Housing: Rising mortgage rates a ‘tough thing for a lot of buyers,’ economist says

Realtor.com Chief Economist Danielle Hale analyzes the record rise in home prices in the month of March, the housing market outlook, mortgage rates, housing bubble fears, and trends in bids from homebuyers.

Video Transcript

- More buyers are getting priced out of the market, home prices surging once again in the month of March, jumping more than 20% from a year ago. That's the highest year-over-year price change in more than the 35 years of tracking this data. We want to bring in Danielle Hale, chief economist at Realtor.com.

And Danielle, it's important to point out that this data is from March. So since March we've seen some movement when it comes to the housing sector. We've seen the Fed raise rates. The 30-year mortgage rate is above 5%. So do you think we've seen home prices peak, or is there still a little bit of wiggle room there?

DANIELLE HALE: I think that we've seen the growth rate peak, but I don't think prices themselves have peaked. So as you pointed out, this is March data. This is sales data. So really these contracts were signed between buyers and sellers quite a while ago. We're looking at the housing market through the rear view mirror when we're looking at the Case-Shiller data.

And normally, there's a lot of stability in the housing market, but not so over the last couple months. Mortgage rates were up 91 basis points in March alone, and then climbed higher in April and May. So that's a bit of a backward looking indicator. You flash forward and look at our recent weekly housing data-- you can see that active listing prices continue to rise, but what matters more is that the number of homes available for sale is off of all-time lows, and has started to increase.

And so I think that's going to be important for the housing market going forward. We're starting to see signs of balance return. It's not yet showing up in the home prices, but we do expect to see that in the months ahead.

- Inventory's still historically low. What do you expect to have a bigger impact in the months ahead-- that insignificant small inventory or the rising mortgage rates that you just mentioned? And how high do you think they'll climb?

DANIELLE HALE: Well, they're actually both going to work together. We've had years of not enough supply in the housing market. You can solve that by either boosting supply or by cutting back on demand, and we're really seeing both unfold here. Construction has been moving up. It's taken a little bit of a hit in recent months, but it remains near the high end of the recent range.

And we've seen buyers pull back and become a bit choosier as costs are high. Between the combination of higher prices and higher mortgage rates, the cost for a monthly mortgage payment is nearly 50% more than it was one year ago. So that's a tough thing for a lot of buyers to navigate, and we are seeing that play out with somewhat slower pace of home sales, whether we're looking at existing homes or new homes.

So we're seeing some moderation in the housing market. We expect that to continue as we move forward. When it comes to mortgage rates, I do think that the market has done a really good job of anticipating where the Fed is going to go, because the Fed has been pretty good about telegraphing what it is expecting. When it comes to the future pace of increases, there's pretty broad agreement that we're going to see another couple of 50 basis point rate hikes in the months ahead.

And so mortgage rates don't have to rise higher to anticipate those rate increases. They don't have to rise once those rate increases happen, because they've already incorporated a lot of that increase into today's mortgage rates. So I think we might see some stability in mortgage rates going forward, which would be welcome news for home shoppers, and give them some time to adjust to this new mortgage rate environment.

- So Danielle, if you are in the market right now for new home-- obviously, it's an extremely tough market, especially in certain areas-- does it make sense then to wait a couple of months, do you think, or should people who are looking now be actively trying to buy?

DANIELLE HALE: I think, if you wait, you will likely see more options on the market. So you'll have more to choose from the longer you wait. That said, do you think we're going to see some stability in mortgage rates. That's far from guaranteed. So if we get new data that shows that inflation is not going to continue to move down, or that demand remains very high and that the Fed might have to go further than everyone is currently expecting, there's always the risk that mortgage rates could start climbing again.

So you have to navigate these two risks. I think the other thing to consider is that, even though we expect to see more options in the future, the housing market remains undersupplied. And so you look at the number of options you have for sale right now compared to, say, before the pandemic-- there's much less to choose from. In that case, when you find a home that's a good fit for your wants and needs, that fits in your budget, I think you should go for it.

- Some of the numbers in here are just staggering-- Tampa, Phoenix, and Miami up 34%, 32%, and 32% on an annual basis, which is just unsustainable. So in terms of the long-term here, some are factoring this is a bubble that will burst. Others just feel it's a bit of a softening. What do you see happening with the real estate market over the next 6 to 12 months?

DANIELLE HALE: Yeah, as you've noted, I think it's very clear that that level of price increase cannot be sustained. If you look at the weaker end of the markets and the bottom markets-- like, Minneapolis, Washington, DC, and Chicago still saw home prices move up by more than double digit percent relative to a year ago. So that would be eye-popping, were it not the bottom end of the market.

So we do expect home price growth to slow. That said, it's hard to see home prices go in the other direction-- and by that, I mean decline-- in part because we have an under-building situation in the housing market. If you look over the last decade, we've seen 5.8 million more households formed than single-family homes were built.

So for context, we build about 1.1 million or so single family homes each year. In other words, we're five years behind when it comes to homebuilding. And we can catch up by seeing more building, fewer households formed, or just time to work through that overhang. I think we're going to gradually get there, but it's going to take some time. It's a really big hole to climb out of.

- Danielle, I know one of the trends that you have been closely watching are bidding wars, how many people are entering these bidding wars when it comes to buying their homes. Has that only increased, or what are you seeing now?

DANIELLE HALE: For a period of time, we saw asking prices that were below selling prices, which is unusual. So if there's a bidding war you see, potential buyers have to offer more than the asking price in order to win, because they either expect other buyers, or there actually are other buyers that they're competing with. I think, as we move forward, we're going to see asking prices remain relatively high, but those sales prices are going to come back down.

So you might be able to win a home by just offering the asking price. And maybe in some markets you might be able to offer a little bit less an asking price. So it's not really widely the case in the data yet, but I do think that that's the direction that we're going to go in.