[August 2023]
1 minute speech
Title : Real estate: Housing market is facing a 'real inventory problem': Economist
Link : https://youtu.be/h_YDBRvS-QU
1. Key words
Rising mortgage rates, low inventory challenge home builders. Redfin CEO warns of sales drop with 8% rates. Economist highlights 18% fewer homes, affordability concerns due to high rates, teacher housing affordability drops. Labor shortages, material costs challenge builders.
2. Summary
Mortgage rates are rising, with both 30-year and 50-year rates nearing seven percent. Home builders face challenges like decreased buyer traffic and low inventory, impacting the housing market. Redfin's CEO notes a sales volume drop and warns that if rates reach eight percent, conditions could worsen. Redfin Chief Economist emphasizes the housing inventory problem, mentioning 18 percent fewer homes available than last year. Affordability concerns persist due to high rates and rising prices. Teacher affordability for homes near work has dropped, reflecting broader housing inequalities. Labor shortages and increased material costs continue to challenge builders.
3. Script
Mortgage rates are staying high. Last week, Freddie Mac data showed that both the 30-year and 50-year mortgage rates were approaching seven percent. Now, with that in mind, mortgage rates are not the only thing worrying investors about the housing market. Home builders are reporting a significant drop in buyer traffic. Inventory is at low levels, and sales have seen a stalled recovery. Redfin's CEO Glenn Kelman said that the market has hit rock bottom, adding that sales volume couldn't be worse. And if the mortgage interest rate were to continue increasing and hit eight percent, analysts are saying that things will only get worse.
Let's bring in Redfin Chief Economist Daryl Fairweather to discuss more about this and about the state of the real estate market. Good to have you back on the show here. So, we saw Redfin out with a new report this morning that new builds are making up nearly a third of single-family houses on the market. Tell us, what is this all doing now in terms of the state of real estate right now?
"There is a real inventory problem in the housing market. There are about 18 percent fewer homes for sale now than there were last year, and last year wasn't great for inventory either. So, if you're a buyer looking for a home, chances are you're going to be seeing a lot of new construction relative to the number of existing homes. This has been great for builders in this really hard market, given mortgage rates, and has meant that building activity is continuing and contributing to GDP."
But then when are we going to see affordability catch up with that? Because a lot of homeowners obviously, they can afford to sit in their homes for longer. But you have renters trying to get into the market and just not being able to afford these homes.
"Well, affordability is complex. It's not just prices; it's also mortgage rates. And mortgage rates are near seven percent when they were at three percent during the pandemic. So, that is a huge jump in the monthly mortgage payments that buyers would have to pay. Now, if you're paying cash, you can avoid that. But that further exacerbates this inequality problem in housing where the wealthy can find a home and build equity, but people who are just trying to break into the housing market are having a very difficult time."
Now, for some people, they say, look, no matter what the interest rate is looking like, it's better to just sort of buy a home. But as you're trying to weigh the buy versus rent discussion here, what should people consider in this sort of environment?
"It's really about the long term. So, if you're planning on staying in your home for five years or more, buying is the way to go because prices will go up over that horizon. And when you go to sell, you will have equity, or you cannot sell and just stay put and not have to worry about rising rents. Rents aren't going up so fast right now, and it is more affordable to rent a home than to buy one in almost all of the country. But in the long term, we do expect rents to continue to grow. And if you buy now, you can at least put a cap on what your monthly housing cost is going to be."
And there's a lot of people sort of moved around during the pandemic, trying to get the most bang for their buck when they were working from home. We saw, obviously, the Southeast really benefiting from that. In this sort of environment, are there certain states or major cities that are really benefiting the most or where people can really get the most bang for their buck right now?
"Well, benefited kind of depends on who you're talking about. The homeowners in places like Florida are probably happy to see their equity go up as so many people have moved into the state. But the renters and people who are just trying to get their foot in the door in the housing market are probably really worried about how fast housing has gone up in price. And that's for rentals and for homes for sale. Now, in places on the coast like Coastal California, prices are down, but mortgage rates are so high that if you're a homebuyer, it doesn't really compensate for that. So, you may be glad that prices are down in places like Los Angeles, San Francisco, but it's still not easy to get into the market if you're a first-time homebuyer."
And something interesting that Redfin came out with, a report showing that the typical teacher can afford just 12 percent of the homes near the school that they actually work at, and that's down from 30 percent in 2019. So, in terms of affordability for your everyday person who's now having to pay more just to try and live closer to work, are we getting any signs of that perhaps tempering at any point?
"Not in the near term. And what was so interesting about that report is that places like Nashville and Denver, that haven't really been at the top of the list in terms of being really expensive, are some of the places where only one percent of homes for sale are affordable to a teacher. So, that's very worrying, that in more parts of the country, we're seeing this big divide in terms of who can afford to live close to where they work. And we need to build a lot more, especially in these places that people want to live, in order to combat that and to make it easier for people to just have a home and go to work and live their lives."
And in terms of things that help get more houses on the market, things like labor improvement when it comes to home builders, the cost of lumber and things like that, are we starting to see within those sectors some improvements here, or when will we see enough improvement to balance out the demand that's out there right now?
"It's still a challenging environment for builders. They have a hard time getting labor because there's not a lot of people skilled in construction in the US, even though we could bring them in through immigration policy. Currently, it's just very difficult to hire people, and the materials costs have gone up considerably since the pandemic. There aren't the supply chain shortages, so it's not like builders can't get what they need. They're likely just paying more for it and having to pass that cost on to the buyer."
I do appreciate you joining us with your insights. We'll be keeping an eye on those rental and mortgage rates as well. A big thank you to Redfin Chief Economist Daryl Fairweather. Thanks so much.