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Housing: ‘What we have is a real affordability crisis on all fronts,’ economist says Senior Economist George Ratiu joins Yahoo Finance Live to discuss the U.S. affordability crisis, Fed tightening, rising rent & mortgage rates, and the state of the housing market.

Video transcript

SEANA SMITH: Mortgage rates jumping once again, hitting 6.92%, the highest level that we've seen in 20 years. Now those sky-high mortgage rates are pushing potential homebuyers to the sidelines. And that's keeping the pressure on the rental market. Let's talk about this with George Ratiu, a senior economist.

George, it's great to see you again. We also had that CPI data out this morning, showing that rents-- the price of rents continuing to rise. Just, what's your assessment of the real estate, given the numbers that we've gotten today?

GEORGE RATIU: Seana, what we have is a real affordability crisis on all fronts. To your point, let's start with the CPI, right? The Fed has been so aggressive, 75 basis point hikes this year every time it meets. And even with that, the CPI we saw today is up over 8%. The core CPI, even when you strip out the food and energy, is still up over 6 and 1/2%. So there's no real slowdown yet in that, and the housing component, to your point, is still aggressively rising.

The one thing I'll add is, we track rents in the top 50 largest metro markets. What we're seeing is a silver lining. Specifically, we are seeing rents beginning to moderate. We've had in September the second month in a row in which rent growth has been in single digits, a little over 7%. So there is a glimmer of hope on the horizon for a lot of renters. The trouble is, rents remain pretty high, $1,700 a month across the country.

And when I look at big cities-- New York, Boston, Miami, Chicago-- we saw double digit growth. And when you throw in the mortgage rate, all of a sudden, we see that the challenge is compound, right? Now, to your point, we haven't seen mortgage rates near 7% in about 20 years. 2002, a median home was about $160,000, which, at 7% mortgage rate, would net about an $800 monthly mortgage payment.

Today, with a median price of a home of $420,000, the same 7% mortgage rate translates into a roughly $2,300 a month monthly mortgage payment. In essence, when you look at what households did in 2002, dedicated about 30% of their monthly income to housing. Today, it's 44%. So obviously, there is a huge financial vise that's right now squeezing a lot of American households.

DAVE BRIGGS: Yeah, and people have about $100,000 left in buying power because of these rates as well, now at near 7. They don't move right with the rate hikes, but with the 10-year, how high do you think mortgage rates will get in the next couple of months?

GEORGE RATIU: Dave, it's such a good question. And it's something that even two months ago, we would have not contemplated. If you would have asked most economists or market observers two months ago, do you see rates at 7, they would have said, oh, not likely.

My view is, when I look at inflation, when I look at the 10-year Treasury, right-- we crested 4% again this week-- I do expect upward pressure to continue. I would not be surprised, frankly, before the end of the year if we see 7%, 7 and 1/2%. Until the Fed becomes much more noticeably successful at taming inflation, I do see upward pressures on mortgage rates continuing.

RACHELLE AKUFFO: And George, in terms of sellers, obviously, at this point, they're enjoying a lot of equity in their homes. They're not trying to leave at the moment. Where is the coolness in this market going to end up coming from, as we're still seeing homebuilders not building as many houses right now?

GEORGE RATIU: Rachelle, that is really something that's on so many people's minds. So, one, indeed, we were hoping that the supply picture will improve with builders earlier this year, in the first six months, really ramping up construction of single family homes. But they have gotten, obviously, unnaturally spooked by the developments in the market, the pullback on the buyer side, so they are cutting back on single family. They are actually continuing with the multifamily side.

But for home sellers, the interesting picture is after roughly two months, May and June, where we saw new listings on pick up, we've actually seen them retreat. It seems that for a lot of homeowners, they are worried that they have missed the peak of the market. And many of them are holding back. And I'll add, there is a seasonality component, right? We are past the peak market activity. Summer generally sees most volume, and naturally, fall and winter, we see a slight fallback from that.

But by and large, I think for a lot of sellers, the real concern right now is if they are looking for a trade-up home, they're paying a higher price plus a lot higher mortgage rates. So that might end up locking in, effectively, a lot of potential sellers over the next few months.

DAVE BRIGGS: Is the Fed going to break something in the housing sector, George?

GEORGE RATIU: Well, the Fed has already-- and we heard Jerome Powell already state that its intent is to significantly cool housing, right? He used the words "housing correction" is needed because the overcompetitive pace we saw in 2020, 2021 have put a lot of people on the sidelines.

So I think as far as the Fed is concerned, the correction we are seeing in housing in terms of demand pulling back, medium prices are already coming down from their summer peaks. These are, in a sense, is the very prescription the Fed is trying to apply to housing, and by extrapolation, the economy.

I think for a lot of market watchers, the question is, has the Fed done enough? At least based on CPI, not yet. And so can the Fed do too much, right? Can we have too much of an overcorrection? And I think the jury's still out on both accounts.

RACHELLE AKUFFO: It's certainly a delicate balance the Fed trying to make there. George Ratiu from, thank you so much for joining us this afternoon.