Odeta Kushi on the Fed, housing affordability and the dual lock-in effect

HousingWire

The housing market is caught between the lowest mortgage rates since October of 2024 and low inventory. With the impact of Wednesday’s Federal Open Market Committee (FOMC) meeting looming, industry professionals are laser-focused on the impact of Federal Reserve rate cuts on the housing market, inventory and buyer and seller behavior.   In this episode of Ten Minute Talks HousingWire’s Allison LaForgia sits down with Odeta Kushi, Vice President and Deputy Chief Economist at First American, to unpack the housing market’s most pressing questions. From August’s inventory decline to the stubborn “dual lock-in effect” keeping homeowners on the sidelines, Kushi explains the forces behind economic trends.   Odeta also breaks down a bright spot in the market: affordability factors are easing, she also addresses where pressure still lingers and how modest improvements in sales could set the stage for the rest of 2025. Whether you’re a lender, agent, or market watcher, Kushi’s insights offer a clear view of different aspects of the market and opportunities for the months ahead.    #HousingMarket #InterestRates #RealEstate #MarketAnalysis

Transcript

00:00Right now, all three are trending in the right direction, which is why we believe,

00:05you know, this will continue to see some affordability improvements in the months

00:09to come if those trends continue. I'm Alison LaForgia, Managing Editor of HousingWire's

00:21Content Studio. And today on 10 Minute Talks, my guest is Odetta Cushy. Odetta, welcome.

00:26Thank you so much. It's great to be here. Odetta serves as First American's Vice President,

00:33Deputy Chief Economist. And today we're going to talk about something that's top of mind,

00:38probably all over your LinkedIn and social media feeds. We're going to talk about what's going on

00:43with the housing market. And we're going to start with tomorrow's Federal Open Market Committee

00:48meeting and what the impact of that meeting is. So if the Federal Reserve does move forward with

00:57those expected rate cuts that we're hoping that we see, what does that mean for housing?

01:03That's a great question. All eyes are on that meeting tomorrow. And I think that

01:07it's important to point out that the Fed's actions have already been priced into mortgage rates. In fact,

01:13the market's priced in three rate cuts through the remainder of the year. And that's in part why we've

01:19seen this rate benefit. Mortgage rates are down to 6.3%, I believe it is, the lowest mortgage rates in

01:27about 11 months. So a lot of the Fed action has been priced in. I think if Powell signals more easing to

01:34come, we might get additional benefits to that mortgage rate. But I think if he's a little bit more

01:41cautious, continues to reaffirm that they'll take this data-driven stance and be watching for

01:48incoming inflation reports or potential tariff impacts, we might not get any additional rate

01:54benefits. So, you know, as I always like to remind people, that 30-year fixed-rate mortgage is not

01:59benchmarked to the Fed funds rate or what the Fed does. It's loosely benchmarked to the 10-year treasury

02:05yield. And that 10-year treasury moves around for all sorts of reasons, inflation, inflation

02:10expectations, you know, geopolitical conflict, all sorts of factors. So it's very possible to get a

02:17situation where, you know, the mortgage rate could even rise after the Fed cuts rates. We saw that last

02:23year. So it's unclear exactly what will happen to mortgage rates after the Fed meeting, but we've

02:29certainly received a rate benefit in anticipation of that meeting. So you just mentioned that we've

02:35seen mortgage rates tipping to the lowest rates since October of last year, right? And we've seen

02:41some modest sales improvement. What are your expectations for the housing market through the

02:46end of the year as best as we can predict it with everything that's going on right now?

02:52Yeah, there's a lot of moving pieces. I think my general expectation is not a boom, not a bust,

02:57but sort of continued recalibration to this higher interest rate environment that we find ourselves

03:03in. We see some demand pick up from those, the rates moving lower. We saw that in the mortgage

03:10applications data from last week that buyers are responding to lower rates. I expect that if rates

03:17fall further, closer to 6%, we'll get more activity in the housing market. That said, I'm not expecting

03:23sales activity to boom or even get back to normal levels or pre-pandemic levels. And there's a lot

03:30of different factors at play there. Of course, that lock-in effect is still a headwind to the housing

03:36market. And I think there's just a lot of general sort of macroeconomic uncertainty this year. The labor

03:41market seems to be slowing down, which is a contributing factor. So I'm not expecting normalcy, but I do expect

03:48some improvement. One of the factors that I feel like we talk about a lot is inventory. And in August,

03:54we saw an inventory decline. How do you think that impacts the fall market? Or is this typical

04:01seasonality? Yeah, that's a great question. You can't buy what's not for sale, right? So inventory is

04:08key to unlocking the housing market. And to your point, we've sort of seen a plateauing of inventory.

