Mid-Year Housing Market Update + Mortgage Rate Forecast

Dave:
Where is the economy midway through 2024? How are these stubbornly high interest rates impacting the housing market? Are people still locked into their homes or are they now more willing to move? We’re covering the state of the market on today’s episode.
Hey investors, I’m Dave Meyer Solo today, which means we have a bigger news episode for you. If you haven’t listened to this format before. Every Friday, we bring you content that discusses what is going on in the housing market and economy at large. We’ll bring you data, we’ll bring you experts so you can make informed investing decisions. And today the expert we are bringing on is the chief economist at Redfin. Her name is Daryl Fairweather. And on today’s show, we’re gonna pick her brain about what is going on in the housing market and the economy halfway through the year. On this episode, we’re gonna discuss why the data points to a strong overall American economy, but Americans don’t feel that way about the economy in general. We’ll also talk about our favorite word, my least favorite word of 2024 inflation and how it is impacting the average American and the housing market. We’ll also talk about the lock-in effect and why home sales volume has remained so low throughout this year. And lastly, we’ll talk about a couple of predictions Darrell has for the rest of the year. Before we jump into the episode, I want to thank our sponsor for today, which is rent app. It is a free and easy way to collect rent. And if you wanna learn more, go to rent.app/landlord. Let’s bring on Daryl Daryl, welcome to the BiggerPockets Real Estate Podcast. Thank you for being here.

Daryl:
Thank you for having me.

Dave:
I’d love to start with the broader economic picture before we jump into the specifics of the housing market. So can you just give us an overview of what’s happened with the economy so far in 2024?

Daryl:
2024 has been a year of strong economic growth, but economic growth is not exactly what we were hoping for this year. Strangely, we were hoping that the economy would slow down to the point that prices would slow down too, that we would get some relief from inflation. But that hasn’t happened very quickly, which has caused the Fed to keep interest rates high, which makes borrowing for anything more expensive and that particularly hurts the market for homes.

Dave:
And what do you attribute the stubbornness of inflation to? Why has the economy stayed as relatively hot as it is? And I should clarify, it has slowed down, right? It’s slower than it was in 2023, but it is still technically growing real GDP inflation adjusted GDP is still technically up your year. So why is that?

Daryl:
Well, my theory for why the economy is still so strong is that the pandemic destroyed a lot of the economy. It destroyed businesses, it destroyed old ways of doing things. And with that came the opportunity for new kinds of growth in the economy. It’s kind of like what happens in nature when there’s a forest fire, it’s right after the fire that you see the most new growth of trees and you can think of small businesses being in the same way. And that was also fueled by a long period of low interest rates and money flowing into the economy from the government and also government spending. The Inflation reduction act was a big bill and that is still getting rolled out and that’s why we’re seeing growth in government jobs and that contributes to the economy as well. So I think that, I mean, all roads lead back to the pandemic in terms of why we are where we are right now. But the pandemic did change the way that we do things and that has been beneficial to the economy. But too much economic growth means prices go up too quickly because people are trying to hire really fast and then wages grow up and that leads to higher costs and more inflation. And that’s why the Fed needs to intervene because if you let the economy grow too fast for too long, you get bubbles, you get inflation, you get a lot of bad outcomes.

Dave:
And this is sort of a subjective question, but I’m curious of your opinion on, despite the fact that real GDP is up, I think it was like 1.3% last quarter, there’s also this sentiment that the economy is doing very, very poorly. Do you have any ideas on sort of this juxtaposition between the economic data and economic sentiment right now? Sure.

Daryl:
I think you can look at what parts of the economy are adding jobs or wages are growing, which is mostly the, the bottom of the economy, the lower wage jobs. There’s been a lot of progress with unions with minimum wage increases. And if you are middle class, it might just feel like things are more expensive without there being really a lot of benefits to you. So I think that’s where a lot of the disconnect is, is it, it kind of depends on where you sit in the economy, whether it feels better or not. But when you look at the unemployment number, you can’t really deny that more people have jobs now or fewer people are looking for jobs. Those jobs are still being created. So it might just not be in the areas of the economy that we traditionally thought of as strong like real estate or like technology.

