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Homeowners became ‘overambitious’ with prices in Sun Belt states, economist says

Redfin Chief Economist and Insider Contributor Daryl Fairweather joins Yahoo Finance Live to discuss the housing market, high mortgage rates, and how many homebuyers can't even afford their payments.

Video transcript

[AUDIO LOGO]

DAVID BRIGGS: A steady stream of evidence showing a cooling housing sector continues to flow today with news that new home sales dropped 12.6% to their lowest levels since 2016, and also down nearly 30% from a year ago. Where is this market headed?

Daryl Fairweather is the Redfin Chief Economist and Insider contributor. Good to see you, Daryl. So are we seeing any signs of flattening down the road? Or can we expect these numbers to continue to fall as long as the Fed is tightening?

DARYL FAIRWEATHER: I expect prices to continue to fall for the rest of the year because mortgage rates are so high, and home buyers simply can't afford their monthly payments. Monthly payments are up about 40% from last year. So it's really hard for buyers to stomach that.

RACHELLE AKUFFO: And in terms of the new listings also falling, what does that tell us, is it that some of these sellers are perhaps waiting for the market to go back up? Or is it an inventory issue?

DARYL FAIRWEATHER: Sellers are sitting on record equity gains from last year, and they locked into very low mortgage rates last year. So it's not really a good reason for homeowners to sell right now, especially when they see that the market is soft. They can just hold on and wait. Also, the lending standards of the last decade were really strict, so homeowners are in a really good financial position, even with inflation in the economy and all of that. We're not going to see very many distressed sales because the kind of people who own homes are in a good financial position.

SEANA SMITH: Daryl, you mention the fact that you do expect prices to continue to fall. Some economists out there are saying that home prices are likely to plunge. Do you think that's exaggerated? Or how big of a drop are you expecting to see?

DARYL FAIRWEATHER: I think that's unlikely unless we enter into a pretty severe recession. Like I said, homeowners are in a good financial position. They have plenty of equity. They have a big cushion. You'd really need to see a wave of distressed sales to get to a point where prices drop because sellers and homeowners can just wait out this market. So you have a pullback in both demand and supply and prices stay stable, even though sales are way down.

DAVID BRIGGS: A maddening situation for home buyers is you're seeing-- we showed it earlier-- the median price right now $439. That is up $37,000 a month ago. So we're seeing numbers fall, but not if you want to get back in this game. We're hearing also, Daryl, that we are in a housing recession, expert after expert coming out with that statement. What does it mean for home buyers and for homeowners?

DARYL FAIRWEATHER: I think housing recession is a bit of hyperbole. This is a normal part of the housing cycle. We just had a really hot period, and what goes up must come down eventually. That happens throughout the house-- that happens in the housing market every so often. It happened in 2018 even. It didn't last very long.

I think the question is, how long is this going to last? And that really depends on the economy. How long is inflation going to stick around? How long is the Fed going to have to raise interest rates to fight that inflation? Is it going to be so bad that we go into a recession? That's what I'm waiting to see is what happens in the economy because what's happening in the housing market isn't all that unusual compared to how hot it was just a couple of months ago.

RACHELLE AKUFFO: And Daryl, given how much people moved around during the pandemic, which areas are seeing faster recovery than others right now?

DARYL FAIRWEATHER: Well, the Midwest is really stable. When everybody was moving around, it was mostly from the expensive coastal areas, like San Francisco, Los Angeles, New York, to the Sun Belt, like Florida, Texas, Arizona. Those Sun Belt areas, they went up really fast. And now that mortgage rates have gone up, they are correcting really quickly. Some of the homeowners there got overambitious when it came to pricing, and they're having to learn the hard way that they have to lower prices in order to sell.

So that's why we're seeing a lot of price drops in those areas and not as many home sales. The Bay Area, Los Angeles, those markets are still really expensive, and remote work is still an option for people. So a lot of people would rather just move somewhere else or rent for another year than to buy a home in a place that has million-dollar homes where that extra mortgage interest rate could raise your monthly payment by up to $1,000. Now, the Midwest is just stable. They didn't go up that much during the pandemic, and there's not really anywhere to fall because they've been so stable.

DAVID BRIGGS: We had a bit of an issue there with the shot. Is Daryl still with us, had one more question?

DARYL FAIRWEATHER: I'm here--

DAVID BRIGGS: You're there.

DARYL FAIRWEATHER: --if you can hear me.

DAVID BRIGGS: Great. Had one more question for you because the problem underlying all of this is lack of inventory. You have an interesting piece out about the simple fix for that relates to taxing, stop taxing housing. Tell us more about this and why it would work.

DARYL FAIRWEATHER: So one thing that defines building new housing is the tax structure. We tax housing, meaning that an apartment building that has 10 units in it is going to get taxed more than a single-family home. So with the apartment building, if you could just hold on to that single-family home and not have to pay higher taxes. The way to get around this is to tax the land instead of the property because the land doesn't change. And this is an efficient tax because it doesn't discourage investment [AUDIO OUT]

RACHELLE AKUFFO: All right, we will have to leave it there due to some technical issues. A big thank you, though, to Daryl Fairweather, Redfin's Chief Economist. Thank you so much.