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The Crash That Won’t Come | Redfin Chief Economist Daryl Fairweather on the Great Housing Reset
01:00:44
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- [00:01]
A
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- [00:30]
B
There's not a correction or a crash. We're really just moving into a new phase of the housing market. Moving forward, we think that incomes are going to start outpacing home prices. As long as the economy keeps chugging along where it is. I think that the Fed will keep rates at this close to neutral area. And that means that, you know, we really shouldn't expect much movement on 30 year mortgage rates. We're also expecting a bit more supply as that mortgage rate lock in effect just becomes more dampened over time. But I think it is still a very big part of why inventory is so low and why sales are slow. So slow. And it will take, you know, another five years to unwind all that locked up inventory.
- [01:17]
A
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. My guest today, hate the game. Author and chief economist at Redfin, Daryl Fairweather. Welcome back to Excess Returns.
- [01:31]
B
Thank you for having me back.
- [01:33]
A
So last time we got a lot of attention on this, probably because housing is a big topic both for investors and a lot of people own houses. So they care about this stuff. And you have such a unique approach, I think, to this space. You're putting out some of the most cutting edge research in and around how we think about this data. It helped me out when my wife and I were buying our last house. So I want to talk about this report. You just put it out. It's called the Great Housing Reset. I'm starting with that word, reset. You didn't say correction. You didn't say crash. What is a reset? Why are we framing it this way?
- [02:07]
B
Because it's not a correction or a crash or really just moving into a new phase of the housing market. The housing market went through a lot during the pandemic. We're still dealing with some of the aftermath of that, like people being locked into record low mortgage rates. There's still a Lack of demand in many of the most popular places. But moving forward, we think that incomes are going to start outpacing home prices and that slowly, starting this year, things will start to improve. Things will start to feel like they're getting back to what the housing market was like in 2018, which wasn't, you know, the optimal place for the housing market to be. But at least it's a time when things felt at least, at least a little bit more normal.
- [02:52]
A
So one of the words used to describe this was semblance of normal. And it looked like, I want to say, five years. What's semblance of normal mean? What's normalizing?
- [03:02]
B
Normalizing means that instead of things getting increasingly worse every year, when it comes to housing affordability, we think things will start to get incrementally better. There's been a lot of housing reforms all across the country. Incomes and the economy are growing. And, you know, we're in a tough place with inventory when it comes to existing homes. But that should improve every year. Every year farther we get away from the pandemic. It is time for people to sell those homes that they got during the pandemic, leave those record low mortgage rates behind, and get back to a market that feels like both sellers and buyers are on the same page again.
- [03:43]
A
Can you go back to this point for a second too, on income outpacing price? You just break that down a little bit. What does that look like if we bring that forward over five years?
- [03:53]
B
Yeah. So next year we are forecasting 1% increase in home prices, whereas wages will likely increase 2 to 3% along with the growth of the economy. And we think that that's going to be true moving forward, that home prices will grow more slowly than incomes or other price categories. Prices are really high, arguably too high. So the more that, the more inventory that comes online, the more that existing homeowners decide to sell their homes, whether that's baby boomers or move up buyers, the more inventory there will be available. And we think that that will allow home prices to remain somewhat stable while people's incomes can grow and catch up.
- [04:33]
A
I think this is really important. I don't see many people talking about this stretching in over several years, which is part of why we wanted to put the highlighter on this, because that income differential makes a huge difference once it's not just a six month phenomena. If this stacks, that changes the nature of how we price these things. Fair to say, yes.
- [04:51]
B
We did an analysis stretching this out longer, looking at different scenarios, and obviously there's a lot of variables when you go further out but there, there should be less pressure on demand. Like population is not growing as quickly, households are not forming as quickly. There's seems to be less restrictions on supply. With so many states allowing for housing to be developed in places that couldn't be developed before. Red tape getting cut. We're even hearing stuff like out of the White House about cutting red tape on building housing. So I think over the next decade or so we will move to a healthier place in the housing market. It may not be like what it was like pre housing bubble in the early 2000s, but at least we won't be in the situation where things just keep getting worse. People keep ignoring the problem. I think things will incrementally get better when it comes to housing affordability.
- [05:42]
A
So let's turn to mortgages because that's a huge part of housing affordability. I saw you talking on LinkedIn about this. You said we're probably stuck near 6% for a while. Unless economic data shifts so low sixes that assumes no shock. What would what was shifting data look like? What could change that? What are you guys looking there for sensitivity?
- [06:03]
B
Well we have to see a major shift in either mortgage markets or in the economy. Just in the last week or so there was this announcement about Fannie and Freddie buying $200 billion worth of mortgage backed securities and that moved mortgage rates down by 15 basis points which isn't like a whole lot. It kind of if you zoom out can look just like noise. But that was a big announcement and didn't even move mortgage rates that much. I think what we'd have to see see which is not what I'm hoping for, for mortgage rates to move down more significantly would be a recession or something or just inflation is no longer a problem anymore and unemployment becomes more of a problem. I mean that's still kind of a recession scenario. But as long as the economy keeps chugging along where it is, I think that the Fed will keep rates at this close to neutral area. And that means that, you know, we really shouldn't expect much movement on 30 year mortgage rates.
- [06:58]
A
And with that the mortgage bond purchase, I mean that was, I think it was like 200 billion in size if I have it right. This is not a small amount of money and it was worth 10 to 15 basis points. I'm curious how you're thinking because on a policy initiative we have a change in the Fed probably this year. How much does you've said the bond market, not the Fed sets these Rates, which is an important reminder. Does a change in the Fed impact mortgage policy or mortgage rates in any meaningful way?
- [07:26]
B
I don't think so. I mean, it could create volatility. And volatility in rates is bad for the housing market. People don't like it when they look up rates one day and then when they go to lock them, there's something completely different. It adds a lot of uncertainty to the market. It can slow down the housing market. And if there is uncertainty about who this Fed chair is going to be, about how he's going to, to set policy, or how he's going to lead policy from the Fed, that uncertainty in and of itself could add a lot of noise to mortgage rates. But mortgage rates themselves aren't just dependent on what the Fed does in terms of short term rates. It's a projection of future expectations about rates will, what rates will be and where they will go. So if we have a very dovish Fed chair come in who starts cutting rates really aggressively, that would send a signal to investors that, okay, we're cutting now, but we're going to have to raise later on, or we're cutting now, but inflation is going to be more of a problem because we're cutting too fast. And both of those things would push mortgage rates up, not down. So it's, it really isn't possible, I think, for the Fed to kind of diverge from what markets expect it to do. It is, you know, it kind of is this debate about, like, who's really driving the car when it comes to rates. Is it the Fed or is it the markets? And the Fed has some control, but really it's, it's markets that, that have the final say.
