Home buyers need to 'be prepared to move quickly' amid supply, mortgage rate constraints: Economist

Zillow Senior Economist Jeff Tucker joins Yahoo Finance Live to discuss how debt default will impact the housing market, mortgage rates, pricing in the housing market, and housing inventory.

Video Transcript

- As the debt ceiling talks drag on in Washington, there's a new warning about what it might do to the housing market. Real estate company Zillow saying that if the US does default on its debt, mortgage rates are going to go through the roof. Joining us now is Zillow senior economist, Jeff Zucker. Jeff, it's good to see you.

Excuse me, Jeff Tucker. Sorry about that, Jeff. Break this down for us. When we talk about the impact that a debt default is going to have on the housing market, mortgage rates are going to jump by how much?

JEFF TUCKER: Yeah, we have estimated that they might jump as high as 8.4% based on the current relationship with the 10-year Treasury yield. And really at the root of that, what it's coming back to is the concern about systemic risk in the financial system as everyone begins to doubt the collateral and their counterparties any time they're making loans.

What that means for consumers and homebuyers is borrowing costs are likely to rise really substantially.

- To what extent has that already seeped into the thinking around home buying right now.

JEFF TUCKER: I think I don't think we've seen too much impact yet. We've certainly seen the 1-month and the 3-month Treasury bills-- already see their yield rise pretty astronomically in the last couple of weeks. I think a lot of folks are still expecting and hoping that a resolution to the debt ceiling crisis comes along so that this won't actually impact those long-term yields, long-term borrowing costs. So at the moment, I don't think it's quite yet filtering through.

But just because it's unlikely doesn't mean it's impossible. And so one of the reasons we did this research was just to highlight what a serious issue it is and why it is so important to come to a resolution on the debt ceiling and hopefully never find out exactly what does happen if we crash through it and default on the debt.

- Yeah, hopefully we don't. Jeff, what are you seeing just in terms of activity today and how that compares to some of the expectations that we had headed into this year when we initially thought that maybe mortgage rates would be a little bit lower than where they are today?

JEFF TUCKER: Yeah, borrowing costs do remain high. They've been quite volatile. They're still bouncing around between 6.25% and 6.5% on a 30-year mortgage. That's a lot more interest that homebuyers are paying. And I think maybe the biggest surprise of the spring home shopping season is how many buyers are kind of forging ahead in spite of that.

Buyers kind of went missing in action in last fall and last winter. There was a lot of concern that home prices might even decline this year. And instead, a lot of buyers have kind of come back to the market. They're out there shopping for homes.

Yes, it's a lower level of activity, fewer homes are trading hands. But a big part of the reason for that is when those home shoppers have returned to the market, they're not finding as many listings as they would have hoped for or as we would expect in really any previous spring selling season. There just aren't that many new listings hitting Zillow every week as we would expect or as homebuyers would like to see. So the ones that do come to the market are getting a surprising amount of competition and actually seeing the prices get bid up again.

- Well, that was my next question there. What does that mean for prices? I mean, you got to imagine those who maybe sort of sat out for a few months, coming back into the market and realizing the inventory still isn't there, but the same buyers are there. That's got to be a bit demoralizing. I mean, how much higher are prices spiking right now?

JEFF TUCKER: So luckily they're not spiking. We're not back to the frenzied spring shopping season of 2021 or 2022. Our home price index is rising at about a 1% pace not seasonally adjusted. So that's not a spike. But it is a sort of competitive spring shopping season. Homes are selling in a median of 10 days to go pending. That's a bit slower than last year when it was just six days for the typical home to go pending in April.

But compared to any time pre-pandemic, that still qualifies as a very fast moving market. So I think that underscores for buyers that it's not too hot to handle like it may have felt last year or the year before, but you need to be prepared to move quickly in a market like this. If you see a home that you like, you need to be preapproved, you need to be working with an agent so you can be one of those folks who makes an offer on it within the first weekend or by that offer review date on Monday or Tuesday.

- Higher prices, higher rates certainly a tough environment for prospective home buyers. Jeff, when you talk about the inventory issue right now, do you see that improving at all? And what will it take in order to get there?

JEFF TUCKER: Yeah, the inventory is quite low. I think part of the story is that so many existing homeowners locked in a mortgage at 3% or less in some cases. And so for them, if they need a big mortgage on their next home, that presents a really high hurdle to moving. They'll pay a lot more interest when they move. I think it's important to remember, though, that many homebuyers own their homes outright, many of those folks who might move maybe are thinking of retiring from Boston or Seattle, moving to Florida or Phoenix, and they might be able to buy that home they're retiring in in cash.

So there's a lot of scenarios where people could be coming off the sidelines. I think as folks hear the news that homes are selling quickly and prices haven't actually particularly fallen, that could draw some more sellers out. And then probably the elephant in the room here is new construction. So home builders have absolutely heard this news, that there's not much existing home inventory to compete with them.

So they are kind of filling the void. They are continuing to crank through and complete the homes that they started building last fall, last year as they suddenly see buyers lining up to buy them again.

- Yeah, certainly there is a very strong demand for homes out there and far from the supply that we need. Zillow's Jeff Tucker, thanks so much.