Is Buying a Bad Decision in 2023?

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. And today we’ve got a excellent episode for you. We have Daryl Fairweather, who is the chief economist from Redfin, joining us today to talk about a wide variety of topics about the housing market and where she thinks things are going over the next year or so.
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So if you’re interested in getting all of this premium audio content for just $100, you can sign up today by going to biggerpockets.com/playlist. That’s biggerpockets.com/playlist. Make sure to check it out. With that, we are going to take a quick break and then we’re going to be back with our interview today, which again is with Daryl Fairweather, who’s the chief economist for Redfin. We’re going to talk all about whether it’s cheaper to rent or to buy, what’s going on with insurance in California and Florida, how affordability is dictating the housing market and a whole lot more.
Daryl Fairweather, welcome to On the Market. Thanks for being here.

Daryl:
Happy to be here.

Dave:
Well, I have been following your work at Redfin for quite a long time, but for anyone who’s not familiar with us, can you give us a brief introduction?

Daryl:
I’m the chief economist at Redfin. I study the housing market along with a team of other economists. We look at things like why are home prices the way they are, why are home sale the way they are, what can customers know to make a more informed decision. And we look at whole economy, we look at the housing market, we deliver that information to our customers, our agents, and our executives.

Dave:
What are some of the big trends that you’ve seen over the first half of the year?

Daryl:
This year has just been really slow in terms of the volume of sales. Because mortgage rates are much higher now than they were last year, we’re seeing way fewer buyers in the market, but also fewer sellers. Plenty of homeowners locked into record loan mortgage rates during the pandemic, and they don’t want to get those up, which means that even though mortgage rates are high, it hasn’t really translated into price coming down. It just means less volume.

Dave:
And do you expect these trends to continue over the second half of the year?

Daryl:
I think these trends are going to fizzle out. It’s kind of an open question as to how long that could take, but eventually people will either get used to these higher rates or rates will come down because inflation has slowed down. And that’s probably going to happen sometime next year, but we don’t know if it’s going to happen towards the beginning of the year or towards the end of the year or if even longer it might take.

Dave:
Yeah, I think that that’s what we’ve all been seeing. And obviously no one knows when interest rates are going to change, but we’ll be anxiously awaiting that. You and your team recently released some information that I wanted to talk about, which is that in the US right now, there are actually only four major US metro areas where it is cheaper to buy a home than rent. Can you tell us just a little bit about that research and the methodology behind it?

Daryl:
We looked at how much it costs right now to rent a particular home versus owning it. We looked at what the monthly mortgage payment would be and compared that to the monthly rent. Usually, it’s actually a bit of a better deal to get a mortgage than to pay rent. But right now it’s actually cheaper to rent, and that’s because of how high mortgage rates are. In places like the Bay Area, that difference is really extreme because the housing market is so expensive and those high mortgage rates really add up to a lot more money, like thousands of dollars more a month. But then in a place like Detroit, we actually have the opposite phenomenon, and that’s really particular to the economics of Detroit and how there are many more renters than there are home buyers because the demographics and wealthier people having left the city for decades. So it’s pretty unusual that Detroit, even with these higher mortgage rates, it’s still more expensive to rent.

Dave:
So even during, I would guess I would say, lower interest rate periods like we’ve had over the last decade or so, it’s still normal for some markets to be better to rent than to buy. Is that right?

Daryl:
Yeah, I mean usually there’s more of a mix where some markets are going to be better for renting, and that can have to do with just the property taxes in that area or the demographics of the area, the incomes in that area. But usually we don’t see this extreme where almost every single market it’s better to rent.

Dave:
And are you seeing any different dynamics in buyer or seller behavior in those markets?

Daryl:
Well, it’s why people are just backing off the housing market entirely. It makes sense for buyers that they’re backing off because it’s just all this extra money they have to pay an interest when interest rates are so high. It’s a little bit stranger that prices haven’t come down because of all these buyers backing off, you would think sellers would have to lower their price. But homeowners are instead just choosing not to list. They’re not accepting lower prices than what is on the market.

Dave:
And just for the record, the other three metro areas other than Detroit are also Philadelphia, Cleveland, and Houston. You mentioned that people are backing out of the housing market. Do you think it’s because people understand this dynamic and are actually doing this equation? Or is it more that just the whiplash of higher interest rates has people afraid of a crash? Or do you have any insight into what’s driving that behavior?

