As the Federal Reserve continues its hawkish market reset – which has contributed to a rise in interest and mortgage rates – real estate experts are sounding the alarm that "big trouble" lies ahead for the U.S. market.
"When you have a rise and increase in interest rates like we've had, that is a big problem for housing. Interest rates are like the mother's milk of housing," Pulte Capital CEO Bill Pulte told FOX Business’ Maria Bartiromo Thursday. "And if you cut it off, you're in big trouble. And when you've had these massive increases in interest rates, it just puts a lot of things to a stop."
"It's a tale of two cities. I hate to relate it to politics, but the more red states, places like Florida, Texas, the office buildings are pretty busy. Business is booming. There's more demand and supply," Thor Equities CEO Joe Sitt said later on "Varney & Co." "It's more, I hate to say it, markets like ours here in New York, Chicago, San Francisco is a ghost town. San Francisco's been destroyed."
One of the nation’s largest homebuilders, KB Home, released its Q4 report Wednesday which indicated more signs of housing weakness. According to the report, KB Home saw a 68% cancelation rate on new construction projects.
U.S. REAL ESTATE HAS ‘MONUMENTAL OPPORTUNITY’ TO SOLVE HOUSING CRISIS IN 2023: EXPERT
Mortgage rates also increased last week, with the 30-year rate rising to 6.48% and the 15-year mortgage coming in at 5.73%, up from 5.68% the week prior. Higher mortgage rates continue to test homebuyer affordability, according to the Mortgage Bankers Association (MBA).
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Fed Chair Jerome Powell warned on Tuesday that raising interest rates to slow the economy "are not popular" in the short term, and could even create political opposition.
"Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time," Powell said Tuesday in remarks prepared for delivery at a conference held by Sweden's central bank. "But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy."
"It’s going to be tough," Pulte spoke of the real estate market. "The [KB Home] cancelation rate… was through the roof, something like 68%, which is just enormous. Usually, that number is around 10, at most 20%. So I think we've got a tough road ahead this year, and I think you'll start to see that in earnings toward the back half of this year and frankly, into next year. I think the earnings are going to continue to deteriorate."
Property investor Sitt claimed it’s "going to take some time" for metropolitan areas to see a rebound in their commercial and personal housing markets.
"I think the cities are going to wake up and try to react," Sitt said. "I would say San Francisco rents are probably down somewhere in the neighborhood of about 35%. No exaggeration. It's dramatic what's going on in that marketplace."
Real estate investments are going where the money "feels comfortable," according to Sitt, who predicted that Sunbelt states might experience less volatility this year due to a manufacturing job boom.
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"I hate, again, relating to politics, but from a global place, the autocratic countries are doing the best. Singapore, Dubai, Monaco. Some people joke Florida and Texas is part of that," the Thor Equities CEO said. "The world order is changing, particularly because of some of the conflict with China. So you've got this tremendous onshoring wave, and so all of the Southeast now is going to get their next economic benefit. I call it the battery belt, that battery belt market of all those jobs that are going to create for manufacturing, is going to have ripple effects there."
Pulte contested that his firm has yet to find promising opportunities in the real estate sector so far this year under rising rate pressure.
"Not yet. It's going to be pretty interesting," Pulte said. "The M&A [mergers and acquisitions] environment in housing and building products is something to keep an eye on over the next six, 12, 18 months. It's not time yet."
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FOX Business’ Megan Henney and Nora Colomer contributed to this report.
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