Migration, Inflation, and Why Cities Are Losing Their Status

Dave:
Hey, everyone. Welcome to On the Market. This is your host, Dave Meyer. And today we have an incredible show for you. Today, I’m going to be joined by the one and only Henry Washington. And we’re going to be having a fantastic conversation with Taylor Marr, who is an economist at Redfin. He’s going to share all sorts of incredible information about the housing market and the migration patterns that are impacting housing markets all over the country that we’ve been seeing since COVID. Take notes during this episode, because there is so much good information that Taylor’s dropping here you’re going to want to pay close attention to this one.
Welcome to On the Market, everyone. Today, I have my friend Henry Washington joining me for an interview with Taylor Marr from Redfin.
Henry, what’s going on man?

Henry:
What’s up, buddy? Glad to be here. Always love talking shop up with you.

Dave:
Yeah, absolutely. I think that this is the first show we’ve done, just you and me, so far.

Henry:
I know, it’s special. I think we should do more, Dave.

Dave:
All right. Well, we already recorded the interview, and it was a very special interview. So maybe this is a good sign for this pairing.
But before we jump into it, can you tell everyone listening what they should listen for? Because there was just so much information that Taylor provides to us, relevant information, I’m curious what some of your favorite takeaways were?

Henry:
Absolutely. If you are not driving, get yourself a pen and a piece of paper and try to write down some of these statistics that he’s talking about. So we have talked a lot, on multiple episodes, about different factors in the market, and our take on them and what we think investors should or shouldn’t do based on what we’re seeing. And now, today, we got the actual data behind a lot of those things.
So if you are an aspiring investor, an active investor, and you’re actively looking for properties, the information you’re going to get here, it’s the backbone of everything we’ve been talking about because it’s the data that’s driving home sales. We talk about inflation. We talk a lot about migration and how that’s impacting prices. We talk about how rents are being impacted, based on home prices.
So there’s a ton of information here. So I highly suggest, just get a pen and a piece of paper and just try to jot down as much as you can, and then go back through it and listen to it again because there’s so much good stuff here.

Dave:
Absolutely. I completely agree. I know before you were a full-time investor you were doing data and analytics as well. As a former analyst, something I always look for is trying to find source data, where the data actually comes from, and looking for that.
And what I love about Taylor’s information, and what Redfin’s putting out, is they’re taking their own data. This is stuff that’s happening on their website. They are able to see, in near real time, where people who live in one market are searching for homes. And this is real source data that gives you, I mean, as reliable information as you can get. So, as Henry said, write down some notes. And, with that, let’s bring in Taylor.
Welcome, Taylor Marr, who is the deputy chief economist for Redfin, to On the Market. Taylor, thanks so much for joining us.

Taylor:
Thanks for having me. I’m excited to be here.

Dave:
Great. Can you tell us a little bit, to just get us started, about what your day-to-day looks like at Redfin and how you got into real estate economics and data analysis?

Taylor:
That’s a great question. So my day-to-day usually starts off with checking the latest economic releases. So this morning I woke up and looked at what’s going on in the financial markets reacting to the big drop in new home sales. And usually, after that, I look at some other data, refresh my own data at Redfin … we’re tracking data daily, weekly … and try and just get a grasp of what’s going on, my finger on the pulse of what’s going on across the country, which markets are changing in what way.
And then I usually collaborate with my coworkers. We have a team of economists that we all work closely with. We help each other pull data, discuss research ideas, and ultimately we try and find unique ways that Redfin data can shed some light in what’s going on in trends across the country. So, that’s primarily what I do. I talk to a lot of press, such as yourself, and try and make sense of the turbulent market that we’re in.
So how I got into this, I first and foremost have studied economics, really been tracking the global economy. And when I was in grad school I was particularly focused on the housing bubble; what factors led to that, what policy responses address some of those factors. And that really fed, naturally, into studying real estate markets.
So I joined Redfin about seven years ago. Really just digging into the data, modeling different things on the data. In particular, one of the first projects I really got excited about was modeling and predicting migration. We have millions of Redfin users across the country, and what a untapped data source to try and understand: can this give us a real time gauge about what households are doing across the country, whether they’re looking to move? Does this predict census data that tends to be a couple years lagged?
So that was one of the first projects I got into. And mostly spend my days talking about migration, the housing market, interest rates, the economy, all that’s happening. So yeah, hopefully that’s a little bit about me.

