David Finkelstein, President and CEO of Annaly Capital Management, joined Closing Bell to give his expert take on the housing market, as mortgage rates hit a 16-year high, pricing out many Americans from homebuying.

Annaly CEO Talks 25 Years Since IPO, Struggling Housing Sector

Okay, Annaly capital management is celebrating 25 years since going public. But the mortgage real Estate Investment Trust has bigger things on its mind amid major turmoil in the housing sector. The Fed's decision to hike interest rates has led to skyrocketing mortgage rates as refinancing and new mortgage applications drop significantly slowing down the housing market. That's not to mention higher home prices, which have risen almost 8% in the past year. Joining me now, is president and Ceo of Annaly Capital Management. David. Finkelstein, David, thank you so much for joining us. The 30 year fixed mortgage rate just hit a 16 year high. What kind of pressure is that putting on the housing sector right now? Well, thanks asia, it's a pleasure to be here. And yes, we are at peak mortgage rates for the cycle and it has put pressure on the housing market certainly. But it's important to note is that we were coming from a period where home price appreciation since the onset of Covid is up roughly 40%. And so naturally you would expect some normalization in that and higher mortgage rates accelerate that normal is a So we do expect home prices to decline from their peak levels, but we think it'll be relatively contained. But nonetheless, for the next 2-3 quarters, we would expect between 10 and 15% decline in H. B. A. In home prices over that period. But again, we do think there's solid fundamentals with housing and ultimate support for the sector, but we do need to correct here. So thanks for giving us kind of a glimpse of the path forward. It sounds like it gets a little bit worse before it gets better to normalization. And also, we know the market is expecting those rate hikes from the Fed in the coming months. Just tell us a little bit more about the 30,000 ft view to normalization. Mhm. Sure. So if you think about it, the rate hikes that the Fed projects based on their most recent dot plots are for the most part priced into interest rate markets, which happened to be priced into mortgage rates currently. So a lot of what you're thinking about in terms of Fed policy going forward is actually already priced into the market. Now, there could be a surprise which could lead to further rate increases beyond what's expected, But nonetheless, where we sit today, we still have probably about 150 more basis points worth of rate hikes and the mortgage rate is reflective of that. And so ultimately, policy will normalize markets will settle down and housing will ultimately regain its footing. But for the time being, higher, mortgage rates are going to continue to dampen demand and make affordability that much more difficult? Yeah. When we talk about the commercial real estate market, where is your finger on that pulse? We know there are old commercial buildings being turned into residential. Is there a reason right now to be bullish on that sector? I think it's a possibility and that that trend has has occurred and it certainly could occur on a go forward basis. It's not an easy process to convert a commercial real estate property into residential. It doesn't tell quite a big cost, but to the extent it's practical and economical, you will see it occur. Okay, got it, appreciate that insight there we know anally instituted a one for four stock split last month. Tell us more about the reasoning behind this and what you're expecting as a result moving forward. Yes. So that was actually an administrative uh move on the part of the company, simply to get our share count in line with our market cap. And coincidence with that we were added to the S&P. and um with the reverse split our volume on a daily basis, should be more commensurate with both the market cap and and our peers in the index. All right. And, you know, taking a look at the housing market generally, How does this downturn compared to previous ones that we've seen in the past? We constantly have guests on the show who talked to us about these economic conditions, how their unprecedented. There are a number of factors from the pandemic and also the global picture. What are your thoughts? Yeah. So it's a great question. Obviously all markets have exhibited considerable volatility in 2022. And, you know, as you mentioned on your intro, this is our 25th anniversary that we're celebrating at the new york stock Exchange. And I'll bring you back to um you know, 25 years ago when anna lee was founded and went public. You know, we've gone through in in incredible amount of volatility over those 2.5 decades, you know, for example, right at the outset of this companies of this company's existence, we have the Russian debt crisis, long term capital and we had 9 11 and then the financial crisis, Covid and so anally is very experienced at managing through times of market volatility. And historically we've always come out ahead and so we're optimistic about where we sit today. When we look at the market that we operate in which is fixed income and mortgage backed securities, we see higher, higher interest rates, obviously that were at the highest level of interest rates that we've had since the financial crisis. The pricing of the assets that we invest in, primarily agency MBS and to a lesser degree residential credit. That pricing is, is more inexpensive today, relative to benchmarks than it has been since the crisis. And then when you consider, you know what the outlook looks like and the durability of our portfolio, we actually feel very good about where we sit today and what the future looks like. Once we get through this bout of volatility. Well, taking a look at your legacy, it's no surprise that you do feel that congratulations on the anniversary and thank you so much for joining us. That's David Finkelstein, president and Ceo of Annaly Capital Management.