BAM Key Details:

  • In a Fox Business interview, Redfin CEO Glenn Kelman reacted to the latest news on the U.S. housing market, warning that mortgage rates are unlikely to ease in 2023 and that the American dream is fading for millennials and younger generations. 
  • A CNBC article looks at the decline in consumer sentiment despite improving job numbers, thanks to inflation with housing costs, food, gas, and other purchases. 

In a Fox Business interview, Redfin CEO Glenn Kelman issued a warning for U.S. homebuyers. 

The thing is, if you’ve been watching the daily Hot Sheet, Kelman’s warning will not come as a shock. 

Mortgage rates reached 7.81% on Friday (October 7, 2023) and are likely to climb even higher today as they approach 8%. Again, this is not news to the BAM audience. 

Because, like it or not, we’re looking at higher-for-longer mortgage rates, probably well into 2024. 

You’ll have to ask the Fed when the market’s going to get better, because it seems very unlikely that interest rates will ease by the end of this year. So, the only real question is whether we’re going to catch a break entering the home buying season of 2024. But I think most people have written off the 2023 home buying season.

Glenn Kelman

Redfin CEO

Byron Lazine addressed Kelman’s remarks in yesterday’s Hot Sheet, doubling down on the warning with a look back at January 2023 and a sobering prediction for the beginning of 2024. As we approach the middle of October, we’re looking at three months in a row of record-breaking unaffordability in the U.S. housing market. And much depends on what the Fed decides at the next FOMC meeting (October 31-November 1). 

I don’t expect the light switch of demand to be as strong in January of 2024 as it was in January 2023. Real estate professionals need to be prepared for this January being similar, best case scenario, or, more likely scenario, a little worse than 2023 in terms of demand—in terms of how many people can afford real estate when, right now, October is going to be the most unaffordable market in history.

Byron Lazine

People are giving up on the American Dream

The bigger problem arising from the decline in housing affordability is the parallel decline in belief in the American Dream, especially among those of younger generations. 

One in five millennials believe they will never own a home. And if you don’t have that conviction that you’re going to get your piece, it’s really hard to invest in the long term. It’s really hard to believe that society is going to work out for you. I think we have to come together as a society, build more houses, and figure out a way that [the] next generation is going to be able to buy into our society.

Glenn Kelman

Redfin CEO

Byron agreed with Kelman’s emphasis on the consumer’s belief that someday they’ll be able to buy a home. Consumers who don’t have that belief are less likely to grow their savings and reduce their consumer debt to improve their chances of qualifying for a mortgage loan. 

Without the possibility of buying a home, there’s no down payment to save for and no urgency to reduce the debt-to-income ratio. 

It’s worth noting that while millennials are the largest adult generation in this country, their share of the buyers in last year’s housing market shrank, and baby boomers became the largest (generational) group of homebuyers. 

Also, if one in five millennials see homeownership as permanently out of reach for them, that number is likely to be similar if not worse for Gen Z. And part of that pessimism has to do with changes in the job market. More on that in a bit. 

For now, as more newly constructed rental properties hit the market, the gap in cost between renting and buying a home in this market will be more noticeable. And it wasn’t that long ago when the estimated monthly mortgage payment on a home was often hundreds of dollars less than the rent for a comparable unit with the same number of bedrooms. 

1% (or less) down payment programs don’t address the main issue

Fox Business co-host Jackie DeAngelis brought up Zillow’s 1% down payment program and after asking Kelman for his take on it, she called it a “recipe for disaster.”

A buyer who takes advantage of a 1% down payment program can buy a home sooner than otherwise since, compared to a 3% down payment mortgage, they only have to save one-third as much to qualify for a loan. But the lower down payment also means they have less invested in the property they buy, setting them back in terms of building home equity—at least compared to buyers who put down between 3% and 20%. 

Kelman responded by pointing out that programs like those offered by Zillow and Rocket Mortgage fail to address the “fundamental problem” within the U.S. housing market. 

Home affordability is a four-decade low. Prices are up 40% since 2019, and now interest rates have compounded that. And so I think the real issue for us is that this generation owns less than 20% of American wealth entering home-buying age. I’m talking about the millennial generation, whereas baby boomers own more than 30% of American wealth.

We can come up with creative financing. The piper always has to be paid when that happens. But fundamentally, we have to figure out how to build more houses. And, mostly, it has been the red states where we have figured that out, where through low regulation and through a real partnership with builders, places like Orlando and Las Vegas have just been building like crazy, and that’s where everyone’s moving. So, it used to be that about 18% of our customers were relocating. Now it’s more than 25% of our customers are relocating. That continued through the pandemic. It’s not going to stop.

Glenn Kelman

Redfin CEO

Job numbers don’t tell the whole story

In better news, the U.S. economy added over 2.3 million jobs this year, unemployment is still below 4%, and nearly 10 million positions are open for those seeking employment. 

In defiance of the Fed, the U.S. job market is holding steady. So, if an abundance of jobs and low unemployment are hallmarks of a healthy economy, why are so many consumers taking a pessimistic view? 

The sour attitude is mainly due to the inflated cost of housing—along with food, gas, utilities, and all the things consumers pay for in a given month. It costs too much just to get by. 

Elizabeth Crofoot, senior economist at labor analytics from Lightcast, sums it up: 

You see all these high-level headline numbers, and those numbers don’t jibe with your economic reality. I don’t know if there’s a right or wrong, it’s just people’s reality, and aggregate economic statistics sometimes don’t reflect what people are living day to day.

Elizabeth Crofoot

Senior Economist at Lightcast

The cost of inflation across the board is disproportionately affecting consumers earning less than the average for their area. They’re the ones finding it most difficult to even entertain the idea of buying a home. 

And without that hope, there’s less incentive to consistently save money each month and to do what it takes to eliminate debt and reduce unnecessary spending. 

These 8% rates and what’s going on with inflation is beating up the bottom third of every market, and specifically housing, more than anyone else—people with lower incomes…they’re getting hurt the most.

Byron Lazine

It’s also true that job numbers don’t reflect the obstacles job seekers encounter when looking for employment. Over 25% of the job creation for September consists of lower-wage jobs in the leisure and hospitality industry. 

Real opportunities for career advancement are harder to find in today’s job market. And Census Bureau surveys reflect a growing despair among job seekers in their teens and 20s, who worry more than older generations about their financial futures. 

Having a college degree isn’t the golden ticket it’s made out to be, either. Too many college grads are struggling to advance in their chosen careers or even to find jobs in their chosen fields. 

The solution isn’t to pump out more grant money to help more people afford college—any more than slicing two-thirds off the required down payment solves the problem of low inventory. 

Takeaways for real estate agents

Glenn Kelman’s warning about mortgage rates and the loss of the American Dream is worth taking into consideration when you’re having conversations with potential buyers and sellers in your market. 

That said, if you’re a BAM regular and you’re putting what you learn into practice, you’re having more conversations than the average real estate agent. And that in itself will open your eyes to what your clients really think about the economy and what their biggest challenges are. 

Keep looking for ways to reduce the stress of buying and selling a home. No one in your client’s circle should be a better listener and problem solver than you are.