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Zillow Senior Economist Jeff Tucker breaks down the outlook of the housing market and mortgage rates following the Fed’s latest rate hike, including regional home pricing trends ahead of 2023.

Video Transcript

DAVID BRIGGS: Fed Chair Jerome Powell saying inflation in the housing market could start to cool by the middle of 2023. But will another 50 point hike further punish the housing sector? Joining us now is Zillow Senior Economist Jeff Tucker. Jeff, good to see you. How will today’s decision by the Fed impact the housing sector that the Fed chair said, quote, “had weakened significantly?”

JEFF TUCKER: Yeah, you know, today’s announcement was not a surprise in terms of the actual 50 basis point hike. So I think that news of slightly taking his foot off the brakes had been priced in for mortgages and 10-year treasuries already. So it still seems like a small step in the right direction. We’ve seen that 10-year Treasury working its way down from over 4% to 3 and 1/2%.

And critically for housing, that has brought the mortgage rate down on a 30-year mortgage from over 7% back down to about 6 and 1/3%. That’s really major progress in terms of improving affordability for homebuyers. And this– it’s a long road for us to get back from this high-inflation, high-rate environment to a more slow and steady low-inflation, less-costly environment. And we are making progress in that direction at this moment.

SEANA SMITH: Jeff, you mentioned the progress that we’re making, the drop in mortgage rates. Do you expect that decline to continue? And where do you think rates are headed then if, in fact, we do see that decline continue?

JEFF TUCKER: I think that is the base case scenario right now. We’re seeing a lot of goods inflation kind of turning the corner. And we have a lot of reason to expect shelter inflation also to turn the corner in the new year. The Zillow rent index year-over-year growth peaked back in February. That takes time to flow through to the CPI rent index.

So we expect sometime in the first or second quarter to actually see that begin to decelerate on a year-over-year basis. That’s the single biggest component in services in the CPI. So putting that all together, I think the base case has to be that inflation kind of continues on this trajectory downward.

So what does that do to mortgages? I think that does bring us back into the 5% to 6% range over the course of 2023. The more optimistic scenario is that we make a lot of progress toward the lower end of that range. The less optimistic scenario is that we end up stalling in the upper 5%– upper five-point something percent range for mortgages.