Homeowners aren’t ready to face how much less their houses are worth

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Over the years, I have encountered a lot of weird statements from company chief executives announcing layoffs or business setbacks.But possibly the strangest one came on Wednesday from Redfin chief executive Glenn Kelman, who said his firm was letting go of 13 percent of its workforce, and shuttering its “iBuying” division, which bought homes directly…

imageOver the years, I have encountered a lot of weird statements from company chief executives announcing layoffs or business setbacks.But possibly the strangest one came on Wednesday from Redfin chief executive Glenn Kelman, who said his firm was letting go of 13 percent of its workforce, and shuttering its “iBuying” division, which bought homes directly from consumers, did light renovations and put them back on the market.Anyone who has watched a house-flipping show knows how hard it can be to make money that way.Around this time last year, Zillow closed its own iBuying division after losing buckets of money .

Yet this is not how Kelman explained his move.“We’re closing our iBuying business, RedfinNow,” he said in a statement , “because maintaining a profit with rising interest rates would make our offers on homes insultingly low.” Insultingly! What is insulting about offering people the market price for their house? Homeowners are presumably aware that mortgage rates have spiked, thanks to the Federal Reserve Board’s aggressive policy, topping 7 percent in the latest report from Freddie Mac.

And because owners already have homes and mortgages, they are also aware that when rates are higher, people cannot afford to pay as much for houses.And yet I don’t think Kelman is crazy; he’s probably right.Many homeowners would be insulted by what Redfin could rationally offer.His statement is strange because the housing market is in a very strange place — and finding a new normal will require some ugly adjustments, psychological as well as financial.

As I noted in June , most American homeowners have known only a world of steadily falling interest rates.Mortgage rates hit their all-time high in the early 1980s, as the Fed under Paul Volcker aggressively tightened monetary policy to fight record inflation.Since then, rates have followed a long downward trend.

Prices responded with a corresponding upward trend — albeit with some brutal interruptions, most notably, the collapse of the housing bubble after 2006 .During the financial crisis, however, the Fed stepped in with more easy money, and by 2022 most homeowners were sitting on a nice chunk of equity .This made homeowners feel prosperous and secure.It probably also boosted consumer demand, because people who feel richer are willing to spend more.

And despite the memories of the crash, most people still take it for granted that housing is a great investment as well as a way to keep the rain off their heads.These trends could not go on forever.During the pandemic, my credit union was offering 15-year fixed-rate mortgages for less than 2 percent annual interest, and they weren’t going to keep lowering that rate until they were paying me money to buy a house.Now, we are in the midst of a sharp reversal and prices will have to adjust accordingly.Someone who could have gotten a mortgage at 3 to 4 percent a few years ago now has to pay more than twice that.To keep their mortgage payment the same, the cost of the house would have to fall by almost half.Now, not everyone has to worry so much about their monthly payment; older home buyers who have built up some equity aren’t as sensitive to mortgage rates.But unless prices drop significantly, the market will be starved of new entrants — which means falling demand and, ultimately, lower prices.

Home buyers aren’t yet ready to recognize the extent of that loss, so they won’t sell their homes unless they really, really have to.Especially because moving would mean giving up the absurdly low mortgage rates that prevailed before the Fed got serious about fighting inflation.Many of the real estate listings in my neighborhood now have an eerie quality, like looking at the twinkling light of some long-dead star.Houses sit on the market or prices drift downward in tiny increments that are wholly inadequate to the magnitude of the interest-rate shift.

Though supply remains quite low by historical standards , inventories are rising, and sales have fallen by almost a quarter.Homeowners seem to be sitting out the market , waiting for the return of the good times.This helps explain why median sales prices have fallen by only about 7 percent, from a June high of $413,800 to $384,800 in September — and were still up year-over-year.Of course, that 7 percent decline might be a good deal if interest rates fall back to where they were fairly quickly.

Home buyers could suffer a high payment for a couple of years, and then refinance into something more affordable — and sellers could avoid taking a hit to their personal wealth.That’s one way we could get out of this strange market.But it’s hard to imagine that interest rates are going back to where they were during the pandemic.The public health crisis is over, and the Fed is now in inflation-fighting mode.

We homeowners might never again be as rich as we felt in 2020 and 2021 — which would mean that the only way the market can go back to normal is for us to eventually, painfully admit that we’re poorer, and move on..

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