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Housing: There's 'no escape' from higher costs, economist explains

Realtor.com Chief Economist Danielle Hale joins Yahoo Finance Live to discuss housing affordability following Fed Chair Powell's recent comments on interest rates and inflation.

Video Transcript

[AUDIO LOGO]

JEROME POWELL: There was a big imbalance between supply and demand. Housing prices were going up at an unsustainably fast level. So the deceleration in housing prices that we're seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals.

And that's a good thing. For the longer term, what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again. And I think we-- so we probably, in the housing market, have to go through a correction to get back to that place.

DAVID BRIGGS: Fed Chair Jerome Powell renewed emphasis on housing and the real estate environment today at the Fed meeting after raising rates for 75 basis points. Also saying that there was-- "weakened significantly" is how he described housing in this environment, the one area they're seeing evidence of success beyond all else. Let's talk about that with Danielle Hale, realtor.com Chief Economist. In terms of where we're headed, Danielle, your reaction to that statement from Powell about a correction. Are you seeing compelling evidence that we are in correction territory? Is that still down the road?

DANIELLE HALE: We've certainly seen sales activity pull back significantly. Today's numbers on existing home sales were down almost 20% compared to a year ago. That's a second month in a row where the declines have been about that large. We know that the housing market was overheated at this time last year in response to very close to record low rates. We are seeing now that buyers are responding as rates climb to new records, home sales are pulling back, and we're seeing fewer transactions in the market.

SEANA SMITH: Danielle, when you take a look at the potential correction here, I guess, how much worse do you see it potentially getting here for housing in the next couple of months?

DANIELLE HALE: You know, I think that remains to be seen. A lot depends on what happens to mortgage rates. We know that housing is a very interest rate sensitive sector. The difference between 5%, where we were just six weeks ago, and over 6% now is a pretty big payment shock.

And if you look at where we are now compared to where we were one year ago, monthly mortgage payments are up 66% between the combo of higher mortgage rates and higher home prices. So that's a lot for households that are shopping to absorb. I think as long as we see mortgage rates remain elevated, it's going to be hard to see sales activity pick up in a big and meaningful way.

RACHELLE AKUFFO: So then, Danielle, for buyers, sellers, and renters who are seeing this announcement knowing that rates are going to continue to climb and that the Fed isn't going to be slowing down any time soon, what are the big takeaways for them?

DANIELLE HALE: Yeah, I think given the higher rate environment, it's more important than ever to make sure that you're financially prepared. There's really kind of no escape from higher cost as someone looking for a place to live right now, whether you're planning to buy, whether you're planning to rent. Home prices continue to go up by double digit on the asking price side. Sales prices today actually slipped into single-digit territory for the first time, but they're still up more than 7% compared to a year ago. So the prices of homes to buy and to rent are getting more expensive.

And then you factor in mortgage rates, that adds an extra layer of cost for home buyers. I think going in with a plan, setting your budget and sticking to it. It can be really tempting as prices go higher to just push that budget envelope a little bit. But I think sticking to your budget in this important-- in this environment is very important for buyers.

And on the plus side in the housing market, as we see this pullback in buying activity, those who can continue to remain in the housing market are finding that sellers may be a little bit more open to negotiating because they're seeing fewer home buyers. The market, in many areas, is not quite as competitive as it was a year ago.

We're seeing month-to-month price declines. They're still gaining on a year-over-year basis. But more importantly, we're seeing sellers, in some cases, reduce asking prices. So that is actually back to roughly one in five homes, whereas it was about half that at this time last year.

DAVID BRIGGS: We're looking at another jumbo hike, possibly 75 points, at least 50, at the next meeting and, look, a Fed funds rate of 4.4 by the end of next year. Where do you think mortgage rates are headed? I'm hearing some feel we're headed to at least 7%.

DANIELLE HALE: You know, I think it's possible, but it's not a given at this point. If you're tracking the rates, long-term rates have actually come down a little bit after the Fed's announcement today. We'll see if they stay in that territory. But there's usually some variability in the spread between short-term rates and mortgage rates.

There's a little bit more consistency between 10-year Treasury rates and mortgage rates. And as 10-year Treasury rates come down, that gives mortgage rates some breathing room. We are not necessarily going to see another 75 basis point surge in mortgage rates. But I do think as long as inflation remains rampant, as long as we don't know exactly what the end point will be for those short-term rates, that continues to put upward pressure on mortgage rates.

SEANA SMITH: Danielle, how long do you see this challenging environment that we're currently in right now? How long do you see this lasting?

DANIELLE HALE: I think it really depends on inflation. So that's the key thing, we need to see inflation get back to under control, back-- moving steadily towards the Fed's 2% target. We haven't seen that in the annual data yet. There's some bright spots in the month-over-month data on overall inflation.

That was largely driven by energy prices. We're really going to need to see, across the board in those core inflation indicators, price growth decelerate significantly before we can say we're close to the end on this tightening cycle and we can start to think about what it might look like if rates were to trend lower.

RACHELLE AKUFFO: And, Danielle, how much of the pressure that was already on the housing market is being compounded when you look at things like home builder confidence, when you look at what people are willing to spend, and even if they have the labor to really complete some of these homes?

DANIELLE HALE: Yeah, I think that's the most challenging thing right now is that the housing market remains in a long-term shortage situation. We haven't built enough homes over the last decade to keep up with the number of households that have formed. So whether you're looking at rental vacancy rates or homeowner vacancy rates, we see that housing is in relatively short supply in the big picture macro sense.

If you look at the market of homes for sale, we're seeing improvement. There are 25% more homes for sale right now compared to this time last year. So we are seeing an improvement, a little bit of a better balance between supply and demand in the transaction side. But those vacancy rates remain close to record lows.

So there's still plenty of opportunity for builders to build more. But they're facing headwinds when it comes to housing demand. Because of these higher costs, because of the higher cost of financing because of higher mortgage rates, it is going to be difficult for them to navigate this market going forward. There's plenty of long-term demand. But in the short run, we're seeing demand pull back because of the higher costs.

DAVID BRIGGS: Real estate geeks like ourselves, we're on pins and needles waiting to hear mortgage-backed securities. And we heard that question, and the Fed Chair said, no, we're not even close to thinking about rolling those off the balance sheets. Apologies for this being so theoretical. But when that begins, when we begin to sell off our mortgage-backed securities, any sense of what that means for the housing sector?

DANIELLE HALE: Yeah, so as the Fed rolls off mortgage-backed securities, that should mean an increase in mortgage rates unless we see a big surge in other investors stepping in to make those mortgage-backed securities purchases. So my best guess is that that's going to be some upward pressure on mortgage rates, some additional upward pressure when we get to that point.

DAVID BRIGGS: So let's put a bow on this thing with advice for the homeowner. If you're sitting here watching mortgage rates continue to go up and a slight cooling off to prices, what's your advice?

DANIELLE HALE: So mortgages are going up. If you're a homeowner and you want to stay in your home, you're looking at record high levels of equity thanks to those price increases that we've seen. Interestingly, even if we do see a correction or even a pullback in housing prices of 10% to 20%, that would still put most homeowners, or at least, in aggregate, homeowners would still have a record high share of equity.

So most homeowners are in a really good position. I think it's important for recent home buyers and those thinking about home buying to make sure they're going in on as strong a financial footing as possible so that they are making decisions that can be sustainable for themselves in the long run. Don't push your budget. Now is not the time to do that in the housing market.