Hovnanian: Higher Mortgage Rates Will Just Lead to Smaller Homes

July 2, 2013 2 Comments »
Hovnanian: Higher Mortgage Rates Will Just Lead to Smaller Homes

During an interview with CNBC this morning, Ara Hovnanian of K. Hovnanian Homes expressed that he’s not worried about higher mortgage rates hurting the housing market.

In fact, the mega home builder’s CEO actually thinks we’re in the “early innings” of the housing recovery, noting that housing starts are still way below the expected average for this decade.

He said we’re currently at a pace of around 900,000 annual starts, up from 500,000 just two years ago, but nowhere close to the 1.5-1.6 million expected.

At the same time, mortgage rates are still insanely cheap, as I pointed out yesterday.

Hovnanian recalled conditions back in 1983, when mortgage rates averaged 13.4% and housing starts were at a staggering 1.7 million.

So if you look at things from a mortgage rate point of view, there’s not enough supply to keep up with demand.

That would explain some of the recent home price gains, which are slated to keep increasing at a steady clip.

All in all, he didn’t seem too concerned about mortgage rates rising, so long as they don’t rise by some obscene amount in a short period of time.

Funnily enough, he actually called for 3% mortgage rates back in 2008 to solve the problem of supply and demand. Looks like he got his wish…

Customers Want Bigger Homes While Rates Are Cheap

At the moment, Hovnanian says customers have been buying the largest of their offerings, perhaps because housing is so affordable.

In fact, they’ve had to design larger homes to add to their lineup to keep up with that trend.

In Houston, customers can buy a 4,000 square foot home for $250,000, which is pretty darn huge (and cheap).

Seeing that rates on the 30-year fixed are averaging close to 4.5%, you’d be looking at a monthly mortgage payment of just over $1,000 if you put 20% down.

So it’s no wonder people will go bigger if they can. But if rates rise to say 5.5%, Hovnanian said the same customer might go with a 3,000 square feet house. If rates really shoot up, he said customers could even settle for a townhouse instead.

In other words, he doesn’t think higher mortgage rates will cool the housing market per se, they will just dictate what prospective buyers can afford.

[Check out my mortgage payment graphs to assess affordability.]

People Need Shelter…

Hovnanian seems to believe that the need for shelter is what’s driving the market recovery, though you have to wonder if it’s just that pesky bubble mentality creeping back in, what with home prices still “on sale” and rates so attractive.

Of course, inventory constraints seem to be the real issue, and Hovnanian is clearly pleased that the private equity funds are buying up scores of single-family homes throughout the United States.

Thanks to the likes of Blackstone and Colony American Homes, demand for his company’s homes is probably that much higher.

And he doesn’t think they’ll flip the homes they buy – conversely, he sees them holding and renting for years to come, and slowly unloading as prices rise.

However, he does think managing such a large number of homes will be challenging.

Finally, Hovnanian weighed in on potential winning real estate markets throughout the country, naming both Northern and Southern California, along with Phoenix and “many of the land-constrained Florida markets.”

Other winners in his eyes included Washington D.C., New Jersey, and suburban New York.

Of course, this should all be taken with a grain of salt, seeing that he’s the head of a major home building company. But he does have some decent points about rates and supply.

Maybe there is a lot more upside ahead, so long as the distressed inventory doesn’t rear its ugly head.

2 Comments

  1. James LeBlanc July 14, 2013 at 7:48 pm -

    I am so sick of hearing about how mortgage rates are “so cheap.” The classic response to the increase in rates right now by people 40+ is “when I was purchasing my house, interest rates were 15% so you’re lucky they are so low right now.” Well, to put that comment into perspective – the asking amount for those people at the time interest rates were 15% was most likely between $25,000 and $45,000. Yes, that’s right. No, I didn’t leave any zeros off of those numbers. Interest rates HAVE to be so low right now, otherwise people are going to lose their shirts and the kitchen sink if they go back up to 8% or 15% for that matter. Banks are playing off the “well 10 years ago interest rates were 15%” sell. Well, banks – we aren’t stupid. And yes, this article was insinuating that interest rates are dirt cheap. Well that is because houses are so expensive. Wait until the baby boomer generation all decide to sell their houses at the same time; talk about a bubble bursting. Can’t wait for all that supply and so little demand.

  2. Shudder September 8, 2013 at 12:56 pm -

    Yeah, we should trust the CEO of a homebuilding company to tell us what’s good for us. As if!

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