Measuring the Resiliency of the U.S. Housing Market

This piece originally appeared in the July 2023 edition of MortgagePoint magazine, online now.

Taylor Marr is the Deputy Chief Economist on the Research Team at Redfin. He is passionate about housing and urban policy and is an advocate for increased mobility and affordability. He laid the framework for our migration data and reports and diligently tracks the housing market and economy.

Before Redfin, Marr built financial market index funds for Vanguard at the University of Chicago. Marr went to graduate school for international economics in Berlin, where he focused on behavioral causes of the global housing bubble and subsequent policy responses. Marr’s research has been featured in the New York Times, the Wall Street Journal, and the Economist. He was also recently the President of the Seattle Economics Council and collaborates frequently with the Fed, HUD, and the Census Bureau.

MortgagePoint recently spoke with Marr to pick his brain on the current real estate market, the reports he authors, where the market is heading in the next six months, and the possibility of a recession. Marr also touches on happenings with the Federal Reserve and gives renters some welcome news.

Q: To start, you laid the framework for many of the reports which are now industry standards starting a little over seven years ago. Are you happy with the progress you’ve made? Is there anything else you would like to cover?
I am happy with some of the progress for sure. In particular, I’m passionate about migration and mobility overall of people being able to relocate, find a better home, find a better neighborhood, and some of the work that we’ve done tracking migration and tracking housing markets. I think that paved the way for a lot of interest in more migration products and research that we’ve seen come out since then. I would like to do more in terms of local migration—where and what neighborhoods people are choosing, what ones they’re priced out of, and how it relates to opening up different areas of opportunity that might become more expensive. Mobility within a metro is equally as important for building homeownership and where families can grow up.

I’ve been looking forward to getting more into the rental market as well. [Redfin] has started to track what’s going on in the rental market for a few years now, and we’ve acquired the rental company Rent. That’s been a big plan to focus research on. There’s a lot more we can do there in terms of investigating where rental housing is that’s affordable and what policies are leading towards that. That’s a big area of opportunity.

Q: Based on current reports, where do you think the market is headed over the next six months?
We’re in uncertain times because mortgage rates are fluctuating quite a bit. What is clear, though, is that the market was weakest about six months ago in November 2022 when rates were over 7% and prices were starting to pull back quickly. They were decelerating at some of the fastest paces in over a decade last fall.

At the same time, sales were rapidly falling; they bottomed out in January, and we’ve started to see a bit of a rebound, perhaps inklings of a recovery beginning. However, we don’t anticipate much more growth this year. In fact, 2023 is going to be overall one of the worst years in more than a decade in terms of sales, in addition to prices declining for the first time since the Great Financial Crisis of 2007-2008.

Overall, looking forward to the remainder of the year, we should see a little bit of stability in terms of sales, which are no longer declining rapidly, but they’re also not going to recover too much. We still anticipate about 4.3 million sales for the year, which is about the rate that the National Association of Realtors (NAR) just reported in early June. We did anticipate downward pressure on mortgage rates where they would fall from about six and a half closer to the low sixes.

I think that’s an uncertain estimate [from NAR], because right now, the Fed may be done hiking, but they may have more room to grow.

There’s a lot of pressure. We had the new banking crisis that was putting some downward pressure on rates for a while but that seems to be resolved. Overall, there’s still a lot of economic growth weakening on the horizon, and the labor market is still expected to cool further on the horizon. Both of those things could help with downward pressure on mortgage rates, pulling them closer to 6% as we anticipate, but right now rates have been shooting in the other direction as the economy has been more resilient while inflation has not come down as much. So, that’s complicated our outlook.

Overall, the outlook we set forth six months ago seems to be still in play, and we’ve been just tracking right alongside that with how sales have progressed, and what’s happened with prices. They seem to have not necessarily bottomed out, but they also haven’t fallen much further. They fell about 3% back in March and April, and they’ve been steady since then according to our weekly data that’s been tracking this. So, the projections we put forth at the end of last year, we’ve been tracking right along that, and we’d still probably agree with that outlook for the rest of the year—that price prices aren’t going to fall too much further, they might even steadily increase in the back half of the year while sales will improve slightly. It depends a lot on what the Fed decides to do over the next couple of months at their July and September meetings.

Q: Earlier in May, Fed Chair Powell reiterated that he is still expecting a soft landing for the economy this year and that appears slightly more likely, given the latest data. Do you predict further rate hikes above the 5% mark at the Federal Open Market Committee’s next few meetings?
I don’t know. The Fed has raised rates at the fastest pace in more than four decades. That is sufficient to wait and see the effects of that in terms of a cooling labor market. Market cooling and overall consumer demand are helping with bringing inflation down.