Daryl:
Oh, I think it’s the affordability that is driving buyer behavior. When they go and they talk to a lender and they realize that what they were quoted last year is not what they’re getting quoted this year, they can’t afford as much. And maybe there aren’t any homes in the market at all that met the criteria that are within their budget, so they go to the rental market instead. With homeowners, I think they’re just comfortable. I don’t know if they’re really paying attention. Maybe if they were thinking about selling to buy again that they’ve realized that doing that would put them in a much worse financial situation because they’re going to have to pay way more interest. But I think most of them are just not really paying attention because maybe they bought recently or they’re not planning on moving.

Dave:
Do you think that pullback for buyer demand will impact rents and the price of rent over time?

Daryl:
If interest rates remain higher or even go up, then I would think that more demand would go to the rental market and that would push up rents eventually. Rents are the same as they were last year when it comes to asking rents. The Fed is starting to see a slowdown and rental inflation too. I don’t think that it would be happen overnight. I don’t think that most people would see an increase in their ranked in the near term, but I do anticipate that it will happen, say, in the next three years.

Dave:
So yeah, what I was curious about is, because it’s so much cheaper to rent than to buy a home in the vast majority of markets right now, if there is any risk of that shifting because we are seeing, it seems now to be a very modest correction in prices. I think according to your research, it’s like 1% now.

Daryl:
That intuition is correct, but there are other forces at play. One is that high inflation means that people have less money left over to spend on their rent. During the pandemic, we saw a lot of household formation, people moving out of roommate situations and getting an apartment of their own for the first time or wanting more space, and that was contributing to the run-up in rents. And now we’re seeing kind of reversal of that, of people tightening their waist belts and getting roommates or not getting a bigger apartment or not spacious one. So that’s working against rising rents. Then another thing that’s working against rising rents is that a lot of homeowners who want to move and want to keep their mortgage rate are deciding to rent out their old home instead of selling it. So then there’s some inventory that switches over from the for sale market into the rental market.

Dave:
Got it. Okay. So I mean it doesn’t sound like affordability is going to improve in either the rental or housing market anytime soon in your mind.

Daryl:
No, and I think the best we can hope for is that affordability doesn’t get considerably worse. I worry that once the economic weirdness that we’re experiencing right now is behind us and people come back to the housing market, that that could lead to another wrap in home prices and rent.

Dave:
I know that that Redfin has some data about buyer demand, which is always from our perspective a little bit harder to find. So I’m curious if you have any thoughts on just how much demand has dropped off, and to your previous point, if rates come down, how much sort of demand is sitting on the sideline and waiting for, as you put it, the economic weirdness to work itself out?

Daryl:
So home sales are down about 15%. I think a little over 15%, and that is really is a reflection of there being fewer buyers on the market. We’ve also seen a decline in new listings, so part of it is that buyers are eating or just don’t like what’s on the market. We do see a little bit of a bump in demand every time mortgage rates come down. So I think a big story is still affordability that people would be buying if they could afford it.

Dave:
Yeah. That definitely seems to be the most prevalent storyline that we are hearing here. I mean, you’re talking about economic weirdness and you mentioned that rates may come down as inflation starts to come down. Have you done any modeling or thoughts on where mortgage rates might come down to and settle in the long run?

Daryl:
It’s really hard to model mortgage rates. It’s not like historical data can predict future interest rates, but I have seen forecasts in the range of 5% to 5.5%. I think the Redfin economics team is more in the 5.5% range for the average for next year. Right now, we’re sitting close to 7%, so it’s kind of hard to imagine rates falling back to a place where it would encourage home owners to start listing again, but I think it could fall enough to see a lot of buyers return to the market.

Dave:
I was just going to ask about that because that would, I guess, support your theory that it would go up again if it’s low enough to increase demand but not low enough to increase supply. We’re in this weird world where I feel like for years, people and analysts were saying, “when interest rates go up, supply is going to spike, that’s going to create this downward pressure on prices.” Clearly that hasn’t happened in any dramatic way at least. And I’m curious, could the opposite happen whereas it’s going to take interest rates to drop for inventory to go up, which is basically, from my understanding, sort of the opposite of the historical pattern?

