'Demand is going to remain pretty strong': Lending Tree CIO on the housing market

Tendayi Kapfidze, Lending Tree Chief Economist joins Yahoo Finance Live to discuss an outlook on the housing market.

Video transcript

KRISTIN MYERS: Welcome back-- some discouraging economic data out today, at least on the housing front. Homebuilding fell by more than had been expected in the month of April as prices soar for lumber and other raw materials. We're joined now by Tendayi Kapfidze, Lending Tree's Chief Economist.

So the housing starts, they've been dropping. And on this show, we've been chatting about those rising costs of lumber which many say likely dragged down some of those figures for the month of April. But with housing demand still running so high, far outpacing supply, do you view this drop as temporary or, really, the beginning here of a greater trend?

TENDAYI KAPFIDZE: I think it's a continuation of a trend where the challenge in the new home market has been, one is the cost of lumber, another one is the availability-- the availability of labor, particularly skilled labor that is needed in the construction of homes. And this is actually still a bit of a hangover from the housing crisis where a lot of people who were involved in homebuilding kind of left the industry. And the industry has never fully recovered from that. And so what we're seeing now with this huge increase in demand because of low rates and because of some of the stimulus from COVID is that the industry is not well-placed to really respond in terms of putting a lot of new product out there of new homes.

ALEXIS CHRISTOFOROUS: Yeah. In fact, we saw that job postings hit a record 8.1 million in April. And one of the areas that showed a lot of unemployment, or high unemployment, was, indeed, the construction industry. So what are you seeing in terms of inventory loosening up? Are there parts of the country where there is more supply than others right now? And what do you really need to see to start to close that inventory gap?

TENDAYI KAPFIDZE: Yeah, the inventory challenge is really nationwide. So I wouldn't necessarily point out particular areas maybe having less challenges than any other area. I do think that, though, with more vaccines coming online, and more people getting vaccinated, and part of the reopening is that some people who maybe were hesitant to have people come through and look at their homes-- this is in the new homes-- sorry, in the existing homes market-- are going to be a little bit more comfortable with putting their homes in the market.

So I think we'll get a little bit more supply in the existing market. But yeah, the new homes market is construction-based. You saw the permits number didn't really drop. So the permits are being printed, there's demand for new construction, there's just not enough capacity to deliver. So hopefully we get a little bit more supply from the existing side of the marketplace.

KRISTIN MYERS: So then, Tendayi, when does the steam really come off of the housing market? Is it when more and more folks are vaccinated when we hit that level of herd immunity? Is that going to be the catalyst? Or is it going to be something else?

TENDAYI KAPFIDZE: I think demand is going to remain pretty strong in the housing market. And you're not really going to get enough supply to satisfy the demand that's out there. And part of this is that the demand was actually existing prior to the COVID crisis. The COVID crisis just kind of exaggerated a trend that was already occurring. And the main trend that's occurring is that millennials-- the middle part of the millennial generation is in their late-20s and early-30s.

And these are the peak home-buying years, so there's a lot of demand coming in from millennials who are trying to access homeownership. And you know, that's not really being met by the current inventory of homes on the market or by new construction of homes by the homebuilders. So we're going to be in the supply kind of crunch for a while in the housing market, and that's going to support home prices, and, unfortunately for many other Americans, make it less affordable to be able to get a house.

ALEXIS CHRISTOFOROUS: You know, you bring up a good point that building permits, which is always sort of a future indicator of where home construction is headed-- and we saw that permits for single-family homes actually fell 3.8% and multi-family home permits were up just under 1%. What does that tell you? I mean, I see numbers like that, I don't think we're going to get a lot of relief any time soon.

TENDAYI KAPFIDZE: Yeah. And I'll say small changes like that on any month to month basis really don't signal that much. I think if you look at the underlying trend, we see that single-family and both multi-family permits have been trending upwards. But they're not going up fast enough, as you rightly point out.

So yeah, I think we're going to be in this situation for a while where, really, the demand for housing is going to be outstripping the supply. And then that turns into higher prices.

KRISTIN MYERS: So looking out ahead, as you're saying that this supply crunch is essentially going to exist for a pretty long time, right now, of course, we're also in a really accommodating environment where interest rates are so low. So right now, it's cheaper than ever to go out and get a mortgage. But that's not likely going to stay that way.

And we were just talking to Octavio Morency who's talking about the need for interest rates to go up-- maybe not within the next couple of months, but definitely soon-- sooner than some folks either want or probably anticipating. What happens when we see those interest rates go up, when we see those mortgage rates start to rise? Do you think that demand starts to reduce then? I'm curious to know where you see the housing market, the real estate market really going, you know, beyond 2021 once the economic recovery really, really starts to pick up that steam and get underway.

TENDAYI KAPFIDZE: Yeah, I think what happens if we do get interest rate rises, it makes housing a little bit less affordable, right? You can purchase less house for the same amount of money if the rates are higher. And I think the other thing that happens is that a lot of times, interest rates, they get capitalized into home prices.

So if interest rates go higher, we might see slightly slower home price growth. So I think higher rates will take a little bit of the momentum out of the housing market. But they're not really, I think, going to lead to a situation where we kind of address the supply and demand imbalance.

I think we're still going to see more demand than supply out there, even if we do get higher rates. Those will probably result in slower home price increases and might take a few people out of the market.

KRISTIN MYERS: All right, Tendayi Kapfidze, Lending Tree's Chief Economist, thank you so much for joining us.