Rising mortgage rates are ‘a rude awakening’ for homebuyers: Economist
Nest Seekers International Chief Economist Erin Sykes sits down with Yahoo Finance Live to discuss rising mortgage rates, the Fed’s interest rate hikes, housing market inventories, rising rent prices, and how these factors are barring home buyers from entering the housing market that was previously considered “hot”.
Video Transcript
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DAVE BRIGGS: After a red hot couple of years, is the crash coming to the housing market? Or is it simply a cooling off? Mortgage demand falling this week to a 22-year low and mortgage applications down 40% from their 2021 peak. So what’s to come? Let’s ask Erin Sykes, Nest Seekers International chief economist. Erin, nice to see you. How do you evaluate the real estate market at the moment? And how does it compare to ’07, ’08, with some saying, we’re bound to repeat that?
ERIN SYKES: So, often, recessions come with a lot of different inputs. The outputs tend to be the same. It’s a cooling and it’s a pulling back. But also remember that they tend to be very, very short. So you get a short window of opportunity in order to make your move. And what we’re dealing with now is a case of normalcy bias, where people were just so used to the hot housing market, they thought it would go on in perpetuity.
And it’s a rude awakening right now with the increase in rates. And it’s shaking a lot of people up, combined with the uncertainty in Ukraine and in inflation and oil prices and all of the different factors that we dealt with over the last two years from COVID. So you have people putting on the brakes for now, but still a lot of interest in the market. So I think it’s still too early to say is this very much going to be a crash, or is this just a cooling period.
SEANA SMITH: Hey, Erin, we certainly have seen some sellers bring down the price of their homes. Do you think price drops, are they going to become more common? And also the supply situation, when do you see that significantly improving?
ERIN SYKES: Sure, so rate increases are a form of demand destruction. So they naturally bring down the prices in homes, in addition to that normalcy bias that we were discussing before, where sellers were perhaps a little unrealistic and thinking that you should set a record every time you sell your house, and every six months, you can make 20% or 30% if you sell. So we know that that cannot go on.
However, you also have the factor of all of the supply shortages. And that’s a little bit harder to control than the demand side, especially with that labor workforce participation rate down and so many people going off in their own, becoming 1099s, and even those who are on long-term disability because of long haul COVID. So we’re really set for some challenges in the long-term future for that workforce participation. Therefore, it’s difficult for home builders to get the employees that they need to satisfy the outstanding two to three million units that we need in the housing market.
RACHELLE AKUFFO: Erin, Rachelle here. Some people are looking at these house prices, and they’re clearly giving up, as we’re seeing, obviously, the mortgage rate demand falling there. But we’re also seeing asking rent rising above $2,000 for the first time back in May. That’s a 15% rise year over year. Is it better to rent or buy in this environment? It seems like people are stuck between a rock and a hard place.
ERIN SYKES: Exactly, and I think that that rental statistic is even more important, in a lot of ways, than the pricing on sales. Because you have so many people stuck renting, and they’re really having difficulty from both sides. If they saved and they wanted to participate in the buyer’s market, now they’re hit with challenges because of inflation. It’s difficult to get that first 20% down. So they’re forced into renting.
And landlords are basically taking the money they lost over the last couple of years in COVID, especially in the cities, and really pumping up those rental numbers. Again, it’s supply and demand. You have more people that need to rent because they can’t purchase. So you’re naturally going to have more competition there. And I am– you know, that is, to me, what affects the most of America and really hits the hardest. And you’re seeing a lot of people, even families, moving from two and three-bedroom places into one-bedroom rentals, just to be able to hold their rent flat.
DAVE BRIGGS: Erin, it’s difficult to paint the country with one broad brush because every market is different. It’s like politics. And Tip O’Neill said, all politics is local. But what do you see, generally speaking, when it comes to prices? Are they going to fall significantly throughout the summer?
ERIN SYKES: So it really depends on the market. And I apologize for just echoing you there. But if you look at the– America in general, over the last year, we’re up 20% year over year in prices for homes. However, if you look at markets like Palm Beach, you’re looking at 200% and 300% increases. So it’s really apples and oranges.
And even if we take a number and say we’re going to see a pullback in prices of 15% to 20% in most markets, that affects different areas much more than others, especially if you’re looking at if it’s a luxury home based market, like Palm Beach Island, versus a more suburban development and an area that is more up and coming.
SEANA SMITH: Hey, Erin, what are the two, three most important factors for first-time homebuyers, those who may have been priced out of the market? Now that we’re seeing prices come down a bit, what should they be factoring in when they are deciding if it’s the right time to buy the house now?
ERIN SYKES: Sure, so I want to stress that there is going to be a period of economic opportunity. And that goes for all markets, right? If we see a pullback, that’s when you should jump in. Even if it feels reticent and you’re a little bit nervous, that is likely the right time to buy, not when there’s a frenzy of buying, and you have lots of competition.
So I think an important thing right now is to keep an eye open for that opportunity, to lock in a rate now, and buy yourself a little time. So if you see a further pullback in prices, you already have a rate locked. So if we see an increase of a half a point come the Fed meeting, then you already are locked in with today’s number.
And again, I think a lot of times, we forget that mortgage rates move in between the Fed meetings. And we saw a quarter point increase just in the last week in anticipation of their changes. So, just be proactive. Keep your powder dry. Have some cash to make a move. And look for the upcoming opportunity.
RACHELLE AKUFFO: There you go, stay ready. A big thank you there to Erin Sykes, Nest Seekers International chief economist. Thank you so much.
