Is Housing About To Crash? Where Are Mortgage Rates Headed? Redfin's Chief Economist Answers

Key Concepts

• Buyer’s Market: A real estate market favoring buyers due to increased supply and/or decreased demand, leading to price reductions and negotiation power for buyers.
• Fed Funds Rate: The target interest rate set by the Federal Reserve for the overnight lending between banks.
• 30-Year Fixed Rate Mortgage: A mortgage loan with a fixed interest rate over a 30-year term.
• Hawkish/Dovish Monetary Policy: Hawkish refers to a stance favoring higher interest rates to control inflation, while dovish favors lower rates to stimulate economic growth.
• Sale-to-List Ratio: The percentage of the final sale price compared to the original listing price, indicating market competitiveness.
• Sunk Cost Fallacy: The tendency to continue investing in something due to prior investment, even if it’s no longer rational.
• Institutional Investors: Entities like corporations or funds that purchase properties for investment purposes.
• Demographic Trends: Shifts in population characteristics (age, generation) impacting housing demand.

Housing Market Outlook & Mortgage Rate Analysis with Daryl Farweather

This discussion with Daryl Farweather, Chief Economist at Redfin, focuses on the current state and future outlook of the US housing market and mortgage rates, particularly in light of the recent appointment of a new Fed chair and broader economic conditions.

I. Federal Reserve & Mortgage Rate Stability

The conversation begins by addressing concerns about mortgage rate volatility following the appointment of Jerome Powell’s successor. It’s argued that the appointment of a Wall Street insider, considered a more traditional pick, will likely contribute to greater stability in mortgage rates. The volatility experienced in the previous year was attributed to uncertainty surrounding Federal Reserve policy and presidential frustration with the Fed.

Data from the St. Louis Fed shows that 30-year fixed rates have already begun to decline from their peak. However, the relationship between the Fed Funds Rate (short-term) and mortgage rates (long-term) is complex. Mortgage rates are heavily influenced by future expectations about inflation and economic growth, not solely by the Fed’s immediate actions. The Fed can influence mortgage rates, but doesn’t have complete control.

There is discussion about the possibility of a more hawkish Fed chair maintaining higher interest rates for longer, even if the administration desires lower rates. However, Farweather suggests this may not significantly impact long-term rate expectations, as the Fed is only one voice on the Open Market Committee, and communication clarity from the Fed chair is crucial for market stability.

II. Redfin’s Housing Market Forecast (2024)

Redfin forecasts an average 30-year fixed mortgage rate of 6.3% for 2024, aligning with predictions from Kashia prediction market traders (71% chance rates stay above 6.2%). There’s no expectation of significant rate declines this year, given persistent inflation and a “wobbly” labor market.

For rates to decline substantially, inflation needs to come down, which is dependent on broader economic factors and policy. Despite stable rates, Redfin anticipates home prices will increase slower than wages or overall inflation, making homes more affordable in real terms. Rent increases are also expected, potentially pushing more people towards homeownership. Overall, home sales are projected to increase by only 3%.

III. Affordability & Supply Constraints

A major hurdle to housing affordability remains high prices. Higher mortgage rates have incentivized existing homeowners to stay put, as many have mortgages below 4% and would face a significant premium refinancing at current rates (above 6%). This restricted supply is a key driver of continued high prices despite decreased demand.

However, 2025 is expected to see increased supply as more sellers begin to drop prices and buyers receive discounts below listing price. The current situation is described as a “real buyer’s market” – the first since the Great Recession.

IV. Institutional Investors & Government Intervention

The discussion addresses Trump’s statements regarding institutional investors buying up single-family homes and his executive order to curb this activity. Farweather argues that institutional investors represent a small share (around 3%) of home buying activity and banning them wouldn’t significantly improve affordability for first-time homebuyers. They would likely be replaced by smaller investors, and their focus is on investment properties (fixer-uppers, up-and-coming neighborhoods). A broader focus on all types of housing, including multi-family units, is suggested.

Trump’s announcement of a $200 billion purchase of mortgage-backed securities did initially lower mortgage rates by 15 basis points, but this effect was short-lived due to other economic and political factors.

V. Supply Dynamics & Generational Shifts

New construction is expected to remain weak in 2024 due to high interest rates, labor constraints (related to immigration policies), and tariffs on materials. Historically strong construction markets like Texas and Florida are currently experiencing weaker demand. Increased construction is anticipated in the Midwest, Northeast, and parts of the West Coast where demand is holding up.

A significant demographic shift is occurring. Millennials are at peak home-buying age, while Gen Z is a smaller generation. Baby Boomers are aging and their homes will eventually enter the market, but these homes may not align with the preferences of younger generations. This could lead to a divergence in home values, with some homes declining while others retain value.

Gen Z’s homeownership rate (27.1% in 2025) lags behind previous generations, largely due to limited housing supply. Developers are primarily focused on building smaller units (studios, one-bedrooms) rather than the family homes needed to meet current demand.

VI. Behavioral Economics & Home Buying Strategies

Farweather emphasizes the importance of avoiding the “sunk cost fallacy” when selling a home – focusing on current market conditions rather than past purchase prices. The sale-to-list ratio is a key indicator of market competitiveness.

He highlights the psychological aspect of homeownership, suggesting it remains a strong cultural desire even if it’s not always the most financially optimal decision. He advocates for a rational approach to home buying, considering opportunity costs and long-term goals.

VII. Future Outlook & Key Takeaways

The overall sentiment is that the housing market is transitioning to a more balanced state, but affordability remains a significant challenge. Key takeaways include:

• Stability over Decline: Mortgage rates are expected to stabilize around 6.3% in 2024, rather than decline significantly.
• Supply is Key: Increasing housing supply, particularly family-sized homes, is crucial for improving affordability.
• Demographic Shifts: Generational changes will impact housing demand and values.
• Rational Decision-Making: Buyers and sellers should avoid emotional biases and focus on current market conditions.
• Government Role: Zoning reform and potential subsidies for construction are needed to address the housing shortage.

The conversation concludes with a discussion of Farweather’s book, “Hate the Game,” which applies game theory to everyday life decisions, including home buying, and emphasizes the importance of self-awareness and rational decision-making.