Homebuyers Optimistic & Adapting to New Mortgage Rates

Ahead of the highly anticipated Federal Reserve rate decision on Wednesday, CEO and President of the National Association of Home Builders (NAHB) Jim Tobin joins Yahoo Finance Live to share his insights on the outlook for the housing market.

Tobin expresses optimism, describing 2024 as "this pivot year," where he expects rates to come down and demand to start rebounding in the housing market. He believes "the economy will keep moving along at a nice pace," with rates potentially declining in the second half of the year. While acknowledging concerns about shelter inflation, Tobin encourages "people to get used to the new normal" of mortgage rates, rather than hoping for a return to the 3-4% range.

Addressing the costs of new home construction, Tobin attributes the challenges to the inability to keep up with demand. He notes that "price spikes," especially with lumber (LBR=F), occurred "right after the COVID lockdowns when homebuilding really got going." However, he cautions that lumber companies are not "getting ready for a surge in demand," and if this demand does return, it could create "a supply crunch," forcing lumber companies to play catch-up, ultimately leading to higher construction costs.

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Video Transcript

BRAD SMITH: Well, US homebuilding bouncing back in February. The new residential construction jumped 10.7% in February from the month prior to an annualized pace of more than 1.5 million units. That's according to the Commerce Department. While home affordability continues to be a challenge for many Americans, the expectation the Fed could cut interest rates this year is making people more optimistic that we could be in a buyer's market.

So for more on the housing sector, we're joined by Jim Tobin who is the National Association of Home Builders' chief executive officer and president. The NAHB has had some news of its own this week. We'll dive into that, of course, here, Jim. But what more noticeably are you seeing in this environment? And are we set up for a shift in the sentiment out there?

JIM TOBIN: Good morning. Yeah, I do think we are set for a shift in sentiment. I see optimism. We were just at our annual trade show just a couple of weeks ago, and the vibe amongst all the attendees was optimism.

I really think they are looking at 2024 as this pivot year where we come out of the high interest rate environment. Hopefully, we'll see some of those Fed rate cuts through the course of this year, but really, demand starting to come back. And, of course, our members are ready to respond by building more homes and apartments.

SEANA SMITH: Jim, what happens if we don't get three rate cuts? What happens if it's two or, God forbid, if it's zero? What then happens to home builders?

JIM TOBIN: Well, I still-- we are optimistic that it's at least two. Some people were forecasting something a little earlier in the year. We think that the rates are going to be back loaded into the second half of the year. But I think we're not anticipating that. We're really thinking that the economy is going to keep moving along at a nice pace.

I know there's been some concern about a little spike in inflation, especially in the shelter inflation piece. But I think that we will continue to see rates moderate into the 6% range. And again, we're still waiting for people to get used to the new normal out here, rather than those 3% or 4% rates that we got used to over the last four or five years. So, again, we're optimistic and hopefully the Fed will see that the right thing to do is to keep moving the country forward by bringing those rates down.

BRAD SMITH: Of course, this week, we got the National Association of Home Builders, the builder sentiment report that came out on March 18. And just yesterday, we heard from the Chief Economist Robert Dietz saying, "However, as homebuilding activity picks up, builders will likely grapple with rising material prices, particularly for lumber." How apt is the consumer environment to really take on more of this pricing as new construction comes about?

JIM TOBIN: Yeah. I mean, between labor and material prices, and then you have to factor in lot costs as well, I think ultimately, if demand surges and building continues to move forward, but not at the pace to meet that pent-up demand, I do see some spikes in prices coming. And lumber in particular, we saw those price spikes right after the COVID lockdowns when homebuilding really got going.

It's just that we're not sure that the lumber companies are really getting ready for a surge in demand, that they're kind of waiting for us to get a little farther out ahead. And if we do do that, then I think the fear is that the lumber companies are going to play catch up, which means a supply crunch and then price spikes. And of course, that just translates into higher construction costs.