Housing Shock: Biggest Seller/Buyer Gap In History | Daryl Fairweather

Daryl Fairweather · Redfin

Higher mortgage rates freeze sellers out, keeping US home prices elevated despite fewer transactions.

Most homeowners locked in cheap pandemic-era fixed mortgages. When rates rise, they don't sell, so buyers pull back and supply shrinks at the same time. Transactions fall but prices stay high despite a continued housing shortage. This is counterintuitive, because normally higher rates push prices down to meet buyers.

“So what we're seeing is that when mortgage rates go up, we actually see more sellers back off of the market, and that allows prices to remain high because there's a pullback in demand and supply at the exact same time.”at 5:00

Daryl Fairweather · Redfin

Builders are pulling back from completing projects as high rates squeeze financing and buyer demand.

Homebuilder sentiment is low. High rates hit builders twice: they pay more to borrow for projects, and fewer buyers can afford finished homes. Builders still have leftover pandemic inventory to sell. They are buying land but not finishing projects, and they offer buydowns and incentives to close deals. She expects little new construction in this market.

“Homebuilder sentiment is also quite low right now. Builders are up against a lot. They're up against high interest rates, which hit them two ways. ... It hits them because they have to borrow for their projects,”at 6:07

Daryl Fairweather · Redfin

US home prices won't fall sharply; a slow correction could take years to unwind.

Fixed-rate mortgages cannot be undone and let homeowners keep low payments, so they have no reason to sell. Lenders now use forbearance, adding missed payments to the end of the loan instead of foreclosing, so distressed sales that would force price cuts are rare. Nominal prices are flat, but they are rising more slowly than inflation, so real prices fall gradually. Making fixed mortgages portable is not feasible. The market stays stalled for years unless demand returns through higher wages or lower mortgage rates, and she is not banking on lower rates.

“So instead, what we have now is a very slow moving correction where prices aren't going down nominally, but they are going up slower than inflation and will probably take years to unwind this,”at 10:44

Daryl Fairweather · Redfin

Adjustable-rate mortgages are rising as buyers seek lower rates; existing pandemic-era fixed loans stay put.

ARM share is increasing somewhat because buyers facing high rates are choosing adjustable products to get lower starting rates and accept the risk. This does nothing for the existing pandemic-era fixed mortgages, which owners will keep until paid off because of their 3% rates.

“They're increasing a bit, and that's because as mortgage rates have increased, buyers are trying to find ways to lower their rates, and opting for an adjustable rate is one way to do that.”at 13:29

Daryl Fairweather · Redfin

AI boom is keeping US mortgage rates high by drawing investor money away from mortgages.

Expected AI-driven economic growth gives investors higher-return options such as corporate bonds and data centers. They move money out of the safe US mortgage market. With less capital available for mortgages, rates stay higher. She says AI did not cause the 2022-2023 rate rises, but she argues it explains why rates have stayed high since.

“I think the AI boom is responsible for why mortgage rates are as high as they are. ... You can buy corporate bonds, you can invest in data centers, and that means that investors, instead of putting their money into The US mortgage market... they're chasing these higher returns.”at 15:17

Daryl Fairweather · Redfin

AI-wealth gains are driving San Francisco home prices and the luxury housing market nationally.

People who got rich from working at or investing in AI companies are putting that wealth into housing. That has pushed San Francisco to some of the fastest price growth in the country. The top 5% of the luxury market is also doing well nationwide, because wealthy stock-market investors who profited from AI do not feel the fixed-rate mortgage squeeze. Their demand and supply are more liquid, so that segment moves more healthily than the rest of the market.

“we have seen a boom in San Francisco where people who have gotten wealthy because they've worked for these AI companies or they've invested in these AI companies are turning around and putting that wealth directly into the housing market, and that has accelerated price growth.”at 16:06

Daryl Fairweather · Redfin

Midwest and affordable Northeast housing markets remain strong because prices stayed within middle-class reach.

These cities did not appreciate much during the pandemic, so they stayed affordable on local middle-class incomes even after rates rose. They were places people left in the early 2000s, but they now offer solid job markets, such as health tech in Cincinnati and Google offices in Chicago. Locals can stay near family. Rising costs in superstar cities also make these markets more attractive when people compare earnings with living costs.

“We're seeing the same thing happening in Midwestern cities like Chicago and Milwaukee. These are places that didn't appreciate incredibly during the pandemic. They remained affordable.”at 21:16

Daryl Fairweather · Redfin

Foreclosures have risen modestly but remain near historic lows as lenders restructure loans.

Foreclosures are up somewhat since the pandemic but remain low. Most borrowers have fixed-rate loans, so payments have not risen. Many have large equity cushions from pandemic price gains, giving room to restructure. Banks now prefer to keep homeowners in their homes, so they work with borrowers who fall behind. Economic strain from inflation and job losses has pushed some foreclosures up, but the data still show these events as rare.

“Foreclosures have increased somewhat since the pandemic, but still remain at historical lows because of the way that foreclosure has changed since the foreclosure crisis.”at 23:59

Daryl Fairweather · Redfin

Sunbelt markets like Texas and Florida face price corrections after the pandemic building boom added supply.

