Housing market: Level of activity is 'still very low' but starting to see increase, economist says

Mike Fratantoni, Mortgage Bankers Association Chief Economist, joins Yahoo Finance Live to discuss MBA's forecast for mortgage rates, the housing market, home builder sentiment and other indicators, and how Fed policy will affect real estate.

Video transcript

DAVE BRIGGS: Mortgage rates continuing to fall. The average 30-year fixed sliding to 6.09% from 6.13%. That's according to Freddie Mac. Now, mortgage rates do not move directly with the Fed's interest rates, but more in line with the 10-year. But certainly notable that Jerome Powell indicated Wednesday, quote, "given our outlook, I don't see us cutting rates this year."

Mike Fratantoni is the Mortgage Bankers Association Chief Economist. He joins us now. Good to see you, sir. So that rate-- I think a pretty notable move down near that five range. But given what the Fed Chair said, how low do you think rates will get this year?

MIKE FRATANTONI: Yeah, so we're forecasting that we're going to be closer to 5% than 6% by the end of 2023. As you noted, the Fed we think is still going to push up short-term rates at least one more time-- one more 25 basis point hike. But long-term rates like 10-year treasuries, 30-year mortgages are already reflecting the weakness we've seen in the economy and, honestly, reflecting the fact that at some point, the Fed will reverse course and begin to drop rates.

SEANA SMITH: How low do you think rates need to drop in order to spur a lot more activity in the housing market? Because still, even though we have seen some improvement, we know sellers and a number of buyers still remain on the sideline.

MIKE FRATANTONI: Yeah. It's been interesting-- fourth quarter of 2022, the housing market, I think, was just dead in the water. And you look at the level of activity right now, it's still very low. Applications to buy a home still about 40% below where we were last year at this time.

But we're beginning to see an increase in the level of activity. And that's in our data in terms of mortgage applications. It's in pending home sales from the realtors. And it's in builder sentiment from the homebuilders. So everything pointing in the same direction-- January a little bit better than that extraordinarily slow fourth quarter from last year.

DAVE BRIGGS: Is the worst behind us, Mark? Mike, excuse me.

MIKE FRATANTONI: Yeah. I mean, we were above 7% for a 30-year mortgage rate in fourth quarter last year. And now like you said, last week, we were a little above 6%. And some of the data in the market today say-- a lot of our mortgage lenders are quoting rates that begin with a 5. So I think that's going to be enough to get potential buyers much more interested and out looking for properties.

SEANA SMITH: Mike, what about the state of the economy right now? Because that remains uncertain. If we do see a recession, how do you see that impacting housing over the next several months?

MIKE FRATANTONI: Yeah. That is our baseline forecast. So we think we're going to be in a recession the first half of this year. The unemployment rate, which was at 3.5% in December, we see getting above 5% by the end of 2023. And that's going to be a headwind, certainly.

But a benefit, again, particularly for that first-time buyer, is rates down from 7% to maybe the mid-5s. Home prices, instead of growing double-digits, we think are essentially going to be flat for much of the next two years. So from particularly a first-time home buyer perspective, the market is a bit more inviting.

They might actually see some additional properties out on the market. Particularly in the new home portion of the market, we've seen inventory pick up. In terms of existing homes, inventory is actually still quite tight. And a lot of current owners, if they don't have to sell into the somewhat weaker market, they may just hold onto their properties for a bit longer.

DAVE BRIGGS: Historically speaking, where are those inventory levels and when do you believe that story begins to change?

MIKE FRATANTONI: Yeah. So, again, different on the new versus existing side. New home side, there's about nine months of supply. A lot of that are homes under construction. And we expect that builders are going to be forward-leaning in terms of offering incentives, and in some cases, price cuts, to move those homes.

But a builder is in a different position from a current owner-- homeowners in the US in the aggregate have about $30 trillion of home equity right now. And millions of them are sitting on mortgages that were taken out at all-time lows-- 3% or even lower. So we have less than three months of supply in the existing side.

So if you're a buyer, probably more opportunities to see in the new home market in the existing home market right now. Six months of supply is typically what you think as a balanced market. Again, new home market-- looks like we got more than that. Existing, a lot less.

SEANA SMITH: Mike, you mentioned the fact that some buyers are coming back into the market. How much leverage do buyers have today?

MIKE FRATANTONI: Well, certainly a lot more than they did last year at this time. Last year, it was all about multiple bidding wars and properties going for well above list price. Now, it's just not the same level of fever in the market. So I think a buyer has a lot more leverage.

I wouldn't overstate that, though. Again, given the lack of inventory in the existing side, if a current owner is not in any way distressed and doesn't have to move, they may not give a lot on price, but there may be other options available. You see many sellers, perhaps they're going to offer to buy down that buyer's mortgage rate for a period of time. That certainly happens in the new home market.

So it's not all about price and negotiating around price. There are other terms of the transaction where a seller might be more flexible to get the property sold.

SEANA SMITH: Mike Fratantoni, Mortgage Banking Association Chief Economist, thanks so much.