There is widespread disagreement in terms of what the outlook is for the Fed. Some people want much more aggressive cuts, and some committee members themselves are predicting two or more hikes. So, odds have increased lately that the Fed has more hiking to go, but I would still place my bet that they’re going to pause. I predict we’ll see the cumulative effects lag, and that’s what Jerome Powell said at the last press conference: that once you consider the lag that takes place from how rates are hiked, and when you see that overall impact on the economy and inflation, it takes some time to see how those changes will unravel.

[When it comes to] comments about a soft landing still being a possibility this year, I’m in the optimistic camp with them. The latest data seems to be pointing in that direction. All the recession calls [from Fannie Mae and the like] have been pushed out every three months, further and further. It’s been a year now that the majority of people have been expecting a recession within the next 6-12 months, and those estimates just keep getting pushed out.

I think people underestimated how resilient the American consumer is and how resilient the labor market is. Few anticipated that the unemployment rate would fall further last month, rather than start to creep up, which is quite remarkable.

Q: How is the “lock-in effect” impacting the market? Should we be worried about this in the long term
The lock-in effect is certainly playing a big role in terms of people deciding whether or not to sell their home when they feel they need to move, or whether they move at all. How large of a role it’s playing Is hard to say.

Certainly, new listings are down about 25% right now, year over year, and overall, more than four out of five existing mortgage holders have a rate that’s well below 5%. They are locked into that lower rate. But there are other factors at play beyond just the lock-in effect that, even with rates at or above 6%, we could still see some increased supply hit the market.

A lot of people moved during the pandemic. A lot of moves were “pulled forward,” demand was pulled forward, and people listing their homes for sale were pulled forward. So, right now, a record level of people—I think it’s three-in-five, more than half of households—have moved within the last four years. And that number is significantly elevated.

That’s just because so many people moved during the pandemic, whether they moved across the street or the country. Many of those moves mean that a lot of people now are not planning to move for several years; they’ll probably stay in their homes, so the shorter tenure of existing homeowners is also going to be a drag on supply alongside the lock-in effect.

We also have a lot of new construction that is still coming down the pipeline. You need that additional supply to create options for people who would otherwise move. A lot of homeowners might have a low rate, but what they’re complaining about is available inventory. More new construction and more people listing their homes for sale could cause them to jump into the game of musical chairs and switch homes.

Without those new chairs being added or other people moving, they’re also going to be locked into their homes, not just because of rates but because of [the lack of] inventory.

All three of those factors are holding back supply right now. All of them are concerning. But the interest rate factor has been the most salient for people when you do the math on a 3% mortgage versus a 6% mortgage. That has held back supply this year.

Q: What are the most important trends you see in the housing market?
Well, building off the last two concepts, one has been supply; that’s been very concerning, that new listings are down 25%. That’s a huge drop, and it’s holding back sales, even if demand is strong or we see a wave of demand rushing to the market when rates drop even a little bit.

Ultimately, a lot of those homebuyers end up hitting a wall when they don’t find a home to buy, so the lack of supply has been a big challenge for the housing market. This is also true in the rental market. There is progress that has been made, but then the other challenge is mobility: people freezing in place because of a challenging housing market, both with high rents and high mortgage payments because of high rates.

[This] incentivizes people just stay in place when households are less mobile and less likely to move across the country to take a new job. It makes the American economy less dynamic. It also does not bode well for opening up areas of opportunity for upward economic mobility, like for people moving into a better neighborhood for their children to get into a better school district.

If those moves are held back because of fluctuations in interest rates and available supply, that’s a big concern. So, the lack of mobility has been a top issue for the housing market, especially right now because of interest rates. But it’s also been a long-standing one where we’ve been in basically five decades of declining mobility, with people being less mobile each year as a share of moves per household.

Q: What are some of the most important factors that influence home prices?
Well, supply pulling back is an important factor because that means that even though demand has fallen, many buyers have gotten priced out of the market. A lot of sellers pulling back and not listing their homes for sale has kept prices pretty resilient overall.

If you were just looking at how rates change and how much you need prices to fall because of that change in rates, you would have expected prices to be down more than 30% by now, to keep people’s mortgage payments in line with their income or what you would expect. But prices haven’t fallen 30%—they’ve barely fallen 3%. And so, the most important factor behind that is just that supplies have pulled back almost as much as demand.

The other factor here is that finding a baseline for what prices should be is incredibly difficult for housing. A lot of people might compare how prices have risen from 2019 to 2021, and they expect prices to revert to that average or to just automatically fall. But there’s been also a big boost in affordability, not only from low rates, which pushed up prices quite a bit. We certainly shouldn’t return to what we would expect from pandemic-era 3% rates. But also, there was a lot of pandemic stimulus money that went into the housing market, and all the billions of dollars that were directed to households and increased the budget that people could spend on housing. In addition, suspended student loan payments increased the number of first-time homebuyers that might be willing to spend on a mortgage. The work-from-home phenomenon shifts how much you’re willing to spend as a share of all your income on housing versus on other things like your commute.