Places that built many homes during the pandemic saw the fastest price corrections. The new supply sat unsold when rates rose, so prices fell slowly. Builders are also willing to negotiate. Higher insurance costs, property taxes, HOA fees and climate risk have eaten into buyers' budgets, adding to the downward pressure on Texas and Florida prices.

“because supply increased to meet demand and with increasing supply you get lower prices.”at 26:01

Daryl Fairweather · Redfin

US rents are flat to slightly down and rising slower than inflation, keeping buyers unpressured.

Rental growth is slow. ApartmentList shows rents down slightly. The Census shelter index, which the government uses, shows rents rising more slowly than inflation. Rents have stayed affordable for several years, so people do not feel pressure to buy to avoid rent increases. This is one reason buying demand is weak.

“No. Rental growth is slow. ... I think apartment list shows that rents are down slightly. The shelter index, which is what the census goes off of, rents are going up slower than inflation.”at 29:14

Daryl Fairweather · Redfin

Affordability only returns if incomes outpace home prices over the next five years.

Normal affordability means a median-priced home costs about 30% of median income, as in 2018. That level is far off. Two things could restore it: lower mortgage rates, which she cannot predict, or incomes rising faster than home prices over five years as the economy grows. She thinks income growth is realistic, though it is not yet reaching regular people.

“There are two things that will get us there. One is a decline in mortgage rates, which you can't predict or bank on, the other is a rise in incomes, which I think is realistic, that incomes rise faster than home prices over the next five years as the economy grows.”at 30:47

Daryl Fairweather · Redfin

Condo prices are falling and units sit unsold, letting buyers negotiate below asking prices.

Condos are not selling well, so buyers can get a deal, including buying below asking price. Buyers paying all cash get the best deal. Buyers who put down around 5% and take on large interest costs probably should not buy. Renting and reassessing in a year may make more sense while condo prices keep falling.

“Prices are coming down for condos right now, so it might make sense to rent and then reevaluate a year from now when prices have come down to a place that makes more sense for you.”at 33:20

Daryl Fairweather · Redfin

Move-in-ready luxury homes are selling while fixer-uppers and exurban homes struggle.

Fixer-uppers are hard to sell in any market, and more so now, because buyers must borrow more for repairs and flippers face expensive short-term loans at high rates. Move-in-ready, larger homes in desirable urban neighborhoods sell more easily, because they appeal to wealthier buyers who feel secure given stock-market gains. Exurban homes that require long car commutes are also harder to sell.

“homes that are selling easier are actually those more luxury homes that don't need any work, that are in desirable neighborhoods that are larger because that is appealing to that wealthier clientele.”at 34:58

Daryl Fairweather · Redfin

Higher mortgage rates limit home-equity borrowing, reducing money flowing through the economy and spending.

Higher rates mean homeowners cannot tap their home equity as cheaply. Fewer people refinance or take second mortgages, which reduces money circulating in the economy. People then spend less than they would have. Rates still slow the broader economy, though the fixed-rate product mutes the effect on existing owners.

“it has meant that people aren't able to tap their home equity as cheaply as they could have before. So with fewer people refinancing or taking on second mortgages, that means that there is less money flowing around in the economy and people aren't able to spend as much as they would have before.”at 14:18

Daryl Fairweather · Redfin

Data centers near homes raise local utility and school borrowing costs and can hurt property values.

She cites an economics paper, which she has not yet looked up, finding that municipalities with data centers face higher interest rates on utility bonds and school bonds. School funding comes from property taxes. Markets seem to believe a data center makes a town less desirable and drives up energy costs, making it less livable. Even though few data centers sit next to homes, where they do, higher utility bills and noise are expected to hurt property values.

“it found that when data centers were put into local municipalities, those municipalities ended up having higher interest rates on their bonds for utilities and also for schools because those are funded through property taxes.”at 17:56

Daryl Fairweather · Redfin

Big Tech firms like Amazon and Microsoft are cutting headcount as AI reduces reliance on workers.

Amazon has mostly halted hiring, and Microsoft is offering buyouts to 60,000 employees. She reads this as legacy tech downsizing in the AI era and trying to reduce reliance on workers. This contrasts with San Francisco's AI companies, which are not hiring much but are enriching their employees and investors. Seattle's legacy-tech housing demand has therefore faded.

“Amazon has halted hiring for the most part, and Microsoft just announced that they were going to try to buy out 60,000 employees. So they are downsizing in the age of AI trying to figure out how AI can reduce their reliance on workers.”at 19:11

Daryl Fairweather · Redfin

Fewer Americans moving slows labor market dynamism, since moves often tie to new jobs.

Fewer people are moving because of high rates and a stuck labor market. Relocation is often for a new job, so reduced moving hurts the labor market as well as housing. People stuck in place weaken economic dynamism.

“it's bad for the labor market too because oftentimes when people are moving to a new city, it's to start a new job.”at 27:13