Dave:
Well, that’s sounds like an awesome job. I’m very excited to have you on. I mean, I think I have a cool job, but-

Henry:
It sounds like your dream job.

Dave:
Yeah. It’s my second dream job. I have my dream job. But Taylor, you’re coming in close.
You have written extensively about all sorts of really interesting information about the housing market. But you mentioned migration, which is one of the things we wanted to dive into today. We’ve seen such a uptake in migration since COVID, and it’s seemingly having a large impact on many housing markets. Can you just give us a brief overview, to start, about what your research has uncovered? And then I’m sure Henry and I will have a million more questions.

Taylor:
Yeah. So at a high-level, what we’ve been tracking … and again, we’ve been tracking migration for years and trying to get a real time pulse about what households are doing, where they’re looking to move to, what the macro trends are. One thing we noticed right away, when the pandemic hit, is initially a surge of searches away from urban places to rural places, people looking when the COVID lockdown orders were in place, people looking ahead for the hills and basically dream about owning a vacation property on the coast somewhere where they can work from home in.
So we watched that trend happen initially, and it was like, well, people are just daydreaming. But then what we started to do was track things like second home mortgage applications and track purchases, and follow people as they were buying these homes, selling homes, in these urban areas. And what we saw evolve in our migration data is that, really, there was a pandemic acceleration of migration out of these big urban areas and into more rural small towns, and in particular suburbanization was accelerating.
So throughout the pandemic we basically watched a major uptick in migration. A lot of the trends that were happening pre-pandemic, such as a lot of people leaving the Bay Area because it’s too expensive, moving to places like Sacramento or Phoenix … which are more affordable for those Bay Area migrants … we basically just watched that trend accelerate.
And the same is true, trends on the East Coast, out of New York and DC, pandemic accelerated the migration trends that were already underway, it accelerated some of the suburbanization trends that were also underway. And, really, the hot destinations just became hotter. So Phoenix, Atlanta, Tampa. These Sun Belt metros that were relatively affordable across the country tended to just attract a lot of households looking to relocate. Remote work basically untethered a lot of workers and made that a much easier transition.
One thing also, that I think gets overlooked in the narrative about how the pandemic maybe fueled migration, is that it’s not just about affordability. One thing that holds back a lot of people from moving are close community ties. What the pandemic did, especially during the middle of 2020, is really cut all ties. People were forced to social distance. Churches were shut down. Schools were shut down. Workplaces were largely closed for a little while. So it created a one-time reset for people to reevaluate their daily patterns in life. I would say that it really just lowered the bar to allow people who already kind of wanted to move but maybe had excuses as to why not, it allowed those households to feel more free to move.
Then, throughout the pandemic, we had a lot of other things start to influence migration, from low interest rates and second homes that I mentioned. But otherwise, politics became a major driver. We saw the politics of how local responses to the pandemic, whether it’s at the statewide of restrictions for COVID or just cultural responses, also started to play a large role in people’s migration decisions. So that was another factor that happened throughout the pandemic as well.

Henry:
Awesome. I think it’s cool to dive into seeing how the migration patterns played out in COVID and it’s cool to think about. Because we get so into real estate here, I had forgotten how politics played a big role in people wanting to migrate as well, and then its impacts on real estate.
So I’ve got a two-part question for you, is: do you feel like the migration patterns had a big part in the increase in real estate prices in those areas that were “more affordable” and now they may not be as affordable? And how do you see the impacts of that migration pattern now that things are starting to settle down a little bit, maybe come back to normal? I don’t think things are recessing, but things are kind of returning to normal levels. And what are the impacts of that migration?

