Daryl Fairweather on the housing shortage, climate change
How did we get here?
It is perhaps an obvious statement that the market for a single-family house is one of high demand and low inventory, but few were predicting that at the start of the coronavirus pandemic — or even at the end of the last housing crash.
Today’s HousingWire Daily is an episode of the Houses In Motion series, hosted by Senior Real Estate Reporter Matthew Blake. Blake interviewed Daryl Fairweather, chief economist at Redfin, who explained how the public policies and business decisions made after the housing bubble burst in 2008 capped who is able to buy a house and led to the current inventory shortage.
Fairweather argued that these limits came as demand soared thanks to low interest rates and a shift toward millennial homebuyers. Fairweather also discussed how climate change might affect real estate going forward.
Here is a small preview of our interview, which has been lightly edited for length and clarity:
Matthew Blake: So far, we haven’t seen prices significantly decline in any area due to climate change— is that correct? Or are there parts of the country where maybe you could see the climate bubble starting to burst?
Daryl Fairweather: There are communities in Alaska that have literally relocated, who just abandon their homes and move inland. We could see more of that going forward. But we haven’t seen it in any major metro areas.
Matthew Blake: You have a climate check risk score on Redfin right now. I suppose as a homebuyer I could hypothetically say, ‘Well, climate change is omnipresent. So, if I move here, who’s to say this would not be a risk, or this would be that much greater a risk than another place?’ With how much precision can you know the risk of a natural disaster in a given place?
Daryl Fairweather: I think that when interpreting the risk score, you should treat it as kind of like going to the slot machines in Vegas, you know what the odds are but the draw on the pull you never really know. That’s the excitement of gambling. Unfortunately, when it comes to climate, I don’t think it’s that exciting.
So, if there’s a risk score of 100 it should be very concerning. If there’s a risk score of 25—I mean it’s a gamble, but everywhere is going to be a gamble.
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Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:
Matthew Blake: Hello, and welcome to “Houses in Motion,” part of “HousingWire Daily.” I’m Matthew Blake, senior real estate reporter at HousingWire. We are joined this week by Daryl Fairweather, who is the chief economist at Redfin. Daryl discussed with us the high demand, low inventory housing market in a way that connected how today’s unusual market stems from The Wall Street meltdown of delayed odds. Also, we discussed how climate change is shaping housing. Daryl shared with us how the growing number of natural disasters visiting parts of the U.S. may impact where people buy homes going forward. I hope you were informed, entertained, or perhaps even infotained by this episode. I can be contacted at email@example.com. That is firstname.lastname@example.org. Daryl, welcome to the show.
Daryl Fairweather: Thank you for having me
Matthew Blake: First, before we talk about…I think the main reason that we’re having you on the show is just to talk about the crazy housing economy right now. Tell us a little bit about yourself and what you do as the chief economist at Redfin.
Daryl Fairweather: Sure. So at Redfin, I’ve been here for almost three years now and I study the housing market. I have a team of economists and we all are researching what’s going on in the housing market based on the data that we receive, being a national brokerage. We also look at the different patterns that our users are engaging in on the website to kind of get ahead of housing market trends. And we put that research onto the world so that our customers can be more informed. So our agents will be more informed. And also just to educate people about what they need to know about the housing market for when they do one day buy a home even if they aren’t our customer yet.
Matthew Blake: And in terms of your background, I saw that you got a Ph.D. from the University of Chicago in economics and behavioral economics. And you were a behavioral economist at Amazon. Could you explain to the audience and myself what a behavioral economist is and if it factors at all into your current job?
Daryl Fairweather: Sure. As a behavioral economist, I was also trained in psychology. So I understand some of the psychological biases that people encounter when they are engaging with the economy. And this comes up a lot when it comes to buying a home. When people buy a home, it’s oftentimes like their first major purchase and it can be the biggest purchase they ever make in their whole life. So you don’t get a whole lot of practice with it. And when you don’t have practice, you’re more prone to fall into some psychological traps. So, yeah, use that knowledge to kind of just dig a little bit deeper into what’s really going on in the housing market and looking at it from also the psychological perspective as well as the economic perspective.
Matthew Blake: Yeah, that’s really interesting. So, in terms of what the housing market is right now, the phrase high demand, low inventory has almost become a cliche right now. It’s something that at least I’ve been hearing covering the housing market since February, if not before. How long has this present housing cycle been going on for? And how did we get here?