- [08:55]
A
There's a big difference between Fed funds and something that's 10 years out. And that is time. Yeah, absolutely. What about on, I want to go back to the wage increase piece again. What is the wage increase? Even if it's a couple of percent a year, what does that do for affordability? How should we think about this?
- [09:13]
B
Well, even if it's just, you know, wages growing, say 1% faster than home values over the years, that's going to become a bigger and bigger difference. And you get, you know, exponential returns, 1% times 1% times 1%. It's going to lead to larger gains. So it will take time, but those gains will start to stack up and will allow more people to be able to afford homes who previously felt like it wasn't an option at all for them before. I mean, that's assuming that you know, we don't get any supply shocks. I think that one thing I worry about is that is definitely climate change. Like how climate change could impact the availability of housing or the cost of housing outside of the home price. Like, what I'm mostly talking about is can people afford the down payment and the monthly mortgage payments. But we're seeing other costs related to housing go up. So at least when it comes to being able to afford that mortgage, I think people will be better able to afford it on their incomes or their incomes keep growing. Every single year.
- [10:13]
A
New year, same extra value, meals at McDonald's. So now get two snack wraps plus fries and a medium soft drink for just $8 for a limited time only. Prices and participation may vary. Prices may be higher in Hawaii, Alaska and California. And for delivery only, because it's tied into this. And we will come back to the mortgage or the, the climate change side of this. I think that's some of the most interesting stuff that you guys are adding in your research that I don't see anywhere else. And I think it's really cool that some of that's in the app now too, right? Yes, yes, Very, very cool to be able to see that and then look at it geographically. You were talking about in the piece 3% growth in home sales. And I'm curious about the turnover in stock. That's there too. So 3% growth, that means ending 2026 at 4.2 million units annualized, which is only half of 2020 levels. So what's actually moving that dial? Is it rates? Is it wage growth? Is it just seasonalities? How do we think about this 3% growth factor?
- [11:14]
B
It's mostly because mortgage rates are simply lower than they were last year. And when mortgage rates come down, it allows people to afford more, and that brings more buyers back to the market. We're also expecting a bit more supply as that mortgage rate lock in effect just becomes more dampened over time. But I think it is still a very big part of why inventory is so low and why sales are so slow. And it will take, you know, another five years to unwind all that locked.
- [11:41]
A
Up inventory with that locked up inventory. And maybe this gets very regional too. Obviously wages, labor, employment in different regions has a big impact on this. Are you seeing any particular areas where that divergence is happening faster?
- [11:59]
B
Well, the, the Midwest and the former, you know, industrial cities of the Northeast like Baltimore, Pittsburgh, that's where we're seeing home prices go up the fastest. And those are like the strongest markets in terms of demand. There are Markets that kind of missed the pandemic boom in housing because people weren't really moving there the way that they were moving to Austin or Arizona or these other popular migration destinations. But because of that, home values didn't go up all that much during the pandemic. It's those areas are still some of the most affordable parts of the country. And if you're looking for a place where you can afford a home on a middle class income, then those places are still attractive. And as the economy has been strong, it's helped like more parts of the country and more people be able to afford homeownership. So in these more affordable areas in the Midwest and parts of the Northeast, that's where people are still buying homes and there still aren't enough homes for everybody who wants to buy them. That's where the number of buyers is outpacing the number of sellers and it's leading to higher prices.
- [13:02]
A
Is there a different lock in effect that's happening in those markets because of less turnover, less change in the pandemic era? Does that help accelerate this right now or at least for the next few years?
- [13:13]
B
Yeah, I think the lock in effect is. So the lock in effect is very detrimental in markets where homes are very expensive because that difference in interest that you're paying, it's not linear, it's higher the more that you're borrowing. So going from say a $500,000 home to a $750,000 home is a bigger increase or percentage increase in interest than say going from a $200,000 home to a $300,000 home, even though both would be like a 50% increase in price. So yeah, those Midwest markets where home values were low to begin with, the lock in effect isn't as big of a deal. And also it's easier to afford a down payment that can get you around that interest cost. If you're putting very little down, then you're having to pay a lot more in interest. If you could afford to have a 20% down payment or a 50% down payment or pay all in cash and you don't have to worry about rates at all.
- [14:11]
A
This is one of the things that really stuck out reading this report is that means that geographic arbitrage of people. We saw a big jump of people from the cities to the Austins and also to the Pittsburgh's of the world. Let's be honest, stuff like that. I'm guilty of doing that. Not to Pittsburgh, shout out to Scranton Wilkes Barre, but this idea of playing that geographic arbitrage of where you're going to move out because the lock in effects are different, the rate structure and the real estate markets are different with where this is going. That probably keeps added pressure of people leaving some of those metropolitan areas to look at these markets for the next handful of years under this scenario. Too fair?
- [14:50]
B
Yes and no. I mean, it depends on what we're comparing ourselves to. We're not seeing as many remote job opportunities now compared to the pandemic, but there certainly are more remote opportunities compared to before the pandemic. So that's still playing a factor in the housing market, but not as big of a factor as it was during the pandemic. And most of the demand in these Midwestern, these upper, these Great Lake areas, these northeast cities, it's more local. I mean, some of it is like people leaving Chicago and going to Milwaukee because you can take the Amtrak from Milwaukee to Chicago and come in two days a week to the office and get a much more affordable home. So there is some geographic arbitrage, but it's not so much people leaving the state, it's more people seeing what other areas are available closer by. That makes sense for them.
- [15:36]
A
Are you seeing any change between and I'm glad you brought up the remote work scenario because that's sort of where it feels like the geographic arbitrage really starts to break down. Any other change related to you mentioned the AI stuff and white collar jobs and places where you might feel that pinch? Are we seeing any indication of that actually happening yet?
