Real State

Post-Pandemic Boom Markets to Cool Off “Sharply”

The housing market is a living, breathing organism, constantly moving, with each real estate market playing by its own rules. Thanks to the individuality of the American housing market, homebuyers had the flexibility to choose where they wanted to live as soon as the 2020 lockdowns took place. No longer did homebuyers have to purchase a house that was close enough to the office. Since many worked remotely, the entire country became their office, and a slew of newly nomadic workers decided to settle down in states both far from and near home.

These migration patterns changed the landscape of the housing market and made once-sleepy cities into booming metros with high-priced homes almost overnight. Now, the trend has reached a halt, as homebuyers remain frozen in place, stuck between high housing prices and even higher mortgage rates. But, with in-office work becoming more and more mandatory, could these domestic migrants start being called back to the big cities and tech hubs they came from?

We brought Taylor Marr, Deputy Chief Economist at Redfin, on to the show to give his take on where the housing market is headed. Taylor goes deep into the two halves of the 2022 housing market and why “booming” post-pandemic markets like Boise are seeing steep declines. We also talk about mortgage rate buydowns, the new buyer’s market, and where migration is starting to slow as homebuyers get caught in financial quicksand.

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined today by James Dainard. James, what’s up man?

James:
No, just hanging out in the sunshine and I got to fly to Seattle after this, so I want to stay where I am, but that’s not in the cards today.

Dave:
What are you heading up there to do?

James:
We got to walk some properties. We’re doing our market update. We have a investor class and then we have our Heaton/Dainard holiday party, which is always a fun time. We like to wild out on the holidays.

Dave:
Well, for anyone listening to this, we are recording this a couple weeks in advance given the holidays, so you know that we are recording this in late December, but what’s your holiday party plan?

James:
Well, typically, and COVID kind of has messes up, we used to throw big house parties at one of our flips or our new builds.

Dave:
That’s awesome.

James:
They’re pretty wild and we have a good time. But this year we rented out … It’s cool. It’s like a bunch of games, so they have bowling, Topgolf, all the different things. We’re doing a little bit more formal. Next year I will be going back to a house party, DJs and all sorts of things.

Dave:
Man, I’m missing you by three days. I’m going to be in Seattle on Friday.

James:
Oh dude. Yeah, because I leave Wednesday night.

Dave:
That sucks. All right. Well, that’s too bad. But today we do have an awesome show for you. I don’t know, I think Henry hosted the first time that we had Taylor Marr on, but we have Taylor Marr who’s the Deputy Chief Economist for Redfin and probably one of the people who’s research I follow most closely. He is an expert on the housing market, everything. But today we really go into a lot of migration conversation and about what happened during the pandemic and if those trends are continuing now or what new trends are emerging that investors and aspiring investors should be paying attention to. James, was there anything in particular you really enjoyed and think listeners should keep an ear out for?

James:
Well, I think it’s just really tracking these trends that aren’t … Like I think a lot of us as investors, we look at our local markets and the housing, what’s going on right now and what we’re doing. The most important thing for investors is to switch and pivot your plan up. And I know I learned that in 2008 is like to look at all these outside things. Migration is, that was something I never really looked at before besides my local market. But as an investor I want to keep investing and you can track these trends in really place … It’s not always about the hottest trending areas. It’s like where are the people moving? The migration is a huge factor in that and I think it’s just important that people open their eyes and look at the big picture and then it tells you how to invest in the next two to four years because you want to invest where the people are going.

Dave:
Yeah, absolutely. That’s great advice and I think you all can learn a lot, not only about how what’s happening over the last couple years, but just the general mindset and some new information that you should be considering as you think about your own personalized investing strategy. All right, so we’re going to take a quick break and then we will bring Taylor on after that. Taylor Marr, who is the Deputy Chief Economist at Redfin, welcome back to On the Market.

Taylor:
Thanks for having me. So great to be here.

Dave:
Well, I think we said this when we were talking before the show, but your first episode was one of our most popular ever. We’re very grateful to have you back on the show. We had you first on back and I think it was like May or June and the housing market was looking very different than it does now. Can you just give us your take on what’s happened over the second half of 2022?

Taylor:
Yeah. So I mean, the first half was very interesting because already by that time interest rates rose substantially and we were seeing a lot of leading indicators take a dive south, the market was reacting, that was sort of act one with mortgage rates adjusting to some of the actions of The Fed. Now we’re in stage two, which is really that inflation was more worrisome in the second half of the year. That caused a bit more aggression on the part of The Fed to raise rates. They were hiking faster than anticipated. As a result, interest rates rose much faster even since the summer and really they just were more volatile. They shot up during the months of, I believe it was August and July and down at the same time about a percentage point swing. They’ve done that now twice. Mortgage rate volatility hit a 35 year high and that aspect in particular really explains what’s happened in the market the last six months because as interest rates have fluctuated dramatically even after they rose and were cooling the market, we’ve also watched other indicators play catch up.
Home values, for example, have been falling at one of their fastest paces since 2009 according to the Case-Shiller Index. That’s in reaction to these rising interest rates. But also we see more of the short term leading indicators of demand really bounce back and forth alongside this rise and fall of interest rates. A couple of examples, sellers have increasingly had to drop their price as they don’t get an offer that they want and rates are higher. They drop their price to meet buyers where they’re at and what they can afford. But then when interest rates fall, they’re not having to do as many price drops. And that ping ponging has happened for sellers. A lot of them have been de-listing their homes or jumping back into the market and re-listing their homes when interest rates fall. Then the same as true of buyers, they’ll rush in start touring homes, maybe even shift when they’re making offers after rates are falling and they get a little bit more of a tailwind from the lower rates. Really it’s been just one of volatility. If I were to pick one word to sum up the last six months.