Daryl Fairweather: We got here starting back at the end of the last housing crisis. So, after the last housing market crash, after the last foreclosure crisis, we changed a lot of laws in the way that housing can operate. And also people’s mindset just changed. So, one consequence of the last housing crash is that builders got really scared about the market. They got in way over their heads during the last housing bubble, lost a lot of money, so builders have just been more conservative the last decade. The last decade, there were fewer single-family homes built than any decade going back to the 1960s, which is just astounding considering that the population has grown a lot since the 1960s. So that contributed to the lack of supply. On the demand side, we also kind of turned housing into a luxury good. It’s something that you can only access a mortgage… You can only access the mortgage if you have really good credit now. There’s no more subprime lending.
And that has made it so the housing market kind of grows along with wealth inequality and wealth inequality has been growing over the last decade. So as the rich get richer, they put more money into housing and that drives up home prices. And also cheap debt like mortgage rates being so low makes it easier for people to buy homes to finance their homes and that also drives up home prices. And then on top of all of that, we have this big demographic shift. Millennials are entering home-buying age, they’re the largest generation. So that’s just going to fuel a whole lot of new homebuyers. People are getting to that point in their lives where it’s time to settle down and start a family, all of that. So, it’s been a lot of different circumstances leading to what we’re in right now, but a lot of these things are long-term so we’re probably gonna be here for perhaps another decade unless we really start to address the lack of housing supply.
Matthew Blake: Yeah. So, the low inventory, this is something that we’ve been seeing since the housing market crash of 2008. I mean, and it sounds like what you’re saying is that it’s coming from the companies that build homes themselves being more conservative. Why have the building companies remained conservative as the market seems to have shifted in the last couple years?
Daryl Fairweather: Right. And actually, there’s another factor affecting building as well, which is just restrictive zoning laws. So, builders’ costs have been going up alongside their more conservative approach. Why they become more conservative is just that they learned their lesson last time. They saw how risky it is to overbuild during a boom time. So, even though we’ve been in a boom time that hasn’t really been met by a boom in building in the same way because it’s just less risky to build fewer homes and then charge higher prices. So, this encourages builders to focus more on luxury housing, on larger homes. And that doesn’t really do anything for the fundamental problem of there not being enough affordable homes, enough homes for all the people who want to buy them, not just the people who are most wealthy and most well-financed. So, I think it’s a natural reaction to the last crisis, but unfortunately, it’s kind of causing a new crisis of its own.
Matthew Blake: Yeah. That’s very interesting. You mentioned at the end of sort of your synopsis of what’s going on, restrictive zoning. Could you say a little bit more about…I assume you’re talking about like restrictive zoning in cities, but what do you mean by that, and how does that affect the supply?
Daryl Fairweather: Yes. So, in some of the places that have been most expensive homes like San Francisco, for example, or Los Angeles or some of these other coastal cities, there’s an abundance of land that is zoned only for single-family homes and a lack of zoning for multi-family homes. And it’s very difficult to increase the stock of housing when you’re restricted by the land. You can build more homes on the same plot of land if you just changed the zoning laws. But that is something that local governments vote on, they have the power to affect. And at the local level, at the individual level, homeowners want their land, their home to be as valuable as possible. And if there’s more housing, that could drive down their own home value or at least it would slow down the growth of prices that they’ve been able to accrue. And also there are just some aesthetic reasons. People don’t like multi-family housing. If a neighborhood…I think people envision American neighborhood as being like the picket fence and the lawn, and that the apartment building or the condo building just doesn’t resonate the same way. So I think some people just don’t want their neighborhood to change and look more like more urban. They want that suburban feel, even if it is, it’s housing that’s close to their urban core.
Matthew Blake: Yeah. And so, at HousingWire, we spend a lot of time looking at U.S. housing and urban development, looking at other federal agencies and federal policies. Is there anything the federal government or even the state government could do to override some of these restrictive zoning laws you’re discussing?
Daryl Fairweather: Yes, the federal government could step in and start using both carrots and sticks to encourage local governments to change their zoning laws. It’s a difficult thing to do. It can be politically unsuccessful to tell local government that the federal government is gonna override them, but it may be necessary. I mean, I think the housing does represent kind of the classic issue of local interests or individual interests being against collective interests. So, it would make sense for states and federal governments to step in and they are. In California, for example, you can now build an ADU in almost any single-family lot. And that was done at the state level, in Oregon, but there’ve been other states that have stepped in on zoning.
Matthew Blake: Interesting. And in terms of the demand side, you were discussing how housing has become a luxury good, and it seems like in my limited understanding of the history of the housing crisis, that maybe some of that was well-intentioned in terms of ensuring that people who buy homes can actually afford to buy homes and have enough equity to do that. But how has maybe housing become too much of a luxury good, or maybe how has it tipped too far in the other direction?
