America’s first chief economist, Mark Fleming, joins Yahoo Finance to discuss what’s next for the housing market and how rising mortgage rates are just one of the ramifications after Fed Chairman Powell’s comments.
MYLES UDLAND: Welcome to Yahoo Finance Live this Friday morning. The main story of the past week was what happened with the announcement of the Federal Reserve System on Wednesday. And, of course, the move caused a lot of excitement in the bond market. And where we have changes in the bond market, we have changes in the mortgage market and then in the housing market.
Mark Fleming is joining us now to talk about all the negative effects we’ve seen in the last couple of days since the Fed’s announcement. He is the chief economist at First American. o Mark, let’s start with what we’ve really seen in 30 year rates over the last couple of months. Because we saw a big rise in Treasury bond yields in early 2021 after record lows reached late last year.
What was ahead of this announcement and what have we seen over the past few days?
MARK FLEMING: Well, you’re absolutely right. Earlier this year, we saw that mortgage rates were in the range of 2-3 / 4 or less than 3%. Obviously, rising Treasury yields have pushed mortgage rates to just over 3%. But even with statements about the risks of inflation, transient inflation, the bond market has not reacted much to the FOMC statements made earlier this week.
And mortgage rates are still at a level that is possibly at any standard historical low, even at the level of 3.
JULIE HYMAN: So, Mark, how do mortgage rates generally affect the decisions people make right now? I mean, we talk a lot about the dynamics of housing construction, greater dynamics of supply and demand, more timber is difficult to obtain or expensive, and so on. And we’re talking a lot less about the mortgage side of the equation. Because he was so low. So what do you think about it?
MARK FLEMING: Well, low mortgage rates basically determine what we call the purchasing power of a home, you know how much home you can afford to buy. Well, a mortgage rate of 3% to 3.5% means you can buy a lot of homes. Just for context, before the global financial crisis, mortgage rates were 4 and 1/2, 5 and 1/2, 6%. So now we have such a high demand for home purchases due to low mortgage rates.
But what’s interesting is that the same low mortgage rates actually affect the supply as well. Because most of the homes for sale are brought in by existing homeowners. And existing homeowners are enjoying low rates and fixing refinanced mortgages at historically low levels, which pushes them away from market attraction. Thus, you get a restriction in supply and an increase in demand, which leads to a rapid increase in house prices.
MYLES UDLAND: Yes, and it is obviously very easy in the media to talk about rapidly rising house prices, not only because the data is, again, very easy to discern. But everyone who watches our program and reads our articles has some idea of the housing market. But the affordability side that you outlined here is also an interesting dynamic: how much more affordable a $ 500,000 home would be at 3% versus 4%, and so on.
And I’m just curious, when you sit here and think about the future of the rate market, the future of the business cycle, is there a world at all where a 30-year period has returned 5% or 6%? Or have we created this dynamic whereby the housing market needs 2 and 3/4, 3 and 1/4 things to keep this cycle going and the dynamism staying there?
MARK FLEMING: Well, that’s actually interesting. If you think about it, mortgage rates have been in this very low range for about ten years now. So we have stimulated purchasing power and demand for housing for a very long time, since the global financial crisis. And I believe that you are absolutely right. We kind of got used to it. We put our expectations on him. At the same time, people will continue to buy houses. This is not a purely financial decision to sell or buy. Many other factors are taken into account when making these decisions.
We do expect that interest rates will eventually rise, and so will mortgage rates. But this does not mean that the housing market cannot continue. This really means that the rise in house prices will stop. But it’s good. Since you know that at 16%, 17%, and in some markets more than 20%, the annual increase in house prices is obviously not infinitely sustainable.
BRIAN SOZZY: How do you think this will affect the lower end of the housing market when lower income households no longer receive these additional unemployment checks?
MARK FLEMING: Great question. And this is where the question of affordability begins to tie in, right, is that as rates rise, the entry-level buyer looking for their first home is more likely to be pushed out of the market due to higher rates. And that’s why we see it most of all there. It is also one of the market segments with the smallest supply. So, in your opinion, there really is an accessibility issue.
And as business continues, people on lower incomes and people on lower incomes are more likely to lose access to home ownership.
MYLES UDLAND: Okay, Mark Fleming, chief economist at First American. Mark, really appreciate the time to talk to us about the housing market this morning. I know that we will contact you soon and talk.
MARK FLEMING: Thank you.