Dave:
And Taylor, some of your work that I enjoy the most is all about the different regional variations in the housing market, but the assessment you just gave us, is that true across the board or are you seeing this more? Are you seeing more volatility in certain markets compared to others?

Taylor:
We definitely are seeing more volatility. At a large scale, if you think about the last 10 years, you also see large volatility in places where it’s easy to build housing. Places like Phoenix, Texas, Nashville, these places are more volatile because it’s easier to increase supply, it’s easier for investors to swoop in and also make the market a little bit more volatile. But that’s even been true just on a more narrow time scale of the last six months to a year that it’s these pandemic boom towns, particularly in the mountain region like Boise, Salt Lake City, Phoenix, all of those places, Vegas as well have boomed, but they’ve also cooled down sharply. As interest rates have bounced back and forth, they haven’t actually seen as much of a bounce back in demand, meaning that they have continued to cool sharply in reaction to still the yet higher rates.
I think part of that is because investors have been pulling back and sellers have been pulled back and a little bit of change in interest rates in the near term I think has already scared off a lot of the big players where they sense there’s just a lot of risk out there for now. Those markets have seen a bigger back off, but other markets out on the northeast and the Midwest, those have seen more resilience when interest rates fall a little bit from their highs and that’s marking in some of that national volatility we’re seeing

James:
Taylor, I operate out of the Seattle market, so it’s tech. We saw a lot of appreciation the last 24 months, or not so much last six, but I guess the last 28 to 30 months. And we’ve definitely seen a pretty drastic pullback from the peak pricing. A lot of the pricing’s down 25, 30%, not from medium but from that peak spring pricing. Then what we’ve kind of seen recently is it’s kind of leveled off with a slow trickle going on through the market. And part of what we’re looking at as far as investors goes is we saw a big drop from the seller settlement because people got so impatient with the days on markets that they were cutting price after two, three weeks.
And now what we’ve seen is the pricing’s actually kind of leveled out a little bit and the days on market are being consistent around 30 to 45 days in our market and now things are selling very close to list or I would say within a 2-3% ratio at that point. We’ve seen hot markets like Phoenix, Boise, even San Diego, these hot bubbly markets and then we’ve seen the tech ones that bubbled up because of the job growth, do you think that those are going to start leveling out as well or do you predict that those could still decline even with those big drops that we’ve seen in the last six months?

Taylor:
That’s an excellent question. I know a lot of people in Seattle are wondering this. I talked to a lot of reporters there. I have a lot of friends in Seattle because I recently lived there and for the last 10 years been most of my home base. I’m pretty familiar with Seattle. And what I know about Seattle is it does have these floors when financial markets starts to recover. There’s a lot of tech wealth in the area and as stocks like Amazon and Microsoft and Facebook recover a little bit, that can really help support demand by quite a bit. It’s harder to see that in the data because there’s also this psychological component, just like when there’s a rise of layoffs, not everyone is laid off, the layoffs are really small, but there is a psychological ripple effect that a lot of people might have increased fear and anxiety about acting in the real estate market is the big decision.
With that said, markets like Seattle and San Francisco that are very expensive and that haven’t been characterized as much of a boom and bust like Boise or Phoenix, Boise and Phoenix are relatively small markets so it doesn’t take a lot of activity to make a big change. Whereas Seattle and San Francisco, it’s harder to get that magnitude of difference. Now Seattle, it’s fallen in home values from its May peak through September according to Case-Shiller by about 9% already. Based on more recent data I believe that’s continuing by at least a few percentage points. We have seen a big adjustment from the higher interest rates, but also it’s been really a trifecta in Seattle of three things. There’s been higher interest rates, it’s already an expensive market, so it’s more sensitive to that. Financial market conditions with a lot of, as I mentioned, tech stocks as the NASDAQ is down more than 30% from the start of the year, that weighs much more heavily in markets like Seattle or San Francisco where there’s a high presence concentration of tech workers.
The third thing is migration. In 2021, Seattle posted a net outflow of people leaving the area for the first time in more than a decade. There was really just an untethering from remote work that allowed a lot of people to leave. It continued to get an influx of people from the Bay Area because they were facing the same decision, but a lot of people went to Eastern Washington and even to a place like Phoenix. Now there is this element of higher interest rates are causing people to sort of freeze in place and not move as much, but as interest rates have fallen, we’ve definitely heard from agents on the ground as recently as last week that buyers are jumping back in. They’re eager to get out there and they might have pulled back extra quickly as things started to turn south, but they’re still there.
They’re sideline buyers, there’s a lot of income eligible, those with sufficient down payments where they could be buying a home if they just found a good deal. The problem is it’s taken a while for sellers to sort of meet buyers where they are. They’re usually slower to drop their price, slower to react to market conditions. And once they fully do, there’s enough buyers to really start to stabilize the market. I’m in the camp that things are reacting sharper in Seattle maybe than we even realize, but there is an element of stability that’s sort of on the plate right here. And one of the key things as well with this feature in Seattle is there have been some homes that have dropped even more than 20%. I looked at some homes that actually recently closed in April and May when prices peaked and looking at their Redfin estimate or their Zestimate, indeed some of them have lost more than 20% of their home value, which wipes away almost all of their equity.
That’s scary. Now, thankfully, most of those buyers probably won’t be moving for 10 years, so it’s not going to impact them too dramatically unless they lose their job or have some sort of other economic shock. I don’t think there’s a wave of supply to hit the market. Then there’s also this element that yeah, maybe sellers aren’t having to drop their price as much, but there is still a lot of bargaining power that buyers are building up and they’re able to ask for increasing seller concessions, which means that maybe they’re getting additional 3% back from the seller to do things like home repairs or buy down their mortgage rate. And this is sort of a missed feature in a lot of the data right now because no one is capturing, “Here’s what a list price was.”
Let’s say you listed your home for a million dollars in Seattle, maybe you had to drop your price down to 900,000, then maybe you sold it for under asking price at 850, but then maybe you had to give back another 50 in seller concessions. If we’re looking at any of the one metrics, we might not capture that full effect of how really the housing market has adjusted for this particular seller. Part of that missing feature is the seller concessions that are on the rise as well.