Daryl Fairweather: As you mentioned, there are positives to the fact that homeowners are very financially secure. It’s one of the reasons why the housing market has remained so resilient through this last pandemic recession. If we had the housing market of 2005 going into the pandemic, that would have had a very different outcome than us having the housing market we have now where people have plenty of equity and good credit scores, and stable incomes. All those people being homeowners means that the housing stock is a lot more resilient to economic shocks. But on the downside, it means that the benefits of homeownership only go to the most wealthy people, the most financially well-off people. And there are a lot of benefits to homeownership. It’s one of the easiest way for people to save because they’re just putting the money towards their mortgage payment anyway, and then over time, they get all this equity, and then they can use that equity to finance their kid’s college or finance a new business. If you don’t have access to that kind of asset, then your ability to move up in the income class in America, it’s more difficult.
Matthew Blake: I mean, it sounds like all the factors of today, you know, occurred well, it started occurring well before the pandemic. How has the pandemic maybe accelerated what we’re seeing right now in the housing market or introduced like new factors into the housing market?
Daryl Fairweather: I would say that there’ve been very unequal outcomes with the pandemic. Some people have been hurt, lost their jobs, they lost their businesses, and those people likely were not buying homes during the pandemic because if you don’t have income, you can’t get a mortgage. And luckily, there was mortgage forbearance. So I think many homeowners were able to weather the pandemic. But if you were a renter going into the pandemic and you were about to buy a home, it is definitely harder to buy a home now than it was going into the pandemic or even in the first months of the pandemic. So, unfortunately, some people have just kind of missed the bus, and home prices are now much higher. Even though mortgage rates are lower, overall, affordability has worsened if you’re just now getting back on your feet trying to buy a home. So, yeah, I think the pandemic has contributed to more of that inequality that stems from homeownership. And then people who are able to buy homes, they are doing great. Like they have seen their incomes rise during the pandemic, they’re probably working from home, they’ve probably seen their stock portfolios rise. So, they’ve been able to buy more homes and get even more of the benefits of owning property.
Matthew Blake: Let me ask you a really basic question because you mentioned a few times now how homeownership is important for building up wealth. Could you explain a little bit why that’s the case?
Daryl Fairweather: Yeah. So, I mean, there are other ways to build wealth. It’s not like homeownership is the only way to do it. So you can put your money in the stock market, for example, but what makes homeownership the primary way that people build wealth is that it’s just an automatic process. This goes back to the behavioral economics part of it that it’s harder for people to say that they have to go out of their way to do it. They have to like have discipline and set aside some percentage of their budget every month that they could be spending on more short-term things like eating out at restaurants, for example. But if you have to pay a mortgage and it’s just lumped into your housing costs, you’re gonna be more easily able to build up wealth because you have to do it. And then over time, you just look at how much equity you have and there’s your retirement savings, or there’s the money for your kid’s college or there’s the money to start your business. So, yeah, it’s just a very easy way for people to build wealth and it definitely is popular in this country.
Matthew Blake: Yeah. Shifting now a bit to in terms of what’s happening right now, you’re quoted in…I think this is from September 1st Redfin report saying that the housing market is becoming slightly more favorable to buyers and that home prices have plateaued. Could you say why you think that home prices have plateaued and why maybe the market is changing a bit?
Daryl Fairweather: Yeah. So the pandemic shifted homebuyer preferences, mortgage rates dropped, and there were new homebuyers who were ready to buy. And that was a very sudden shift. It happened just in a matter of weeks. Like the pandemic happened. The housing market went on pause for a couple of weeks and then it came back roaring. And it’s been moving towards this new normal of higher home prices and low mortgage rates. And it’s taken a while, but that transition that’s been happening since around June of 2020 is starting to slow down a bit. So, at first, there were tons of bidding wars, people spending above asking price, buying homes in under a week. All of those trends are still with us but they’re starting to look less severe and starting to at least level off whereas before, it was just like every single week we would check the data, prices will be up and more people will be spending above asking price. So, it’s not that way anymore. Now we’re seeing those numbers start to just flatten out and follow the normal seasonal trend that we would expect this time of year.
Matthew Blake: And going into the fall, what is the normal seasonal trend of the fall housing market?
Daryl Fairweather: The housing market usually peaks in summer. That’s when people are out of school and the weather’s nice and it’s easy to move. In fall, the housing market tends to slow down. People are focused on back to school. They’re planning for the holidays even. And then by the actual holidays, the housing market is pretty much hibernated. And then it usually comes back in March, and then again heats up until late summer. So, right now, we would expect home sales to be slowing down, so there’d be fewer listings, fewer buyers, and that is what’s happening right now, but we’re coming from a very high-priced market.