- [15:54]
B
Well, the San Jose market is a very strong market and it's an outlier when we look at, you know, the West Coast. A lot of west coast markets are down right now because they're already so expensive and because mortgage rates make borrowing to buy a home even more of a hurdle. But San Jose, even though it's the most expensive housing market in the whole entire country, continues to go up. And I think AI does have some, does have something to do with that. There are people in San Jose who are very, very wealthy, who have lots of liquid wealth that they can put directly into a home. And they don't care what the price is, they don't care what mortgage rates are.
- [16:30]
A
How do we think about affordability in 2026? And I'm saying this from the perspective of Gen Z young families, people who are coming new to market. How should we properly frame affordability around this demographic group?
- [16:46]
B
Well, the good news for them is that rents have been stable for the last three years or so. They have not gone up, their wages have gone up faster than rents have. I mean if you look at census data, it tells a different story. But if you look at more recent data like the data that Redfin looks at, um, rents have been stable. So if they stay renting, at least it's not like this, this, there's not this dread that I think a lot of people in the, in like the 2010s felt that every single year their rent just kept going up faster than their incomes and they, they couldn't keep up with that. That hasn't been happening. But it's really hard for them to make the jump from being renters to being first time homebuyers because of how high mortgage rates are. And if they're looking at some say buying a one bedroom condo versus renting a one bedroom apartment, the monthly payment is going to be significantly lower if they rent versus if they borrow to buy that condo. So I think for a lot of them, they, they, they probably feel like, you know, the, the American dream of that single family home with the yard is just so far out of reach for them unless they have some big windfall like they happen to work for a company that's whose stock has gone up and now they have all this money to spend. But yeah, unless there's some kind of financial miracle coming towards them, they feel like it's just not something that they can achieve unless they have help from their family or unless they move somewhere significantly more affordable.
- [18:06]
A
Focusing on them just a little bit more too, because I think you have in the report you expect rents to rise 2 to 3% with fewer apartments being built, more people being forced to rent or buy versus buy, like you just said. Does that mean they're in like tread water mode right now, that cohort?
- [18:25]
B
Yeah, well, for the last couple of years they have enjoyed stable rents, but that will probably change. Starting next year their rents will go up, which I think is going to make them feel like they're under pressure where if they keep renting, you know, that's not, they're not able to lock in their housing expense. But if they buy, they have to make a big financial jump in terms of what their housing payments look like. So I feel like they, they got a little bit of a respite, but things are going to start to become more challenging again in the coming years. Yeah, as I said, like housing is becoming more affordable compared to incomes. But if you, that's like on the incremental level. So if you're on the margin between, if you're if you're marginally able to afford a home, having rates come down, having prices be stable, that helps you. But if you're like, you know, you would need to earn 50% more in order to afford a home, it doesn't really help you all that much that incomes are growing, you know, 1% faster than home values. You need something more significant to change for homeownership to seem viable for you.
- [19:28]
A
Does that make it more attractive for if somebody owns a bunch of apartments or they have a rental, they have the control over the rents that are being charged. This is a favorable environment over the next, say in that five year window for people who own housing stock that are looking to rent it.
- [19:46]
B
Yeah, I mean, so investor activity has been pretty stable for the last couple of years, but I would expect that to start increasing as rents go up because that makes the investment more attractive.
- [19:57]
A
Yeah. Especially if rates are lower too, because.
- [20:00]
B
Yeah, that help that, that affects them as well. Yes.
- [20:03]
A
It's interesting to look at that differential between investor activity and properties for rent versus properties to own for people who just maybe want a second home or a first time buyer. What do you think about in the high immigration areas too? Because this is another place where the rental dynamic seems skewed. So if we look at a Miami or a South Florida or anywhere else with immigration where it's been strong, big changes in the last couple of years, to say the least.
- [20:31]
B
Yeah, it's hard to like parse out like what the impact of immigration has been. I mean, there's obviously been a lot of policy changes related to immigration. Florida as a whole has been very weak, and that's for reasons that aren't really directly that aren't related to immigration. The condo market in Florida has been very weak since the Surfside condo collapse and new rules that made condos have to increase their HOA fees to increase their reserves so they can maintain them better. That really set the condo market down, just that added cost. But also in Florida, you know, investor activity, or, sorry, foreign investor activity, has remained quite strong. The US Dollar is, is weaker than it was a couple of years ago. So if you're buying in a foreign currency as a foreign investor, US Housing is on sale essentially. So it kind of depends on like what group of immigrants we're talking about. And with the other dynamics that are happening in those local markets, there isn't just one story about immigration and housing.
- [21:34]
A
Happening with a, what, 10% decline in the dollar over the last year. If you're bringing in money from overseas, that's A, that's a big differential in a short amount of time that you're, you're feeling. One of the other parts that I thought was really interesting in the report was multi generational living. More co buying with friends, more garage to suite conversions. I think you had some really cool thumbtack data. What's going on there as we look out over the next several years?
- [22:01]
B
Well, because rents are going up and because homeownership is still out of reach for a lot of younger people, they're going to come up with creative solutions for how to afford their housing. They will either find roommates, people unrelated, or they'll get roommates with people that they are related to. ADUs have been legalized to build in California and in many other states or cities they have legalized building ADUs, which I think opens up a lot of opportunities for intergenerational living. Baby boomers are living in these homes that are too big for them and their kids need homes. So if they can build an adu, a granny flat in their backyard that fits their needs and then they get to be close to their kids and then they can help out with childcare, which is another big expense that seems to just keep getting more expensive, then it can be, I think, a viable solution for a lot of people to find a way into homeownership when a lot of the ways in seem too far out of reach.
- [22:54]
A
Is there anything. And just going back to the like, would you call them granny flats? I know we have a million different regional names for what all these things are. Is there any other way to get a sense of it? I feel like it's, you drive through a neighborhood and you go, oh, look how many converted garages and other things are back there. But is there a stronger way to get a sense of what that looks like in somebody's backyard, let alone at the national level?