04:14And I think that that is sort of slowing the housing market momentum. It remains to be seen

04:22if maybe lower interest rates can encourage some potential sellers off the sidelines. We know that

04:28the withdrawal rate has been a little bit elevated too. So sellers are kind of looking around and

04:34pulling back their listings because maybe they don't think they can get the price that they want,

04:40or potentially they can't find a better home to buy. And so maybe lower rates can entice some of

04:45those sellers back into the market. But certainly, we don't want inventory to trend in the wrong

04:51direction if we want the housing market to start to pick up. I feel like I'm always reminding myself

04:56that sellers are also buyers. That's right. Housing is very unique in that way.

05:02It's very unique in that way. And you mentioned the dual lock-in effect. And I know that this is

05:07something that you talk about on your podcast with Mark Fleming, where homeowners with low mortgage

05:13rates stay put while potential buyers hesitate to enter the market. How do you think this dynamic

05:19is shaping some of the activity that we're seeing today and inventory levels?

05:26Yeah. So the dual lock-in effect, we're talking about the very well-known rate lock-in effect. So

05:31that's your first. And obviously, that's the golden handcuffs of low interest rates. We know that 81%

05:37of existing homeowners are sitting on rates below 6%. So they don't have that financial incentive to jump

05:43into the market. So that's a factor that's been holding back market potential for some time. It is

05:48easing, but nevertheless, is certainly holding back the market. That second lock-in effect is the weaker

05:55labor market. The hires rate right now is at about 2013-2014 levels, which is when the unemployment

06:02rate was 7%. So we're not really hiring in the economy. And we know that a job change is a driver

06:10of sales activity. And so we're calling this the second lock-in effect is this sort of stagnant labor

06:17market where we're not seeing companies hire. A little bit of a pivot, but want to make sure that we,

06:23in this 10 minutes, which is not a lot of time, get to talk a little bit about affordability.

06:28Can you talk to me a little bit about which affordability factors are currently easing

06:33and where we see that pressure remaining? So this is a modest, bright spot, I think,

06:40in the housing market right now, or at least something that's trending in the right direction.

06:44We're seeing affordability improve, and it's for key factors. So mortgage rates are moderating.

06:52We just talked about that. Income growth is actually outpacing house price growth as house

06:59price growth continues to moderate. So we track nominal house price changes through the First

07:06American Data and Analytics House Price Index. And that index is showing us that house price growth,

07:11annual house price growth, is actually in the single digits. It's at about the slowest rate since 2012.

07:17And so that allows buyers a little bit of breathing room, right? It's not what we saw over the pandemic

07:23with double digit house price growth, and it's allowing incomes to catch up. So actually, when we talk

07:29about what matters for affordability, it's income, interest rates, and house prices. And right now, all three

07:35are trending in the right direction, which is why we believe, you know, this will continue to see some

07:41affordability improvements in the months to come. If those trends continue, affordability will still

07:47be limited from a historical perspective. We calculated that affordability is over 30% lower

07:54than it was in early 2022, just before the Fed started to increase interest rates. So it will still

08:01be a challenging affordability environment, but progress, not perfection, right?

08:06Progress is all we're looking for at this point, right? Yeah. So to wrap up today's conversation,

08:15as we see inventory patterns shift and thought and behavior continue, what should the industry be

08:23paying attention to in the coming months? So I think there's a lot of factors, but I just keep coming

08:31back to the labor market, because I think that the labor market is so central to not just the Federal Reserve

08:39and the monetary policy decisions that they'll be making through the end of the year. Certainly, if we see

08:45the labor markets start to slow substantially, you know, that could mean that we're going to get some more

08:52rate cuts. But I think the labor market is also key to buyer and seller behavior. This is potentially the

08:59biggest financial purchase that a potential buyer will make in their life. And that's really predicated

09:05on them feeling confident in their job prospects. And so I think labor market conditions will impact

09:11buyer behavior, and it'll impact seller behavior. I mean, one thing we didn't get to talk about at length

09:16in this episode is that if the labor market slows, if people potentially lose their jobs, that could

09:24actually contribute to some forced selling, some sellers having to sell their homes because they

09:30don't have a job anymore. So I'm watching the labor market just to see how it'll impact buyers and

09:37sellers, and of course, the broader macroeconomic environment. Well, we'll have to keep an eye on the

09:42labor market. It's a good factor for us all to continue to watch, it sounds like. And we'll see what

09:48comes out of this FLMC meeting tomorrow. That's right. Odetta, thank you so much for joining me for

09:56this episode of 10 Minute Talks. And to our audience, that wraps up today's episode. We'll be back soon

10:03with more quick hitting insights from across the housing industry. Until then, stay connected with us

10:09and housingwire.com.

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