Medium-priced homebuyers lost 'about $100,000 in purchasing power': Economist Manager of Economic Research George Ratiu assesses the buying power prospective homebuyers have amid mortgage rate and housing price trends.

Video Transcript

DAVE BRIGGS: Mortgage rates jumping to their highest level since the 2008 financial crisis. The average rate on a 30-year fixed now 6.7%, according to Freddie Mac, more than doubling from 3% just one year ago. So what's ahead for the housing market?

We're joined now by manager of economic research, George Ratiu. George, nice to see you. You have separate housing debt out today. We're going to get to that in a moment. But let's start with these rates with continuing Fed tightening. Where do you believe rates are headed? And how severe do you expect the impact to be on home values?

GEORGE RATIU: Dave, that is the question of the season. When you look at mortgage rates, even a month ago, we would not have expected we'd see anything within a 7% range. And yet, here we are, very close. What that really means when you put numbers to paper is that for the typical buyer, someone who's on a median household income of about $71,000 and putting a 20% down on a median priced home, at 3%, they would have over $107,000 more.

So put it another way. The buyer today in September of a medium-priced home lost about $100,000 in purchasing power. That's tremendous. When you juxtapose on top of that the fact that home prices are still rising compared to a year ago, though, they are finally backing off peak, and you throw in the fact that inflation is eroding most people's incomes, you have an affordability crisis, which is making it really challenging.

And with the Fed, to your point, committed fully to bringing inflation down here to 2%, I am not surprised to see rates moving within 7%. And very likely before the end of the year, we could see even mid 7's.

RACHELLE AKUFFO: And so what sort of trends are you seeing in terms of inventory and the changes there?

GEORGE RATIU: Rchelle, what we're seeing at, looking at the inventory picture, is, number one, a significant improvement. Most of it, mind you, borne out by the significant dropoff in demand. However, active inventory is up from a year ago. And homes are spending longer on the market. That, in a sense, is really good news. It's showing market is moving back towards balance.

At the same time, worryingly, as we go into the colder months of the year and a lot of homeowners are beginning to get worried they missed the peak. We are seeing new listings pull back. So just at a time when we need supply to increase, we're seeing some of that supply shrink. And that's still keeping upward pressure on prices for the time being.

SEANA SMITH: George, you mentioned the fact that homes are sitting on the market for longer. How long is a typical home on the market? And I guess, how does that compare to those pre-pandemic times?

GEORGE RATIU: So in many respects, we're looking at roughly around a 40-day mark right now. Pre-pandemic, we would normally expect the home to be on the market somewhere closer to 60 days, right? Somewhere between two and three months would be more of a balanced market. So we're still a ways off from that point. The encouraging factor here is the fact that we're seeing a lot of sellers still trying to make a go at it.

But for buyers, the real challenge is their incomes and that their ability to borrow are really being curtailed. And in effect, what the market is doing is pretty much following what the Federal Reserve has said. I mean, we heard Chairman Powell at the last meeting of the FOMC say that housing needs a correction. And if anything, we're seeing that actually take place in real estate markets right now.

DAVE BRIGGS: Yeah, and that statement from Powell raising a lot of questions. Do you think the Fed can bring home values back to or seeks to bring home values back to 2019, 2020 levels?

GEORGE RATIU: That's a great question, Dave. And I don't think the Fed has a particular target in mind, like they do with inflation. However, I do see it from at least the remarks, Powell's remarks. He pointed out that people today can not really afford to purchase a home. And for many first-time homebuyers, that's absolutely the case.

So from my perspective, I see at least having homes, price wise, move sideways as a real benefit, as long as incomes keep rising. If, however, inflation lasts longer into next year than the Fed anticipates, that could further erode purchasing power. And that's even before we discuss any economic outlook, a potential recession, or labor market, which is still very strong, slowing down at some point next year.

RACHELLE AKUFFO: And George, just quickly, because I know in the suburbs, I've started to see home prices coming down, but what about the top 10 metro areas? What are you seeing there?

GEORGE RATIU: In the top 10, at least by size, we are still seeing activity fairly brisk. In fact, when we look at our top 50 metros, we are only seeing a couple of them with actual price declines year over year. The others, it's a combination of, number one, the fact that we are still in a tight inventory situation. Yes, it's improving, but it's nowhere near historical markets.

Second, we're still seeing buyers interested in purchasing. The truth is we're changing stages of life. We're changing life circumstances. Transactions will continue. People will retire. People will change jobs. People will have children and need a bigger home.

So we're still seeing buyers in the market. It's just that right now, the only ones that can afford it are either repeat buyers who have a lot of equity, folks with cash, thinking of retirees selling in a high cost area, moving somewhere more affordable, or people with higher incomes. And for those outside of those groups, it's a much, much more challenging environment.

SEANA SMITH: George Ratiu, thanks so much for taking the time to talk to us. Great to have you.