- [23:16]
B
I don't, Yeah, I haven't seen a data source on how many ADUs are being built, but it seems like nowadays everybody's trying to figure out a way to get more and more data to feed into these AI models. So I wouldn't be surprised if there's some startup out there using like satellite data to estimate these kinds of investments, but I haven't seen any yet.
- [23:35]
A
Is there anything we can infer from? It was, it was the great, the great mystery of 15 plus years ago where it was like everybody around the, all the millennials, around the financial crisis period, it's like, here's their second recession and we're going to See oodles and oodles of them moving back in with mom and dad and living in the basement forever. It's going to slow household formation down, which wasn't all wrong, but it did. Demand slows down and then it picks back up with what we're seeing post pandemic. Are we seeing any of that glut come back in as these generationals morph? Do we think they'll be slowed down longer?
- [24:10]
B
Well, there was a huge boon in activity during the pandemic. It brought a lot of people into the housing market before they probably would have otherwise decided to buy a home because of how cheap mortgages were. And people tend to stay in their homes for about 10 years. So I think that did bring forward a lot of demand and is one of the contributing factors to why demand is so weak right now. So when we get to that 10 year out mark in 2030, I think that a lot of those people who jumped into the housing market then will be ready to move and that's probably going to be the, the finish line for those pandemic era housing market distortions.
- [24:49]
A
Let's turn to policy. I know it's not a fun topic to talk about right now, and you've been, you've been appropriately vocal. I will say on social media with this stuff. You constantly bring it back that the root cause in housing is a supply shortage. And the answer is we just need more homes where people actually want to live. Give me an idea. What would good housing policy look like? And then let's talk through some of the stuff that's been thrown on the table lately.
- [25:17]
B
Yeah, the big ones are getting rid of single family zoning and replacing it with dense zoning. Transit is really important because people want to live in places where they can get to where they need to work. And getting from point A to point B involves transit. And we've seen a lot of progress in terms of allowing for dense housing to be built near transit. But we also need to invest in transit so that, you know, cities are connected, neighborhoods are connected, and people have, if you, if you increase transit, you naturally increase the availability of land for where people will want to live. And then another one is, is looking at like, how do we, how do we deal with the misallocation of land and homes? Baby boomers are the largest generation. Or did millennials surpass them? They're one of the biggest generations, like up there with millennials. But they're going to be downsizing. They're going to be, you know, I don't know how to put this more bluntly, they're going to be dying soon, but we don't necessarily need to wait that long to free up that housing that probably isn't appropriate for them. You know, an older person is probably better suited in a home that is smaller, easier to maintain, where they have access to healthcare, they can get to the grocery store without needing a car, they have access to communities like they're close, they can walk to their friends and they have that kind of social life. And living in a single family neighborhood in a big house is not that. But there's a lot of incentives that keep people in their homes in the tax code. And also there's just like, I think, I think people just don't like to move and they like to, they like to, they like the idea of staying in their home forever even if it's not best suited to them. So we need some policy that helps with that reallocation of housing, getting people into the housing that is most appropriate for them for whatever stage of life that they're in.
- [27:05]
A
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- [28:15]
B
Well, they don't, they don't address any of those underlying problems that I just discussed about supply and especially supply in places where we most need it. It's really just adding to demand and we've, we've tried those types of things before. Fueling demand in a supply restricted market just makes housing prices go up. So it doesn't achieve the goal of making housing more affordable. But those kinds of policies, I think they're a Lot easier to implement. And they can be attractive even to voters because they just hear like, you know, they're saving money on their down payment or their monthly mortgage payment or whatever it is, but they don't consider like how that feeds into higher prices in a supply restricted market. But there were some, even, there were more housing policies that came out today. There was a Republican plan that was released that did have some things that get at these core problems I talked about like a lack of supply. There was one about punishing municipalities, withholding federal funding from municipalities that don't reform their permitting processes. And that can really hold back supply when you're not permitting, when you're not allowing for permits to be issued in a timely matter. Like time is money. So if you can speed up that process and you can reduce the cost of building housing, which increases supply. There's also an interesting thing in there about eliminating capital gains taxes. When we were selling a home to a first time home buyer or the current renter occupant of the home. And that would be expensive, but it could really help reallocating homes towards younger generations and first time home buyers.
- [29:50]
A
Do you feel like the latest wave of some of these proposals are actually, I'm not going to call them progressive, but actually making progress from where we were because it seems like this stalled out in and around the last presidential election with any thoughtful ideas here?
- [30:04]
B
Yeah, these, I mean I've, I've seen, you know, politicians announce big ambitious housing policies before and they don't get passed. So I'll believe it when I see it. When it comes to whether they get.
- [30:16]
A
Passed or not, this is the correct approach. I want to spend just at least a minute on the 50 year mortgage idea and stretching stuff out. As a financial planning person in my day job, this makes my earlobes itch in profound ways. What are, what are some of your thoughts on proposals like this? And I, I know you just said some of this in your last answer, but let's talk about the 50 year mortgage as an idea explicitly for a second.
- [30:41]
B
The 50 year mortgage, I don't, I don't think it's a product that people are gonna want because if you do the math for like a $500,000 home, you're gonna be saving about $135 a month on your monthly payment, but you're going to be paying for it because you're going to be paying that monthly payment for 50 years instead of 30 years, which means that you're going to be paying about double the amount of interest over the life of the loan. Instead of paying like I think it was like $250,000 in interest, you're going to be paying $500,000 in interest. So you pay for the home and then you pay double when you consider the interest for a 50 year mortgage. So I think when people sit down with their mortgage lenders and they see the math, they're, they will continue to choose a 30 year mortgage as opposed to the 50 year mortgage. And it doesn't get at the down payment issue. I think a lot of the reasons why people can't afford to become a first time home buyer is, I mean the monthly mortgage payment is part of it, but the down payment can be the bigger hurdle for a first time home buyer. So there was something in the Republican plan about down payment assistance. I think that that makes more sense than introducing a 50 year mortgage product. And just like when you think about 50 years of a mortgage, if people are buying their first home at the age of 30, they're gonna be paying this until they're 80, if they live that long. So I, I don't think people, I think people like the idea of owning their home outright at some point and they would prefer the mortgage that gets them there faster.
