Rising mortgage rates, home prices make payments ‘unaffordable’ for homebuyers: Economist

Zillow Senior Economist Jeff Tucker sits down with Yahoo Finance Live to assess the state of the housing market as prospective homebuyers contend with rising mortgage rates, declining housing prices, and the Fed's interest rate hikes.

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DAVE BRIGGS: We have more evidence today of cooling prices, as the Case-Shiller Index shows the national homes price index falling 0.8% in September. Joining us now, Jeff Tucker, Zillow Senior Economist. Good to see you, sir. So, look, this is kind of the ultimate glass half empty, glass half full. And I am a pessimist, but not when it comes to the housing market. Prices are still up 10.6% year over year. Not many assets have performed that well in the last year. What do you make of the housing market at this moment? How do you characterize it?

JEFF TUCKER: Yeah, prices are up still double digits for the year. That's now reflected in this kind of jaw-dropping watershed moment that Fannie and Freddie are backing some mortgages over $1,000,000 in high cost markets. It's-- that year over year change, though, that's really the story of last winter and the first half of 2022, where the market was still, frankly, overheated for housing and a bit of a needed cooldown and kind of a correction that started right around the 4th of July. The housing market has been cooling down. And so metrics like Case-Shiller, the Zillow Home Value Index, we've all been seeing some modest declines in home values.

At the end of the day, what this is being driven by is affordability. There are a lot of interested buyers on the sidelines. But the combination of higher prices and higher mortgage rates is making that mortgage payment unaffordable for many people. The typical mortgage is up 77% year over year. Just taking kind of the national price level and typical mortgage rates on a 30-year mortgage right now, that is huge sticker shock for people going out and considering buying a home. So it is keeping a lot of folks on the sidelines at the moment.

JARED BLIKRE: What about the opposite side here? We've been talking about the buyers. What about the sellers? How motivated are they?

JEFF TUCKER: You know, sellers are also kind of taking a break from the market at the moment. We have a record high number of people with mortgages down at around 3%. They look at conditions today, thinking about selling their home, moving across town. They're going to need to get a mortgage up more at like 6 and 1/2% or towards 7%. That's a huge disincentive to sell and move. So really, both supply and demand are getting hammered by these high rates.

So far, the biggest casualty is sales volume, just not a lot of transactions occurring. So we're seeing existing home sales and, a leading indicator, pending home sales down 28% or more like 30% or 35%. That is a big part of the economy. It is pulling away a lot of commissions, loan origination fees. But frankly, what's kind of surprising almost is how little prices have fallen, given how much activity has fallen. And it gets back to what you pointed out, that a lot of sellers are actually kind of on strike at the moment waiting for better selling conditions.

DAVE BRIGGS: Yeah, the market really just frozen on both sides. A lot of my peers in real estate just sitting home watching the World Cup at the moment. So prices frozen. Let's talk a little bit about rates, 6.58%. That's down from above 7%, but more than double from earlier this year. So again, it's depending on how you view it. Brian Moynihan said he thinks they'll stay high for two years. Where do you think they're headed?

JEFF TUCKER: I see a lot of data to suggest that we may be near the turning point for inflation. If you look at core inflation, excluding shelter, that has begun to decelerate. And then crucially, we know shelter is the biggest services component in inflation. And the Zillow Rent Index has been decelerating on a year over year basis since February.

So we are looking for a turning point in the rent component of CPI to start turning in Q1 of this coming year. So I think all the signs point toward turning the corner at some point in the year ahead. So as inflation comes down, the Fed no longer needs to be fighting it quite so hard. That should turn mortgage rates from this tremendous headwind into maybe a bit of a tailwind sometime in the year ahead for home buyers.

JARED BLIKRE: And, Jeff, just to put a fine point on some of the differences between the current decline in home prices and then that we saw during the global financial crisis, much different circumstances. But we don't really have the tanning salon managers who have five investment properties, for instance. You don't have that kind of leverage embedded in the system. Just wondering, can you quantify some of these details?

JEFF TUCKER: Yeah, it's a very different slowdown we're seeing now, where the 2007-2008 slowdown was really a supply-led slowdown, where a lot of sellers had homes they could not afford. The tanning salon manager with five rental homes, they had bubble-- they had balloon mortgage payments coming up. They had negative amortizing loans. They had a bunch of loans that they could not afford. Suddenly, they had to sell those homes or the bank took it back from them and sold it for them at a loss in foreclosure.

It's really the polar opposite today, where it's the buyers who are just finding themselves stretched too far because of that affordability challenge. And what that means is-- you know, we saw a preview of this in August-- when rates come back down or if prices come down enough, there are all these buyers waiting in the wings who will jump off the sidelines. So when I said we saw a preview of that, we did see a surge of demand. And we actually saw those price declines kind of pause in August and September because just a little bit of mortgage rate relief brought a bunch of buyers off the fence.

DAVE BRIGGS: Somebody ought to tell Powell about this tanning salon index on the economy. Quickly, the senior economist over at Pantheon says he believes there's a collapse in prices ahead, and really what they've done is just kind of gradually cool off. Do you think they'll collapse in the next year?

JEFF TUCKER: I do not think they'll collapse. And it really, for me, comes back to this idea of a demand-driven slowdown, where we know there's a record number of people in their early 30s looking to become first-time homeowners. And they've been waiting through some really rough conditions. They waited through homes all selling in two days with multiple offers over asking price.

They're starting to see some better buying conditions. Homes are now on the market for twice as long as they were last year. So buyers aren't rushed anymore. And I think for a lot of people, they're just waiting to see a little bit of price relief, and especially some mortgage rate relief. And when that comes along, that will actually bring more buyers back into the market so that these price declines are actually sort of a self-slowing process rather than an accelerating process, when we had a lot of foreclosures in 2008.

So if anything, I think it's sort of self-limiting. And what we are forecasting is for approximately a plateau with a bit of single-digit percentage price declines, especially in certain markets, the very expensive ones out West, but broadly looks like a plateau if you kind of zoom out.

JARED BLIKRE: Got to leave it there. But good to hear there are some structural tailwinds instead of headwinds in this market, at least with respect to the demographics. Thank you, Zillow Senior Economist Jeff Tucker.