Daryl:
So the historical pattern is worsening affordability, at least since the great recession. So right now with mortgage rates being higher and prices being slightly lower, affordability, the cost of a mortgage payment is up about 15%. If we were in a world where mortgage rates were still at 3%, then I think we would’ve seen prices go up another 15% that this year to worsen affordability by that much. So regardless of what happens at interest rates, the reason that affordability is continuing to worsen is because we have a fundamental lack of supply and only increasing supply is going to bring down affordability or at least… Or sorry, make homes more affordable, or at least make them not become extremely unaffordable.

Dave:
Just switching gears a little bit, some of the research you and your team do that I’m always really interested in is about migration patterns. It seems that, at least anecdotally, that some of the really dramatic migration trends from the pandemic are slowing down. Is that what you’re seeing?

Daryl:
We’re seeing fewer home purchases down about 15%, like I said. But out of the people who are buying homes, a record share of them are moving outside of their metro area. We have people still leaving San Francisco for Phoenix and for Las Vegas. We have New Yorkers moving to Miami, actually the Carolinas, so that is still happening. In fact, with mortgage rates being so high, the only time it can often make sense for a homeowner to sell their home and move somewhere else and still be able to lower their payment is to move somewhere much more affordable.

Dave:
And where are the most affordable housing markets right now?

Daryl:
I’ll tell you which one’s the most popular migration destination. So it’s Phoenix, Miami, Sarasota, Tampa. I think Las Vegas is still on the list. Houston, I believe is on the list. [inaudible 00:14:18] Houston and Dallas, but it’s all these kind of Sunbelt areas. Those are really popular because it’s easy to build housing there. Land is cheap. You can get at home for a much lower price than on the coast, but it still has warm weather. Now, the Midwest and a lot of the Northeast is still as affordable as the southern part of the country, but it’s not as attractive probably because of the weather, where like the Midwest has kind of been in a industrial decline for a lot many, many years. So that also contributes. Where are the job opportunities? A lot of them are in Florida and Phoenix.

Dave:
Your team released an article about some of these migration patterns and how a lot of them are in disaster prone areas like Phoenix being drought prone, or I think it might even be in a drought, in Florida having high risks of flooding. How do you think that’s going to impact the housing market over the long run in those areas?

Daryl:
I think those places are going to have to figure out a way to adapt to climate change in order to sustain this kind of migration. I’m a little bit less… I don’t think that people are going to stop moving to Florida. I don’t think people are going to stop moving to Phoenix unless the affordability changes, which it very well might like when homes start costing more because property insurance is going up or there’s higher property taxes to fund initiatives that would make these areas more resilient to climate change, then I think people will maybe slowed down living there. But if these places are able to adapt without prices going up too much, then I think they would still be attractive. So maybe it’s people become more knowledgeable about how much the cost of climate change might be for them. We have information on Redfin regarding flood scores and other climate measures to help people understand that. I think once people understand that, they might factored into their affordability equation, but affordability is top of mind for home buyers.

Dave:
Well, it seems really relevant because at least in Florida recently there’s been all this news about the cost of insurance. I think they’re projecting premiums to go up 40% this year. In California, two major insurance companies have decided to stop issuing new policies. Do you think that that is a trend that’s going to continue and what are the implications of that? I’ve just never really seen any historical precedent for this situation where people who have mortgages and legally need to have insurance might not be able to find it.

Daryl:
Yes. So the reason this is happening is that in California, for example, wildfire risk is projected to increase. And construction costs, building new homes that has been going up and will likely continue to go up in California. So insurers, they worry about how often is a home going to get burnt down and what is the cost of rebuilding the home. So both those factors are getting worse for insurance companies. They could theoretically pass that cost on to consumers and just charge more so that they are making a profit still. But I believe that California has restricted their ability to increase prices. So some of them like State Farm are pulling out entirely.

Dave:
I see.

Daryl:
Yeah. From what I understand of Florida, flood risk is increasing, but it’s being just directly passed to consumers. So we’ve heard stories of people’s insurance premiums going up by thousands, tens of thousands of dollars, and that being a real shock that they have to bear because of this increased risk.

Dave:
Are there other markets other than Florida and California that you think might be in similar situations?