Taylor:
Yeah, those are great questions. So first, one of the things that we watched happen throughout the pandemic, with politics playing a role, is that basically people started to pay a lot more attention to how the political landscape will influence their decision. And politics and the migration, as it shifted people into these other areas, it definitely did play a role in the housing market. Some of the hottest migration destinations also had some of the fastest home price appreciation.
New research that came out just a couple weeks ago showed that more than half of the appreciation in real estate markets can be tied to the trends of increase in remote work. And indeed, where the migration patterns really shine are remote workers, of leaving the Bay Area, leaving coastal cities like Seattle, New York, to work remotely out of more affordable destinations.
These remote workers sometimes did take a pay cut, or maybe they kept their same wage. But overall, what we can see when we track Redfin users, as they set a budget when they’re searching in a new market like Phoenix and they’re coming from the Bay Area, they’ll say, “Show me homes only under 500,000.” So as they’re setting their budgets, what we’ve found is that people relocating into these more affordable areas tend to have significantly larger budgets than locals do. And it makes sense, because they’re usually coming from more higher income origins and, as a result, they have more money to spend on housing in these destinations. In particular, this was pronounced in hot migration destinations like Nashville, Phoenix, Atlanta, where migrants have bigger budgets and are able to basically really increase demand more than just moving there as a new household and stronger population growth, but really with a lot more money.
So that might not show up in the wage data at all. If you’re just comparing wage growth you won’t see that as much because these people might not have had an income growth, they might have even taken an income cut, a pay cut, for working remotely out of these areas. But we definitely do see that remote work contributed towards untethering workers, allowing them to migrate to these areas. And then, as a result, that’s pushed up home prices a lot more, but largely in check with the incomes.
Once you change the picture to look at: okay, what’s the typical buyer’s income in the market today or in this year? and you factor in the inward migration into an area, the home price growth that looks exuberant from local incomes actually starts to look a little bit more rational, when you think about how much money these households are able to come in with, coupled with more space for a home office and more demand for real estate generally, alongside more investor activity. We tracked an uptick in investor sales and purchases, as well as second home purchases by households looking to even use them as short-term rentals in the future.
Now, going to your other part of your question, which is: where do we go from here? We know that interest rates have been rising at their fastest pace in history. We see that that’s having a real impact on the market. Just in the last week we got data from NAR and Census on April sales, and both of them declined substantially. We know that the market is cooling, in terms of competition, as a result of higher interest rates.
But what does that mean for migration? Well, for migration, we haven’t really observed any slowdown yet. Our latest data, just from last month, still shows the continued pace of migration out of more expensive areas into more affordable areas. And indeed, actually, it could even make more sense financially to look to move to a more low cost area. And these migrants, or people relocating for work, and thinking about buying a bigger home in Phoenix, for example, might be less interest rate sensitive because they might be able to sell a home, cash in on their equity.
We know that cash sales have increased, not just in the face of rise in interest rates, but really throughout the last year. And part of that is because of this migration pattern that we’ve been observing, of people selling homes in these hot coastal cities, cashing in on the equity, and then paying cash for a property wherever they’re relocating. And these might be retirees as well; downsizing. But those are households that are not going to be as sensitive to interest rates.
So as the market cools, it also could make financial sense. We know that mortgage payments are rising about 43% year over year, once you combine the effect of higher home prices as well as higher interest rates. So that’s a huge hit to affordability for the typical home buyer today. But where you can save on housing is really by migrating, or looking to move to either a suburb or a place in the country that’s much more affordable.
Not everyone can work remote. Not everyone has those options. Certainly, renters don’t have those options. And that’s a serious concern that’s hitting millions of households right now as well. But for a lot of households that are looking to relocate, maybe take a new job, they might be more incentivized, I guess, as rates do rise, to still make that move to somewhere that’s more affordable.
What we did find when we surveyed households that moved during the pandemic, is that the majority were able to actually increase their disposable income by cutting down on their housing costs after they moved. So it might have been more expensive compared to a year ago, but for them, for that household, it was cheaper to buy in their new place than in their past place. So someone who moved from Seattle to Boise, for example, typically was able to save a little bit of money on housing even though prices were growing rapidly in Boise.
So that’s how that all fits together. We do think there’s still trends in remote work. Airbnb, just a couple weeks ago, announced that all of their engineers can work from anywhere. And we’re still seeing a lot of companies make these announcements. A lot of tech companies, in particular, are struggling to retain employees, there’s stock-based compensation that’s been hit as well.
One of the things that these tech companies can and are likely to continue doing is really think about, “Well, how can we give workers a boost in pay without actually increasing their pay?” And that’s allowed them to keep their current pay, but move to somewhere more affordable. So I think that’s also behind the strategy that a lot of these tech companies have, is if we could say, “Hey, you can work from anywhere. You’re going to increase your disposable income by quite a bit, even if we don’t pay you anymore and just allow you to take your income somewhere else.” I think that’s what’s happening still and partly behind some of these continued migration trends.
One of the other things with migration that we’ve observed, one of the exceptions to this pattern continuing throughout 2022, is the New York metro area. One thing that we’ve observed is that more people are looking to move back to New York. We know rents are surging. There’s a lot of people who maybe left New York last year, or during 2020, that are now returning to New York. New college grads that are taking jobs in New York. So New York is still likely to continue to see an outflow of residents on net.
But what we saw is that, basically, it probably peaked, in terms of the most people leaving, about a year ago. So the outflow that we are observing now, for the last few quarters, has not been as dramatic as it was during the peak. Now, that’s not true in places like LA, the Bay Area, DC. All of those trends of outflow continue to accelerate, continue on their pandemic-driven trend of more people leaving.
So it remains to be seen what’s going to actually happen. I know New York doesn’t have a lot of affordable housing or rental units, so that is pushing buyers and renters and households to their limits. And it could be a blip. New York is just not affordable enough to continue to retain people. And that’s, really, its Achilles heel. Great city for jobs, but ultimately housing is so unaffordable that more people just opt to leave.

