Homeowners will need 'a pretty strong incentive' to sell amid declining prices: Economist

Realtor.com Chief Economist Danielle Hale joins Yahoo Finance Live to discuss the decline of home prices in the real estate industry in Q1, mortgage rate trends, the rental community, and the outlook for home sale transactions.

Video Transcript

SEANA SMITH: All right, let's take a look at the real estate market. Home prices are on the decline across the US, with nearly a third of metro areas posting annual price decreases for houses on the market in the first quarter. That's according to the latest numbers that we're getting from the National Association of Realtors.

We want to bring in Danielle Hale, Realtor.com Chief Economist joining us now. Danielle, it's good to see you here. So just what's your assessment of this report and what it tells us about the state of housing at play today?

DANIELLE HALE: Well, this report covers local market data. So we're looking at city level data. And it shows us-- reminds us, really, that real estate is local. And so even though we're seeing nationwide trends with home prices declining slightly nationwide, what we're seeing is that in some markets, the declines are quite acute. And in other markets, we're actually seeing home prices continue to go up. So real estate is local. And this report today really just hammers that home.

SEANA SMITH: When you take into effect some of the price declines, though, that we are seeing, how much of that has to do with the fact that inventory levels are so low?

DANIELLE HALE: Yeah. So inventories are up compared to a year ago, but still down in most markets about half of what they were before the pandemic. That's not true everywhere. In fact, our data show that the Austin, Texas market, in particular, is back up to where it was before the pandemic. And we're also seeing bigger inventory growth in a lot of the markets out in the West.

And these are the same markets that are seeing home prices soften or decline. And so it really is affecting the balance of supply and demand, but it's not just a supply story. It's also a bit of a demand story. And we're just not seeing as much of it in the West, because that's where prices have been the highest and where households have really struggled the most to keep up with those high prices.

SEANA SMITH: So many homebuyers, especially first time homebuyers, have been priced out of the market. Danielle, I think a lot of people out there if they're sitting on the sidelines, they're not ready, not really sure if they should sell their house now, or if you're a potential homebuyer, you don't know if now's the right time to look. Is the worst of housing-- is that behind us? Or what do you think the next several months could potentially look like?

DANIELLE HALE: You know, I think when it comes to sales activities and the number of home transactions taking place, I think we have seen the low. But I think it's going to be a slow climb from here. If you look at a lot of existing homeowners, they have mortgage rates that are well below current market mortgage rates.

And so they have to have a pretty strong incentive to make a move today, because, financially, it's going to be more expensive if they sell their home. Now, fortunately, a lot of those homeowners have seen some equity creation from the fact that prices have gone up so much over the past couple of years, notwithstanding the recent softness in prices in the West.

So they've got a good equity cushion. But with mortgage rates where they are, it's going to be expensive to make a move. So it's hard for them to make the transition. They've got to have life factors or job factors really requiring them to make a move.

And on the flip side for first time homebuyers, with prices up so much, they've got to really amass a critical amount of savings to get into the market. And so it continues to be a challenging market for both buyers and sellers who want to turn around and buy again. As a result, I think we're going to see sales climb very slowly from this level unless we see a big adjustment in mortgage rates. And I'm just not seeing that any time soon. It's going to be a pretty slow, gradual recovery from here.

SEANA SMITH: Danielle, what do you think is ahead when it comes to mortgage rates? Because here we are trending to the upside here. When we started the year, there was lots of talk about that-- maybe we'd fall back to 6%, even below that 6% level. Do you still see that as a potential here before the end of the year?

DANIELLE HALE: Our forecast for the year had mortgage rates actually higher than they are now. But I think the story is right. So we thought that inflation would be a little bit more persistent than it has-- than people were initially expecting. And so that's going to put upward pressure on mortgage rates.

I do think we're starting to see progress on mortgage rates. And especially with the Fed signaling that they're close, potentially, to the end of the tightening cycle, I think that's going to help. And we'll see long term rates start to gradually ease in the second half of the year.

And mortgage rates are likely to follow them down. We're certainly not going back to 3% anytime soon. But I do think we'll get back into the low 6s by the end of the year.

SEANA SMITH: Danielle, what about the rental market? So many people are priced out of the homebuyer market. Obviously, that has really boosted demand for rentals out there. Are those dynamics at all changing?

DANIELLE HALE: It's interesting, we're seeing a lot of the geographic dispersion that we're seeing in the housing market and for sale prices is very similar to what we're seeing in the rental market. So those expensive coastal markets, particularly in the West Coast, we're seeing some softening, in fact, even some year over year declines in certain markets, whereas in the Midwest, there's a lot more affordability.

We're seeing rents continue to go up. So it really matters where you are and how affordable your housing market is. And we're seeing those affordable markets are doing better from both a home price and a rent perspective, whereas those expensive markets are seeing a bit of an adjustment.

SEANA SMITH: All right, Danielle Hale, thanks so much for joining us here-- Realtor.com Chief Economist.