Matthew Blake: You know, at times, there can be maybe an almost obsessive focus with interest rates, but how important or not important is mortgage interest rates in driving the current housing market would you say?
Daryl Fairweather: Mortgage interest rates are really important and it’s not just the current housing market. It’s in the story of the housing market for…I mean, that’s always been a story in the housing market. Mortgages have been falling for the last couple of decades, but they fell a lot in 2020 with the pandemic happening. But anytime mortgage rates fall, it just becomes more affordable temporarily for people to buy a home because prices take time to react to the fall in mortgage rates. How it works is that mortgage rates fall, people see that they can get the same priced home for a lower monthly mortgage payment, so more buyers are encouraged to buy. Those buyers compete with one another, and that drives up prices, and then over time, the benefits of the lower mortgage rates disappear. But anytime they drop, more buyers come on the market to take advantage of that like temporary moment in time where it is a bit more affordable to buy homes. And that happened at a very large scale during the pandemic.
Matthew Blake: And you mentioned another factor was the demographic shift where more millennials are buying. How long do you kind of see this happening? I picture like if millennials are just starting to buy now, that this will be like a year’s long trend, but, well, how is this going to sort of really, I guess, acutely impact the housing market?
Daryl Fairweather: It means that you can pretty much bet that home prices will go up long-term because there just are all these new people entering the housing market. And we haven’t really done a great job of building homes for them. And it’s going to take a long time to catch up to the increase in homebuyers coming on the market. So, in the worst-case scenario where we still don’t build enough housing, you can just guarantee that prices will go up. And the people who are able to buy those homes will be the most wealthy millennials. So, this could contribute to, you know, rising housing inequality, this new generation of homebuyers coming up because there just aren’t enough homes for all of them.
Matthew Blake: So, who has the current housing market benefited in terms of real estate professionals, consumers, who are the winners of this current pretty specific market?
Daryl Fairweather: The biggest winners are people who are already homeowners going into this pandemic. If you owned a home, you’ve seen your equity increase, home prices are up 20%, home values are up double digits as well. So yeah, you’ve just gotten this windfall of having more home equity and that’s just wealth that you can tap into if you want to. And then at the same time, mortgage rates have fallen and many homeowners have refinanced. So now, they have more equity and they also can make lower monthly mortgage payments because that has become cheaper. So they’ve definitely been the winners. If you were able to buy a home at the very beginning of the pandemic, like May or even early June, you’ve also seen your equity rise because home prices have gone up ever since then too. People who tried to buy a home and were outbid, out-competed, and are now renting, they’re going to come back to the housing market later on, they’re gonna have to really double down on saving to keep up with how much home prices have gone up, unfortunately. So they’re gonna have a hard time. And then renters also, their rents have been actually falling during the pandemic in most places, but I expect them to really shoot up just because more people are getting priced out in the for-sale markets. They’ll have to go to the rental market.
Matthew Blake: So, folks that are renting right now that maybe wanted to buy sound like they’re being hurt. Who else has been sort of losing out during the past year or so in the housing market?
Daryl Fairweather: Yeah, I think renters are probably…I mean, renters, they may not feel like the loss just yet, but they will over the next year because right now, it actually isn’t that bad of a time to have a lease and to have it locked in a rental price. Next year, I think rents are gonna be much higher than they are right now. So, I think renters will be hurt. We’re not going to see those impacts for another year or so. There’s some renters obviously who have been hurt by the pandemic itself and have lost their jobs and may be facing eviction now that the eviction moratorium has ended.
Matthew Blake: How do you see the eviction moratorium ending affecting the national housing market?
Daryl Fairweather: There will likely be an increase in available rental stock just as a consequence of more people being evicted. Those people who are evicted are likely going to have a very hard time finding a new rental because they’ll be competing against the people who got priced out of the housing market who have enough wealth to buy a home, but maybe they just didn’t wanna compete, or the prices got a little bit too high for them. Those people are gonna be able to sign leases and they probably have really good credit to do it. So the people who are evicted are gonna be competing against the people who had good enough credit to buy a home. So, the people who are evicted are likely gonna have a very hard time finding housing. It could lead to more homelessness.
Matthew Blake: I wanted to shift gears to one other large topic, probably larger maybe than the housing market itself. So, Redfin published a study that, perhaps to oversimplify, said that U.S. places most at risk to natural disasters that are probably being largely caused by climate change are actually experiencing net migration. And some of the examples that the report gave included Austin, Texas with high heat risk, parts of Florida with heat and flooding risk, this is also not good. What do you see kind of happening next on this front? And, you know, when might come a time when more homebuyers are deterred due to climate change-related problems or do you not see this, you know, shifting out in a logical way on the horizon?
