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Homebuyers are in a 'wait-and-see mode' amid elevated mortgage rates: Economist

RealPage Head of Economics & Industry Principals Jay Parsons joins Yahoo Finance Live to assess the housing market as mortgage rates dip while remaining elevated, inflationary impacts on housing demand, and rental inventory.

Video Transcript

SEANA SMITH: Let's stick with housing here and take a look at what's happening in the rental market because inflationary pressures and economic uncertainty are hitting that market pretty hard. And your report from RealPage found that apartment demand plunged in the third quarter, its first 3Q drop that we've seen in 30 years.

We want to bring in Jay Parsons, head of the economics industry principles at RealPage. Jay, it's great to see you. So very unusual for us to see a drop here in the third quarter, which is typically very strong three-month time frame for the rental market. What do you think is behind this massive drop that we saw?

JAY PARSONS: Yeah, so I think the first thing I was looking for is signs of affordability concerns, given the number of-- given the rate-- the rent increases that occurred over the last couple of years. But that's just not showing up. Wages are still up. Rent collection is still very high. In fact, they're actually up year over year.

And we're not seeing any kind of move down into cheaper units and cheaper areas. And so, really, what appears to be happening is a freeze in household formation because there's very little leasing traffic right now. And obviously, we know people aren't buying houses right now. So it tells me that people are kind of in a wait and see mode. And they've really pushed the pause button on their housing search for the time being.

DAVE BRIGGS: The pause button-- is that how you describe the entire housing sector at the moment? And is that because of mortgage rates? It seems like buyers and sellers have, back to your word, paused.

JAY PARSONS: Yeah, no, I think obviously for renters. It's not necessarily mortgage rates directly, but it's the same kind of underlying factors that are driving up mortgage rates. And that's really inflation, you know? [INAUDIBLE] a lot about home prices and rents, but one thing everyone feels every day is groceries. I mean, they're up 13% year over year. And so I think with overall inflation, we're seeing consumer confidence is way down.

And you think about it. When you don't feel certain about the economy and your place in it, your financial situation, human nature is to wait it out, wait and see. And so, thankfully, as you know, the job market remains strong for the time being. Unemployment's low. And so that tells me that there's a lot of pent-up demand being built up right now. So if the job market remains strong, I do think demand will come back. But it's certainly not happening right now.

SEANA SMITH: Jay, how long until you think that demand does return to the rental market?

JAY PARSONS: Yeah, good question. So these next few months, winter's a slow period for housing of all types. You don't see a lot of people moving around in the winter months. And so we really won't know much until early spring. So I think by the time we get to about March, we should see that demand come back. Now, of course, if the job market turns, it could be a very different story. But at this point, I would expect to see a lot-- particularly for rentals, I think we'll see rental demand come back first around that time frame.

DAVE BRIGGS: What's the inventory story in the rental market?

JAY PARSONS: So we saw a huge drop-off in vacancies in 2021-- record apartment demand, record single family rental demand. We peaked on occupancy rates in March. It has gotten a little better for renters out there. There's a little more availability. It's still low. While there was weak apartment demand in Q3, it's still a very tight market. We have very low vacancy right now and high retention rates.

But we-- it's gotten a little bit better. And I think the good news for renters as well is we're going to see a lot of new inventory next year. We're seeing 40-year highs in apartment construction. We're seeing a large number of single family rental communities, [INAUDIBLE] communities are being built. We've even heard of home sellers who are now choosing to rent out their homes while they wait out the mortgage market. And so there's definitely more inventory. And I think we'll see more next year as well.

SEANA SMITH: Jay, what does this do to prices? I guess, if there's more inventory, more options on the table, are we going to see a pretty big drop then in rentals?

JAY PARSONS: I don't think we're going to see necessarily a drop in rents for most parts of the country. I think we could see some seasonal cuts here in the winter months, but nothing dramatic and drastic. But I think we can see-- more importantly, though, I think we're going to see a big moderation in rent growth next year.

And to be honest, we've already seen that. I mean, certainly, the CPI does not reflect this. And most of the big rent hikes occurred in 2021. And in 2022, we've really seen more moderate rent increases. And I think we're going to see more of a return to normal in terms of rent growth next year.

SEANA SMITH: All right, Jay Parsons, great to get your take. Thanks so much for joining us.