- [32:04]
A
Well, that one seems to have mostly died on the vine at this point, which is probably good for all of us. And I agree, I don't think really anybody was asking for that, especially with the down payment math. Because heaven forbid you put a smaller amount down, down and then what do you pay private mortgage interest forever?
- [32:18]
B
Like what's right? Right.
- [32:20]
A
The amortization tables don't like any of these ideas. What are these policies do you actually see as realistic and meaningful? Like if, if I give you the magic wand, what are some actual policies that you're either seeing in place now or people proposing that you went, yes, that would actually help.
- [32:38]
B
Well, at the state level there are law policies that have been passed that I think are going to help. In California, New York, they are probably prioritizing building dense housing near transit. And I think states like Montana, Florida, they've eliminated single family zoning pretty much like across the board or at least in large parts of the states, it's just the default that now you can build multifamily housing. So I think all of those things are really positive. It's going to take time to see the results of it, especially in a high interest rate environment where construction labor is hard to come by because of immigration and materials are more expensive because of tariffs. Like it's going to, I think we have to maybe we need to maybe pay more attention to how we can get the construction industry back in a healthy place to take advantage of all of these reforms that we're seeing. On the policy level.
- [33:30]
A
I want to jump into geography a little bit. You talked about being pretty bullish, pretty optimistic on the New York City suburbs, the Great Lakes, Midwest metros, and then bearish on the quote unquote zoom towns, Austin, Nashville, Miami parks and Florida. Just walk us through the logic on parsing the geographies.
- [33:48]
B
Yeah, so the places that we're most bullish on are the places that are still quite affordable compared to the national median. And those are largely in the Midwest, in upstate New York. That's where there's still, it's, it's still achievable to be a middle class homeowner. And because that means that if it's still achievable, that means there's a lot of demand and prices will continue to be supported in the, in the south, prices went up a lot during the pandemic, so there's not really much room for them to grow. If anything, they're falling right now and then they're up against other challenges related to climate and insurance costs that's going to make it harder for people to afford housing altogether. So yeah, we're, we're, we're more bullish on, on this, on the Sunbelt region, which you know, during the pandemic was a place where investors were all in on and we saw all this construction but some of them lost money on that because they all went all in at the same time and they didn't forecast the consequences of building so much housing all at once.
- [34:52]
A
I want to play this game a little bit demographically as well. So if you were a 20 something, where in the country are you looking at? You're maybe you're not ready to buy a home yet. So you're looking at rents, but you're thinking, I'd like to buy a home somewhere in here as I build my career in the next five to ten years. Where's a twenty something looking right now?
- [35:11]
B
Well, I think for young people, they should really prioritize their careers and making sure that their income is going to grow. Like I said, not like at an average level, income is maybe like a 1 to 2% faster than home values. But you personally have the opportunity to grow your income much faster, especially if you're in one of these superstar cities where salaries are going up. So I would say like, don't really focus on owning a home, focus on increasing your income at that point. And then you have to think about sacrifices like, well, how can I reduce my overall living cost while still making sure that I'm able to get to my job and perform well at my job once I'm there, you don't be sitting in an hour commute to get to your job, but you also have to be able to afford that rent near your job. So maybe you should think about going carless, relying more on public transit, getting roommates, whatever it may be to, to help bring your overall cost of living down while you focus on getting your, your income up.
- [36:08]
A
So now jump it forward. Next phase of life. Somebody who's in their, you know, mid-30s to mid-40s somewhere, where are they thinking in the country? What's most optimal for probably raising the family, access to advancing the career. That phase.
- [36:22]
B
Yeah. So if you're in that phase where you're ready to settle down, start a family, do the whole traditional thing, then I think considering housing costs is more important at that point. And if you're already established in your career, you probably can take those skills anywhere and get an income that will allow you to buy a home, assuming that it's an affordable area. So that's where I think the Midwest, the upstate New York, those growing markets in terms of value could, could be quite attractive to somebody. I mean, this is assuming that you're. You're ready to leave whatever city you're behind, you're living in completely behind and move somewhere new. But I mean, that's what I did. I left Seattle and moved to Wisconsin. And it's been a great move for me. My cost of living is way lower than it would have been had I stayed in Seattle. And my quality of life is better. My kids can walk to school, they can walk to the lake. We're near family. So it's a lot easier to afford that kind of like, village that a lot of people want if they're in a place that has affordable housing. But obviously depends on what your job is and whether you can take your job to one of those places that has more affordable housing.
- [37:33]
A
And let's take it one level out. Then from there you're 60 to 70 years old, you're maybe at the end of the work part, you've got equity in the home. And whatever else do you think about just holding on or if you were going to swap that equity for something else? Where are you looking if you're in that demographic?
- [37:51]
B
Yeah, this one's really Hard because I think that if, if you're focused on how can I make the last years of my life as, as pleasant as possible. I think moving somewhere where you don't have to worry about maintaining your home, where you're close to your friends or your family, where you're close to everything you need in life, you can walk there, that's gonna, that's gonna make your life more enjoyable more than having some big house where you don't even go in some of the rooms half the time because it's just too big for you. But unfortunately, the tax code incentivizes those people to stay in their big homes. If they're in a state that fixes property taxes for seniors or for just people, depending on how long they live in their home, that's gonna motivate them to stay in their home longer because they don't want their taxes to go up or they don't wanna give up that tax benefit. Capital gains taxes. If you sell your home and then decide to rent, you're going to have to pay capital gains tax on a portion of that. And whereas if you hold onto your home forever and then pass it down to your heirs, your heirs get it at a stepped up basis. So if you're planning for tax purposes, for wealth transfer purposes, that might keep you stuck in your house. But if you're more focused on, you know, how can I have the most, you know, engaging life in those senior years? And I think you should try to move to a community where you have quick access to all the things that you enjoy. I think that's why a lot of people leave and go to like the villages or whatever. It's like they have everything they need right there and lots of friends. And I get why that's very attractive to them if that's the lifestyle that they want.
- [39:32]
A
How do you feel about supply for those? I know a while ago there was a lot of build out into the villages, into things like that. Do we still have a need for more supply for those, those types of communities around the country?