James:
Yeah. We sell a lot of different type of product in our market. And I think our market’s probably very similar to Austin and San Francisco. I think we’re seeing this. I’ve been tracking those to kind of see what the trends are in there. I’m like, okay, we’re all in the same boat at this point. I think that’s a great point is it you have to be careful about the data because I know that on every … We do sell a lot of new construction product town homes. Every deal we’re doing, the rates are getting bought down by the builders or the sellers where that’s what we’re really pushing on is to buy that rate down. And it’s costing, I mean, anywhere between 25 and $35,000 in credits, which if you think about that, it’s about anywhere between two and 5% of the actual sale price.
It’s kind of like when apartment sellers go to sell their apartment deals and they want to pack the performer and they give away all the concessions up front, but on paper it looks like it’s really good because they gave away a free month and I feel like it’s throwing the data off. When we’re looking at transactions, we’re going, “Okay, well how much closing costs are actually coming off there and is that the real value of the property?” Because these buy downs are expensive and it’s really something that it became normal, at least in the new construction, not as much in the fix and flip or the renovated product or the [inaudible 00:15:27] but in new construction it’s fairly common.

Dave:
Just for everyone listening, just to make sure everyone understands is basically what Taylor and James are saying is that even though in a market like Seattle where the data is reflecting price drops of, Taylor, I think you said about 9% according to Case-Shiller, and this is happening in a lot of markets across the country. But it sounds like what you’re saying Taylor and James, is that the real number might actually be more considerable because sellers are giving concessions that have a monetary value up to 20 or $30,000 like James just said, but that’s not reflected in the sale price. In terms of actual buyer leverage, it might even be more in a market like Seattle than 9%, it could be 11%, it could be 12% and in whatever market you’re operating it in, it might actually be two or three more points than what’s actually reflected in the data.

Taylor:
Absolutely. And going back to the mortgage rate buy down, so this has been something that has been increasingly common this year looking at data from Freddie Mac, they report on mortgage rates as well as what points are being paid on a loan in order to buy down the rate. And it did rise to nearly a 20 year high for different loans like a 15 year fixed, for a 30 year fixed also has risen to about a decade high. They stopped reporting on that. It’s hard to know what’s happening real time now, but this isn’t important because a lot of builders are also going through this tactic to try and make it where buyers aren’t scared off by a high monthly payment when they plug in today’s interest rates. By buying down the rate, they can make a monthly payment much more favorable. In fact, it is so favorable that buying down the points is even better for a buyer than just getting that cash down in the lower sale price.
It actually is pretty great to overall increase demand of buyers, the pool of buyers that could afford on a monthly payment that home. The problem though becomes buying pain points on a loan is effectively placing a bet that you’re going to lock into this rate and that rates won’t be falling. And what we’ve seen in, again, mortgage rate volatility, the fluctuation of mortgage rates from one month to the next is at a 35 year high. And this means that the chances that rates fall by a percentage point are higher now than they have been in a very long time. I don’t think it’s likely that rates ever go back to sub 3%, two and a half percent that happened during the pandemic. That was a unique circumstance with The Fed pumping billions of dollars into mortgage backed securities creating an abnormal market for mortgages.
But now going ahead rates could go higher and you would be really happy that you paid points on a loan and you don’t face higher borrowing costs. That would work out really well if rates never fall below where you are. But if rates do fall back to let’s say 5%, which is possible if we enter into a recession, rates normally do fall during a recession, then you effectively gave up tens of thousands of dollars to bet on that rate not falling effectively. You might not see it that way. There’s refinancing costs, there’s other things at play there as well. But this is sort of a hidden feature also that’s impacting the market that people might not always have full control or negotiation over.

