HOMEOWNERS ARE POORER; DEAL WITH IT
WASHINGTON — Over the years, I have encountered a lot of weird statements from company chief executives announcing layoffs or business setbacks. But possibly the strangest one came recently from Redfin chief executive Glenn Kelman, who said his firm was letting go of 13% of its workforce, and shuttering its “iBuying” division, which bought homes directly from consumers, did light renovations and put them back on the market. Anyone who has watched a house-flipping show knows how hard it can be to make money that way. Around this time last year, Zillow closed its own iBuying division after losing buckets of money. Yet this is not how Kelman explained it. “We’re closing our iBuying business, RedfinNow,” he said in a statement, “because maintaining a profit with rising interest rates would make our offers on homes insultingly low.”
Insultingly! What is insulting about offering people the market price for their house? Homeowners are presumably aware mortgage rates have spiked. And because owners already have homes and mortgages, they are also aware when rates are higher, people cannot afford to pay as much for houses.
And yet I don’t think Kelman is crazy; he’s probably right. Many homeowners would be insulted by what Redfin could rationally offer. His statement is strange because the housing market is in a very strange place — and finding a new normal will require some ugly adjustments, psychological and financial.
As I noted in June, most American homeowners have known only a world of low interest rates. Mortgage rates hit their all-time high in the early 1980s. Since then, rates have followed a long downward trend. Prices responded with a corresponding upward trend.
During the financial crisis, however, the Fed stepped in with easy money, and by 2022 most homeowners were sitting on a nice chunk of equity. This made homeowners feel prosperous and secure. It probably also boosted consumer demand, because people who feel richer are willing to spend more. Most people still take it for granted that housing is a great investment as well as a way to keep rain off their heads.
These trends could not go on forever. Now someone who could have gotten a mortgage at 3% to 4% a few years ago has to pay more than twice that. To keep their mortgage payment the same, the cost of the house would have to fall by almost half.
Unless prices drop significantly, the market will be starved of new entrants — which means falling demand and, ultimately, lower prices.
Homebuyers aren’t yet ready to recognize the extent of that loss, so they won’t sell their homes unless they really, really have to.
Though supply in my neighborhood remains quite low by historical standards, inventories are rising, and sales have fallen by almost a quarter. Homeowners seem to be sitting out the market, waiting for the return of the good times. This helps explain why median sales prices have fallen by only about 7% and were still up year-over-year.
Of course, that 7% decline might be a good deal if interest rates fall back to where they were fairly quickly. Homebuyers could suffer a high payment for a couple of years, and then refinance into something more affordable — and sellers could avoid taking a hit to their personal wealth. That’s one way we could get out of this strange market.
But it’s hard to imagine interest rates are going back to where they were during the pandemic. The public health crisis is over, and the Fed is now in inflation-fighting mode. We homeowners might never again be as rich as we felt in 2020 and 2021 — which would mean the only way the market can go back to normal is for us to eventually, painfully admit we’re poorer, and move on.