Daryl:
I mean, I would expect that any place that sees an increased risk on natural disaster that would impact a home would see an increase in premiums. The only places where you might see markets pull out is when there’s some kind of regulation that prevents insurers from raising their costs. But I think most people over time will see rise in costs that it’s hard to attribute any natural disaster to climate change. But when you start to see the risk increase year over year, then you can make the correlation.

Dave:
Got it. Yeah, I see. And I think eventually there’s sort of like this domino effect where if the costs keep going up, demand goes down, and that could negatively impact home prices in those areas. But there’s sort of a couple of steps away from that?

Daryl:
Well, I think we could actually see a run-up in prices followed by a leveling off or even a decline, because part of the problem is that a home in California is not built for flood. It’s not built for extremely cold weather, but you have more of these really anomalous weather events happening than those homes are impacted in a way that a home that is built for those kinds of disasters wouldn’t be the same way that then California homes are built for earthquakes, but other places they’re not. So I think that over time people would adapt their homes to make them more resilient to climate change, and that could bring down the impact and maybe bring down insurance costs as well. But I think in the short term, it’s likely that insurance costs would go up.

Dave:
Yeah, it’s interesting. I have a property I own in Colorado. It’s been really difficult to find insurance always there. I have been able to find insurance, but not the quality or the full coverage that I want. Actually, right before we started recording, I got an email from our HOA that there’s like a fire within a mile of that place. So hopefully it’s okay. But it just shows you these things really do impact homeowners, property owners all across the country. Even if you can find insurance, you need to make sure that you’re able to get the right kind and quality to protect yourself against whatever the risks might be in your given area.

Daryl:
Absolutely.

Dave:
Is there anything else you think our audience of real estate investors and just people curious about economics should know about your work at Redfin?

Daryl:
I’m always just focusing a lot on what I see as the fundamental issue with the housing market, which is the lack of supply. There’s been a lot of legislation that’s more pro-housing development, places like California, Montana, Florida, all around the country. So I think that’s something definitely to pay attention to it. For real estate investors in particular, it creates more opportunities. There aren’t enough homes for sale for anybody, but it also could impact price appreciation. So it’s definitely something to pay attention to.

Dave:
Yeah, I feel like most investors understand that the lack of supply is a big problem and it’s creating… There are obviously short term benefits to short supply for real estate investors, but I think most people believe that a healthier, more functioning housing market is actually in everyone’s best interest, or at least that’s what I think. So hopefully there is more supply coming online.
All right, Daryl, thank you so much for joining us. If people want to track your work or the work of your team, where should they do that?

Daryl:
You can Google Redfin News. That’s where all of our reports go. You can also follow me on Twitter, @FairweatherPhD, or Instagram, or LinkedIn or wherever. That goes to on all of my channels.

Dave:
All right. Well, thank you so much for being here. We really appreciate it.

Daryl:
Thank you.

Dave:
Another big thanks to Daryl for joining us. I thought that was a really fascinating episode, Daryl and her team. If you guys don’t follow Redfin’s Research, I highly recommend it. They’re constantly putting out original research about the housing market, about rents, about all the things that we talked about today.
I found it just super interesting to hear how much cheaper it is to rent than to buy right now. I mean, I’ve sort of known that anecdotally, but when you hear those stats that there were only four metro areas in the US where it’s cheaper to buy than to rent, it’s pretty startling. But I also do want to just caveat and say that the research that Daryl and her team are doing around that is really just for home buyers, right? That’s for people who are buying their primary residence. It’s not for people who are collecting rent. It’s not for people who are considering house hacking or doing a value add project. That’s just if you’re buying your primary residence. So I don’t want anyone… It’s definitely information that’s worth taking note of, especially if you’re buying a primary residence. But if you are doing some of the more traditional real estate strategies, that’s not what she and her team have been looking into.
So again, thank you for Daryl, and thank you all for listening. Again, if you want to start listening to this show completely ad free, if you want to listen to the AMA that I’m doing in the next couple of days, if you want to listen to some bonus episodes, make sure to sign up for the new BiggerPockets content subscription. You can just go to biggerpockets.com/playlist. That’s biggerpockets.com/playlist. Thanks again. We’ll see you next time.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.