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Mortgage rates are still inching up, causing mortgage purchase applications to decline a whopping 37 percent from last year.
The Federal Reserve is still struggling to get a hold on inflation — a harder task than expected as a strong jobs market and wage growth fuel robust consumer spending.
Meanwhile, homebuyers and homesellers are putting their transaction plans on hold rather than struggling with an increasingly confusing market.
Daryl Fairweather
Redfin Chief Economist Daryl Fairweather said the spring homebuying market presents a plethora of challenges, not only for agents and consumers but for real estate leaders whose strategies for the coming year will depend on home sales activity and other macroeconomic factors.
“It seems like we’re always in uncharted territory lately,” Fairweather told Inman. “So I’m trying to be humble in making predictions.”
Although it’s impossible to exactly chart the future, Fairweather said there are still a few metrics leaders can lean on to help them make smart, long-term moves. “Leaders need to keep the big picture in mind and not pay too much attention to any one piece of news,” she added. “Looking at things more holistically, I think, will lead to better decision-making for leaders.”
Inman: Thanks for chatting with me today, Daryl. Let’s start with a bird’s-eye view of the market — what are you expecting to happen this spring? What factors will be the primary drivers of buying and selling activity over the upcoming months?
Fairweather: We’re expecting sales to be much softer than last year. Exactly how much is really going to depend on interest rates. Interest rates are lower now than they were in the fall, but they keep bouncing up and down, adding more volatility, which is not really good for the housing market. Hopefully, we’ll get some better economic news soon and interest rates will continue to decrease. That will mean the decline in home sales won’t be as stark as we’re bracing ourselves for.
I’ve heard a range of forecasts for home sales. What would be the best-case scenario? What would be the worst-case scenario?
The worst-case scenario is that [full-year] home sales can fall by as much as 20 percent. We don’t really think that’s very likely though. In a more optimistic scenario, home sales will only fall by 4 percent. The middle of that is home sales are probably going to fall by around 9 percent.
What I’ve heard is closer to the 9 percent range. I’m imagining what happens over the next few months will be major in deciding if we experience the best or worst-case scenario this year. What’s the most important market metric that will give us, especially leaders, a clue into how 2023 could end?
I think the most important metric to track is inflation, and then specifically within that, wage inflation is really the thing the Federal Reserve is worried about. If wages are rising, inflation is going to continue throughout the economy — when there are higher wages, higher prices are set.
There’s some positive news on inflation overall, but because more jobs keep getting added to the economy it means that wages might remain elevated. But no one really knows either way. But right now, that’s a good thing to follow.
As someone who’s not an economist, it seems that higher wages would be a great thing as it would give people more income to potentially fast-track their journey into homebuying. So how might the Fed strike a balance between leveling out wage inflation and inflation in a way that still gives Americans a solid financial footing?
In general, higher wages are usually a good thing — but right now the Fed’s priority is to slow down the economy, so these higher wages would be a sign that its efforts have not yet been successful and there’s likely more inflation to come.
So, the other side of the inflation conversation revolves around mortgages. As you said before, interest rates have been bouncing up and down, which has created a volatile market. With that said, what are you expecting in terms of mortgages this spring? And how will the fluctuation in mortgage rates continue to impact real estate businesses’ bottom lines?
When inflation goes up, mortgage rates tend to go up because banks have to factor inflation into the cost of lending. So the relationship is pretty close right now. There are other things that can affect mortgage rates, like the overall global economy. But the demand for mortgages right now is really the thing to watch.
What about the overall global economy should leaders focus on? There has been the war in Ukraine, and then recent headlines about Chinese surveillance balloons have stoked additional war worries. How could those conflicts impact inflation or other economic factors here?
It’s hard to say how the global economy would affect inflation. Take the war in Ukraine. If the war in Ukraine were to end, that would mean foreign investors wouldn’t feel so compelled to put their money into assets like mortgages.
At the same time, the war in Ukraine is contributing to inflation in the energy and food sectors [because the war] is disrupting the supply chains there. So it’s kind of hard to say which direction inflation and mortgage rates will go if the war ends. It really could be either direction.
When it comes to what’s potentially happening with China, it’s hard to know how it could impact our economy and housing market. It seems like we’re always in uncharted territory lately. So I’m trying to be humble about making predictions.
I understand. We have been experiencing a lot of unprecedented events lately. So outside of wage inflation and inflation, what’s another thing leaders would be smart to pay attention to?
I would pay attention to mortgage purchase applications. It’s the earliest indicator we have of overall demand and gives us a pulse on whether the housing market is coming back or not.
Thankfully, mortgage purchase applications are looking better than they did back in the fall. Last year, there was a lot of demand, so I wouldn’t anticipate that we get close to that. However, they’re doing a little bit better than we anticipated in the fall when we were worried about what the housing market was gonna look like this year.
What factors are leading to the rebound? Mortgage rates are still high compared to 2020 and 2021. Do you think homebuyers are becoming more immune to rate fluctuations? What’s helping them push through?
[Home] prices have come down since [last] summer, so that balances out the impact of higher mortgage rates. I think some people are looking at how much prices have fallen and thinking that, “You know, [current] mortgage rate might be more of a temporary thing, and if I have to refinance later I can.”
What about sellers? There has been an issue with potential homesellers not wanting to list because they locked in an amazing rate, and of course, that’s contributing to inventory shortages and elevated home prices. What’s it going to take for them to make a move?
I think it’s going to take something big in their life, like retirement or marriage or children moving out, to get them to want to move somewhere else. Again, people have options. They can hold on to their home and rent it out, but rents are starting to slow down a bit so that might be not as big of a motivating factor anymore.
Are there any other traditionally overlooked factors that you would advise leaders to hone in on this spring? Also, what are some things leaders can do to raise their economic IQ? Any publications or resources they could add to their daily routines?
During a slow period or downturn, like right now, leaders might not be prepared for the moment when the market turns back around. It’s hard to know exactly when that’s going to happen, but it’s important to stay on top of all these metrics compared to the market share surge — people are going to want to buy homes as soon as the economics work out for them.
There are some unlikely scenarios that people should still pay attention to, like if the Fed overshoots on their hawkish interest rate raises. Then they would have to reverse course and lower interest rates, but I think that’s unlikely.
For now, I’d suggest leaders just read the economic section of the New York Times or any other newspaper they trust. That’s going to keep you pretty well aware of what’s happening. But more than that, leaders need to keep the big picture in mind and not pay too much attention to any one piece of news.
Looking at things more holistically, I think, will lead to better decision-making for leaders.
