Inflation is high and interest rates keep rising, leading to a lot of speculation about the housing market, with many throwing around the word “crash.” This week, The Escape Home’s Danielle Hyams checked in with Redfin chief economist Daryl Fairweather to get a pulse on what exactly is going on.
EH: What is the effect of higher interest rates on prices and demand?
Fairweather: Interest rates have really cut into demand. The median monthly mortgage payment on a home is almost 40% higher than what it was a year ago, so that just really cuts into buyer’s budgets, it’s why we’ve seen a slow down in prices, demand and sales.
EH: Does that mean it could be shifting from a seller’s market to a buyer’s market?
Fairweather: If you have gotten to the point where you have been approved for a mortgage and there are homes within your budget that you see on the market, then I think you do have the upperhand, it’s just harder now for people to get to that point.
EH: Have you seen any effect from the tight labor market on housing?
Fairweather: It helps people move. So one thing that’s happening is the most expensive housing markets have seen people leave. Places like the Bay Area and Los Angeles — not so much New York, New York is a different picture — but those expensive west coast markets have a stark decline, especially for $1 million + listings. Since people are priced out of those million-dollar-plus areas, they’re packing up and moving somewhere else, and because the labor market is so tight, that’s a viable option. They can take their job with them if they’re remote or they can find a new job somewhere else pretty easily.
EH: Speaking of remote work, have you seen any impact on the housing market of remote workers being called back to the office?
Fairweather: No, I don’t think that has happened enough to make a difference. Maybe in New York City, where you had all of those pandemic-era discounts for apartments and people were really afraid to live in New York during the pandemic but a lot of people want to come back to New York because it’s such a vibrant area and some people want to be in the office there but it still hasn’t bounced back to what it pre-pandemic.
EH: How is the second-home market looking?
Fairweather: The second-home market is way cooler than it was during the pandemic. With interest rates being higher and the economy being weaker, people don’t buy second homes when they’re worried about their stock market portfolio.
EH: During the pandemic a lot of buying was being driven by investors, has that changed?
Fairweather: Investor purchases have plateaued since 2021 when they peaked. I think that investors pulled forward in terms of when they bought because investors are pretty savvy — they saw how low interest rates were in 2020 and 2021 and that’s why they pounced on the market then. But now that interest rates are higher and a lot of them are less bullish about the growth of the housing market, it’s not as good of an investment. When interest rates come back down though, I would expect them to come right back.
EH: Are there any predictions about when interest rates will drop again?
Fairweather: If we are in a recession they will drop. Or if inflation just starts to subside and we have a soft landing with the economy — that’s what the Fed is going for — then interest rates will go down slowly.
EH: Does that mean you should wait to buy?
Fairweather: You don’t really have to wait on account of mortgage rates because you can always refinance later, it’s more whether you can afford to buy a home at the prevailing mortgage rates that you would be willing to stay in for five years. If you can do that now, you’re probably going to be able to refinance later and reduce your housing payments even more.
EH: Predictions for the next six months? Is the housing market really going to crash?
Fairweather: It really depends on the course of the economy. If inflation is persistent and the Fed has to continue to raise interest rates to fight it even more than they’re planning now, then interest rates will go up and the housing market will suffer. If inflation starts to subside and the Fed can back off when it comes to interest rate increases, then I think things will probably flatten out and we will have home values basically at the same level they were last year going into 2023. If we’re in a recession — if it’s a mild recession I think it will be the same scenario because interest rates will go down which will prompt some people to buy homes, at the same time the recession itself will cool demand so I think it will be kind of a wash. If we have a severe recession then I think the housing market could see prices decline by 5%.