped 13.4% for March, to a rate of 1.09 million. Odeta, what was attributed to this decline, and what does this data tell us about the current state of the housing market?

Odeta Kushi: Yeah, thank you for the question. So this number is indicative of a slower pace of building, but not of cooling demand for homes. You know, the fundamentals that are driving new home sales are still very strong. Low mortgage rate, a limited supply of existing homes for sale, and, of course, sturdy demand driven by millennials who are aging into homebuying.

Now, the pandemic and the desire for more space have actually accelerated the decision to buy a home. However, builders are facing multiple supply-side headwinds that make it very difficult to build, notably, rising lumber and material costs, a lack of buildable lots, and a chronic shortage of construction workers. Now, higher costs and limited availability of building materials increase the cost of building and, of course, delay projects, which is one reason for the decline in single-family housing starts. The supply-side headwinds could slow the home-building momentum at a time when the housing market desperately needs new home construction.

Now, I will mention that while groundbreaking on single-family homes did decline on a month-over-month basis, the pace remains higher than prior to the pandemic, and overall has been strong in 2021.

Victoria Jones: All right, well, I’d like to focus now on lumber, as you touched in earlier. This building materials cost has continued to soar over the last year. According to the National Association of Home Builders, lumber prices have tripled over the past 12 months, and have cost the price of an average new single-family home to increase by $35,872. So if we don’t see a decline in lumber costs, what can the industry do to increase inventory and meet the surge in homebuyer demand?

Odeta Kushi: Right, so first, obviously, it’s important to do everything we can in order to build more homes, but it’s important to know that new home sales only make up roughly 10% of all home sales, meaning the relief new home supply can provide is relatively small compared to the overall supply of the market. Existing home sales actually make up the bulk of all home sales, which means more existing homeowners must sell their homes in order for supply to increase meaningfully.

Now, a growing economy and an improving health situation could encourage hesitant existing homeowners to list their homes for sale, but it is unlikely to significantly narrow the gap between supply and demand in the near term.

Victoria Jones: Okay, thank you for that insight. Well, I’d like to continue the discussion on homebuyer demand, in the week ending on May 20th, 2021, Freddie Mac claims the average U.S. mortgage rate rose 6 basis points to exactly 3%. So in your perspective, if mortgage rates continue to rise, can we expect to reach a point where homebuyer demand levels off?

Odeta Kushi: So as the economic outlook continues to brighten, it is possible that the 30-year fixed-rate mortgage will continue to climb alongside the 10-year treasury yield, which will put downward pressure on house-buying power. The good news, for now, is that consensus forecasts still put mortgage rates below 3.5% in 2021, which is very low from a historic perspective, so in other words, house-buying power will remain strong in 2021.

Of course, without an increase in income or moderation in house price growth, a rise in mortgage rates can result in an affordability squeeze for buyers that are on the margin, causing them to pull back. Now, a pullback of buyers can prompt fewer or less intense bidding wars and cause house price appreciation to moderate, which may then help affordability.

But I also think it’s really important to mention that while mortgage rates are highly influential, they are not the only factor affecting the decision to buy a home, because buying a home is also a lifestyle decision, and we have a large cohort of millennials that are reaching their prime homebuying age and their new normal likely includes more work from home options, which will prompt people to reconsider their housing situation. There’s also been an increase in the personal savings rates driven by stimulus checks and the pandemic-driven limited discretionary spending, which can be used towards a down payment. So all of these factors will help to boost demand.

Victoria Jones: All right, well, as we’re now almost halfway through 2021, given the trends we’ve seen so far, how do you expect the housing market to behave going forward into the summer months?

Odeta Kushi: That’s a great question. You know, the economic recovery will likely pick up the pace in the summer months, and the growing economy has multiple implications for the housing market. It means growing consumer confidence, a stronger labor market, and higher wages. All of these things bode well for housing demand, and while a growing economy and improving public health conditions can spur hesitant existing homeowners to list their homes for sale, as I mentioned before, it’s unlikely to significantly ease the super seller’s market conditions we find ourselves in. So it’s likely that the ongoing shortage of supply relative to demand will continue to support house price growth, so a continuation of the current dynamics.

Victoria Jones: Okay, well, lastly, before we go, is there anything else that you’d like to add today or anything else our listeners should be keeping in mind?

Odeta Kushi: Well, I can end on a positive note. Obviously, I mentioned we are in a super seller’s market and we need to build more homes in order to bridge the gap between supply and demand. Homebuilders have been trying their best to respond to the shortage of homes for sale, and single-family housing starts have exceeded their pre-pandemic pace for about eight straight months, so it can take four to eight months to go from a housing start to a completed home, but this is positive news for a housing market that’s in need of a new supply.

Victoria Jones:  A lot of great insight here today, Odeta. Thank you for your time and thanks for joining us on “HousingWire Daily.”

Odeta Kushi: Thank you so much, Victoria. It’s great to be here.