Dave:
That’s such a good point and I haven’t heard it articulated that way before, but basically the reason you accept and want a seller concession of someone buying down your rate is because your monthly payment is too high and you’re saying, “Okay, you’re going to get my payment down to an acceptable level and in exchange I’m willing to pay the price that you’re asking for.” But if rates fall in the future, then you’re basically the benefit that you negotiated is moot and you’re still paying that higher price that the seller wanted and the benefit they gave you is sort of negated.

Taylor:
At least in part. And in the flip side of that is really adjust rate mortgages, which we’ve also seen rise in tandem with paying points on a loan. There’s effectively a rise of on both sides of the equation of people placed a bet effectively that either rates will stay high and not fall in the future or that they’ll go low and not rise too much in the future. The adjust rate mortgage camp, which makes up about one in 10 buyers as of lately, they’ve been opting for adjust rate mortgages according to Mortgage Banks Association. And that rise of the use of ARMs is basically again, placing a bet that rates won’t shoot up much higher or significantly higher than you have now, making that your borrowing costs in let’s say five years after the fixed exchange period expires that you’ll be able to afford that payment. If rates do fall or even stay steady and adjust rate mortgages is sort of the other set of that equation that would be beneficial for someone.

James:
Taylor, I guess we’re talking about kind of markets and things move around, you pointed out something very interesting in Seattle or I know a lot of these tech areas or San Francisco, the population went down as well, that people were moving out over 2023 and a lot of that was the migration and the work from home where people could be flexible. If you have the opportunity to leave Seattle and work in a sunny place, a lot of people like to take that, they will take that opportunity. Do you see with the migration, we’ve seen this rapid, like in Phoenix, Florida, Texas, a lot of people have moved into these states and we’ve seen a lot of inflation rise in those areas, pricing rise in those areas. Do you predict as we’re going into, as the rates increase and we’re looking like we could go into a recession, do you see that the migration could A, start falling dramatically?
Because as people get concerned about their welfare and their jobs, they stop moving around, they want to spend less money and they want to be more stable. But also do you see maybe a reverse migration coming back with a lot of these companies, I know in Washington or even in New York I’ve read a few times that these companies want people back in the office and they want bodies back in the chairs. Do you see that some of these markets, Austin, San Francisco, Seattle, New York, do you see that migration reversing over the next 12 to 24 even though it’s really expensive to live there? Or do you see the migration pattern still going consistent where people are chasing affordability and more being comfortable in the condition that they want to live in?

Taylor:
You’re right to call out this dichotomy of, on the one hand you have people that are chasing affordability and that really is what dominated the pandemic during 2020-2021. People were untethered from their workplace and able to relocate move remotely. That also was coupled with a unique circumstance where rates fell and made an affordability opportunity even better where you can move and lock in this lower rate. This flood of people leaving California, which I think the state lost population during the pandemic for the first time in, I believe it’s a century if I have that right from the census. And a lot of these people went into adjacent states, Nevada and Arizona and Oregon even. And that created a home buying frenzy in these areas. That was really a chase for affordability. Most of the people surveying said that they were moving for housing related reasons.
Typically people primarily move for job related reasons, to get a better paying job or job opportunities. But the pandemic, we saw that take over from housing related reasons and it was really one of affordability. People wanted bigger space, to work from home, larger yard, suburban house, things like that. And that move for affordability impacted all of these markets, pushing up prices. Now the flip side of that is that prices grew so much in places like Austin that they really make it less attractive today than it was two years ago for someone looking for affordability. In effect, some of the people that have already taken advantage of that affordability opportunity have sort of mitigated the current affordability opportunity. Especially as you mentioned, inflation costs have been more than double in Phoenix than they have in LA and as well as Atlanta or Tampa than they have in New York.
And part of this is due to the migration trends that have taken place during the pandemic. But as these places get more expensive with not just housing but other costs of living at restaurants, to pay for the workers, the increased demand, that also has weighed in making these places as attractive as they used to be. At the same time, I don’t think we’re going to see a big return to these cities that lost people. We don’t see too much of a slowing down. Instead what we do see is we see the places like Salt Lake City that had a boom, they’re past their boom period and that has been slowing down to basically not quite lose people, but essentially not gain as many people as they did a year ago. The same story is true in places like Austin. A lot of these pandemic boom towns, Boise as well, migration has slowed into them.
But it’s not that people are flocking back to places like Seattle and San Francisco, they’re just losing slightly fewer people. Going back 60 years or so in the migration data, what we know is that during recessions and periods of higher interest rates, people are … They have economic anxiety and they just freeze in place. They don’t make these big moves as often during the immediate years of an economic slowdown or crisis. As such, our prediction for next year is that this is also going to be the case we’re entering into a tough economy with The Fed having interest rates higher and holding them above 5% most likely. And as that happens, it’ll keep mortgage rates elevated and soften the labor market. All of those things create conditions where it’s less favorable to move and relocate on net than it was right now or maybe over the past year.
We do anticipate a slight slowdown to migration, but to remain elevated above pre pandemic norms because of this untethering remote work. And still people do want to move for some affordability still, especially if you have that flexibility. But then there’s this other component. It doesn’t mean all bad news for the San Francisco, New York, Chicagos of the world. If you look at Gen Z and some surveys, the number one cities that they want to go to are still the same cities of San Francisco, New York and coming out of the Great Financial Crisis, now there was a big hit to those cities in the immediate years, but the second recovery started, they led the recovery. They led in job growth. A lot of people relocated to San Francisco. I mean, we know it now as having lost 180,000 people during the pandemic. But during 2014 it was booming.
There was a lot of job growth. It was early in the recovery and a lot of young millennials were launching their careers moving to cities like San Francisco or New York or Seattle. It’s just that they got so expensive by not building housing that now they’re losing people. I do think coming out of this economic slowdown, when things start to pick up again, we might see some Gen Z younger people still move for their careers. They’re less concerned about housing costs than maybe the older millennials are who are starting families and left these cities. But it doesn’t mean that that will completely offset the loss that’s taken place during the pandemic.

