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Interest rate cuts could 'dramatically increase' home prices

Housing starts and building permits data for May came in below expectations as mortgage rates continue to remain high. Pulte Capital CEO Bill Pulte and S&P Global Ratings Homebuilders Director Maurice Austin join Morning Brief to discuss the state of the housing market and its relationship to ongoing rate pressures.

"I think it's a little bit of a speed bump. The housing market is very strong. It continues to be very strong," Pulte explains. He notes that big home builders — such as PulteGroup (PHM), which his family originally founded — are in a good position as they "have a balance sheet, have access to the mortgage bond market and, frankly, are taking market share right now."

As the market awaits an interest rate cut from the Federal Reserve, Pulte adds that a cut will "dramatically increase" the price of homes. With more people being able to afford mortgages, demand could skyrocket, creating an affordability issue. Austin adds, "What we've seen is the level of sales incentives remain elevated, and they will continue to be so as long as rates stay higher for longer, which ultimately could lead to negative profitability on the homebuilder side."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.


This post was written by Melanie Riehl

Video transcript

Home builder stocks falling after the Commerce Department reports.

Housing starts and building permits came in below expectations for the month of May.

This is a sign, high mortgage rates continues to weigh on home builders and buyers for more on the sector, we're joined by Bill Pulte who is the pool capital ce ceo and Maurice Austin, who is the S and P global ratings home builders director.

Great to have both of you here with us today.

You know, Bill I I wanna turn to you first here.

You know, as you're thinking about more broadly what this spells out for the housing sector.

What comes to mind when you see softening like this?

I think it's a little bit of a speed bump.

You know, the housing market is very strong, it continues to be very strong and very importantly, the big home builders and this may sound a little biased.

Obviously, my family founded Pulte Homes, which is one of the top home builders, but the the big home builders have a balance sheet, have access to the mortgage bond market and frankly are taking market share right now.

So I think that the big builders will be doing fine.

It's a little bit of a speed bump, but it's something to definitely keep an eye on.

Well, Maurice, I wanna bring you into the conversation because one thing we've been talking about a lot is of course the impact to potential home buyers.

And I'm curious from your perspective, when we do get that 25 basis point cut, does that lead to just a groundswell in demand?

That's been pent up over the years during the rate hike cycle?

Um II, I don't think so.

I think where we are currently, I think the um, buyers, um they've pretty much um, become acclimated to these um, new mortgage rates.

I mean, obviously 2 3% was at a historic low, but even at 7% historically, um those numbers are low from a historic level.

Um And again, even though they've risen over the last couple of years, um they are low by historic standards.

Well, Bill, I wanna bring you in on that exact question because as you mentioned, your family, very familiar with, this is one of the largest home builders in the country.

There's also this idea that a cut in rates could lead to more inventory and a potential swell in that.

How would your family be responding to a potential rate cut to come?

Well, I'm not with the company any longer, but I will say this just my own opinion is that the cuts in interest rates will dramatically increase.

In my opinion, the price of homes because I think what's gonna happen is you're gonna see people be able to access that mortgage market in a way that frankly like, yes, I agree.

A lot of people have become acclimated to the interest rates right now.

But if you see a reduction in interest rates, I think demand could potentially skyrocket and that could be a big problem for affordability.

It could be a big problem for people trying to get their first home.

If you see prices go up even higher than they already are.

So Maurice, does that signal that for some of the home builders out there, new home builders that have been trying to incentivize buyers to, to, to build with them uh by offering offsets essentially to the mortgage rates that that's gonna dry up in the near term.

Um It, it could possibly dry up.

What we've seen is the level of sales incentives remain elevated and they will continue to, to be so as long as rates stay high for longer, which ultimately could lead um to negative profitability on the home builder side.


Well, that's, that's a great point and it leads to this question about the data that we saw today in terms of just low housing starts and permits bill from your perspective.

What would be the single biggest thing that could happen to increase residential construction more?

Would that be something a move coming from the Federal Reserve or would it have to be some type of policy move from the federal government?

No, it's a great question.

It's a threshold question.

It's a question.

I think you're gonna see a lot in this election.

But really the answer is zoning, you know, zoning is regulation and there's so many regulations around building homes these days, people are worried about turtles and birds and all the things that we love, we love turtles and birds.

But sometimes if you want a new development, you have to allow for that new development to happen and you look at a lot of these municipalities and people don't want new homes to be built.

So it really is an issue of zoning and I see that being the only way that this is gonna solve, but that's a very, very complicated problem.

Yeah, it seems like builders in New York are more concerned about alligator or sewer alligators up here.

So uh that's the um that is the analogous concern here in the city, densely populated is this, you know, all things considered, you know, one of the major things that we're looking at this morning, especially with the new high that was just reported by Red Fin in home prices.

When should we expect some easing on that front?


I'll go to you first and then and then bill uh you can weigh in as well here.

Yeah, I mean, when you take a look at the increase in, in home prices.

I think part of that as well comes to, comes with the limited supply of existing homes.

Um, I mean, we, we, um, we know about the lock in effect with those homeowners, um, that took out a mortgage at 2 3%.

They're not looking to sell their homes anytime soon.

So that has decreased the inventory for, um, existing homes.

So when a, um, buyer is looking to buy a home, he naturally now goes to a, a new home to, um, to, to purchase, um, but still the home price appreciation is having an impact on affordability.

And I think that will continue regardless of, um, the, um, mortgage rates.


And, and bill, I'll allow you to comment as well to, to Maurice's point when a, when a buyer is going into the market here, he, she, they, they're considering the reality of what these near record high housing costs are also doing to demand in the environment and where that's drying up and still, where you've perhaps got the wealthier.

And that are still saying, all right, we're, we're willing to, to still remain buyers or remain active, at least in the bidding.

What, what are you seeing?


And he's right, Maurice is correct.

There's basically a new home market which is like new cars, but for new homes and then there's the old or used homes.

The problem right now is nobody's selling their old used homes, nobody's selling their, you know, old homes, they just, they are selling them, but not to the numbers that Maurice was exactly right on is saying is that there's not too much competition.

So now you really have to, in order to get a home, you might want to buy a new home and that is gonna keep prices very high.

Now, if you see a big fluctuation or you see a big reduction rather in existing homes, uh, and people start selling those homes, then obviously you could see, uh, housing prices go down.

But I'll be honest, I don't really see housing prices go down anytime soon.

I think housing prices will continue to stay where they're at, if not go up.

All right, we're gonna have to leave it there.

But thank you so much, both of you for joining us.

That was Bill Pool, the Pool, the capital CEO and Maurice Austin S and P Global Ratings home Builders director.