By Glenn Kelman, CEO of Redfin
In the summer of 2010, Redfin predicted that a tax-credit-fueled recovery would falter badly, which it did. In the winter of 2011 - 2012, Redfin was one of six housing commentators to call the bottom. In April 2013 Redfin predicted sharp price increases through early summer, only to be curtailed by the rate increase that happened two months later. Here are Redfin CEO Glenn Kelman’s 2014 housing predictions.
1. Interest-Rate Shocks
When mortgage interest rates increase in the next few months, U.S. home-buyers will be in for a surprise. A Wall Street Journal survey of economists found that one-fourth think that rates will rise in December, one-third in January, and more than one-third in March; none expects the music to keep playing after that.
But nobody has told U.S. home-buyers: 83% still believe that a normal interest rate is below 5%. Prior to the Federal Reserve’s 2008 decision to buy $85 billion in debt per month, the 36-year average was 9.2%, and never below 5.8%.
And rates matter. Already this year, changes of one point down and then half a point up have swung Redfin demand in the opposite direction about 20 points.
If rates increase just from 4.5% to 5.5% the mortgage payment on a $500,000 home will increase by nearly $300, from $2,539 per month to $2,838; an 11% incease. A major uptick in 2014 rates will significantly reduce home-buying demand, limiting price increases and, to a lesser extent, sales.
2. A Movement to America’s Other Places
The last time home prices and interest rates rose faster than wages, easy credit let home buyers in America’s most expensive cities keep up. Now that lending regulations have made it harder to borrow more, many will just pay less, spawning a movement to America’s Other Places, where homes are more affordable: Portland, Denver, Austin, Richmond, Dallas, Houston, San Antonio, Atlanta, Raleigh.
A six-year era of falling prices and underwater mortgages has ended, setting Americans loose. Many won’t just move across the street; they’ll move into the heart of the country, bringing money and diversity to places coastal denizens once flew over or forgot. Of the areas where builders anticipate the most 2014 demand, only the New York area, still rebuilding after Hurricane Sandy, is an exception to this trend; California didn’t even make the list.
3. Small is Beautiful
In the last boom, Americans stretched to buy a bigger home, and got up to their ears in debt. Now home-buyers are more disciplined, choosing smaller homes rather than chasing rising prices. The size of homes that Redfin’s users have been marking as a favorite has decreased 6.3% in the past two years.
“Five years ago, many of our buyers would have dug deeper to get that fourth bedroom,” said Marcus Fleming, head of Redfin’s Phoenix real estate agents. “But today most are deciding they’d rather go out to eat once a week, or on a big yearly vacation. Being house-poor just doesn’t make much sense to a new generation of battle-scarred, financially disciplined home-buyers.”
4. One Bigger, Happy Family
Builders are at it again, with U.S. building permits up 46% as of October compared to the five-year average. The homes that set to reach the market in 2014 will look different than what we’ve seen before, many with two master bedrooms so parents, children and grandparents can live under one roof, a trend already well underway in years past, though fewer homes were being built.
Redfin agents see three factors driving this trend:
foreign investors seeking a new home-base for children emigrating to America;
longer retirements for baby-boomers, with more time to spend with family; and
more support from parents for adult children buying homes and raising children.
The way Americans have lived since World War II, with one generation pushing the next out of the nest, never to come back, is slowly being replaced by even older, more fluid arrangements.
“This trend isn’t just for home-buyers from Asia, or boomers pitching in on a house with their kids,” said Kathryn Rion, a manager of Redfin’s Seattle agents. “This is about leaving room for kids to come back after college, even after having kids of their own. The nuclear family isn’t so nuclear anymore. It’s a change in how people are living that has been long in coming, but now with all the new construction, we’re starting to see the floorplans to reflect it.”
5. Profit-Taking from Small-Scale Investors
During the bust, investors bought as many as one out of every five homes in America. With price increases entering their third year in 2014, the $24,000 question is whether investors will start taking profits and selling homes on a large scale.
Based on the listing consultations our agents are hosting now, it seems that mom-and-pop investors will be the first to sell. Many who tied up their cash in an investment property plan to flip those quickly in 2014 for a capital gain. But large-scale investors, defined as those who have bought five or more homes in the past decade, will hold on, generating cash-flow from the spread between high rents and the very low rates at which they borrowed money over the past three years.
6. The Return of Subprime Mortgages
Most buyers will remain disciplined about what they can afford but those who want to stretch will, for the first time in 2014, find lenders eager to help. Banks that have come to depend on unprecedented refinance volumes will have to tap new segments of U.S. home-buyers, goading them to once again to take more risks; we’ll see more low down-payment, low-credit score mortgages being securitized in private markets.
7. Prices Flatline in Second Half
After two years of prices increases, we expect to see 3% - 5% price appreciation in the Case-Shiller index through the first half 2014, with the market flat-lining, or even faltering, in the second-half as buyers step back from rate hikes.
We expect that sellers, sensing that demand may be peaking early in 2014, will increase inventory 10% or more over last year; the number of customers contacting Redfin last week about listing their home is up 254% over the same week last year, compared to only 27% growth on the buy-side. Sales volume, which has mostly been gated by inventory, will increase 5% - 7%
This will tilt 2014 toward a buyer’s market. Already at the end of 2013, we saw sellers over-playing their hands. A December survey of 435 Redfin agents found that 63% believe that home-sellers have unrealistic expectations about the price their property can fetch. One in four listings on the market had to drop its price this fall, compared to one in ten at the beginning of the year.
If home prices settle down, it will come as a relief to many. Volatility has made the U.S. housing market in the past few years more like the stock market, better for speculators than regular consumers, many of whom have no appetite for the ups and downs of finance. It has also made lending money over 30 years for a home purchase a crapshoot.
Glenn Kelman is the CEO of Redfin, a technology-powered real estate brokerage. Follow him on Twitter @glennkelman.