Dave:
Yeah, that, that makes sense when you dig into the, the job numbers, it does seem like some of the lower paying jobs are really where we’re seeing growth. And I, you know, I work in tech, so you hear a lot of people struggling to find work in tech, which is obviously just one of high paying sector. But um, I’ve definitely heard that anecdotally through through people I know. I am also curious about sort of this just, you know, psychological impact of inflation because it does seem that inflation is slowing down, but the sticker shock, at least for me, hasn’t gone away. And I wonder if that’s sort of what’s going on with everyone is we just haven’t mentally gotten used to, to how expensive things have gotten in the last few years, even though the rate of change has come down a bit.

Daryl:
Yes, I think that’s correct. So the government has their way of measuring inflation where they do surveys and they collect price points for the entire broad economy by any individual or any one person’s experience of inflation is going to be on their own personal timeline. I’ll give you an example, like I’m gonna install windows on my house and I had no idea how much its cost to install windows or how that’s gone up and I didn’t realize it until I got the quote. So I think that people are figuring it out when they go to buy a car or when they’re, you know, doing renovations of their home. People have known about the grocery store price increases for a while and I think that just reflects the fact that people go to the grocery store every day. But for these larger purchases, they don’t happen quite as often.

Dave:
That’s such a good point. It kind of just like keeps coming up every couple of weeks, you know, you get used to one thing, but obviously you don’t buy windows very frequently and every time you go and try and make this one big purchase, it’s kind of just like another gut punch if you will, <laugh> on how expensive is. And that could be, uh, psychologically sort of painful, uh, to just like keep experiencing this decline in in spending power.

Daryl:
I think it’s a reality check for people that they maybe thought that their savings could potentially last ’em a certain amount of time and then they realize, oh, I’m going through the same a lot quicker than I thought I was because of these larger expenses.

Dave:
Alright, so now that we understand what’s going on in the broader economy, let’s zoom in on the housing market. Darryl shares her insights and inventory affordability and what might happen with interest rates right after the break. Welcome back to Bigger News. I’m here with Daryl Fairweather, chief economist at Redfin. Let’s jump back into our mid-year market update. So I do wanna get back to our, uh, discussion of the broader economy in a little bit and we’ll start looking forward. But before we do that, let’s just get a status update on how the economic climate has impacted the housing market in particular.

Daryl:
Well, the housing market, and again, it depends on where your perspective is on the housing market. If you are a homeowner, the good news is that home values continue to go up. Prices are up 4% from last year, so it’s outpacing inflation at the moment. I mean, it does depend on what market you’re in. There are places where prices are going down, like in Texas and in Florida for the most part, home values are still going up. The issue really is that there isn’t much volume. There are still very few listings, there’s very little inventory, very few purchases happening, but the market is in balance because buyers are still outnumbering sellers, which is supporting, uh, value growth.

Dave:
And how does that work, given what we were just talking about with inflation? How are there still more buyers than sellers?

Daryl:
So normally, or, and historically when interest rates go up, it destroys demand for homes because you have to borrow to buy a home usually, and when borrowing costs go up, fewer people can afford to have that mortgage to make that purchase. But what was unique about the pandemic was that for a moment, interest rates came down to record lows around 3% for 30 year fixed rate. Everybody who, you know, was paying attention either got that low mortgage when they bought a home or refinanced their existing home with a mortgage that low. And so people who currently have homes have these really low mortgage payments and if they were to sell and buy again, if they were to buy even just an equally valued home, they would end up with a much larger mortgage payment than they had before unless they’re coming with significant equity. So the kinds of people who are selling right now tend to be people who do have a lot of equity in their homes, can afford to make a cash purchase with their next one, they’re downsizing or they’re moving to a more affordable market. But everybody else is better off just holding onto their home, even if it’s not ideal, even if they really wish that they lived across town or they had an extra bedroom, people are financially finding it better just to stay in place. So that has constricted new listings significantly.