Dave:
Taylor, so glad you brought that up. I’ve seen some of, I’m guessing similar surveys about Gen Z and how they’re moving to relatively high price cities, which to me makes a lot of sense. If you’re young, these are attractive cities, there’s a lot to do, they’re high paying jobs. That makes a lot of sense. But for the people who were migrating during the pandemic, you mentioned millennials, is that the demographic that was moving most like people who were just starting their families or was it ubiquitous like everyone was moving?

Taylor:
Yeah, the census recently released back in September I believe, or October, some data on the demographics of everyone at the county level down to the age, race and other aspects about them. I spent some time digging into that data to see how did different counties changed during the pandemic and the counties, the 20 most populous metro areas, those urban counties are really what drove the exodus of migration. New York County, San Francisco County, King County, Washington, these are the urban counties in these large cities that saw all of these people leave. Who left? Well, we know a few things about them. We know that the demographic of millennials, so those basically in their 25 to 44 range, that age group is what drove the exodus out of these large urban counties and in particular non-Hispanic white households that are starting families. Those are the ones that either suburbanized to become a homeowner, to look for more space or to move somewhere more affordable. Places like Tampa or Atlanta where a lot of inbound migration took place as well.
That’s primarily what we know about who moved. There’s also an element that was a little bit more unique now during the pandemic, which is politics. It was a big political response during the pandemic about how do we handle things around shutting down businesses, enforcing mask wearing, all types of different regulations at the state level that took place. And if we look at who left California, it was disproportionately Republicans that left California, registered Republicans that left California into nearby states or that left places like Seattle and Western Washington into Idaho. There was also this political sorting that really was amplified.
That’s been taking place since about the ’80s, which is increasingly why the place we live describes our politics now more than ever, but especially during the pandemic, you increasingly were impacted by your local politics or the state level politics. And that played a role as well in migration with who might have moved. Now going ahead, I don’t think that’s going to play as large of a role. There’s less of this impact even in spite of things like Roe v. Wade or other political aspects at the state level. It still is that taxes dominate and affordability dominates with a high preference for what states people move to.

James:
I always think about this migration because I’ve been talking to a lot of people from Washington. I do know a lot of people that moved out of that state. I actually split my time now between Washington and a sunny place. It had nothing to do with politics, had all to do with sun. But I wonder if, and this is going to be a hard data, this isn’t something you can put data behind, but I guess you could, but the relocation remorse is what I’m calling it because I do know some people that have moved states kind of drastically. And they just kind of did it because they’re like, “I can do this because everyone’s doing it” and now they’re locked in because their homes have depreciated down and they kind of figured out that they picked the wrong city and they’re kind of stuck where they’re like, “Oh man.” It is not that they would’ve not relocated again or sold their home again, but they just did it on such a rush, and the market was also so hot in all these neighborhoods that they had to do …
A lot of home buyers unfortunately in the last 24 months didn’t get to think about their purchase and they had to just get into a house. And I wonder what that’s going to do as far as, because they went into either … I guess some of them can become rentals if it was a more affordable market. But I know a lot of people in Idaho specifically where they moved out there, they loved it for six months, 12 months, and then they go, “You know what? I want to be back towards the ocean.” But now they’re stuck because that market has deflated so quick. Do you guys see any of that? I was wondering if that’s going to actually because some sort of wave of foreclosures because people are just going to say, “No, I don’t want this anymore, I’m just leaving. I don’t care what it is. I have no equity, I don’t care what my payment is. I want to get back to the city.”

