UBS Homebuilders & Building Products Analyst John Lovallo joins Yahoo Finance Live to discuss the debt ceiling, housing market, declining mortgage rates, interest rates, growing demand, and pricing.

Video Transcript

RACHELLE AKUFFO: Mortgage rates ticking down just slightly this week. The 30-year fixed falling to 6.35% from 6.39% the week before. Now this is the second straight week of declines. Rates climbed to 5% in April of 2022, and have stayed above that line since then, apart from just one week.

Although there are some signs inflation is cooling slightly, the Fed's tightening cycle has kept mortgage rates high, and there's a new complication that could actually raise rates, the stalemate in Congress over the debt ceiling. Now Zillow reveals mortgage rates could soar above 8% if the US defaults on its debts, sending the average mortgage payment up 22%.

For more on this, we turn to John Lovallo, UBS US Homebuilders and Building Products Equity Research Analyst. Good to have you on the show here. So I'm wondering, are your predictions about what would happen with a debt-- with a debt ceiling default here, would they be as dire as what Zillow is projecting?

JOHN LOVALLO: Hey, Rachelle, how are you? Thanks for having me. You know, frankly, look, if there is a default on debt here in the US, we've got some big problems that extend well beyond what's happening in the homebuilding industry. I can tell you that I read the article that Zillow put out there. It's interesting. I think the math is sound. If you go from 6 and 1/2 percent mortgage rate to 8 and 1/2 percent on a $450,000 average new home in the US, your payment is going to go up by about $7,200 per year. That's about 22%.

Would that-- I think a lot depends on how long this sort of crisis lasts, and how long consumer confidence is really strained. So we'll have to wait and see. I don't have a prediction on what it would do for mortgage rates, but we are in a situation where affordability is challenged. And so anything that negatively impacts interest rates would be negative.

RACHELLE AKUFFO: And you figure this is coming at a time where the Fed is still debating whether or not to hold interest rates at the moment. What are we likely then to see happen between now and then as we get closer to that X date?

JOHN LOVALLO: You know, I think that there could be incremental pressure up on interest rates. I think if you look at affordability from the housing standpoint, it's important to think of in two components. One, there's the interest rate component, which we're clearly speaking of. There's also home prices. And I think that those are the two levers that need to adjust in order to find the clearing price in a market for a home.

Home prices have remained very resilient, which I think is a testament of the demand that's out there currently. Also the fact that there is very little existing home supply. Only 2.6 months, in fact, of existing home supply on the market. So there's various things that could happen.

I think at the end of the day, we're looking at a market that is under built and there is a tremendous amount of pent up demand that's still out there. And so we still remain fairly optimistic on the overall market.

RACHELLE AKUFFO: And as you mentioned, I mean, you have fewer listings that are also helping push prices up, steady buyer demand as well. In terms of affordability, when do you expect that to pick back up because it's still a very tough time, especially if you're a first-time home buyer?

JOHN LOVALLO: It is a very tough time. I think that what's interesting in going back to the fact that there's very little existing home inventory on the market, to the extent that folks are looking to buy a home, they are more inclined today than at probably at any point in history to look at a new home. And what the builders, the home builders, have been able to do, many of which own their own captive finance companies, is to help buyers find that clearing price, whether it's through incentives on lowering the actual price of the home, or actually what's been happening more often is buying down interest rates.

And they have the ability to do this because of the captive finance arms that they have. And so buyers out there today that are buying new homes are not paying 6 and 1/2 percent, the headline rate. They're paying under 5% in most cases. And so I think that sort of lever is very important to keep buying-- the buying wheel continuing to turn. And we think that positions the public home builders in particular extremely, extremely well here in this environment.

RACHELLE AKUFFO: And we know you track what people are searching for in terms of home buying. So what sort of price points are we looking at? And we know that the Sunbelt regions were doing well, but we're starting to see some nuances showing up there as well.

JOHN LOVALLO: Yeah, so the Google Home Search Note that we put out showed that essentially normal seasonality as we moved into April on both the new home side and the existing home side, which is encouraging, and sort of what's to be expected. The average new home in the US right now is about $450,000.

I think to your point, Rachelle, as you move into the hotter areas of the market, the Sunbelt states, if you will, depending on the market because this is a very localized business, home building, prices could be significantly lower. And I think that's where we're seeing the hottest demand, is if you look at price points that are sort of where the three handle on them, is if you think about Texas, and Florida, different markets across those states in particular where things are particularly hot, that's really where the hottest demand has been.

Now the consumer in general, or the home buyer in general, has been pretty resilient, and so there's been demand across the spectrum. But we still think that the hottest part of the market is that first-time entry-level buyer, where both the buyer, which is very need-based and driven by life events, and the home builder, are able to, again, meet that clearing price by maybe building a smaller footprint, maybe moving a little further out from the city than perhaps would have initially been desired. But there are ways to still make that math pencil.

RACHELLE AKUFFO: All right, still some hope there for first-time home buyers. A big thank you there to John Lovallo for joining us this morning. Thank you so much.