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Mortgage rates ‘leading to higher costs for homebuyers,’ economist says

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Realtor.com Chief Economist Danielle Hale joins Yahoo Finance Live to discuss rising mortgage rates and the housing market.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: Mortgage rates are on the rise as the Federal Reserve has begun its rate hiking cycle. And that is causing some early headaches for would-be homeowners. Danielle Hale is the chief economist at realtor.com, joins us now. Danielle, good to see you here this morning. So how-- you know, we've been watching this march higher in mortgage rates, what does that mean to the housing market this spring?

DANIELLE HALE: Yeah. And a march higher is a good way of describing it. So we have seen mortgage rates tick up pretty substantially. As you're showing on the graphic right now, up more than a quarter of a percent in one week. That's normally the size of an increase that we might see over the course of several weeks. And this is not the first time we've seen an increase that large in a one-week period. So mortgage rates are up substantially, nearly a point and a quarter from a year ago.

And that is leading to higher costs for home buyers. So at today's median asking price, we know that those mortgage rates relative to one year ago and the prices that we saw one year ago, mean that the monthly cost is $375 for today's typical home for sale. And $375 sounds like a lot in certain parts of the country, sounds like maybe not quite as much in other parts of the country but relative to that median asking price and the median mortgage payment, it's an increase of 30%, which is pretty sizable. And so we do expect that to impact home buyers' shopping plans as they're in the market this spring home-buying season.

BRIAN SOZZI: Do you think we're teed up, Danielle, for a disappointing spring home-selling season?

DANIELLE HALE: I think it depends on what your expectations are. So if you're expecting this spring home-buying season to look a lot like last spring home-buying season when prices were high but mortgage rates were relatively low and that helped shoppers sort of navigate those higher prices, I think then you probably are going to be disappointed. However, if your comparison is relative to the pre-pandemic period, we're still seeing home sales up above that point because we've got a large number of millennial households that are at those key years for household formation.

So there's some really strong fundamental demand in the market. It's just going to be challenging for those households to navigate the higher prices that we're seeing and the higher cost that stemmed from higher prices and higher mortgage rates. So I do think we'll see a significant number of home sales. I do think we'll start to see inventory improve in 2022, which is going to be good news for home shoppers who have been consistently frustrated by the lack of homes available for sale. So there are some good options or signs in the market this spring but it is going to be more expensive, that's for sure.

JULIE HYMAN: I want to pick up-- it's Julie here. Hi, Danielle. I want to pick up on the inventory question for just a moment. On the Calculated Risk blog this morning, there was actually a post that maybe inventory's already bottomed, right? That we've been seeing a month or so of declining numbers in inventory. Do you agree with that assessment? And how much is that going to help?

DANIELLE HALE: Yeah. It's quite possible. So depending on the metric you're looking at, you're going to find a slightly different seasonality but if you look at the inventory numbers from NAR, their existing home inventory did bottom in January and showed a slight increase in February. Our numbers are still showing year-over-year declines but we have seen those declines kind of compress a bit, so they're getting smaller.

So we're at the part of the year where we typically see more homes available for sale, more movers, and home listings happen in the spring and as we move closer into the summer. So we're certainly past that seasonal low, it's just a question of whether or not we're going to see growth this year. Our forecast expects that we will. We've seen some really healthy construction numbers over the last year. That's going to help add new options for existing homeowners who are looking to trade up.

And on top of that, we think that these cost factors are going to cause the pace of home sales to sort of slow a bit. Buyers are going to really have to think twice when they're looking at those costs that they're agreeing to, signing on for that 30-year mortgage. And that's going to give the appearance of more inventory on the market because it will probably take homes a bit longer to sell.

BRIAN SOZZI: For those still on the fence about whether to buy a home, Danielle, how much further do you see mortgage rates climbing this year?

DANIELLE HALE: Well, I will say, they've already surpassed our original expectations for the year. And it's a very fluid situation right now. Just from the March outlook-- or the December outlook to the March outlook from the Fed was a significant shift in how much Federal Reserve rate-hiking was going to be needed for the year. So I would say the situation is evolving but they're already on their way to 5%. That does seem like it's very likely to hit 5% before the end of the year.

JULIE HYMAN: And when we're talking about pricing, Danielle, how much more do you think prices can rise this year, or do you think we're going to see more of a stabilization, especially as you see that sort of trade-off between pricing and higher rates?

DANIELLE HALE: Yeah. That's a great question. So as I mentioned, those higher rates and higher home prices have led to a 30% increase in the cost of housing year over year. And for general context, inflation is at record highs, it's up about 8%, the energy category of the consumer price index is up about 25%. That's one of the biggest leading categories.

Measured inflation in the consumer price index for housing isn't up quite that much. But if you're looking at home prices, the cost of your monthly mortgage is up 30%. So that's going to impact people's ability to afford the same prices. And so our expectation, our forecast going into 2022 is that we expected home prices to go back into the single-digit territory, roughly around 3%. I think higher mortgage rates are going to hasten our return to that slower price growth.

At the same time, it's going to be hard to see prices decelerate too much given the imbalance of supply and demand that we have. So over the last decade or so, we've built 5.8 million fewer homes than we needed relative to the number of households that were formed. And so that's going to continue to be a pain point in the market. And then we're going to continue to see I think pricing remain relatively high because of that relatively limited supply.

BRIAN SOZZI: Danielle Hale, chief economist at realtor.com. Always good to see you. Have a great rest of the week.