Taylor:
It’s a great question because you’re right. There’s not great hard data on this to know, okay, is this seller someone who recently relocated and that’s their motivation for selling? What we do know is we carry out a lot of surveys at Redfin and we ask our agents, our customers and the general public different questions. And during this migration surge of the pandemic, we did ask people, are you happier after you moved? And also how about affordability? And despite the run up of prices in 20-30% in places like Boise, most people actually saved money on their monthly payment and came out ahead in terms of their monthly mortgage relative to their income.
And in part that’s because, well it’s higher income people that are moving into places like Boise able to afford these. And we can look at data from HMDA, the Home Mortgage Disclosure Act, to see what about the income changes of people that moved? There was an affordability component that might be driving some of this happiness that people felt like they’re getting more disposable income now after their relocation. But by and large people have been satisfied with their moves. You’ll definitely hear regrets. In fact, early on in the pandemic, the New York Times ran the story of someone who left New York City and bought a farm and they discovered a bees nest and they didn’t know what to do so they just sold the home.
Anyway, you’ll hear stories like this, but they’re not the norm. And overall I think people have been more happy. In fact, people do desire to migrate more than they do currently. Mobility has declined for the last five decades, actually six decades now. And as a result people just aren’t moving as much. And that’s not great for the American economy. There’s a lot of reasons for that, such as the rise of occupational licensing makes it harder to move across state lines. But that said, what the pandemic did was it lowered the bar to move. You didn’t have to cut social ties because they were already cut by social distancing, not going to churches and schools and all types of other social institutions. You were already sheltered in place, you weren’t commuting to work. By and large the cost to moving in terms of the social costs were much lower.
That made it where people who really should be moving but are hesitant to because of, well they have their situation set up. The pandemic kind of severed those ties and allowed people to relocate in an easier way. And a lot of people came out ahead because of that. On net, I think it’s good news, there’s definitely regrets. I personally did relocate as well. I left Seattle during April of 2021, moved to Northern Virginia. I love the sun now. It’s wonderful. It’s a super sunny day today and it makes me happy waking up to the sun during the wintertime. But I can relate to those buyers who it was a hectic market, you kind of have to take some compromises.
We didn’t get our dream home, but we got a better home than we had in urban Seattle. But that said, it doesn’t mean I’m going to move next year or the next two years and could always convert to a rental if I want to relocate somewhere and rent even. There are opportunities that people have to mitigate some of those challenges. I don’t think people are as much handcuffed by the decision and renting is really a great option. I do think that’s why we’re seeing a little bit more of people leave the rental market and remain renters in home ownership. We’ll probably take a little bit of a hit in the gains over the next year because of that too.

Dave:
Awesome. Well, this has been fascinating Taylor, and it sounds like all these migration trends are super interesting and relevant to homeowners and real estate investors alike. It sounds like it’s calming down a little bit and we’re going to enter a new phase of migration in the US which we’ll have to see what comes as the economy slows down. But before we get out of here, I did want to shift gears because when we were chatting before the show, you teased some short-term rental information and data that you might have. And I know James and I are eager to hear what you have to say. Can you tell us what updates you have about that market?

Taylor:
Yeah, so during the pandemic we watched a boom of people buying up second homes. It more than doubled the activity overall, partly as a result of lower rates as well as untethering people being able to enjoy them more and move to places where they might have these short-term rentals. But then there were some regulations that were carried out by FHFA that made the cost on this higher. And immediately once those restrictions went in place, there were two separate times that this happened, we saw second home activity pull back sharply. Now second home buying has fallen even faster than the overall housing market has retreated. And investors also are retreating faster than the overall market too. And both of those together really are creating some lack of demand that really propped up a lot of these investor markets. The markets where a lot of second home buying and short term rentals have been purchased are cooling off as well.
And even we see this in Florida, if you split Florida up into the Gulf cities like Cape Coral and Tampa where there’s a lot of second home buying compared to places like Miami where it’s not as common, you see the markets are cooling down sharper in the places that had higher concentration of second home buying. This is posing a problem as now the market cools and you have a lot of people pulling back from selling their home. New listings hitting the real estate market for sale are down about 22% year over year. These are people who basically are opting to not sell. Now some of them are just home buyers, move up buyers who are just going to sit in place. That doesn’t matter too much. But there’s also these second homeowners that maybe would normally offload their properties. But as the market has cooled, they’ve seen home values retreat a little bit.
They’ve decided now’s not a favorable time to sell and maybe they’ll opt to move their home onto the short-term rental market or the long-term rental market. We’re seeing supply move from owner-occupied homes a little bit towards short-term rental listings and long-term rental listings as well. That increased supply is really starting to bring down the overall rents. But in the short-term rental market, what we see immediately happening is really a rise of vacancies and occupancy rates overall are declining. So far AirDNA has put out some great data showing that there’s more short-term rental listings hitting the market and these are people that maybe are having a hard time completely filling it and it’s going to be harder to cash flow some of these short-term rental properties. There’s a lot of concerns, a lot of risk about how these mortgage loans were maybe even structured during the pandemic that maybe there will be some distressed sales coming from these properties.
I do think some of the fears out there on Twitter and elsewhere might be a little overblown. When we look at overall how occupancy rates have changed and even projecting into next year, AirDNA put out an outlook, revenue will decrease because there’s going to be fewer nights booked and with more supply even lower daily rates slightly. But overall the revenue pullback isn’t dramatic. And if people were planning this for a long-term investment, say 10 years, I think they’ll be fine. Most of the people. There were a lot of people that bought during 2020-2021 when prices were high and they might have seen some of the equity go away and maybe they’re not cash flowing it as much as they want, but overall this is only impacting a handful of markets. Even if all of these listings were to list for sale, I don’t anticipate major spillovers into the for sale real estate market causing prices to [inaudible 00:40:27] like that. That’s kind of what I’m watching evolve right now.