Henry:
Well, that’s super cool. It’s New York, right? If you’re from New York, people just always seem to want to end up back there, man. You New Yorkers are interesting people.

Dave:
Not me. I grew up right outside New York City. I left right after college and have never been back. Not planning it either.

Henry:
Right. So we talk a lot, on the show, about supply and demand. And although things seem to be slowing down … like I took a look at our local market numbers recently and although supply, it has gone up percentage-wise, still, from a volume perspective, we’re well under the supply that we need to meet the type of demand that’s out there.
I’m interested to know your thoughts on how migration has played a role in supply and demand … obviously, huge during COVID … and how you’re seeing that change on a day-to-day basis now?

Taylor:
Yeah. So supply is really a major reason that explains some of the pandemic patterns that we’ve been observing and really even precede the pandemic. So the Bay Area was really strong in job growth during the early years of the 2010s, following the Great Recession. The Bay Area really came back strong. It was one of the leading metros. In terms of job growth, there was a boom in the Bay Area. And actually, more people were moving to the Bay Area than leaving, for several years, up until 2015.
2015 is basically peak Bay Area. And then what we saw happen was the tide was turning and more people slowly started to leave as the Bay Area just got too expensive. And it wasn’t for lack of demand … lots of people wanted to live in the Bay Area … it was for lack of supply. The Bay Area just wasn’t adding housing. And this is true across California, across most of the coastal cities, including New York, that, really, supply was just not keeping up with demand. And when that happens that pushes prices up too much, and eventually people just opt to leave or stop coming as well, to the areas that are more expensive.
So when the pandemic really accelerated these out-migration trends out of these expensive coastal cities, well, where were people going? It was largely the places that are building the most, places like Phoenix, Nashville, Raleigh. These are cities that have been developing lots of housing. In terms of per capita basis, they build dramatically more housing than these coastal cities. And as a result of increase in supply, it’s really just allowed the demand to come. It hasn’t tamed prices too much. We know that prices are growing fastest in some of these hot migration destinations. But if they didn’t build, or if they built at the rate of some of these other places, they would’ve seen prices spike even more. So the counterfactual is really just, they’re building a lot of housing.
Now, what’s hitting the market today is a little bit different than some of these longer-term trends with developing more land. These are places where it’s easier to build. They’re usually more lower regulation, more tax-friendly. So there’s a confluence of factors that’s really spurring on not only economic growth, but attracting people to move there. People like to go to places in Florida or Texas or Tennessee to start businesses, to work remote, not pay as much in taxes. So these are areas really just favorable for those who are untethered and able to move to these areas.
Now, one of the things that we’ve been observing is that, just in the last week, about 18% of listings that have hit the market have been forced to drop their price. And that’s because buyers are getting priced out of the market and there’s less foot traffic, less offers coming in, and sellers are just getting a little too aggressive in their pricing. And these sellers are having to drop their price to attract buyers, to get an offer that’s reasonable.
So we’ve been observing this really skyrocket. It went from barely any, just 9% a year ago, to more than double. It’s rising at one of its fastest paces that we’ve been observing in the last seven years. So these price drops are really how supply is having to react to higher interest rates and what’s going on with buyer demand up there.
The places that are building a lot of housing are adding some listings. But really, for every new house that is being built there’s still just as much demand to meet all of that new construction in these metro areas. So they’re not seeing dramatic slow down in prices as a result of all this supply that’s coming on the market.
The one exception might be Minneapolis, where they’ve been building a lot of multi-family permits. And as a result of their upzoning, they’ve made it a little bit easier to build multi-family rental units. And we’re seeing rents start to decline, year over year, in Minneapolis. It’s the one exception. There’s a few others where rents are about flat as well, but Minneapolis is notable for actually adding rental multi-family supply. And that’s having a real effect in terms of rents. I think that’s partly because Minneapolis hasn’t been a hot migration destination like some of these others. Places in the South, that are really seeing tens of thousands of people move there, are building a lot of housing, but they’re not able to build just so much housing that makes a large dent in affordability just yet.

