‘In terms of monthly burden, housing is quite affordable’: Economist

First American Chief Economist Mark Fleming joins Yahoo Finance Live to discuss how low mortgage rates will boost the housing market in 2021.

Video Transcript

- We did get some housing data this morning that was positive. Housing starts at about 1.67 million on an annualized pace. That's up 5.8% month over month, and that is the best pace going back to 2006.

To talk more about the housing market, we're joined by Mark Fleming. He is First American chief economist. Mark, it's good to talk to you. We also saw a story this morning in "The Wall Street Journal" that looked at Redfin data that showed people are staying in their homes for longer. So there really seems to be a supply issue here. Is there any sign of that-- with that hot starts number this morning, any sign of that being alleviated?

MARK FLEMING: Well, nothing sells like a shortage, right? And we've been basically under-building relative to demand for shelter for 11 years now. And the good news is we see in the reported data today that the housing market-- housing starts are up 30% to a high not seen since 2006. Permits are also up, and the construction industry is responding to a significant shortage in the housing market.

And as you said, most people who are already in homes, existing homeowners, are basically hunkering down and choosing to stay put. So it's all about supplying the new homes to the market because all existing homeowners are busy locking in 2.7 or lower 30-year fixed rate interest at the moment.

- How concerned are you, Mark, about the price activity we're seeing in the markets? That might be holding back a lot of buyers. But is this starting to, in your view, take us back to the housing bubble over a decade ago?

MARK FLEMING: Prices are high, but people buy homes not at the nominal price, but based upon how much per month. And when you can get such low mortgage rates, as we're at 50-year historic lows, give or take a tenth or so, on any given week, that generates a lot of house-buying power. So in terms of monthly burden, housing is actually still quite affordable-- not in every marketplace. It depends. But it's not the same as before in terms of bubble territory, really, because of the dynamic of such low, low interest rates today.

- Mark, as you look at some of the dynamics we've seen in housing this year-- and I think the big one that everyone loves to talk about is folks leaving the city for more suburban locales. How much of that do you think is new demand for those homes rather than pulled-forward demand? Do you think this sets both of those locales on a new trajectory, or is it where the market thought it would head, maybe just through 2025 instead of all at once?

MARK FLEMING: Right. Is there a pandemic-driven flight to the suburbs? I would first start to say there's been a longer-run demographic trend of flight, if you will, to the suburbs. And that is all of these millennial first-time home buyers aging into household formation, having families, making the choice to become homeowners. That's really the demand story in the housing market right now. We're already choosing the suburbs, just like every other generation, for the family raising.

When it comes to the pandemic specifically, we only [AUDIO OUT] really one market that we could identify that was really being driven by this pandemic, and that's New York. And if you think about it, New York is the most densely populated city in the country. It's heavily reliant on transportation, like small metal tubes underground packed with people-- all not really good in a pandemic.

But most of the rest of urban America actually looks a lot more suburban. Think of Houston and Charlotte and all of these other markets. So I think it's really much more of a longer-run demographic story, the shift to the suburbs, than a pandemic one.

- That's a really good point about some of those urban areas. We here in the New York area tend to think of mostly New York when we think of urban.

MARK FLEMING: Oh, you're special. You're special out there.

- I guess so. What's going on with pricing here, Mark, going forward? Are we going to see, or are you already seeing, any signs of stabilization?

MARK FLEMING: There are some markets, mostly in California, where, even with the low mortgage rates, house prices have begun to outpace the affordability or the buying power of the people in those markets. So that's slowing down appreciation. But the longer-run issue here is, as we started the segment, there's so few people listing their homes for sale. The inventory of homes for sale is barely a percent of the housing stock. That's extremely low.

And you put that against all of that millennial demographic demand, and Econ 101 says lots of upward price pressure. Will it remain 8%, 9%, 10% like we've been seeing in the last few months? Maybe not. But 4% and 5%-- a slowdown in house price appreciation of 4% or 5% is still a very strong market because prices are going to force the balance back between supply and demand, which is out of balance at the moment.

- Right. All right. We'll see what happens. Mark Fleming, First American Chief Economist. Good to see you, Mark. Thank you.