Kushi says mortgage rates get all the attention, but lack of supply is what's really limiting affordability for buyers
Before sunrise on Wednesday, just as some of the most dedicated mortgage brokers were starting their day, another monkey wrench was thrown into the markets.
Following President Trump’s declaration that the Iran ceasefire was “over”, 10-year Treasury yields climbed sharply and oil prices rose, reigniting inflation concerns. Late Wednesday afternoon, the 10-year yield was up more than 3 basis points, but had spiked more than 5 basis points during the day.
Geopolitical flare-ups have repeatedly disrupted whatever rate trajectory the market thought it had mapped out. One economist already saw the path to higher-for-longer rates before the latest developments in the Middle East.
Odeta Kushi (pictured top), deputy chief economist at First American, said the latest flare-up fits a pattern she and her colleagues had already accounted for. Even if there is some volatility day-to-day, the overall pattern seems to be for elevated rates.
"I think you can see some zigzag, but my baseline expectation is more of a higher-for-longer rate environment," Kushi told Mortgage Professional America. "Inflation concerns are still alive and well. The conflict in the Middle East, as we've seen from recent news, is not over. And so that could put some more pressure on the inflation side. We're not necessarily expecting rates to come down sharply."
Factors working against rate relief
The Middle East is only one piece of the rate picture, Kushi said. The structural forces pushing against rate relief were already in place before Wednesday's news.
"When we were coming into this year, maybe we were all a little bit more positive about mortgage rates being lower," Kushi said. "Even so, we were out there saying that I think there are structural reasons to believe that they could remain elevated and above 6%. Obviously we had that one week in February where we had a five-handle, but for the most part, above 6%."
The geopolitical pressure is only part of what is working against rate relief, she said. Speeches by new Fed chair Kevin Warsh have reaffirmed the central bank’s commitment to reducing inflation. That combined with other factors leaves a limited path to lower rates in the short-term, Kushi said.
"Outside of the persistent inflation concerns, we have elevated federal deficits, increased Treasury issuance," she said. "Kevin Warsh, the new Fed chair, also reinforced that he will be really targeting that 2% inflation target, as Chairman Powell had been noting. So we're definitely looking at a cautious Federal Reserve at the moment. And I think that all suggests that the path to meaningfully lower borrowing costs may be a little bit narrower than many had hoped."
The Fed meeting notes were released on Wednesday, showing internal debate among members about the future path of the Fed funds rate. One thing Kushi noted about Warsh was not only his insistence on keeping the Fed’s 2% inflation target, but also the challenges facing the housing industry.
"Warsh did emphasize responsiveness to incoming data and humility around forecasts," she said. "But the Fed's commitment to returning inflation to 2% was repeatedly reaffirmed. And I thought it was very interesting in the Q and A how he explicitly called out housing and mentioned that policy is restrictive in housing and not as much in other sectors. That was an interesting callout to our industry.”
Solving affordability issues
Despite the rate headwinds, housing has stabilized, Kushi said. First American's analysis shows existing home sales running near 4 million annualized, still subdued but above year-ago levels.
"Inventory is still up relative to a year ago," she said. "Affordability is better than year-ago levels, in part due to better mortgage rates than a year ago, but also because we've seen income growth outpacing house price growth at a national level. And so I do think you see a little bit of an improvement relative to last year."
Supply is the underappreciated constraint in the current market, she said. The pace of inventory recovery has slowed, with some weekly measures running below year-ago levels at mid-year. However, supply doesn’t get the same level of attention from consumers as rates do.
"Mortgage rates have an immediate visible effect on buyers and supply adjusts much more slowly and is less obvious," Kushi said. "But economically, home prices are determined by both sides of the market. Prices are the intersection between supply and demand. And so I do think that there's maybe less from a consumer perspective on supply."
Kushi said the multifamily market offers an example of how things can change. For affordability to improve, supply issues need to be solved.
"There's no silver bullet to solving the housing affordability issues," she said. "But I think a focus on the supply side of the equation is where we should be narrowing our focus. We saw that in the multifamily side. There were a lot of multifamily units come to the market, putting some downward pressure on rents. And so in that same dynamic, more supply is what we need on the for-sale side."
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