Dave:
So what Daryl is talking about here is something known as the lock in effect. You may have heard of this term, it’s kind of all over the media right now, but basically the idea is that mortgage rates during the pandemic went to historic lows. They were in 3%. I even know people who had high 2% mortgages and so many people bought homes with those low mortgage rates or refinance existing mortgages with those low rates that they don’t want to give it up. So people who may normally have wanted to sell their home right now, it’s not very attractive to do so because if they sell their home, they’re gonna have to buy a new one and finance it with a much higher mortgage. Meaning that even if they went to a similarly priced home or even a cheaper home, their mortgage payments might go up. And this is quote unquote locking people in to their existing homes. Now, as you mentioned, inventory is still very low, transaction volume’s low, but from my understanding, thanks largely in part to Redfin and your reporting is that inventory is starting to tick up a little bit this year. Uh, still low in historical context, but where is that new inventory coming from?

Daryl:
Yeah, so we hit a rock bottom at inventory last year, but things are starting to improve. A lot of that is just people needing to move and not being so motivated by money, but being motivated by a marriage or a new baby or a divorce or a death, that kinds of things or a new job. There’s so many reasons people might need to move that would motivate them to do it even if, you know, it doesn’t make the most financial sense just from a mortgage payment perspective. Uh, another reason that we’re seeing more home purchases is that new construction continues to be a strong part of the market. It was seeing some weakness, uh, last month, but the new jobs report shows a lot of new construction jobs being added. So it seems like the construction industry, you know, is still, is still doing well and they’re benefiting from the fact that demand is spilling over from existing homes into new construction. New construction tends to be more expensive, but when there’s nothing existing for sale, then you get more people interested in new builds.

Dave:
And on the demand side, do you think there’s a point where the demand may just run its course? I’m just curious if there’s just a fleeting of people who are willing to pay these high prices and it makes me just curious if we’re starting to see inventories tick up, it’s slow, but, and demand maybe starts to taper off a little bit if we might start to see some downward pressure on appreciation. Not necessarily declines in home prices, but it’s up 4%, which is a pretty solid clip. Uh, so I’m wondering if you have any thoughts on where it might go the rest of this year?

Daryl:
Well, right now it is for the most part more affordable to rent a home compared to buying one. And I think that that has been pushing people more into the rental market and that will likely continue as long as mortgage rates remain high for the for sale market. But that additional demand for rentals is eventually going to pull the market into equilibrium. Like it’s not normal for it to be more expensive to buy a home than to rent one. Because of that we sure everybody would rent one and then rents would go up. There has been more inventory added, but it kind of depends on what geography we’re talking about. So in the south there’s been a lot of multifamily construction, so I think rents could still go down and that would just pull even more people into the rental market and, uh, stall demand for, for homes for sale. But other parts of the country rentals are still constricted and it could still be advantageous to even buy a home for the purpose of renting it out, which adds more demand to the for sale market. So yeah, I, I think that uh, in the long run there will still be demand for homes for sale, but that’s because rents will go up and people will eventually find it, you know, financially beneficial to buy instead of to rent.

Dave:
I never really thought of it that way, that, you know, if eventually it just sort of has to equalize ’cause rents will become too expensive. And that equation that everyone, you know, most would be tenants or home buyers have to make is which one is cheaper and more economically beneficial. Will at some point equalize when that happens. No one knows, I guess. But I’m curious, I almost feel bad asking this question because no one knows, but I have to ask you about your opinion on interest rates and where you think they’re heading because it seems like every other day the Fed sends mixed signals. What’s your read of the situation? I

Daryl:
Think that they’re gonna fall. I think that, you know, I’ve been saying this for a long time, so I feel like I’m the boy that cried wolf on interest rates, but it just is, it is, it’s just taking longer. It’s just taking longer to get inflation under control. But eventually the Fed will succeed and that goal and interest rates will come down. They might not come down as much as people were hoping they would come down. They’re probably not gonna go down to 3% or even 4% I think long run interest rates, you know, might equalize at around five point a half percent because they’re gonna come down from where they are right now because we’re still in this inflationary period, which, which necessitates high in streets, but it’s not. And the fed’s long-term goal is to keep interest rates high just for the sake of keeping them high. They will bring them down when they sense that inflation, that problem has been addressed.

Dave:
And you just mentioned that the, you know, the sort of equilibrium interest rate, which is this sort of mythical idea that at some point will sort of have like this perfect balanced interest rate would be at five point half percent. And I know that a lot of people at least listening to the show may see that as high, but I just wanna provide some historical perspective. I think for the last, since the, you know, the late seventies, early eighties when interest rates were crazy, the long run average is like above six, right?

