Home prices are falling faster now than in 2006—Redfin’s CEO just revealed why
The Pandemic Housing Boom unleashed an “investor mania” unlike anything seen in the U.S. housing market since the aughts housing bubble. Average Joes poured into the market in hopes of building Airbnb empires. Institutional investors, like Blackstone-owned Home Partners of America, quickly expanded their single-family home portfolios. Homebuilders, eager to strike while the irons were hot, broke ground on a record number of “spec” homes. While iBuyers, like Opendoor and Zillow, ramped up their algorithmic homebuying programs.
The investor pullback makes sense. While most housing economists don’t foresee a correction on scale with the Great Financial Crisis bust—during which U.S. home prices fell 27% between 2006 and 2012—they do acknowledge that this home price correction is sharper than it was in 2006. The lagged Case-Shiller Index already shows that home prices are down 8.2% in San Francisco.
To Redfin CEO Glenn Kelman, the Pandemic Housing Boom’s investor frenzy helps explain why home prices are correcting faster this time around. Historically speaking, home prices are sticky. Sellers simply don’t want to relent on price unless economics, like a supply glut, force their hand. That’s not as much the case for institutional investors and builders. If they think prices are about to drop, they want to get out first. The fact that the Pandemic Housing Boom saw investors become a higher share of buyers, Kelman says, ultimately makes the U.S. housing market more vulnerable to a faster swing down.
“When the shiitake mushrooms hit the fan, you [investors] want to get out first. The way to do that is to figure out where the lowest sale is, and be 2% below that. And if it doesn’t sell in the first weekend, move it down [again],” Kelman says.
In other words, Kelman is suggesting that real estate investors, including Redfin’s iBuyer business, helped drive home prices up faster during the boom and will push prices down faster during the correction.
Why was there an investor bull rush (see charts above and below) into the housing market during the pandemic? A combination of low mortgage rates, record appreciation, and soaring rents simply made it irresistible for investors. It brought out everyone from home flippers, to mom-and-pop landlords, to Wall Street juggernauts.
But let’s be clear: Investor mania alone didn’t send U.S. home prices up 43% during the Pandemic Housing Boom. Instead, record home price appreciation was spurred by a perfect storm. The ability to work from anywhere saw white-collar professionals both pony up for larger properties and take off for far-flung markets like Boise. And historically low mortgage rates, which bottomed out at 2.65% in January 2021, made mortgage payments more affordable even as prices rose. Not to mention this all occurred amid a period of low inventory and favorable first-time millennial homebuyer demographics.
While spiked mortgage rates have caused a historic pullback in buyer demand, it hasn’t translated into a massive inventory spike. Most homeowners aren’t scared. So how can home prices fall even if inventory levels are tight? It’s because leveraged investors don’t want to play the “wait and see” game. And all it takes is one home to fall below its comp price to reduce comps for an entire area.
Of course, so-called investor mania during the Pandemic Housing Boom wasn’t one-size-fits-all. The investor frenzy was particularly fierce in Western boomtowns like Phoenix, Austin, and Las Vegas. That helps explain why those frothy housing markets are correcting so dramatically right now.
Look no further than this property in North Las Vegas. In May, Opendoor bought the home for $540,800. Just weeks later, Opendoor listed it for sale in July at $581,000. But Opendoor was too late: The Las Vegas housing market had already rolled over. Fast-forward to October, and the listing just got taken off the market after a series of price cuts brought its list price to $472,000.
At first glance, one might assume Opendoor could soon take a loss of around 13% on the property. Not exactly. See, when iBuyers like Redfin and Opendoor buy a home, they charge sellers a “service fee” in exchange for the speedy transaction. On one hand, that buffers the potential loss for the iBuyer. On the other hand, that buffer means the iBuyer is less afraid to mark down the price.
Not everyone agrees with Kelman. Back in May, Zillow officials told Fortune that the company’s failed iBuyer program—which notoriously overpaid for homes until Zillow announced in November it would exit the program—didn’t drive up U.S. home prices during the Pandemic Housing Boom. In Zillow’s eyes, the buying program was simply too small to do so.
While Kelman attributes the swiftness of the home price correction that was brought on by rising mortgage rates to investors and builders, he says there were also other factors at play. For starters, he says the U.S. housing market has become more mortgage rate sensitive in the years following the 2008 housing crash. Second, he says the housing crash taught sellers and buyers alike that home prices can indeed fall.
“I think that the religion people had from 1946 to 2008, that housing prices always go up, is dead. My parents believed that it was literally inconceivable for [home] prices to go down,” Kelman says. But that housing “religion” got broken, he says, by the 2008 crash. “So folks respond [now] to that [correction] with almost PTSD, and they pull back much more quickly.”
Where will home prices head next?
Groups like Freddie Mac and the Mortgage Bankers Association foresee home prices going sideways in the coming years. And firms like Moody’s Analytics and Goldman Sachs predict a peak-to-trough national decline of around 10%. If a recession hits, Moody’s predicts that national decline would come in between 15% to 20%. Simply put: Home price outlooks are all over the place.
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