You had housing questions. An economist answered them.

0:00NPR.

0:05This is The Indicator from Planet Money. I'm Waylon Wong. Existing home sales in the U.S. are near record lows. Daryl Fairweather, chief economist for the real estate site Redfin, says interest rates are a big reason why. Ever since mortgage rates went up in 2022, both buyers and sellers backed off the market. What you get, Daryl says, is a stagnated market. Buyers can't afford to buy at these high prices and high mortgage rates. And sellers don't want to move because that would mean giving up their very affordable mortgages they got during the pandemic. This year, we've seen a bit of an improvement.

0:41I think that, you know, things are starting to relax a bit, but it's very, very slow going. So it's no surprise that a lot of buyers and sellers are having a hard time right now. We see it in the data. And last week, we heard about it directly from you. The Indicator held a virtual event for our NPR Plus and other qualifying supporters. We called it Ask an Economist, and it was all about trying to make sense of the stagnant housing market. Adrienne Ma, my fellow co-host, and I, and more importantly, our audience, got to put our questions to Daryl. It was like our very own call-in show. It was fun, lively, and full of insights.

1:19So today on the show, we're excited to be able to share with you an audio excerpt of our Ask an Economist event. That's coming up after the break.

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2:28Now, this is your time to turn that momentum into more. The only real question is, what can't you do? Learn more at capella.edu. The higher the mortgage rate, of course, the more expensive it is to borrow money. And this month, the average rate on a 30-year fixed-rate mortgage hit 6.58%, the highest level in nearly a year. I asked economist Daryl Fairweather of Redfin why rates are climbing. It's really the economy. I mean, mortgage rates are based on everything that's happening in the economy. When the economy is growing, that can put pressure on mortgage rates to go up. But also when there's inflation, that also increases mortgage rates.

3:10And in this economy, we have a fast-growing economy. We also have higher inflation than at least the Fed is comfortable with. And that is contributing to these higher mortgage rates. I could get into all the little reasons why the economy is the way it is right now, but those are the big overarching factors keeping rates high and homes, at least for borrowing a home, unaffordable. Yeah. And you had alluded to this a little bit earlier when you talked about the impact of high mortgage rates on both buyers and sellers. And so you're kind of describing what we've covered on the show as kind of like a mortgage lock-in effect, right?

3:46When you see how they affect buyers and sellers. Yeah, this housing market is so different than anything we've seen historically. Normally, when mortgage rates go up, buyers back off because they can't afford to borrow at high rates. And because there are fewer buyers, sellers have to drop their prices in order to get their homes sold. But in this market, sellers are very stubborn. They have what economists call high reservation prices, which means they're not willing to cut their prices. They would rather delist their homes. And many homeowners aren't even choosing to sell at all. They're just staying with their cheap mortgages because they couldn't afford to sell and buy again.

4:25It would cost them $1 ,000 more or even more a month just to get the same priced home at these higher rates. Well, I mean, part of the picture here is not just rates for borrowing. It's also the shortage of supply, right? I mean, it seems like there are pretty varied estimates on how big the housing shortfall is. You know, it's anywhere from, you know, one and a half to several million homes. Can you talk about one or two of the big things that have resulted in this shortage? Yeah, the reason there are so few homes, not enough homes for everybody who wants a home, it mostly boils down to something called NIMBYism, which stands for not in my backyard.

5:05That's when homeowners who live in a local area block new housing development, especially dense housing like apartment buildings or condo towers that they feel don't fit with the aesthetic of a suburban neighborhood. Or maybe they're concerned about extra housing bringing down the value of their homes or they're concerned about, you know, the price point bringing in people who might be lower income than the people who currently live there. There's lots of different reasons why people might be NIMBYs, but these homeowners, they don't feel the impacts of the housing affordability crisis because they already own their home.