Daryl Fairweather: I think that there are likely local housing bubbles that will eventually burst because of climate change. So, it just doesn’t really seem…I mean, maybe there’s something I’m missing, but I just don’t see how there are still million-dollar homes on Key West, for example. I mean, part of me sees the logic, right? Like maybe you really are willing to spend that much money on a home even if you think that there’s a high probability that home won’t be livable in 30 years. Maybe the next 30 years is all you’re really concerned about, so that price is appropriate. But that’s a hard thing for me to actually understand. So I think the more likely thing is that it’s a climate housing bubble happening there and there’re probably others around the country too. Some are gonna be easier. Some are easier to spot than others just because, you know, the climate risk may be obvious, but some places will be hit hard by climate change and it won’t be the most obvious thing people see coming.
On Redfin, we’re now displaying climate check data. So hopefully, people can get more informed about the climate risks in the areas that they’re looking to buy homes. We also have flood factor data, which will tell people at even the listing level what the flood risk is on the property. So, I’m optimistic that people will become more informed. Best-case scenario would be that in the places that are maybe overvalued, we just see a leveling off in prices and maybe a slow decline. But if people continue to kind of look the other way on climate change, you might have a sudden realization of the risks when disaster strikes, and then it would lead to the bubble just bursting. And when bubbles burst, they burst very quickly. Like as soon as one person sells their home for less than what the comps were for, it can just lead to like a cascade of people taking lower and lower prices. So, if you get out too late, it can really devastate your wealth, unfortunately.
Matthew Blake: But so far, we haven’t seen, or have we seen like any kind of area, like you mentioned as an example, Key West, but we haven’t seen yet prices decline or level in Key West yet. Or is there any sort of specific part of the country where maybe you could see the bubbles starting to burst or maybe less severely prices starting to level off?
Daryl Fairweather: I mean, I know that there are some… This isn’t in our data, but I know that there are communities in Alaska that have literally relocated. So just abandoned the homes and moved inland. We could see more of that going forward, but yeah, we haven’t seen in any major metro areas.
Matthew Blake: You have the climate check data on Redfin right now. How easy or not easy is it to kind of forecast, you know, the climate risk? Because I guess as a homebuyer, I suppose I could hypothetically be like, “Well, climate change is on the present, so if I move here, who’s to say this would not be a risk or this would be that much greater than a risk than another place?” Like with how much precision can you know the risk of a natural disaster in a given place?
Daryl Fairweather: So I think that when interpreting the risk score, you should take it as a risk score. It’s kind of like going to the slot machines in Vegas. You know what the odds are, but what your draw on the pool is, you never really know. I mean, that’s the excitement of gambling. Unfortunately, when it comes to climate, I don’t think it’s that exciting. But I think the models are good at assessing the risk score, but it’s always going to depend on what the actual draw is on the slot machine. So, if there’s a risk score of a hundred though, that should be very concerning. If it’s more like 25, I mean, it’s a gamble that everywhere is going to be a gamble.
Matthew Blake: Yeah. Interesting. Is there anything you wanted to discuss?
Daryl Fairweather: We talked a little bit about who has been hurt by the pandemic. And I mentioned renters. I think they’re the most hurt just because they tend to be the lowest income. But other groups that have been hurt include first-time homebuyers who’ve just had to really go through the wringer in this housing market, making multiple offers, weigh contingencies, they may end up regretting some of their home purchase in the end if they ended up spending more than they could actually afford or ended up buying a home that ends up having fundamental problems that they need to address. And then also, it’s been challenging for buyers who don’t have the 20% down payment. So, like FHA and VA buyers, it’s hard for them to compete in bidding wars. Also, new agents, like new buy-side agents, it’s hard for them to get up to speed in such a wild housing market. Like, imagine starting your job and it’s like the most intense housing market in history. So, it’s been difficult for agents. There’s been a lot of agent burnout.
Matthew Blake: Yeah. I mean, how have agents…Yeah, so you’re seeing larger turnover in terms of real estate agents?
Daryl Fairweather: Yeah, some of them are our new agents, our new buy-side agents.
Matthew Blake: Yeah. Well, thanks a lot for your time and I really appreciate it.
Daryl Fairweather: Thank you. Thank you for having me.
Matthew Blake: Daryl Fairweather, chief economist at Redfin, thank you for coming on to “Houses in Motion.”