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Ask the Economist with Daryl Fairweather

Editor's note: This interview originally ran in the December issue of DS News, click here to start reading.

 

Before joining Redfin in October, Daryl Fairweather served as a Senior Behavioral Economist for Amazon, leading a team of analysts and economists who worked on improving employee performance and engagement. Earlier in her career, she worked as both an economist and an analyst for companies such as Intensity Corporation, Morgan Stanley, and the Federal Reserve Bank of Boston. Fairweather holds
a Ph.D. in economics from the University of Chicago and a bachelor's degree from MIT.

Fairweather spoke to DS News about the value of her mentorship by Nobel Prize winner Richard Thaler, how her study of behavioral economics will inform her new role at Redfin, and what she took away from her work at Amazon.

How did studying with Nobel Prize recipient Richard Thaler, who is hailed as the Father of Behavioral Economics, impact your outlook on market behavior, and specifically the housing market?

Economics is ultimately about how people make decisions. The macroeconomy is made up of individual people buying and selling goods and services, and people aren’t perfect. People make mistakes. People are emotional. People often don’t fully understand the consequences of their decisions. Behavioral economics takes all of this into account. The housing market is a perfect example of how human behavior impacts economics. For example, in a cooling housing market, home sellers are slow to react. They will look at what their neighbor’s house sold for a few months ago and feel like they should get the same price, or an even better one. Home sellers have a hard time seeing things from the buyer’s perspective; the buyer doesn’t care what home prices were a few months ago, they are looking at what’s on the market right now and trying to get the best possible deal. That’s why we are seeing so many price drops. Sellers are slowly learning how the market has changed.

How does behavioral economics provide a perspective on the housing market that other approaches can’t?

Behavioral economists start from the premise that people make mistakes and don’t always act rationally. From 2004–2006, home prices went up 50 percent, when historically home prices rise about 1 percent faster than inflation. A behavioral economist would interpret such a dramatic rise in prices as the result of a psychological phenomenon like herding behavior, which is when people mimic the actions of a larger group, even when the larger group is acting irrationally. Herding behavior leads to asset bubbles because people are less likely to bet against the herd. A traditional economist would start from the premise that people act rationally and would only be willing to pay 50 percent higher home prices if they determined the home is 50 percent more valuable. It’s valuable to consider both perspectives when analyzing the housing market. Oftentimes, there is a rational explanation for such fluctuations, but it’s good to have some humility and consider all of the ways that people make mistakes when buying and selling homes.

What is the intersection between big data and customer service, and how will the advent of big data alter the mortgage industry? What will change as technologies become more ubiquitous?

Big data is just a buzzword, unless it is used to improve service and deliver value to consumers. At Redfin, we use data to help buyers and sellers understand the market so they can make better decisions. A good example of this is Redfin Compete Score. It analyzes a vast amount of data about the real estate market to help consumers understand how much competition there is for homes right now and what it will take to win a home in their neighborhood.

On the mortgage side, data is creating more transparency about rates and fees, as well as shining a light on what has been an opaque process for consumers. Data and technology will help streamline the approval and underwriting process, as well as the home closing—we can now do fully digital home closings.

With prices rising and mortgage rates increasing, how will this affect those attempting to sell their homes, as well as homebuyers’ strategies? How will the industry respond as a whole?

When mortgage interest rates go up, monthly payments go up for homebuyers taking on a mortgage to pay for a home. People who are deciding whether to rent or own are going to be comparing their monthly mortgage payment to rents, and more people are going to decide that renting is a better option. Homeowners who have great rates may be more hesitant to sell and get a new mortgage. For homeowners who do sell, they are going to have to lower their price, if they want to increase the number of people touring and making offers on their home. Home builders are going to have to build more affordable homes to attract more potential buyers.

How did working as a Senior Economist with Amazon for two years prepare you for working with Redfin? Is the transition from working for a major e-commerce and cloud-computing company like Amazon very different from working in real estate brokerage?

At both companies, I have used my knowledge of economics and psychology to interpret data and help people make better data-driven decisions. At Amazon, my focus was on delivering internal research to Amazon’s leaders so they could make more informed business decisions. At Redfin, my focus is on sharing insights to everyone interested in buying or selling homes. One exciting part of my job at Redfin is the opportunity to talk with our real estate agents around the country who are often the first to identify trends that may take weeks or months to be reflected in the data.

You worked with the Federal Reserve in Boston, interviewing people who lost their homes due to the financial crisis. What did you most take away from this experience? How did it affect your outlook on the mortgage industry?

Every homeowner I spoke with wanted to pay their mortgage, wanted to keep their home, and desperately wanted help. Listening to homeowners facing foreclosure and learning about the individual and economic consequences of their choices made me want to learn more about how people’s choices shape our economy and what can be done to improve people’s choices and ultimately, people’s lives.

I think the mortgage industry has an important role to play in giving people the opportunity to own their own home. Most people consider homeownership to be a huge financial milestone and have an emotional attachment to their home. It’s incredibly important that people understand how their mortgages work and the risks involved in taking on debt.

About Author: Rachel Williams

Rachel Williams attended Texas Christian University (TCU), where she graduated with Magna Cum Laude with a dual Bachelor of Arts in English and History. Williams is a member of Phi Beta Kappa, widely recognized as the nation’s most prestigious honor society. Subsequent to graduating from TCU, Williams joined the Five Star Institute as an editorial intern, advancing to staff writer, associate editor and is currently the editor in chief and head of corporate communications. She has over a decade of editorial experience with a primary focus on the U.S. residential mortgage industry and financial markets. Williams resides in Dallas, Texas with her husband. She can be reached at Rachel.Williams@DNews.com.
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