- [39:44]
B
Yes, yes, we do. And I think especially in the, in the places where those people currently live, like in Los Angeles, for example, there's not a lot of senior living options. And if you lived your whole life in Los Angeles, that's where all your friends are, that's where you know, you, you want, you want to maintain that community. It's really hard to find a place that meets your needs. I think that's why a lot of people leave entirely and go to like Arizona or go to Florida because there aren't enough dense housing options in those coastal cities.
- [40:20]
A
All right, I want to get to climate now. And I think what's fascinating here is this isn't just a global warming or, you know, sea levels or whatever else conversation that's wrapped into it, but it's not the core of this or the crux of this conversation. As I see it, your part with, with climate is climate. And those factors will influence total ownership costs. And it shows up in places like insurance. And that's part of the thing that flagged some of your work for me was like, wow, this is a way to understand what's happening with friends and clients and people we work with down in Florida, but also people in my backyard in Pennsylvania. When you're in a flood zone versus out, and the flood in the 70s doesn't rhyme with the flood of 10 years ago. And here's why. Break down why climate is of interest. Break down why you're looking at it. Give us sort of the lay of the land to start here.
- [41:10]
B
Yes. So climate impacts housing in multiple ways. One is maintenance costs. If your home is getting rained on more, getting hailed on more, higher winds, whatever it may be, you're going to be spending more money repairing your home, strengthening your home against those elements, and that's just going to cost you money every single year. The other element is insurance costs. Your insurance company is going to be doing the math on how many claims are being made and how those claims are increasing over time and the cost of repairing or replacing homes. So insurance costs are going to go up, which is going to add to housing costs. The disasters themselves will remove some housing stock from the country. Like we saw this in the fires in Los Angeles. Homes burnt down, people can't live there, they're displaced. Now there's less supply and there's more demand, which contributes to higher home prices for the homes that are left behind. So all of those things will increase the cost of housing, not just for homeowners, also for renters. And I don't think that we are prepared for those costs, especially since we are already dealing with the cost of just having scarcity of homes. We're going to have to solve the scarcity of homes problem at the same time that we need to start investing in more resilient homes. And that's going to add to the cost. And we're going to say, like, some places are too dangerous to live in. We need to buy those homes back from those people. The government has to buy those homes back and move those communities away. So it's just going to. It's going to become a much messier problem solving housing affordability with the added variability of climate.
- [42:50]
A
I think something that really jumped out to me in helping some people crunch numbers on this was in the California fires, that reality that when this house is burned down and gone, now that family's displaced, now there's one less house in that neighborhood and now the insurance companies with the replacement costs and then the new house that theoretically that gets put up there and then forward replacement cost. Those things stack at a. Do you have any data on what those cost curves look like? Like that's a sharp appreciation.
- [43:24]
B
No, I mean we just have anecdotal data. One of our agents I think said that insurance went up 50%.
- [43:29]
A
Right.
- [43:30]
B
For their client. So yeah, it's the kinds of people that can afford. I mean there are definitely people who are very wealthy who will pay that cost to live in the Pacific Palisades. But for regular people who aren't that wealthy, they're going to have to move somewhere else where those aren't factors. This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate. C According to Indeed data, sponsored jobs have four times more applicants than non sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsored job credit@ Indeed.com podcast. Terms and conditions apply.
- [44:17]
A
AI is incredible. It can teach you how to fry an egg and even write a poem, pirate style, but it knows nothing about your work. Slackbot is different. It doesn't just know the facts, it knows your schedule. It can turn a brainstorm into a brief. And it doesn't need to be taught because Slackbot isn't just another AI. It's AI that knows your work as well as visit slack.com meetslackbot to learn more. Do you see that continuing to be, for lack of a better word, hyperlocal? It's very, very focused on different areas have very, very different climate profiles and that will continue to push price in those areas. Whereas other places are more or less removed from some of these risks.
- [45:05]
B
I mean, I think that the unique ways that climate impact, affordability and housing costs are going to look different depending on the location. And it's going to depend on the policy too. Like in California, they have fair insurance where the state of California subsidizes insurance, which sounds great but can create the wrong incentives because people. If people aren't internalizing the cost of greater risk, then they aren't going to choose homes at lower risk as quickly. Whereas in a state like Florida, they're mostly going in the direction of, okay, how can we reduce insurance coverage minimums to make insurance more affordable? Which means that people who own these homes are going to be left with more of the cost if their home is destroyed. There was one proposal about how insurance will cover the loan, the mortgage, but not rebuilding. So if your home is destroyed, you can at least pay back your mortgage company. But you have to figure out what you're doing next because the insurance isn't paying for the home to get rebuilt. So, yeah, I think. I think it's gonna. I think it's gonna look very different in different parts of the country because of the climate and because of the policy.
- [46:16]
A
It's fascinating on the policy front of this, too. And I know you've written a little bit about this. This isn't to catch you on the numbers for it, but in an example where you're allowing the insurance companies to basically say, it's not the replacement cost to rebuild your house, but we'll pay off the mortgage. Great. We're subsidizing the banks basically by giving them the coverage there. From a policy perspective, that house in that scenario is gone from your tax base now. And it creates all sorts of other problems. It would seem like in these areas, this is where policy is directly needed to try to counterbalance the reality of the climate in these regions.
- [46:53]
B
Well, I mean, there's a. Part of me feels. There's a. There's a line of logic here where if a home was destroyed, say in a flood, the home that gets built back is not going to look like the home that was destroyed. If it is transferred to the bank and then transferred to a developer. The developer is going to build some home on stilts or some new engineering that's like super resilient. Maybe they're going to put water pumps in it, whatever it is. So I think that there's part of me that's more of an accelerationist. Like, we just need to. We just need to update all the housing. We need to do it as quickly as we can. And there's part of me that is like, no, we need to focus on the people who are in these homes right now. How can we make sure that they aren't displaced and that they have the money to make those improvements themselves or at least have the option to do it? Themselves. So yeah, I think it brings up a lot of just like philosophical questions about what are we trying to achieve here? Do we, are we thinking 10 years down the line or are we thinking more about the people who are vulnerable to these disasters here and now?
