Mortgage rates: ‘The refinancing chance may be over,’ housing economist says

National Association of REALTORS Chief Economist Lawrence Yun joins Yahoo Finance Live to discuss mortgage rate increases to the Fed's interest rate hike schedule, price trends in housing markets, and affordability in homebuilding supply.

Video transcript

RACHELLE AKUFFO: Well, as we see, the market still digesting comments from Federal Reserve Chair Jerome Powell. So let's break down how the Fed's rate hike will impact the housing market. For that, we'll bring in our guest, Lawrence Yun, National Association of Realtors chief economist. Thank you for joining me today. So what changes should prospective buyers or those wanting to refinance, what should they be aware of from now?

LAWRENCE YUN: Oh, well, the refinancing chance may be over because rates will only go higher from this point. The mortgage rates were essentially at 3% last year. It's already at 4% or slightly above. Most of the increase have already occurred in anticipation of the Fed making several moves this year. So from this point onward, I would say the mortgage rate may hit, say, 4.5% towards the year end because based on the past relationship, Fed funds rate and the 30-year fixed rate mortgage is not one to one. It's the more modest increase in mortgage rate when the Fed begins to increase rates.

RACHELLE AKUFFO: And as you mentioned, the 30-year fixed mortgage rate exceeded 4%, and that's for the first time since May of 2019. How much pressure, though, does the Fed's rate hike put on mortgage prices and how fast we might see them come up?

LAWRENCE YUN: Well, you know, the first-time buyers have already facing affordability challenges just because home prices have risen so much, 17% last year. So that in itself is very pricey. Now, with rising mortgage rates, that's going to put another, say, 10% to 15% payment burden, meaning that people taking out a mortgage, the monthly payment will be rising for people who are in the market, and therefore, significant affordability challenges ahead. The only solution is really about increasing supply. I'm glad that today's housing start numbers are beginning to increase, so-- because we need more and more supply in order to calm the home prices from the rapid increases that we saw last year.

RACHELLE AKUFFO: So when do you expect to start seeing perhaps a slowdown in some of this pandemic rush that we saw? And are there still bargains to be had, depending on which part of the country you're in or how much house you can afford?

LAWRENCE YUN: Well, the Midwest region, you know, everything from, say, Cincinnati, Kansas City, and in Michigan is very affordable. So for a middle income family, it is able to buy a home easily. Now in the South, it is still reasonably affordable, but the price increases there has been the strongest, whether it is Charlotte, Atlanta, or Dallas, and the Florida market, a super hot market. The multiple offers are still happening even with higher mortgage rates, which is implying that the residual demand is still there. But I think in the second half of the year, some of the first-time buyers will simply be squeezed out from higher prices and higher mortgage rates.

RACHELLE AKUFFO: Now I want to shift gears and talk about some of these supply side constraints that we're seeing on lumber, building materials, adding on top to rising construction costs. And that's on top of that expectation then for higher interest rates. We're seeing that affecting builder confidence. How concerned are you about that and how long that might last?

LAWRENCE YUN: Well, the builders, I mean, they are making profit. There is an economic incentive, financial incentive to produce more. Of course, there is that supply chain issue and higher material costs-- lumber prices rising and other material costs rising. Construction workers, hard to find, those skilled construction workers. Yet, the builders are tacking on those added costs to the final price, and the consumers are saying, oh, fine, I will pay the higher price. So the builders have incentive to produce more.

Now, we also need to consider, especially in some big cities, about repurposing some disused property. Maybe some office building, turn it into condominiums, or maybe a shopping mall, turn it into some more residential units, because we need to consider all aspects of supply, not only about housing starts and building new homes.

RACHELLE AKUFFO: And you raise an interesting point. We're seeing a lot of churches also being converted now into apartment buildings, given all the space there. But obviously, we did have this rush during the pandemic. I mean, it was so incredibly intense. Some of these listings were up for perhaps hours, in some cases. And we saw what people were willing to do, willing to go far above the listed price, waiving inspection, all sorts of things. What are the trends you're seeing now with demand? And what do you think will continue to drive it?

LAWRENCE YUN: Demand as of yet is still very strong, perhaps not as the intense multiple offer situation. But the multiple offers are still prevalent, say, three or four buyers competing for the same home, compared to, say, 20 buyers one year ago. But multiple offers, I think that will steadily dissipate, as we get more supply. More supply means people do not need to make hurried decision. And furthermore, some decline in demand from rising mortgage rate, so some movement towards normalization. And I think that's a healthy development because we had this intense housing shortage leading to just where people are just waiving appraisals, waiving home inspection, which sometimes people feel very uncomfortable about.

RACHELLE AKUFFO: And we certainly are seeing a little bit of buyer's remorse, so we'll have to be following that story. Thank you for getting us up to speed. Lawrence Yun there, National Association of Realtors chief economist, thank you for your time this afternoon.