Yahoo Finance

Well, we're also going to switch gears just to touch because the number of new residential builds ticked up in August, as mortgage rates continue to trend down from multi-year highs. The Federal Reserve is expected to cut its benchmark rate in just a few hours, a move that many anticipate could benefit the historically tight housing market. We've got Rafe Jadhav, Bajaj Securities senior home builders and building products analyst joining us now to discuss. Rafe, it's great to speak with you. I want to pull up a chart because we are already seeing a record in refinancing applications at their highest levels since, I believe, 2022. You can see at the end of that chart, you are getting an uptick at the very end in those refinancing applications. Rafe, what does that tell you, given that we haven't even had the Fed cut just yet and we're already seeing people running to refinance?

Yeah. Well, um, first off, thank you for having me. Um, so, uh, if you look at the mortgage rates over the last three months from the beginning of July to, uh, today, we've seen mortgage rates fall from around 7% for a 30-year fixed mortgage down to, to almost 6.1%. Um, that's a really sharp decline in a short period of time, um, which is driving the, the increase in the refinancing activity. And we're almost at the lowest mortgage rate in, in, in over two years. So, um, in anticipation of the Fed rate cuts, you've seen the 10-year treasury yield fall, and then mortgage rates have come down along with that.

Where do you believe, and as we're taking a look at the mortgage rates, the 30 and the 15 year that have tremendously kind of dropped, not dropped, but they've trickled lower over the past several weeks, months here as we've been tracking that. And so with that in mind, what is the real mortgage rate going to need to look like for people to come off the sidelines and into the housing market in droves?

Sure. So if you look at the, the current, um, homeowners right now in, in, in the market, there still is a lock-in effect. So the average mortgage rate today for, for homeowners is 3.9%, still a pretty big gap in the existing home market. From a new home perspective, uh, we've already started to see an uptick in demand in, in August relative to June and July, um, as rates have, have moved lower. Um, we think something in the range of when you get to something with a five handle on it, uh, you'll start to get a little bit more activity on the existing home sale side. Um, there has been an uptick in inventory, which is part of, of the solution or part of the, the process for existing home sales to uptick. Um, so we still have a lock-in effect, but definitely, uh, as you're going forward here, it's gotten a little bit better.

Uh, I want to get your response to a conversation that we had yesterday because we spoke with Middleberg Communities Chief Economist Brad Case about the biggest issues facing the housing market. He says it's going to take much more than a rate cut to solve those problems. I want to get your take on the other side.

The problem with single family, um, uh, owner occupied housing is just that it's way too expensive. It is overvalued to the extent that it was back in 2006 before house prices crashed. And so the essential problem is that people don't want to take a highly leveraged investment in an asset whose price may come down sharply.

So, Rafe, I'm curious if the problem is pricing, then what are rate cuts going to do? Are rate cuts going to significantly impact housing prices in one direction or the other?

Sure. So there, there's, there's sort of a story of two different housing markets right now. Um, you have the resale market, the existing home market, and then you have the, the new home market. Um, there's a really interesting dynamic in pricing where existing home prices are actually above new home prices. If I look at that historically, on average, new home prices are around 20% above the existing home market. And I think this is just a dynamic of, of supply. New home builders, um, are adding supply to the market. They're, they're building new homes. We saw the starts uptick today. Um, versus existing homeowners who, um, they're locked in at a really attractive rate. So in order for them to sell their house, they want to be compensated for, for, for giving up their rate. Now, lower rates will help, um, solve the affordability problem just because financing costs are lower. Um, although prices probably tick up a little bit. Um, we think obviously lower rates will support pricing. Um, we just need more inventory on, on, on the market as well. We're still well below the 2019 level of inventory on the market. Lower rates will help increase what's available.

And so with the increase of inventory that we do need, who are some of your favorite home builders that you're tracking right now?

Sure. So if you look at prior periods of, of, of rate cuts, um, the best performing home builder on a relative basis has been, has been NVR. Um, we also like the, the housing markets that they're in. Uh, the mid-Atlantic is, is a really strong performing housing market. They have the highest market share there. And then on the entry level side, the, the, um, builder that we think potentially has the strongest sales uptick from lower rates would be DR Horton, the largest builder in, in, in the US. Um, they've made some really positive changes to their capital allocation over the last quarter. Um, we expect their free cash flow to improve. They're buying back a lot more stock. Uh, so those would be two that we, we would highlight.

Rafe Jadhav is the BBVA Bank of America Securities senior home builders and building products analyst. Great to have you here with us today, Rafe. Appreciate it.

Great. Thank you.