Dave:
I’m so glad you brought this up, Taylor. I’ve been saying on this show, people who listen probably know that I think these high price vacation areas, ski areas, mountain towns, beach communities are probably at some of the greatest risk. Largely my opinion, is informed by some of your research, especially around second home demand and how you’ve shown that it went spiked something like 90% above pre pandemic levels, now it’s well below pre pandemic levels and then I saw the same AirDNA data that you’re referencing and agreed that it’s not like some crazy thing that’s going to happen. They’re forecasting 5% decline, something like 5% decline in revenue. But I think the lesson, or at least what the takeaway from me from this is about people who are trying to get into the short term rental industry right now, I think it could be really difficult.
We’re seeing this huge increase in supply and the number of listings in area and the people who have a lot of reviews and who have their operations set up and humming along are probably going to do just fine during this downturn. But if you’re a new listing in a time where I think revenue for the whole industry can come down as a whole as people pull back on spending a little bit, during a time where there’s more increase or more supply coming online, I just caution people about being too gung-ho and overly optimistic getting into the short-term rental market, particularly in these markets you’re talking about. I don’t know if in major metro it might be totally different dynamics, but in these vacation rental areas, second home areas, like you said Taylor, I think it is an area that is riskier than the overall housing market I should say.

James:
Yeah, we’ve seen a lot of inventory increase and it … I mean, when you mess with that mortgage calculator, it is expensive when you’re looking at these secondary home markets. And I think that’s where you’re seeing this influx of housing. And also I think people are moving around less, but I know Palm Springs, Lake Havasu, even in our Washington market, Suncadia, which is an awesome place, but I mean, the inventory has dramatically increased in these areas and the amount of transactions going on, I think they’re down substantially as well. It seems like those are always the first things to go. When you want to save money, you want to get rid of that extra expense, and I think that the short term rental market with it slowing down, people are just concerned, or a lot of people that bought short term rentals, they might not have rented the way they thought they were going to rent and they just want to get out from underneath them.
Do you know how much short-term rentals got bought with low down payments? Because I was wondering if that is going to be a concern because a lot of people were structuring their deals as they had not owned properties, they wanted to get a new investments and then they bought it with 3-5% down owner occupied. Do you know what the data is behind that? How many transactions got done with little bit of liquidity? Because I mean, those are going to be very underwater properties in the next 12 months.

Taylor:
I don’t know exactly the share. From what I understand, it should be relatively small. Now there are some increased use of different loans, I’m trying to remember what they were called. But basically a loan structured solely banking on sufficient revenue from average bookings per night and at the average rental rate. As both those equations are changing and are going to change then some of the assumptions that went into structure in these mortgages are definitely problematic and could cause people to not only become underwater on their loan if equity falls, but also not able to meet their monthly mortgage just based off of the revenue from the short-term rental market. Some of these people are opting to look for long-term rentals and some markets work favorably for that, like mid-sized cities for example. But the destination resorts, mountain ski towns, lakeside, those aren’t as favorable to finding long-term tenants either.
It is problematic in some of those areas certainly. But I’m not sure exactly the magnitude as to how popular that is. A lot of the buying normally happens with cash and during the pandemic we saw a bunch of people opt to jump on a mortgage because of the rates were so favorable until those restrictions went in place from Fae and Freddie about higher origination fees for example. It really was extremely favorable. You’re getting 3% on a second home loan as long as you had 20 or 25% down. There were certainly some people putting less down. But those I think are a little bit more … Well, a little less common, more unique overall for the short term rental market. But certainly we have seen that that’s taken place.

James:
And I noticed that though over the last 12 to 18 months, there was a lot of DSCR loans going on. It was like these business loans that were getting structured that way. I mean, they were putting a little bit more money down on those loans. I think they would go up to 80% loan to value, maybe 85%. But one thing that’s a little scary is these loans have pretty nasty prepays on them where they’re five year 54321s and so not only are they underwater with the equity, they’re going to have to come up with the difference for … I mean, let’s say you bought a million dollar house and you have a prepay at four or five points and then the market came down 20% off peak. I mean, that’s a very substantially underwater asset in addition to at determine that loan.
Depending if they got two, three or four year terms, in two years their income might be so low to where people have to come in with a lot of cash to buy that loan back down. And that’s where I’m a little concerned with that market in those loans that were structured that way. Because if the income, like you said is going down, the bank’s going to want more money and a lot of these people didn’t have the money. That’s why they went with the DSCR product, and that’s a little terrifying at that point.

Dave:
That is dicey, man. I mean, so much of what we talk about, at least personally, why I don’t think the wheels are going to come off in the housing market, I think we’ll see declines is that lending practices are so much better. But like a DSCR is not a residential mortgage. That’s a business loan like you said James. And what James is saying about prepayment, that means is even if people sell it underwater, there’s a penalty that the bank assesses for ending the loan early that people will have to come up with as well. That can put them further underwater. That’s pretty dicey. Well, Taylor, thank you so much. This has been a huge, huge help. Always enjoy having you on the show. If people want to read your research or connect with you, where should they do that?

Taylor:
Two places. First I’m on Twitter, @TaylorAMarr. And then also I write and contribute research to the Redfin blog. That’s redfin.com/news. And that’s where you can see most of our data, research, we put out a weekly report covering the market as well as a bunch of other research.

