Potential homebuyers are having to contend with both high mortgage rates and a lack of existing homes for sale. But homebuilders are "kind of picking up some of the slack," Zillow Senior Economist Orphe Divounguy tells Yahoo Finance Live. "While existing home sales have fallen, you're seeing this buildup of inventory coming from the new construction site" which helps both buyers and renters in the long run, Divounguy notes.
For more analysis, we want to bring in Orphe Divounguy, Zillow Senior Economist. Orphe, it's good to see you here. So just take a step back for us and give us your assessment of the housing market right now. The dynamics that are currently at play, we have the 30-year fixed rate still not that far from 7%. The Fed has remained and says that it will stay aggressive in its fight against inflation. And there isn't a lot of supply out there on the market. So what does that mean for housing come the fall and winter?
Our Zillow research shows that 90% of homeowners have a mortgage rate below 6%. And so it makes sense that new listings are down 28% compared to last year. And that total inventory is still half of what it was before the pandemic.
So I don't expect mortgage rates to increase as a result of the Fed raising rates. I just think that the current economic environment and conditions basically means that mortgage rates was just not returned to the low level that we saw during the pandemic peak.
SEANA SMITH: So, Orphe, I guess I'm going to press you a little bit here. How low then do you think rates are going to go? Are we talking a drop back to about that 6% level?
ORPHE DIVOUNGUY: No. I think it's really going to depend on inflation going forward, right? We're seeing data coming in that, you know, retail sales came in lower than expected. But core retail sales were pretty hot. You know, so is inflation going to continue to tick down? Can the Fed get core inflation under control and back towards the 2% target? I think that's really going to be critical for where mortgage rates end up going forward.
ALEXANDRA CANAL: And selfishly, for myself, Orphe, what does that mean for the first time homebuyer? We saw that group have the lowest share of June existing home sales in history.
ORPHE DIVOUNGUY: Totally, Allie. For buyers, it just means that there's still stiff competition in the most affordable markets and for the most affordable homes. We're seeing units flying off the shelves, right, in the Midwest, in areas that are, you know, that are still very, very affordable relative to the rest of the country.
And at Zillow, we're trying to make the process really easy for buyers. One of the things-- one of the tools we have is our Zillow monthly-- total monthly cost calculator, where a buyer can actually just put in what it is that they can afford or what they want to pay on a monthly basis. And we basically show them all of the inventory that will fit within their budget.
I tell buyers in this environment, you know, two professionals you need to reach out to, you need to have a mortgage professional on your side who's going to help you improve your credit but also figure out what it is that you can afford, and you need to work with an agent, because an agent is going to help kind of figure out what are the units out there that will fit within your budget. So that's my advice for buyers today.
You know, you don't look at the mortgage rate necessarily. Of course, it's important, but you don't necessarily think about whether or not mortgage rates are going to come down, because, you know, it's impossible to time where mortgage rates-- the time the mortgage rate drop or to figure out where mortgage rates are headed.
Now, there's also good news for buyers out there is that despite the lack of inventory, the lack of existing homes coming on the market, builders are kind of picking up some of the slack. We're seeing builder sentiment increase since January. We're seeing housing starts increase again. And builders still had a lot of inventory, a lot of units under construction that are now making their way on the market.
So, you know, while existing home sales have fallen, you know, you're seeing kind of this buildup of inventory coming from the new construction site. And that's very helpful for buyers and renters in the long run. Also, builders have offered all kinds of incentives. They're trying to make the math work for buyers. They're offering 2-to-1 rate buydowns. They're offering to play some of the closing costs. And again, that's good news for buyers in today's challenging environment.
SEANA SMITH: Orphe, do you think home builders are still going to be offering those types of incentives, given the fact that they are at such an advantage at this point in the housing cycle?
ORPHE DIVOUNGUY: Yeah. I think the incentives are going to stay, because, ultimately, the math has to add up. You have the largest generation, you have millennials going into this housing market wanting to buy a home. And ultimately, if the math doesn't add up, they sit on the sideline and wait. And so builders have an advantage right now where they can build. They know what their costs are going to be. They know how much they can afford to give to buyers.
And for example, a 2 to-- 2-to-1 rate buydown right now is a very lucrative feature right now that's helping drive traffic to new construction, because builders are basically getting buyers where, you know, they would have been a year ago in terms of mortgage rates and making it work for buyers. You know, buyers can save thousands over the first few years of home ownership by taking advantage of that.
ALEXANDRA CANAL: And Orphe, we always hear cash is king when it comes to real estate. Are you seeing a lot of cash deals right now? And does that come with some negotiating power there as well?
ORPHE DIVOUNGUY: Yeah. Look, I-- you know, think I saw a stat, saying something like 28% of home sales are cash. And cash is definitely on the rise, because, basically, buyers that are not necessarily sensitive to interest rates are going to be more active in an environment where mortgage rates are so high, right?
So, yes, cash is definitely making somewhat of a comeback. It's high in terms of as a share of total sales in today's environment. But you know, again, I think for first time home buyers at least, you know, we at Zillow are focused on making home a reality for more people. And that means making the process less complex, you know, offering tools to buyers to potential home buyers.
You know, I mentioned the monthly cost calculator for home buyers. But we also have things like for renters, options for renters. So for example, you heard you probably heard about the White House talking about junk fees. You know, a renter today has having to submit multiple applications just to get one unit. And those applications come with fees. And so they're paying multiple fees in order to get just one unit.
And those fees have historically disproportionately harmed low-income families and minorities. And so at Zillow, we want to make those fees explicit. And we want to make sure buyers know what those fees are. But at the same time, we now have unveiled a new tool where basically buyers can just submit one application fee and apply to as many units as they want in order to save them on those costs.
SEANA SMITH: Some welcome news there for potential buyers, because it certainly is a very, very tough market out there for them. Orphe Divounguy of Zillow, thanks so much for joining