Despite rising home prices, the housing market may not be overvalued

Home prices are rising as the economy struggles to recover. Odeta Kushi, First American Deputy Chief Economist joins Yahoo Finance Live to discuss.

Video Transcript

ZACK GUZMAN: Also want to focus in, though, on housing, as it's been a discussion on a lot of investors' minds. Homeowners out there wondering what this recession might mean for home prices. And last week, we got an update there, at least in terms of pending home sales coming in a little bit softer than expected, falling 2.2% in the month of September. That raised questions whether or not this was just a little bit of a hiccup or the beginning of something else here.

To discuss that with us is our next guest here. Odeta Kushi is First American deputy chief economist. She's joined here alongside Yahoo Finance's Sarah Paynter as well. And Odeta, I was talking about that data point we got last week that was weaker than expected.

But you're saying in terms of the rally we've seen play out here in housing is expected to continue because it's a little bit different than what we saw play out in the last big recession, the Great Recession, and the financial crisis there. Talk to me about why this time is different.

ODETA KUSHI: So there's a lot of reasons why this time, it's different. One of the most significant that's been talked about is the fact that demand is outpacing supply this time around. And we know that prior to 2009, it was not the case. We had an excess of supply relative to demand. So that's one of the main factors why this time, it's different.

Another is that housing is not overvalued. And when I say overvalued, I mean that typically, we want to see house buying power. So how much you can afford to buy, given income and interest rates, equal or exceed the median sale price of the home.

Now that was not the case between 2005 and 2007. The median sale price of a home was much higher than house buying power then, whereas, now, house buying power is nearly twice as high as the median sale price of a home, indicating that housing is not overvalued.

And then, of course, you have equity. Equity is at near all-time highs today. That was not the case leading into the great financial crisis. And then, of course, debt to income ratios are very, very low today. And most homeowners have a mortgage rate that's below 4%. So several reasons why this time is different. And most of it point to the fact that the fundamentals going into this crisis were a lot stronger for the housing market.

SARAH PAYNTER: Odeta, it's great to speak with you. So we had a recent op-ed in "The New York Times" from Morgan Stanley's Ruchir Sharma that said-- that had some concerns about low interest rates and low mortgage rates right now. To what extent do you think that all this home buying is being driven by easy money? And to what extent would we be seeing some of that demand this year anyway?

SARAH PAYNTER: Yeah, so that's a great point. You know, housing typically benefits in a recession because of the easing in monetary policy. And obviously, rates will come down. And that's exactly what we're seeing this time around with the Fed instituting kind of a round two of quantitative easing. And so we've seen mortgage rates come down and folks really trying to lock in those low rates.

But you have to remember that we were seeing this demographic demand for home buying even preceding this economic decline. You have the largest generation in US history that's aging into their prime home buying years. And so they were looking to buy homes even preceding this crisis.

Now, of course, the low mortgage rates are making it a little bit more enticing. And so we're seeing a boost in demand. And of course, we're seeing the deferred demand from the spring when we have the lockdowns. And so a lot of the-- we're playing catch up right now. You know, the spring home buying season was deferred into the summer and even later. And so we're seeing a little bit of that deferred demand now as well.

SARAH PAYNTER: OK, and do you think that concerns about these low interest rates and low mortgage rates creating an inflation situation, do you think that that is a valid concern? Or do you think that we're seeing asset prices that are kind of true to their value?

ODETA KUSHI: Yeah, so I think the fundamentals in the housing market are strong. I think that the low mortgage rates are a product of the economic crisis that we're in right now. And they're making housing more affordable. They're increasing purchasing power and really boosting demand. And so it's a product of low mortgage rates and, obviously, the demographic demand that would be there, no matter what.

And that's what's resulting in the faster house price appreciation, the supply, the demand imbalance. You have increasing demand because of the low rates and the demographic tailwind against very, very low inventory of homes available for sale. And we know that econ 101 for house price appreciation.