5:39They already have fixed rate mortgages and they actually tend to have like more free time. They tend to be retirees who show up at local city council meetings and voice their concerns about new housing getting developed. So for at least the last 10, maybe even 15 years, these people have successfully blocked housing from being developed in the places people most want to live with the best job opportunities. And that's how we got into this mess of home prices being as high as they are. But in places in the Sunbelt, Austin, for example, Arizona, Florida, the laws, they promote more housing. They allow for more housing.

6:16They don't give as much local control. And that's where we're actually seeing prices come down and affordability improve. And we saw a lot of housing development during the pandemic when demand was very hot. So you can see the differences between how prices play out in a place that allows for new construction versus places that don't. OK, so after AJ and I got to ask Daryl our questions, we then opened things up to our virtual audience. My question is, housing has historically been viewed as a good investment. Was this perception true? And do we expect that answer will remain the case? or was it the product of historical conditions that might now be changing?

6:49Kalem, thanks for your question. What do you think, Daryl? There's a couple of reasons to think that housing is always going to be a good investment. One reason is that you need a place to live. If you're renting, then you're paying your landlord. If you own, then you're building up equity. Now, I think that's a bit of an oversimplification because you can pay your landlord and set some money aside and put it into a 401k or your stock market account and still build wealth the same way that a homeowner would. But for behavioral reasons, it's really hard for a lot of people to save every single month in the way that they do save when they own a home.

7:28They just pay their mortgage and magically they build up equity, although it's not magic. They're paying for that. But I think for a lot of people, home ownership is just a really easy way for them to build wealth. And it's a very accessible type of investment because they need a place to live anyway. The other reason why real estate is viewed as a good investment is because of the land. There is a fixed amount of land in this world and they're not making more of it, but we are making more people, or at least for a long time, we were making more people. There's some debate about population growth nowadays.

7:59But for that reason alone, people viewed home ownership as a good investment because there would always be more demand for it in the future, assuming that the area that they're buying in the home is going to grow in population. And I think that that has been true. Moving forward, I think there are some other things to consider, like population in the United States. Is that going to continue to grow? What's going to happen to baby boomers' homes when they pass on, and how will that impact the investment value? I think that the reasons why people buy homes are going to change in the future, and it's not just going to be for a good investment.

8:33I think people are going to think about more just the value of enjoying the home that they live in and having a home that's uniquely theirs. Daryl took a lot more questions from our audience, including this one from Colin, a self-described near-empty nester homeowner. He says it makes sense for him to downsize after his kids move out, but financial factors like his low-rate mortgage and property tax exemption are keeping him in place. So I'm wondering what, if any, role the government should have and addressing those factors for people like me that are gumming up the housing market because we have strong financial incentives to not move right now.

9:10Yeah, I hear stories like that all the time. We've done reporting about how baby boomers own more three-bedroom-plus homes than millennials with families like empty nest or baby boomers and how this is a misallocation of housing. I think people love to kind of pile on the baby boomers and tell them that it's their fault, but they're just responding to the incentives like you laid out. I think in order to improve the situation, we need to create housing that someone like you would really be excited to move into. Denser housing where you can access all the amenities you need. Maybe as you age, you wouldn't be as reliant on a car where you would have friends who are nearby who you can do activities with because otherwise people are going to stay in their homes in these single family neighborhoods isolated, and it's not actually going to be all that beneficial for them, but it's the most affordable option for them at this moment.

10:02So yeah, we really just need to look at the incentives. Thanks again to Daryl Fairweather of Redfin. She is also the author of the book, Hate the Game, Economic Cheat Codes for Life, Love, and Work. To hear the entire event, make sure you're signed up for NPR+. We'll be publishing it as a bonus episode in the Planet Money feed next week. This episode was produced by Biet Le. It was fact-checked by Vito Emanuel and engineered by Robert Rodriguez. Kicking Cannon edits the show, and The Indicator is a production of NPR. Oh, hey there. I'm Brittany Luce. And I don't know, maybe this is a little out of pocket to say, but I think you should listen to my podcast.

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