Home prices will weaken as rising rental supply creates more competition in the housing market, top economist says

• Rising rental inventory adds competition for home sellers, Moody's Analytics chief economist Mark Zandi said.
• New supply is bringing down rents, which should help weaken home prices as well, he told CNBC.
• Mortgage rates will settle between 5%-6%, helping boost home sales, Zandi added.

Growing rental inventory is bringing down rent prices, which should help weaken home prices too, Moody's Analytics chief economist Mark Zandi told CNBC on Monday.

The trend is especially evident among high-end properties, where the rise of multi-family towers in urban centers has lowered rents and impacted the single-family housing market.

"I think that is a sign that we will see the weakness in prices kind of broaden out here," Zandi said.

That's because the added supply increases overall competition in the housing market as sellers of existing homes will be under more pressure to cut prices, he explained.

He added that renting a single-family home offers the same kind of lifestyle as buying one would.

National rental prices are cooling and set to level off further as residential construction has rapidly picked up this year, boosting multifamily completions to their highest levels in the first two quarters since the 1980s.

The rush to add inventory comes as the housing market faces a broad supply crunch, made worse by homeowners' resistance to sell their properties. Through this year, tighter Federal Reserve policy led to a surge in mortgage levels, encouraging owners to stay put with their lower rates.

But owners will eventually have to come back to the market, Zandi said: "I think at some point they're going to need to sell their home due to life events — divorce deaths, children, job change — and when they do, they're going to have to cut price because they're going to get a lot more competition from other sources of housing."

With mortgages coming down from earlier highs, Zandi expects the 30-year fixed rate to settle at around 5%-6% for the long run, down from more than 7% today.

He reiterated that this will help boost housing sales, as long as a recession is avoided and incomes continue to rise.

At "6%, things start to come back to life, but I don't think we get home sales back anywhere close to where they were, you know, pre all this, until we get back down to closer to 5%," he said.