Fed's inflation fight will affect housing supply for decades, says Redfin CEO

The housing market is showing signs of a recovery as the spring home-buying season gets underway.

Mortgage rates fell for the second week in a row, declining to the lowest level in more than a month. The average rate on the benchmark 30-year fixed mortgage fell to 6.74% from 6.88% the week prior, per Freddie Mac.

And as mortgage rates decline, supply is starting to rebound. New listings hit a 17-month high in February, while the total number of homes for sale rose to the highest level in a year, according to Redfin (RDFN).

It’s an improvement from last year’s depressed levels, but supply-demand remains far from balanced. The culprit: Side effects of the Fed’s aggressive rate-hiking campaign.

Top economist Gary Shilling told Yahoo Finance that the Fed’s change in interest rate policy created a "perfect storm" for the industry, with higher rates prompting would-be sellers to stay put, as many have locked in ultra-low rates during the pandemic or in the years prior.

The giant gap between current and past mortgage rates is creating "artificial tightness" in the housing market. "It won't continue indefinitely, but it certainly is disruptive right now," Shilling said.

Redfin CEO Glenn Kelman expects the Fed’s recent moves to affect the housing sector for decades, warning it will take years to work through the aftershocks of the central bank’s aggressive rate-hiking campaign.

"There's going to be low supply for a long time to come," Kelman told Yahoo Finance. "What the Fed did… will have a 30-year tail on it."

Lackluster supply has kept home prices elevated. The median price of previously owned homes rose 5.1% in January from a year ago, with all four US regions showing price growth, according to the National Association of Realtors.

Any hope of relief for the housing sector may be postponed. A series of hotter-than-expected inflation prints has bolstered the case for policymakers to delay rate cuts, according to Oppenheimer's John Stoltzfus. He told Yahoo Finance Live that he thinks the Fed won't cut rates until at least its June meeting.

A delayed rate cut suggests, at least in the near-term, that mortgage rates are unlikely to fall much further, potentially postponing a more substantial rebound in the housing market.

"We need more supply. The real gate on home sales has been the number of homes for sale," Kelman explained. "If interest rates don't come down significantly, we'll see a modest uptick in inventory, but to see a big gain, you're going to have to see a real drop in mortgage interest rates."

Moody's Analytics expects a total housing deficit of 1.5 million to 2 million units this year, with a shortfall of up to 1.2 million for single-family homes.