Homebuyers becoming ‘very eager’ as mortgage rates continue to tick down: Economist

National Association of REALTORS (NAR) Chief Economist Lawrence Yun joins Yahoo Finance Live to discuss current mortgage rates and the housing market.

Video transcript

DAVE BRIGGS: All right, mortgage rates moving for a third straight week down. The average 30 year fixed down to 6.32% from 6.42% one week ago. That's according to Freddie Mac. Down from north of 7% in early November, of course, far more than the 4.67% one year ago.

Let's talk about the housing outlook with Lawrence Yun, National Association of Realtors Chief Economist. Good to see you, sir. So what is driving these rates down and where do you believe they will begin to flatten out?

LAWRENCE YUN: The-- good afternoon. Certainly, the mortgage rates are becoming much better for the consumers. I think the consumers recognize that 3%, 4% mortgage rates of the COVID period, those were special circumstances, bonus conditions. The new normal could be around 6%. And, essentially, that's where we are.

And for people who are considering buying, well, someone who may have been priced out at 7% are now beginning to be very eager as the mortgage rates are approaching 6%. But the reasoning is very simple-- the Federal Reserve is, in essence, saying maybe there's only one more rate hike, or maybe none at all, given the regional bank a little wobbleness in that sector.

So therefore, the mortgage rate has pretty much already topped out. The key question is, are we going to have sufficient supply to adequately meet some of the rising-- potentially rising demand?

SEANA SMITH: And, Lawrence, what are you seeing in terms of supply-- those inventory levels which we know have been very, very low now for quite some time? How big of a challenge is that still here for the market?

LAWRENCE YUN: It is a big challenge. We have only 1 million homes out in the marketplace. Pre-COVID, it was closer to 2 million. So the inventory situation has not really improved. And therefore, we need to think about supply-- bringing more supply, giving the incentive for the builders.

Maybe there's too much regulation for home building activity, land use regulation. And also, consider some of the zoning so that we can produce more housing rather than be restricted by zoning regulations. So we have to really think about bringing more supply to the market, because, clearly, there is a pentup demand.

Millennials did not participate in the market in the last year, but there is a aspiration for home ownership among the younger adults. And we need to assure there is adequate supply to meet that future demand.

DAVE BRIGGS: And we're seeing some of that shift in new numbers that show baby boomers have overtaken millennials as the largest generation of homebuyers-- nearly 40%. That's up from 29% a year ago. What's behind that shift?

LAWRENCE YUN: It's essentially saying that last year, in a period of fast rising mortgage rates, it squeezed away the first time buyers, while for existing homeowners, they saw substantial price gain-- 30%, 40% price gain in short three year time span. And therefore, for existing homeowners, they can always sell their home, used to proceed as a down payment for their next purchase, but for the first time buyers, they don't have that luxury.

They're looking at mortgage rates and rising mortgage rate essentially squeezed them away. And from the future perspective, I mean, we want home ownership opportunity for all age group. So the high mortgage rate last year really killed off the younger adult generation.

SEANA SMITH: And, Lawrence, more specifically to that point when we talk about how much of the first time homebuyers, the percentage there that they make up of all of home purchases, where does that stand now? And do you see that changing any time soon?

LAWRENCE YUN: Last year, exceptionally low. Only 26% of all home buyers were first time buyers. Pre-COVID days, we would have said closer to 40% as being normal. So Federal Reserve clearly needs to understand that when they raise interest rates, it will cause some harm to the economy.

We are seeing it in the regional bank. But also from the home buying opportunity, rising interest rate is essentially limiting people of middle income or moderate income. People who are on the more better situated circumstances, baby boomers, have already accumulated wealth, I mean, they are in a much better situation.

So one has to consider, especially in light where we have so much apartment building construction occurring in the country, where rents will surely come down, which means CPI, consumer price inflation, will come down towards the year end-- so maybe the Fed can stop raising interest rates knowing that inflation will be coming down.

DAVE BRIGGS: I want to get your thoughts quickly on this LA mansion tax, which goes into effect on Saturday. You're seeing a rush of sellers trying to get their home not just sold, but closed, by Saturday. Is that a smart move? And what is the net impact of it?

LAWRENCE YUN: Not a good move. It just means that Los Angeles is saying, look, if you succeed in life, you have some wealth, we don't want you around here. So I think there will be a large outmigration away from LA.

Maybe they will go to Arizona, Nevada. So in the interim, maybe they collect some mansion tax temporarily short term. But over the long term, they have lost out on many productive individuals as they have gone to other states.

DAVE BRIGGS: Lawrence Yun, really appreciate you being here. Thanks so much.

LAWRENCE YUN: Thank you.