Ask the Economist: The Contracting Housing Market

Nela Richardson, Chieif Economist for Refin, joined Redfin from Bloomberg LP, where she was a Senior Economist with Bloomberg Government. She has also held research economist positions at the Commodity Futures Trading Commission, Harvard University's Joint Center for Housing Studies and Freddie Mac. Nela leads the Redfin research team and is a frequent guest expert on housing and economic issues for local and national media

Richardson recent spoke with DS News about her views on the current housing market as well as innovation in the mortgage industry.

You spoke recently of the housing market contracting inside of bubbling. What do you think the future of the market will look like with this contraction?

I think there is going to be less turnover. One of the strengths of the U.S. Labor Market is that it has been supported by a very active, very mobile workforce. Part of that is because historically it has been very easy for people to buy and sell their homes and move to where the jobs are. I think along with other thinkers that it looks to be that this is not going to keep going at the same amount we have seen in the future. This means that turnover will be less. Because inventory is so low, people are a little timid about selling their house and a little afraid of not finding a new home is a new location. There is also the issue of the prices being too high in the location where the home is. Overall, this low turnover in the long run might impact the labor market simply because people can't move because of various housing restraints to where the jobs are.

 

What does the housing market look like in regard to sales, and you spoke of less investors in the market so what impact does that have to the market as a whole?

Year-to-date sales are up and in fact we will have the best year in housing since the bust. But recently we have seen some slowness in the market. The last month we saw a drop year over year so what we think is happening in the second part of the year is that low inventory is actually putting a lid on sales. We could have much stronger sales than we do right now if there was more inventory because buyer demand is high.
For the buyer, having less investors is a good thing because it means less competition. In a market that has such low inventory, it is good to have less competition. At the low end though, for the affordable homes you do see more investors and that is a challenge to first time buyers. This is because whenever there is an affordable home that comes into the market, the agents say that you see first time buyers, high end buyers and investors because that property has such potential as a rental property. First time buyers are not only competing with themselves for affordable housing but they are also competing with investors who want to turn the properties into rentals and high end buyers who want a second home to turn into a vacation home or Airbnb.

 

What are some of the mistakes you are seeing post-crisis in the market and in the mortgage industry?

One, we need more lending to new construction, not less. We've seen recent data show that things are pulling back from multifamily, and that is back news because that trickles down to all segments of the housing market. When there is less in the market whether that is rental or for sale that makes it harder for buyers and renter to find homes in their price range. We need more new construction and lending. Second, we are not overbuilding but we are also not meeting the demand for starter homes. First time buyers, millennials are not finding a lot in their price range whether it's condos or single family homes because they're not building there and homeowners aren't listing at that price range. Third, the for-sale market has never been faster. Technology has really added homebuyers. And yet in the mortgage market we are seeing exactly the opposite. The mortgage market has not kept up with the pace of housing and that is a big mistake. During the crisis, the mortgage market could have outrun the fundamentals of housing but now it is lagging.

 

Why do you think the mortgage industry might be reluctant to innovation?

Regulations, Risk, and Repercussions, the three R's. In a low rate environment like we have now this is the time where you should see innovation in the mortgage market but I think the industry hasn't figured out how to have financial innovations and in a safe way. A lot of the mortgage market is unwilling to take the risk because of regulations and the cost of making a mistake. The justice department won several lawsuits from banks and I think banks are really worried about the repercussions of making a mistake, running out of bounds of regulation, not having clear lines of what is tolerable and what is not in terms of risk and for that reason they’re afraid to take a bet on the American consumer and the future homebuyer of whether they're first time or millennial. The banks right now I think like to stay on the safe end of the pool and so we are not seeing a lot of innovations right now. We are not even seeing a lot of loosening right now. There was a little bit last year but banks are pretty much holding steady on their underwriting standards. Some people would argue that this is great and we should have tight underwriting and it should be hard to get a mortgage because we should make homeownership aspirational enough that people make sound decisions. While I don't disagree with that, I still think that it is too hard to get a mortgage for most middle class families.