- [48:00]
A
It really forces you to ask those questions and play those out. I know we'll see more policymakers do it. I think a lot about my beloved Jersey Shore and what happened post Hurricane Sandy where we saw the rebuilds on fancier versions of stilts and more ground level garages and these ideas where it's okay, this is what this looks like when the money is here to cover this and preserve the tax base and have the people who can afford it come in and take these properties. But this is a bigger challenge when we get into stuff like the LA wildfires or another terrible hurricane in the Gulf region or something like that. Let's talk about energy a little bit. You posted about this on LinkedIn. I know not long ago, too dense housing isn't just cheaper on purchase price, it's more efficient to heat and cool. Talk to me about energy and how we think about energy inputs, especially because we're, we're all competing with AI data centers right now. How should we think about energy inputs for denser housing and some of these policies?
- [48:54]
B
Yeah, I forget the exact percentages, but I know that homes themselves are a significant contributor to carbon emissions and prioritizing things like insulating homes, moving from gas powered heating to electric heating, heat pumps, all of that can really bring down the energy emissions of homes. And if we're going to be moving towards zero emissions and that has to be part of the solution. And also, yeah, just bringing down energy costs even, I mean, just bringing down the energy that people consume. Smaller homes are more efficient to heat. Like there's less square footage. So if you just build them more densely, if you build them on top of each other, less heat is lost. So all that can help in terms of reducing the energy impact of homes.
- [49:44]
A
It's another bizarre one too. One of the last apartments that my wife and I lived in was smack dab in the middle of a big converted old warehouse, basically. And smack dab in the middle, it was like halfway through the winter we were like, we don't touch the thermostat, the heat doesn't ever really turn on and nothing else happens. But we're just packed in the middle of all these places in front of a window with sunlight. It was like this place is always kind of 70 degrees no matter what we do and it was, it was an interesting anecdotal lesson in how much this, this was especially moving out of a house and before into the next house. That point too is, is interesting because. And again neither of us have this number is a shockingly high amount of energy use that gets absorbed by housing. And I don't really see anybody talking about that.
- [50:32]
B
Yeah, I mean I, I think I. Well, I think the reason it's hard to put the number on is because like, do you attribute that, like if your house is powered by natural gas, is that on the homeowner, is that on the natural gas company who's really doing the emitting there? But regardless, we need to electrify homes. If we want to reduce carbon emissions, we gotta, we gotta put them on the grid or other because they can get sources from like solar and hydro and nuclear and all that.
- [50:59]
A
It's interesting too when we think about this in the Midwest. Is this something that you would expect? More apartment buildings, more townhomes, just retrofitting sprawl in some way, shape or form in some of those markets.
- [51:12]
B
Yeah, it's a good point. In some of the coldest places that's where you see more single family homes and fewer apartments. When I talk to developers about like why they aren't building apartments in those areas, they say that they just the dishes in pencil that, that people will pay more for the single family home and because land is cheaper there, they can afford to spread them out instead of stacking them all on top of one another. So they're not really thinking about it from the energy perspective. But and also I think people tend to not really factor in utility costs when buying a home. They should look it up like the difference between the cost of heating a 3000 square foot home compared to a 1500 square foot home. Because it is a significant difference. But most people aren't doing that math.
- [51:58]
A
Total cost of ownership in just about everything comes back into the conversation. You've got two tech predictions. One is generative AI becomes a real estate matchmaker. People have conversational search instead of filters, learns our preferences, finds hyper specific homes. Let's just start with that one. Generative AI going to change the way we buy a house and think about this process.
- [52:20]
B
Yes. So on Redfin you can already chat with a, a generative AI bot about what homes you want. So the old way was you would go on Redfin and go through all of our filters and select things like I'm looking for a three bedroom home with a swimming pool and in this city and you this price point, you search for it. But now we're seeing as people having much more open ended conversations saying things like, hey, I, I, my, I work at this location, my wife, my wife works this other location. We want this amount of the commute. We also, you know, really would prefer to live on a cul de sac or something like that or we want high ceilings, things that like we would never create a one off filter for or it wouldn't be feasible to. But if you can process the photos and you can have a conversation that people can more quickly hone in on the homes that fit their specific needs.
- [53:17]
A
And it sure feels like we're doing the same thing with insurance companies and other housing related areas too. Like AI is here to alter the way we price out, measure, analyze the pictures in all these spaces like never before.
- [53:30]
B
Yeah, I'm bullish on AI allowing consumers to make more informed decisions. I think a lot of people just don't have somebody to walk them through the process. That's why first time home buyers make mistakes compared to experienced home buyers. So I think having just talking to any chatbot, you know, it might feel, you might not know if you're, if they're really like honing in on the expertise that you specifically need. But I think the insurance companies will have a chatbot that you know, knows all, all of their regulations and all of their rules and the real estate company will have a chatbot and it will integrate with the agent too. The agent will know more about what the customer wants when they get handed off to the real person and the customer will come with better context about what to expect.
- [54:20]
A
Another point you made was you could see NAR stepping back. Local MLS is consolidating into larger regional networks. So we see more of those roll up and we just get cleaner, faster innovation across the whole space. Do you see that consolidating in like brokers, agents and the way we buy and sell homes is that finally upon.
- [54:40]
B
Us there's been some consolidation. I think this year we may see more of it. I think that NAR has just come under a lot of, they've had a lot of challenges recently, legal, ethical. So I think that they're going to play a smaller role in that. That will just leave the window open for these MLSs to set their own policy or set things the way that they see as fit.
- [55:04]
A
You mean it really can't be the best time to both buy and sell a house at the same time? Is that what you're telling me here?
- [55:10]
B
Hey, if rates come down. That would help.
- [55:13]
A
It would certainly. It would certainly help. I'm just curious, and this is specifically about the tool that you guys have built at Redfin. It's conversational. You already have it in market. Does that, does having it in market and testing it first, does that feel like an advantage now that it's been in place for a while as people are starting to use it? How do you think about that? It feels like it's almost a, it's not quite a first mover advantage thing here, but I do feel like people who are jumping on these tools early, that might actually help push them further out into the, out onto the curve. Any thoughts on that?
- [55:47]
B
Well, these tools improve over time. So the more conversations that are had with the tools, the better the tools will get. The more we'll understand what data we need to give these tools input on or what data to input into these tools to make them more able to answer the questions of customers. So, yeah, it's still early days. I think that people are going to continue to rely on maps. They're used to maps. But over time I think that, yeah, I think the future is that people, once these tools are really able to get at the core of what people are looking for, that will become the default.
