Housing prices continue to rise under the higher-for-longer inflationary environment, according to a Redfin (RDFN) report. First American Chief Economist Mark Fleming joins Wealth! to discuss the implications of these trends for the housing market.
Fleming explains that the rise in mortgage rates "has a demand-side effect," making homes less affordable for potential buyers. He notes that the impact is now also being felt on the supply side, as homeowners have become less willing to sell their properties due to the increased costs associated with housing transactions.
Looking ahead, Fleming believes that life changes will start to become "the driving factor for people moving," rather than rates, if it remains elevated.
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BRAD SMITH: Staying in the real estate sector, as housing prices are on the rise. The average home price for the four weeks ending April 14 just over $380,000. A nearly 5% increase over the last year. And just about $3,000 short of June 2022's all-time high here. That data according to Redfin.
So now, what do the costs and rising costs in housing mean for your dollar? Joining me now is Mark Fleming, who is the First American chief economist here.
Great to have you here on the program with us. That's a lot of data that we just rattled off to our folks. We know that you track it all, though, as the chief economist. And as we continue to think about what the moderation and prices signal about demand right now, I wonder what you're extrapolating from this data.
MARK FLEMING: Well, the actual rise in mortgage rates has a demand side effect. Obviously, it makes homes less affordable. You can't leverage your income as much to buy the house.
But at the moment, it's also affecting the supply side. And that is those existing home owners and their willingness to sell. And so the dynamic of their willingness to sell, because it costs a lot if you give up the low mortgage rate that you already have, is restricting supply.
So rising rates restrict supply. They also restrict demand. The net effect isn't necessarily falling prices or rising prices. It's, at this point, basically, a cooling of the amount of volume, as we saw in the home sales report today. Less homes being sold. But prices are probably still going to keep going up at somewhere around the 5% to 6% range because of the interplay between demand and supply.
BRAD SMITH: Certainly, what is it going to take, do you believe, for more supply to come into the market?
MARK FLEMING: Well, one thing that would help would be getting rid of this higher for longer world of mortgage rates. s
BRAD SMITH: Yes.
MARK FLEMING: Because as it restricts both supply and demand, lower rates would incent supply and incent demand. But other than that, I think the broader good news is people buy and sell homes. And people, in particular, sell homes for many more reasons than just the financial effect.
So while it might cost them financially to give up that low mortgage rate, we have seen increased supply since last year modestly, because people move for other reasons. Death, divorce, change of jobs, bigger home, things like that.
And the longer we stay in this higher rate environment, the more those kinds of things become the important driving factor for people moving.
BRAD SMITH: Yeah, certainly. And all things considered with the higher for longer that we've continued to hear. And I was just taking a look at the CME Fed watch probability, especially, as it relates to when they will cut, or when they may cut, or when the markets are expecting to cut.
And if you had asked many of those who were looking at this figure a month ago, we would have seen that the markets would have anticipated that we would see-- we would see two cuts by September. But that's changed dramatically. And now, the first cut that we're firmly expecting to see is by September.
So all of that considered, if we do see less cuts than anticipated, how does that create a longer supply side dynamic within this market as well?
MARK FLEMING: Well, if you go back to December, I think people were drinking too much eggnog. They thought it was going to be six or seven cuts this year.
BRAD SMITH: It was good eggnog. All right.
MARK FLEMING: Good eggnog.
BRAD SMITH: Don't hate us for it, Mark.
MARK FLEMING: That's clearly off the table. We're talking about maybe two cuts. And, honestly, what if there were no cuts? And that just means the status quo. Everyone gets used to this rate environment. And, honestly, a 7% mortgage rate, while we think it's astronomically high relative to recent years past, that's actually much closer to the normal for a mortgage rate historically.
BRAD SMITH: While we have here, Mark, moving over to the rental market, what trends are you seeing right now?
MARK FLEMING: Well, there is some good modest news in the rental market, because so much rental has been built in the last couple of years. That's all coming to market this year. So we have a supply glut. That's not the problem in the existing market.
Here, a lot of supply is coming to market in some places. And that's really putting a damper on rent growth, which means, essentially, if you want to get into renting, now, is a pretty good time because there's going to be excess supply relative to demand. And that's not going to last because as household formation picks up, again, in the coming years. And that supply gets all absorbed, we're going to get to a tight market again.
So the supply dynamic-- supply demand dynamic in multifamily is actually quite good right now.
