Yahoo Finance asked 50 top economists, strategists, and advisors for the one chart they are watching right now. For National Association of REALTORS Chief Economist Lawrence Yun, the chart is housing inventory. Right now, the number of existing homes for sale is at historic lows. Yun says the U.S. is in "a very unique housing cycle." "We saw the buyers pull back initially, when the interest rates were much higher, but now... multiple offers are happening, but the supply is not there," Yun said. Yun notes that homebuilders are doing well since people are choosing to build homes rather than buy an existing one. "The inventory clog up, that is holding back the potential for recovery," Yun says.
One of the issues right now is mortgage rates. With mortgage rates pushing toward 7%, Yun says homeowners "do not want to trade away their low interest rate for a much higher rate." If rates were to fall, Yun says you would see a "rush of buyers coming in." Lower interest rates "would not only unleash demand but it will also begin to unleash supply," Yun says.
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Video Transcript
- Well, it's getting harder for Americans to purchase their dream homes. Persistent inventory challenges are continuing to create challenges for home buyers in the month of June. The US registered its lowest inventory count since the National Association of Realtors began tracking this data since 1982.
Well, our next guest says 2023 could go down as the tightest inventory market conditions to have ever been recorded. For more on the state of the housing market, we're joined by Lawrence Yun, National Association of Realtors Chief Economist. Great to have you back on the show here.
So let's break down some of this data because I know you've said that the recovery hasn't taken place, but the housing recession is over. So where are we now, and what breaks this holding pattern?
LAWRENCE YUN: We are in a very unique housing cycle. We saw the buyers pull back initially when the interest rates were much higher. But now, the buyers, multiple offers are happening, but the supply is not there. At the same time, the builders are having a great time. They are making profits. They are building those empty new units, and they are able to find buyers. So we are in a very unique circumstance. But the inventory clog-up, that is holding back the potential for recovery.
- And how quickly can home builders ramp up production, especially when you factor in needing to hire workers and to try and meet some of this demand?
LAWRENCE YUN: The cost of construction is rising. So one has to consider the building permitting process, which may take very, very long time, especially in some states like California, which will hinder continuing supply. Situation but what really needs to happen is, can we find an incentive, tax incentive to unleash some of the inventory held by mom and pop real estate investors?
There are over 20 million single family housing units that are rented out. But if we can get even just 1% of those inventory onto the market through tax incentives, essentially reduction in capital gains tax. If it is sold to say first time buyer or with some income limitation, that will spur more supply immediately, and that will help the housing market and the broader economy. So that will be one consideration I think the Congress should seriously consider.
But in the meantime, it's about the builders and maybe changing housing family circumstances. Some people have to move. New job. New child. Maybe changes in their marriage status, getting married or divorced. All that will also lead to some additions in the supply just from long term demographic factors.
- Now how likely is that to happen? We already have a very tight labor market. Nobody wants to have to then now take on a higher mortgage interest rates as well. What sort of timeline could we be looking at when we might start seeing meaningful loosening in terms of the inventory that's out there?
LAWRENCE YUN: So it's a gradual, steady improvement in inventory. But the big change is either the tax incentive or if the Fed decides to stop raising interest rates. Because one of the reasons for the low supply is that homeowners do not want to trade away their low interest rate for much higher interest rate as they're making their residential movement.
But if the interest rate begins to come down a bit, at least the cost of the move becomes less painful than before. So we could encourage more people to move also by the Fed stopping raising interest rate, especially in light of the fact that the Fed has really damaged the regional banks, small sized banks. I mean, the big banks are fairly immune, but small size banks are important for the country, and we cannot further damage the balance sheet of the small sized banks.
- And it certainly doesn't help. We're already seeing some weaknesses in those regional banks. Moody's downgrading some of the larger banks as well today. But when you look at what people tend to look at, which is the 30-year fixed mortgage, some of the projections for the NAR, 6.4% this year, declining to perhaps 6% in 2024. How much of this pent up demand are we going to see then start to get released by then?
LAWRENCE YUN: Oh, yeah. You will see a rush of buyers coming in with lower interest rate. But also good thing is, again, some of the homeowners who are really liking their low interest rate, well, if the interest rate comes down a bit, they are willing to give up their three 4% mortgage rate, which they locked into a few years ago. So low interest rate will not only unleash demand, but it will also begin to unleash supply situation.
- And Lawrence, where are the deals to be had? Because a lot of people purchased homes to use as Airbnbs or secondary homes and rentals as well and feeling some pressure there as well. Where are the deals to be had regionally in the United States?
LAWRENCE YUN: Regionally, the Midwest, the most affordable regions of the country. You look at say Cincinnati, Indianapolis, the typical median home price at around $250,000. So someone from say coastal region, whether from say California market, New York, they go into the Midwest, they can buy all cash at times, or the mortgage payment will be very, very manageable, and the job growth in the Southern states are very, very strong, whether from Florida, all the way to the Carolinas or Texas. Strong job growth is adding to that demand.
- There's certainly some deals to be had. But obviously, you have to be strategic and know where to look. A big thank you there for breaking that down for us, Lawrence Yun, National Association of Realtors Chief Economist. Thank you for your time this morning.