- [56:27]
A
So you've said that we're in a waiting game on rates and the real fix is time and supply for people listening, what's that really mean for 2026? If you're thinking about buying, if you're thinking about refinancing, if you're thinking about is it a buyer's market or is it a seller's market, what sort of the ways you would just work through each of those phases?
- [56:47]
B
Well, the first thing is that, you know, every. With everything that's happening in the economy in the world, what really matters more than anything is your personal situation. Like you talked about the life cycle of when it makes sense to prioritize renting versus prioritize buying. So think about where you are in your life. If you're ready to buy a home and settle down and knit for like five years or more, that probably makes sense to own. And that's even if home values go up slower than wages, because that's when you're going to start paying down that mortgage and you'll start to have wealth in the home. And yeah, the benefits just start to accrue. So if you're even in a, if you're buying a home in a hot market, but you're just going to sell it within one year, you can still lose money on it because of real estate fees and because of taxes and because of the cost of moving. So I think it's more important for people to just consider, like, is now the right time for me to make a commitment in my life? Yeah.
- [57:43]
A
When we zoom out and just think about this 2026 being the start of this five year reset, slowly approaching a resembling of normalcy or historically, what was more normal? Go through them one more time. The key metrics that people are watching this just to understand the health and the function of the housing market, which is a huge part of the US Economy. What key factors or indicators do you think you should be focused on? First?
- [58:10]
B
First mortgage rates. Mortgage rates are probably going to remain. The mortgage rates are lower this year than they were last year and I think next year low will be lower than they are this year. And yeah, I think the trend is going to be slowly down, kind of like how it was before 2020. Rates were just slowly coming down. So that's going to help make buying the home more affordable now. In the 2010s, anytime mortgage rates came down, prices went up because there was constrained supply. But I think supply is less constrained now and will continue to be less constrained. So there'll be more demand for homes, but not this, you know, perverse price increases that make like the gains from mortgage rates coming down completely moot. No, I think those gains are actually going to show up in lower monthly mortgage payments moving forward. I guess there's like, maybe many people are thinking like, well, why should I buy now instead of later? If you're telling me that buying that home is going to be more affordable when controlling for income, but you can always refinance your mortgage so you can take advantage of lower mortgage rates. And I'm not saying prices are going to go down. I'm just saying they're not going to go up all that quickly. So I think if you're ready to commit, there really isn't a financial reason to wait. And at the same time, we're forecasting that rents are going to go up next year because that big apartment building boom that happened during the pandemic that kept apartment rents low is over. And I think there's probably not going to be another boom like that at that scale. So if you're, there's opportunity cost, right? Like you're not paying higher rent if you buy sooner. You don't to pay that increase in rent when your landlord comes and increases it.
- [59:54]
A
Anything that could surprise us in those or that you feel like are not complete tail risks, but stuff that could surprise us just in the scenario of showing up. And that could be an increase in new permits, new builds, construction. Is there anything that we would watch for that would go, oh, wait, something else is changing what that forecast is in a dramatic way.
- [60:14]
B
I, I worry about changes in insurance, that insurance costs could go up quite dramatically or insurance coverage could become quite limited. And then it's not just about, do I want to buy a home or do I want a mortgage or do I want a rent? Like, do I want to take on this risk of ownership if insurance is like. Or do I pay for that risk through insurance, or do I. Or am I going to take like a, a lesser insurance option? Like the kind of thing that Florida is floating. So I think that could really change the calculus for people deciding whether to own versus rent. And then another one would be recession. Recession's always a possibility. Every year you kind of roll the dice and does the, does the recession side come up and that. Yeah, so that can definitely just completely change things. It would if it doesn't start in the housing market, which it probably wouldn't. It would lower rates, increase demand, kind of like what we saw during the pandemic. So it could actually lead to increases in home demand and home values. But it depends on the nature of the recession. If the recession is related to climate, for example, then maybe that would hit housing more acutely than other sectors of the economy.
- [61:22]
A
Take a minute, plug the book, tell people where they can find it, tell people why they should read the book, and then I want you to tell people where they can look you up on the Internet and keep up with your work.
- [61:31]
B
Yeah. So my book is Hate the Game. You can buy it wherever books are sold, including Amazon. It's also available on Audible and as an audiobook. And you should buy it because it will teach you economics, but it won't feel like you're being taught economics. And it'll teach you how to use economics in your daily life for these important decisions, like where should I live? Should I buy versus rent? If my spouse gets a job somewhere else, should I go with them? Like those kinds of questions. So, yeah, economics shows up in just so many aspects of life. So if you want to kind of use that superpower, then read my book.
- [62:06]
A
And I'm plugging the book for that purpose. Specifically, if you have somebody in your life that's 30 or younger, this book makes a great gift. I've been gifting copies of this book because as an introduction to game theory alone and applying this to decision making as a young adult. Infinitely valuable. People want to follow you online. Keep up. Keep on top of the research. Where should they. Where should they follow you?
- [62:28]
B
Oh, I'm on all the social platforms. Usually my handle is airweatherphd or my name Daryl Fairweather. I'm on TikTok, Instagram, X, Blue Sky, Threads, LinkedIn, all of them substack.
- [62:42]
A
Make sure you look Darrell up there. Yeah, get on the substack too. But whatever your social media is of choice, those little snippets about the housing market, what's going on, especially with policy reactions. Tremendously valuable in the last year. Darrel, thank you so much for coming back on Excess Returns.
- [62:58]
B
Thank you. Thanks for having me.
- [63:00]
A
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast.
- [63:20]
B
Should be construed as investment advice. Securities discussed in the podcast. May Baby holdings of the firms of the hosts New Year New Me Cute, but how about New Year New Money? With Experian, you can actually take control of your finances. Check your FICO score, find ways to save and get matched with credit card offers, giving you time to power through those New Year's goals you know you're going to crush. Start the year off right. Download the Experian app based on FICO's Core 8 model offers an approval not guaranteed. Eligibility requirements and terms apply subject to credit check, which may impact your credit credit scores offers not available in all states. See experian.com for details.
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A
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