Housing market ‘starting to see the impact of higher mortgage rates,’ economist says

Realtor.com Chief Economist Danielle Hale joins Yahoo Finance Live to discuss the housing and rental markets as higher mortgage rates weigh on home sales.

Video Transcript

JULIE HYMAN: US housing starts in April fell by 0.2% to an annual pace of 1.72 million. This coming as homebuyers feel the pressure of higher rates. Weekly mortgage applications declined 11% on a seasonally adjusted basis, as we continue to see mortgage rates move higher and higher and not much moderation on the price front.

For more on the state of the housing market, let's bring in realtor.com chief economist Danielle Hale. Danielle, it's good to see you. So as we look at the inventory side of the equation because that's what those housing starts and building permits numbers that were out today speak to, how are we doing on that front? Is there sort of-- that was one of the reasons, of course, for the tightness in the market, was the lack of more robust new construction. Are things improving at all?

DANIELLE HALE: Yeah, so today's housing construction numbers, not fantastic. But keep in mind, we are building at the higher end of the range that we've seen recently. So you take a big step back. The level of housing starts is actually on the upper end of where we've seen. It's not terrible, even though this month was perhaps a bit disappointing. If you look at overall inventories in the existing market, for example, we have continued to see inventories decline, but the gap with year ago levels is slowing. So in April, we were down about 12% from a year ago. I expect that in May, we're going to be much closer to even, and maybe even possibly see some growth. We've seen some growth in the weekly data. And so what that means is, more homes, more options available for sale for potential home shoppers relative to a year ago. Now, again, taking a step back and looking at these numbers relative to before the pandemic, there still aren't a lot of homes for sale, but we're starting to head in the right direction where we're going to see some more homes on the market, making things a little bit easier for shoppers.

BRAD SMITH: And Danielle, with respect to the Fed policy and when that could have some broader impact on home prices and perhaps curbing the inflation as well and how this is all tied into those mortgage rates and the prices that somebody is paying at the end of the day, over an extended period of time, when do we expect that to actually show up in the numbers?

DANIELLE HALE: Yeah, it's a great question. So Chair Powell likes to say that monetary policy is a blunt tool, and it doesn't work immediately, and that's absolutely true. It's true on inflation, and the housing market is no exception. We are starting to see the impact of higher mortgage rates in the sense that we are seeing somewhat slower home sales pace.

Tomorrow, we're going to see existing home sales numbers. I expect them to come in maybe a little bit down from last month's numbers, right around that 5.7 million mark. That's a number that people would be excited about before the pandemic, but of course, that is moderated from some of the peak numbers that we saw during the pandemic period, up above six million.

So a healthy level of activity for the housing market, but slowing from where we were before, as higher mortgage rates and higher home prices raise the cost of buying a home for shoppers today. If you compare costs right now for a mortgage, they're up about 50% from where we were at this time last year, when rates were much lower and home prices were quite a bit lower. And so that's having an impact on people's willingness and ability to compete in the housing market. And we're seeing slower sales as a result.

BRIAN SOZZI: Do you expect, Danielle, just because the cost of home ownership has gone up so significantly in a short period of time, that people are going to be forced to put their homes on the market, and we could see renewed activity in the rental market?

DANIELLE HALE: Yeah, so we are seeing an uptick in the number of home sellers. That's one of the factors driving the fact that there are more homes on the market. It's because we're seeing more sellers and a bit of a more cautious approach from buyers. As buyers grapple with these conditions, yes, we are seeing some of them decide not to buy, and instead, put those plans on pause and rent.

Of course, the rental market is not super easy to navigate right now either. We see vacancy rates quite low, which means it's hard for renters to find a place to live. And with vacancy rates low, it means landlords are in the driver's seat. They have the ability to push rents higher, and they're doing so as their costs go up. We're seeing rents rise close to 20% on a year over year basis. We're in the 16% to 17% range in recent data. And so people looking to move in today's market are really kind of challenged. Whether they're choosing to rent or choosing to buy, it's hard to find a good option.

JULIE HYMAN: I also have a question about some new data that came out from the website Curbed, where it talks about apartments for rent in New York City versus Airbnb listings. And according to their-- to data that they are citing from Douglas Elliman and from a site that tracks Airbnb listings, there are more Airbnb listings than there are apartments for rent. Now, I don't-- we would need to dig into these numbers to see if they're accurate, but there has been concern that there is sort of competition here. Is that a significant concern, particularly in urban areas, but I guess, even now, in rural areas, too, where there are increasing number of Airbnb listings?

DANIELLE HALE: Yeah, so that's interesting. So yes when housing is made-- taken out of the stock for long-term rentals and switched over into short-term rentals, there's less available. But something we know from tracking the government data is that vacancy rates are down. So those units should factor into those vacancy numbers. And what we're seeing is that there just isn't enough supply, no matter what the use case is. We need to see more building to get us out of this inventory shortage situation to make housing more broadly available, so that rents rise at a more manageable pace.

JULIE HYMAN: Danielle, thanks so much. Danielle Hale is chief economist at realtor.com. Appreciate it.