Daryl:
Well they, they were trending down for a long time and that was supported a lot by demographics about people moving into safer assets and that kind of shifted demand and kept interest rates going down, but that was pre pandemic. I think the post pandemic economy looks very different when it comes to interest rates and the, and the pressures on them. I mean, there’s so many things that go into interest rates. You could, I could point to the global instability, I could point to climate change, I could point to, you know, the state of democracy in the United States and people’s faith and treasury bills. There’s like so many reasons to be worried about interest rates remaining high for longer. Uh, but there are also, you know, reasons that I think are are more optimistic about interest rates coming down. So I don’t really have, um, super strong opinions on where they will land long term. What I will say is that, you know, 3% was the interest rate during a pandemic recession, global crisis. If there was another recession, I think interest rates could drop down below 4%. Again, that’s still on the table, but when the economy is doing well, you wanna keep interest rates high so you have that gap so you can drop them to supercharge the economy when you need it. So I think comparing it to 3% is just the wrong comparison point. If we get into another recession, it could drop down.

Dave:
I keep saying that to people is if mortgage rates get down into the threes or even the fours, like something has gone wrong, probably like you don’t get that without consequences. Like something on a major economic scale has gone awry for the fed to drop rates that low and for mortgage rates to come that down, maybe people wanna root for that, but it, it’s not without consequences. So obviously we’re, we’re hoping that inflation comes down and we reach some sort of equilibrium. We don’t know if and when that will happen. But let’s just for sake of argument, say that rates do come down a bit towards the end of 2024, maybe into 2025. How do you see that impacting home sales volume and home prices

Daryl:
As interest rates come down, demand will come back, uh, to support stronger price growth. I don’t think that affordability will improve in the long run unless we get significantly more supply online. So when you have a movement in interest rates, it’ll just bring back demand. And also what I talked about with the mortgage rate, lockin effect, those are homeowners who are comparing themselves to the 3% mortgage rate that they got. Having it come down from 7% to 6% isn’t really gonna be motivating from a seller perspective. It’s gonna be much more motivating to buyers, which is why I think it would juice demand and lead some more competition, more price growth.

Dave:
That’s a really important distinction and question I was about to ask you, which is because if the lock-in effect sort of was created because of rapidly rising interest rates, it seems possible at least that if rates come down, yes it will increase demand because things become more affordable, more people wanna buy homes, but it could also increase supply. And it sounds like maybe that will happen, but in your estimation it won’t be proportionate. The rise in demand will be greater than the potential rise in supply and for a quick econ lesson that will put upward pressure on pricing.

Daryl:
Yes and all and, and the kinds of sellers who are sensitive to interest rates are the kinds of sellers who are buying again. So even for every one of them that list their home, they’re gonna be buying a home and adding to demand. So I think that it almost necessarily has to be disproportionate that there would be more demand than added supply.

Dave:
Okay. We have to take one more quick break, but when we come back, Daryl tells us what has her surprised about the housing market so far this year and her advice for investors navigating this market. Stay with us. Welcome back investors. Let’s pick back up where we left off. What about the housing market or the economy in 2020s for so far has surprised you?

Daryl:
It’s, it’s surprising that inflation is still persistent. I would’ve thought that the economy would’ve been more sensitive to these rising interest rates and that things would’ve slowed down already. But it, it remains pretty resilient. So yeah, and that’s why we’re in a situation where we are with the housing market. So yeah, I I just figured things would move quicker than they have on, uh, interest rates coming down and inflation getting under control.

Dave:
The inflation data is just so annoying in my opinion, <laugh>, because I know that’s not a technical or professional term, but every time you dig into the data, you start to see these trends where one category will start to come down and it gets encouraging, but then it’s just like whack-a-mole, this other, you know, one other sector of the economy will start to see outsized inflation and bring the total core or the headline CPI back up and it just, it, it’s hard to forecast when that might end. I’m starting to really wonder if and when 2% is realistic, do you think it can happen, let’s say in the next year? Well,

Daryl:
I don’t think that it needs to be literally 2% for the Fed to start cutting because the data that we get is lagged. Meaning that it really represents what things were like, you know, months ago compared to now. But that is one of the reasons that the Fed can’t declare victory too soon is that, you know, they might get a wrong and you know, there are more moles, as you said, emerging that we just didn’t know were underneath the ground before they, before they stopped. So, uh, it’s, it’s, it’s really tricky for them to get the timing right. But there are risks to not cut in as well.

