Real estate: Pending home sales stall amid high mortgage rates

Zillow Senior Economist Jeff Tucker joins Yahoo Finance Live to highlight housing market conditions that continue to pressure home buyers as mortgage rates remain elevated and pending home sales stall in the month of April.

Video Transcript

- Pending home sales at a standstill last month. High mortgage rates and low inventory are keeping buyers on the sideline. And in the latest week, mortgage rates jumped, the 30-year fixed now at 6.57%. That's according to Freddie Mac.

Joining us now is Jeff Tucker. He's a Zillow senior economist. Jeff, great to see you here again. So mortgage rates headed higher for another week here, highest level that we've seen in just about two months. How big of a chill is this higher rate environment going to have on the housing market, which is already struggling to regain some of that momentum that it's lost?

JEFF TUCKER: That's right. Mortgage rates are in the driver's seat for the housing market this year and really for the last 12 months. Those higher interest rates have taken that typical monthly payment from about 24% of the median household income just two years ago now up over 36% of that typical household income. So for a lot of buyers, they're already stretched to the breaking point by, you know, interest rates closer to 6%.

So as this is kind of hovering back up, lifting off closer towards 7%, that's going to push even more buyers out of the running. And for many buyers who still kind of push through and find a way to buy a home, they need to adjust their budget and maybe shop for a smaller home or shop in a lower priced part of town, which is something we're seeing all over the country. That activity and demand is holding up a little bit better in sort of the bargain neighborhoods and cities in metro areas, while it's actually taking the biggest hit in those kind of pricier neighborhoods.

- The 24% to 36% jump is pretty incredible when you think about how much buyers were already trying to buy, especially first-time buyers. What does that shift look like? When you say, we're starting to see a shift in neighborhoods largely because so many buyers are being priced out, what are the hotspots now?

JEFF TUCKER: Yeah, so what that actually means is, you know, when we ask, are prices falling, for instance, it really kind of depends on where you look. So prices have come down, especially in, you know, sort of ritzier suburbs. So here in the Seattle area, that would be places like Bellevue and Redmond, what we call the East Side, often kind of centered around big-tech employers. So these nicer suburban neighborhoods are actually seeing listings kind of linger on the market for longer.

Meanwhile, more affordable neighborhoods and more affordable cities are actually still seeing homes sell quite quickly. They're still selling at prices above what those same homes would have sold for last year. That is also kind of affecting the sales mix. So I think it is actually making that median sale price decline, look a bit steeper than it actually has been if you kind of control for quality, just because more of that sales mix is moving from these kind of ritzy neighborhoods to more middle-class neighborhoods because that's where people can still make the math pencil out to afford a mortgage today.

- Jeff, you talk about affordability being a huge issue, mortgage rates, going back to that, trending to the upside. Do you think we'll see 7% again before the end of the year?

JEFF TUCKER: It's certainly a possibility. I think at the moment, there is probably some uncertainty bleeding into the bond market, bleeding into the mortgage market from all the uncertainty about the debt ceiling. So it could be that if that gets resolved in a timely way, and the markets finally get a little bit of that relief, then we could see rates kind of cool back off. But if this gets drawn out and, you know, it kind of gets ratcheted up to the last minute, that could continue to put some upward pressure on mortgage rates.

And of course, the other source of uncertainty is, what is the Fed going to do? We're all kind of on pins and needles, wondering, are they going to pause here? Are they going to keep hiking? Every day, we get more data about the macro economy. Even today's release was kind of mixed news, where GDP looked strong, but gross domestic income was surprisingly weak.

So someone can kind of read any of this data as glass half-full or half-empty. And it's up to the Fed to kind of decide which way they're going to read it, and are they going to continue on a hawkish path? Which would, I think, make it more likely we end up back towards 7% mortgage rates.

- What does all this mean for sellers? I mean, we're talking about higher rates, right, higher mortgage payments, limited inventory. So you think sellers are in a pretty strong position, and yet we keep hearing about this still being a buyer's market because they can negotiate down, even if it's not the price itself.

JEFF TUCKER: Yeah, it's a difficult market for some folks to gauge. It's certainly cooler than last spring or the one before. But if you're a homeowner considering selling, and you're just going to hold out until things are as frenzied as they were in spring of 2021, you'll be holding your breath a long time because I don't think the market's ever going to be quite that big a seller's market again.

And if you go out and list today, there's still very little competition from other listings down the block. In the first four months of the year, we've had about 1/2 million fewer new listings come to market than on average in those first four months of the year before the pandemic. So dropped from about 1.65 to 1.15 million, or about 30% fewer new listings.

So if you are a seller, you've got a hot commodity. You've got a scarce item that a lot of people do want to buy. Even if a lot of them are kind of knocked out of the running by these high mortgage rates, some buyers are still out there.

You know, we just saw the pending sales were down about 20% year over year. But it's looking like these new listings are down closer to 25% or 30%. So demand is down a bit, but supply is down even more, which is good news if you're in a position to sell a house right now.

- Jeff Tucker, senior economist over at Zillow, appreciate the time today.