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Housing economist details what’s driving people towards thinking about new homes

Realtor.com Chief Economist Danielle Hale sits down with Yahoo Finance Live to discuss the drop in existing home sales for the month of February, the price gaps between building new homes and existing ones, and rising mortgage rates.

Video Transcript

BRAD SMITH: Welcome back to Yahoo Finance Live, everyone. The National Association of Realtors data for the month of February showed a 7.2% decline in sales of existing homes compared to January, and a 2.4% decline compared to February of 2021. Joining us now to break down even more of this data and the latest trends in the housing market, we've got Danielle Hale, who is the realtor.com chief economist.

Danielle, great to have you here with us this afternoon. First and foremost, with the NAR stats and metrics that came out, they noted 120 consecutive months of year over year price increases. That's the longest running streak on record for context. So, at what point would you expect prices for existing homes to push buyers towards new homes?

DANIELLE HALE: Oh, that's a great question, Brad. So yes, as you noted, that 120-month streak, that's 10 years of year over year price gains. I think despite the fact that we've seen existing home sales get more expensive, or at the same time, new homes have also gotten more expensive. So even though they're pricier, there's still a bit of a gap between the price of existing homes and new homes.

And so I don't think it's the prices that are leading people to think about new homes. Rather, I think it's the difficulty of finding a home. With the number of homes for sale close to a record low among existing homes, that is pushing a lot of people to think about new construction instead, because those new homes are a bit more plentiful. But even those can be hard to come by in a completed stage. So a lot of those homes that are for sale as new homes are under construction or not yet started. So that's another factor that's getting people to think about that new versus existing home trade-off. It's really the availability.

BRAD SMITH: Fair point. And so for sold existing homes, do you expect inventory to continue to increase, as we saw in this most recent data?

DANIELLE HALE: So, yeah, I do. We're at the point in the year where we do typically see the number of homes for sale begin to increase. Buyers are out in force early. Sellers tend to come to the market a little bit more slowly, but we should see that normal seasonal uptick. That said, to put this in context, on a year over year basis, the number of homes for sale is still down. In our data, we show roughly a 20% decline.

So to put that into perspective, for every five homes you might have seen for sale last year, this year, there are just four. And it's not like we were talking about how abundant homes were for sale last year. So it is a tough market for buyers throughout their shopping. There's still very limited options. And so that means they have to be really prepared to deal with these market situations. They need to be ready to act quickly and to really know what they want so they can focus in on it when they see it.

BRAD SMITH: Now median prices, they actually rose to $357,000, 15% higher than February of 2021, I believe. And so what does this signal and indicate to you?

DANIELLE HALE: Yeah, so one thing-- home prices are going up. 15% is a pretty hefty increase on a year over year basis. On the plus side for potential buyers, it's down slightly from the year over year growth rate that we saw in January. So a bit of a slowdown in the rate of price growth, but home prices are still growing. So that means we're on pace to hit a new high. And as we talked about earlier, 120 months of consecutive year over year price increases, just for context, when that 10-year streak started, the median home sales price was about $155,000.

Now, the typical sales price is more than two times that. So it's a pretty hefty, additional cost factor for buyers in the market. And that's not the only cost that they're grappling with now. With rising mortgage rates, it's really a one-two punch of higher cost factors for potential buyers in the housing market today.

BRAD SMITH: One of the most closely intertwined factors with the mortgage rates, the 10-year Treasury rate, that's sitting at 2.151%, based on when I last checked before we came on air. Does that materially change purchasing plans for homebuyers right now?

DANIELLE HALE: So it hasn't yet in a big way, but as we see these rising costs mean real dollars for potential buyers. So between higher mortgage rates and higher home costs, the typical buyer today is looking at $340 extra in a monthly housing payment just for the mortgage portion of it. So that's real money. That adds up to over $4,000 a year. That is going to cause some people to, at least, reevaluate their plans and probably adjust their search budgets, if not give up and continue to rent or find some other means of housing.

That said, rents are also rising at double digit pace, so it's not like the rental market is offering a ton of relief right now. And with inflation rampant across the economy, rents are expected to continue to grow. That might keep some people in the housing market, despite higher costs because they want to lock in today's prices before they go up higher. And once you buy a home with that fixed mortgage rate, you have the bulk of your housing costs fixed on a month-to-month basis. So that's a nice hedge against rising inflation.