There have been a lot of fundamental shifts in terms of demand that have pushed up prices in the long term. That means that prices don’t necessarily need to fall back to pre-pandemic levels. That increased demand and decreased supply. Both of those are just fundamentals that, long term, have pushed prices up overall.

Now, the most important thing to take away is that most American households own their home, and higher home prices have given trillions of dollars of equity to American households over the last five years. That extra equity has been remarkable in terms of how it’s supported the American economy. As people have refinanced their mortgages, the Fed recently put out a research paper showing how much [has been saved in monthly payment savings], as well as people cashing out from that equity to pay down debt. That’s a huge stimulus for the economy that is under-appreciated.

Higher home prices create challenges with affordability for first-time homebuyers. And Redfin has looked at that, but overall, on net, there’s also been a big gain for the typical American household that might not even be moving but has benefited from refinancing by tapping into that equity and having either lower housing payments or getting some money that they’ve been able to pour into to other things.

Q: What do you think is the biggest misconception about the housing market?
In part, doubling down on what I just said, one of the biggest misconceptions I see is when people post these charts like price-to-income or how housing has outstripped inflation. Oftentimes, what these charts are trying to imply is that housing is either in a bubble that will fall 50% to come back in line with how prices were as a ratio to rents or incomes back in 1980, or something along those lines.

So, focusing on over-indexing of home prices, and what that means for where they’re supposed to be and overlooking all these fundamental shifts of demand, and also not appropriately adjusting for mortgage rates.

What matters more is not the home price but the mortgage payment, and the typical mortgage payment has not been concerning, even with higher rates right now. They’re certainly elevated year over year, but there’s been a lot of things that people have been able to do such as obtain adjustable-rate mortgages or refinance pain points on a loan to get a lower rate.

These mortgage payments that the typical buyer has right now, even on recent home purchases, have been more in line with incomes.

The Mortgage Bankers Association (MBA) tracks how much mortgage payments are for people going into contract on a loan, and overall, it’s tracked fairly well with incomes. People have not been over-leveraged in housing, and they haven’t been stretching their budgets significantly for housing since the [mid-2000s] housing bubble.

Q: What advice would you give to someone who is looking to buy or sell a home right now?
My advice is to stay aware of mortgage rate changes, find a good local lender, and shop around for rates so you know who’s giving you the best rate. Stay in constant communication with them as the situation evolves. Rates have been extremely volatile over the last year, and as you know, the chances that you could save hundreds of dollars on your mortgage payment in just one day compared to a week ago is pretty significant.

It’s more important than ever to stay in close communication with your lender and be aware of mortgage rates as those big changes happen. It opens opportunities for how much home you can afford, what housing options you might have, and what things you need to do to mitigate those higher payments when rates do increase. Buyers need to be aware of those risks. There’s also been a lot of schemes that people have used to help with these rates.

For example, many builders have offered rate buy-downs, and you can ask sellers to give some concessions in a lot of places in the country to help mitigate those higher rates. Don’t give up as a buyer, even if you’re discouraged, but try to stay on the sidelines and stay in communication with lenders to see what opportunities are out there. And it never hurts to make a lowball offer if that’s what you can afford or if that’s what you think the home is worth to you.

Q: A recent report from Redfin found that the average rent is over $1,967. Is there any good news for renters? Is this sustainable long term?
The good news for renters is the increase in asking rents has slowed down significantly. It was growing closer to 17% about a year ago. That pace slowed to basically stopped growing entirely in many markets. Rents are declining year over year, especially in the ones where rent is most expensive, like Austin or Seattle.

So, the good news is that things have stabilized. You’re also getting a lot more bargaining power right now as a renter; you have more options and oftentimes, landlords are having to give kickbacks to renters such as a free month’s rent, a free parking space, or other types of deals, even if your asking rent is the same, and we’re seeing more renter power in the market overall.

Now, there are still places where rents are growing, and if you’re moving, you are still likely to pay more in rent than you did a couple of years ago. But overall, the direction has been favorable and the most hope I can give is that there are a record number of apartments that are under construction right now. These multifamily units are under construction … there are millions of [unfinished units] in the pipeline that are set to hit the rental market across the country. As that new supply becomes available, it will continue to help push rents down.

In some places, it’s helping with affordability, and there’s more of that to come over the next 6-12 months from what we can see in the permits and what’s been started and is under construction. But yeah, overall, we’re not expecting major rent declines nationally. You probably aren’t going to save a ton, but at least you can expect stability, which means that, if you’re waiting to move in six months, you’re not going to face hundreds of dollars more in rent than moving right now, which was the case a couple of years ago.