Housing expert: ‘We’re going to have pain for as long as inflation stays high’

Despite a recent rebound in mortgage applications after rates dipped for the third straight week, economic uncertainty will continue to weigh on the housing market, according to one expert.

"We are going to have pain for as long as inflation stays as high as it is," Daryl Fairweather, chief economist at Redfin, told Yahoo Finance Live (video above). "We really don't know which way the economy is going to go until we have better data."

The Federal Reserve’s efforts to fight high inflation this year have pushed mortgage rates rapidly higher, creating even worse affordability issues for buyers looking to enter the market. Sellers, on the other hand, are pulling their listings as homebuyer activity shrinks.

"Demand is very weak,” Fairweather said. “Home sales are down 30%. New listings are down over 20%."

The big story in housing has been mortgage rates, which are double where they were at the start of the year.

For instance, the monthly mortgage payment on a medium-priced home is around $2,100, an increase of $650 a month compared with the beginning of the year when the rate was at 3.22%, according to Freddie Mac's annual records.

Rates could move even higher. While Fed Chair Jereme Powell signaled a slowdown in rate increases this week, he also set the table for a more moderate hike of a half-point this month, noting "we need to raise interest rate to a level that is sufficiently restrictive to return inflation to 2%."

Weak supply and demand

Part of the reason why the housing market is cooling is that both the demand and supply sides are low due to high interest rates.

For instance, newly listed homes dropped by 17.2% year over year in November, and houses now take eight days longer to sell than in 2021. On the buyers' side, October's mortgage demand was half the demand versus a year ago.

"So it's not just buyers backing out of the market," Fairweather said, “also sellers.”

Although the market is cooling down, Fairweather noted this is just a temporary phase caused by the Fed's monetary policy. The long-term trend is housing will get more expensive as interest rates come down, she added, because there’s simply not enough inventory.

"The fundamental reason that rents are so high and that buying a home is so expensive is because we don't have enough homes for everybody who needs one," Fairweather said. "I think what we are experiencing now is more just a slow period because of what's happening with inflation."

Rebecca is a reporter for Yahoo Finance.

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