Dave:
Thank you so much to Taylor Marr, who’s the Deputy Chief Economist at Redfin. We really appreciate you coming back on the show.

Taylor:
Thank for having me.

Dave:
All right, James, so what’d you think?

James:
Oh man, Taylor’s great, man. I got to say he might impress me almost just a little bit more than you on the data drops.

Dave:
He definitely impresses. I mean, I look up to him, he knows everything. Most of the stuff I talk about, I’m just copping what Taylor’s talking about anyway.

James:
Yeah, he definitely knows the stuff. And it was really interesting on the migration patterns. Then one thing with the inflation too and the migration, that was something I was reading up yesterday. It blew my mind. I was like, “Oh wow. Yeah, the inflation is double or triple with the people moving there.”

Dave:
Totally. I think two things Taylor does better than anyone is talk about migration. He really has a grasp on where people are moving, why, obviously it impacts the housing market. But it’s just kind of interesting in general if you’re just curious about what motivates people to move and you should definitely check out his research, but I thought that was so true. We talk on the show about how there’s no “national” housing market and you need to look at your regional market to understand pricing. But like you just said the same is true with inflation, right? You look at Phoenix, the inflation rate is double that of LA. You have to factor that in when you consider what’s happening in the housing market there because not only did prices and houses go up in Phoenix faster than most places, but spending power is going down faster than most places in Phoenix. It’s getting a one-two hit in affordability there, that’s probably going to put a lot of downward pressure on prices.

James:
Yeah, it’s kind of smoke and mirrors. I was like, oh yeah, everyone wants to go here because it’s more affordable. But now you’re paying double for everything else. But I mean, at the end of the day too, it’s always short term pain. They did go to a different market. They got a great rate, a lower payment and inflation will give up at some point, especially if the housing market cools down. Because I did see a lot of that stat was … I mean, a lot of the housing market did cause the increase. But yeah, these migration patterns, I know I’ve always been a local investor in Washington, but as I’m watching these and learning more about these, it’s definitely opening my eyes to invest in some other markets.

Dave:
Okay, we’ll have to follow up on that and just see where you’re going. But yeah, I thought the encouraging thing, at least from an investor standpoint about Taylor’s research is that the migration patterns are calming down. It was so hard to predict what was going on the last couple of years. You see these reports, but most population data comes in once a year. You don’t really know even what’s going on. You just hear anecdotally that everyone’s moving to Austin or Phoenix or Boise and it’s hard to know, is it for real? Is it going to last? And to me at least, if you are investing in multiple markets or trying to pick a market to invest in, the best thing that could happen is that one, the work from home situation and two, the migration patterns just become more predictable.

James:
Yeah, I think you’re right. I have thought some of these cities were just surging. And part of it too is where you were living, right? When I was down in California, a lot of people from California were going to Idaho or so was Washington, but then a lot of other states, the Upper East Coast were going down to Florida. Kind of depended on what you were hearing. But yeah, those migration patterns, I knew it had an effect on the market, but I didn’t really realize it had that much pull on the inflation, just everything across the board.
And it did seem like people were moving out a lot more rapid. But at the end of the day, I guess it shows that they’re really not moving around. It was maybe more hype than anything else. But I don’t know, we’ll see what happens. I personally think that this is going to slow down quite a bit because once we go into a … I just remember in 2008 when we went into recession, everyone just kind of froze. Everything froze. And I think we’re going to see that slow down for the short term and then maybe in 12, 24 months people might figure out, it’s like the life after COVID. It’s like you go through this weird thing, then you get settled and then you really figure out what you want to do.

Dave:
Totally, yeah. One of the interesting things I read about migration too is that a lot of migration’s actually in state, it’s like the majority, I forget, I’m not going to say a number because I don’t remember what it is, but I think it’s more than 50% of migration is in state. Just using Seattle as another example, people who are moving Seattle, even out of Seattle, even though some of them went to Boise or Austin or whatever, most of them went to Bellevue or Tacoma or whatever and somewhere else. And based on what you were saying about people like being like, “Yeah, I don’t like this so much,” I wonder if some of that will actually start to reverse. Like you moved to rural Washington during the pandemic because you could and now you’re like, “Oh, maybe I’ll move back to the city where there’s better jobs” and at least for me, better restaurants. I don’t know. We’ll see if that starts to reverse.

James:
Yeah, that pricing on that rural property went through the roof and it was like the further it … Real estate’s always been, the closer you are to the metro, the more expensive it gets and it COVID broke all those rules. And I do feel like those rules are coming back into play right now. People wanted land and they wanted quietness from COVID. Now I think they’re bored and they’re like, “I got to get back into the hustle bustle of the city. I want good restaurants. I don’t want chain restaurants.” They want to live life the way that they’re used to living.

Dave:
Totally. Yeah. It’ll be interesting to see. Hopefully Taylor agrees to come back every couple of months because he’s the master of this and we can continue to pick his brain.

James:
I hope so. I hope you have me on with him.

Dave:
All right, well throw your name in the hat. You’ll be here.

James:
I’m going to bug Kailyn.

Dave:
All right, well, thanks a lot James. Appreciate you being here. And thank you all for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

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