Dave:
Absolutely, yeah. We’re already starting to see GDP start to decline and slow and although the labor market data is super confusing, it seems like the overall trend is that it’s cooling a little bit. And so there’s obviously risks there. And I think it’s important what you just said for everyone to pay attention to is that the Fed is not necessarily looking at the most recent data in general and they’re not just looking at the most recent print of that data. They’re looking at trend and they wanna understand the trajectory of different inflation indicators and they’re gonna use what they forecast inflation to be sort of as their barometer of if and when they should cut rates. Let’s turn to the rest of 2024. You’ve given us some indication of what you think will will happen, but do you have any sort of predictions on the broader economy and how it will hold up with these high interest rates?

Daryl:
Well, I think that by the time interest rates come down, the summer housing market will be kind of over for the most part. So we might see, you know, an unusual amount of demand in the fall and in the winter if interest rates were to come down. But it’s gonna be a time when it’s not really matter for the market so much. So I think, you know, for the most part we’re anticipating that this will be another down year or not down because it’ll be up from last year, but down historically year for sales, it’ll be difficult for listings to increase enough to like support a lot more purchases this year. So unfortunately it’s just, it is what it is. But I guess the, uh, the optimistic take is that we don’t think it will get worse <laugh>. Okay. Uh, than it is right now.
So if you have business right now and things are good from your perspective, then I wouldn’t expect that to change too much. If anything, I would expect there would just be more buyers in the market. And it does kind of depend on each agent or investor’s perspective because markets do vary a lot locally. There are still homes that are getting multiple offers. Uh, there are still homes that are like, I mean prices are still going up. So again, if you’re on the ground trying to find a kind a home, it won’t feel like there’s anything necessarily weird about the housing market except the lack of inventory. That’s, that’s the weird part. I don’t think that’s going to change this year.

Dave:
What does make that change?

Daryl:
Well, I think over time the lock and effect will ease people who bought homes in 2022 at 5% interest rates could potentially be ready to sell again already by 2025. I mean, they’ll be a little bit on the early end, but we’ll just start to see, um, the impact of what happened in 2020 and 2021 fade as it just becomes part of the distant past. Even for people who have those low interest rates every month, they’re paying off, they’re paying down their equity and that mortgage payment matters less to them because they could, they have more to put towards cash purchase on the, on their next purchase if they wanted to. So yeah, it’s just gonna naturally fade, but it’ll probably fade over the course of like a decade. It’s gonna be a little bit less impactful every year.

Dave:
Yeah. There’s not gonna be some sort of event where all of a sudden, at least in your estimation, there’s not gonna be some sort of event where we’re gonna see some huge influx of supply.

Daryl:
I think that the kind of supply we’ll start to see will be the homes that were built during the pandemic going up for resale. Hmm. Those would be the, the kinds of existing homes and, you know, you could look at like where those are located. Um, they were mostly in the south and in the excerpts and in rural areas or suburbs. ’cause that was, that’s what was popular then. But those existing homes that have been around since before 2019, those are probably still gonna feel that lock in effect.

Dave:
Great. And my last question before we get outta here, Daryl, is do you have any advice for people who are hoping to purchase this year and how to navigate this tricky market?

Daryl:
Well, one of the exciting trends I see for investors is that there’s been a lot of liberalization when it comes to upzoning. So ADUs can go in on single family lots and all of California, and that’s true in other states as well. They, there’s been a lot of progress on that. So I think there’s a lot of opportunity for investors who, you know, aren’t just buying to rent, but they, they wanna do something with the home and get even more value out of it, having even more tenants. So that’s something to keep an eye on.

Dave:
Great. Well, Daryl, thank you so much for joining us today and sharing your knowledge and research with us. For everyone listening, if you wanna connect with Daryl or check out any of the research her and her team do at Redfin, we’ll make sure to link to that in the show description or the show notes below. Daryl. Thanks again. Thank

Daryl:
You.