Dave:
Taylor, can you tell us a little bit about the scale of this migration? Because you said that it started pre-pandemic and then it really increased. What type of absolute numbers are we talking here?

Taylor:
So the scale of out-migration that we’ve been observing throughout the pandemic … well, in terms of the largest metro areas, what we saw happen was that for every 100 people in a local metro area, these major metro areas were losing, pre-pandemic, about 1% of the population. But during the pandemic, actually, that accelerated to about 0.4%. So really, this was a major … like a quadrupling of acceleration of out-migration in these major metro areas. The smaller metro areas that really attracted a lot of these migrants, also saw their in-migration rates more than double.
And just to give you a specific example, the Bay Area … which has been notable for this accelerated out-migration … in 2019, before the pandemic, about 62,000 more people left the Bay Area than were looking to move into the Bay Area. But during the pandemic it was more than triple that, at 182,000 more people left the Bay Area than moved to the Bay Area. And that was just due to domestic migration. It’s even worse once you factor in the impact of slowing immigration rates that have been happening for the last five years.
So the scale of this reshaping throughout the pandemic is quite dramatic and having a real impact in some of these markets. The same is true on some of these smaller markets, they’ve seen pretty dramatic increases. Phoenix is one of the fastest growing Metro areas, Austin as well. And that is showing up clearly, in terms of real estate prices, rents, even the market for used cars … that feeds into some of the record levels of inflation we’ve been observing recently … is even driven by this. If you think about people leaving urban walkable areas … like Seattle, the Bay Area, LA, New York … and moving to these more suburban car-dependent areas, that creates a lot more demand for things like a second car for a household, and even gas as they are driving more. And that explains some of the trends in inflation that we’ve been seeing as well.
So we know that inflation has been a major issue throughout the last couple years of the pandemic. And in particular, inflation is rising more than 10% in some of the hottest migration destinations. So one thing that we observed is there’s been a strengthening relationship between migration and local inflation. And part of this comes from, again, rising rents.
Rents in a place like Tampa, that is one of the fastest growing metro areas that we are tracking right now with Redfin data, inflation is over 10%. And rents in particular are over 13%, according to the BLS, the CPI data. We also track rents at Redfin for homes that are available to rent today, and rents are up more than 23% in Tampa. So the migration is also having a pretty dramatic increase in just the cost of living generally. That also feeds into the market for cars, the local market for cars. Which, auto prices have been increasing substantially as well.
So that’s basically everything that we’ve been tracking, as it relates to inflation. There’s always been a somewhat relationship, weak relationship, between inflation and migration for the last decade. But the pandemic dramatically increased that, where now more than half of the variation in local inflation is explained just by the migration patterns over the past year. So if you’re trying to understand how different communities are being impacted by inflation, by rise in interest rates, by rise in rents, migration is really key to understand that phenomenon.

Dave:
That was fascinating. I read that article you published about those correlations. And given what you just shared with us about the scale of this issue, or these patterns, do you think there is a legitimate concern or a legitimate chance that these popular destinations become just as expensive as the places that the migrants are leaving?

Taylor:
I think affordability is an increasing concern in these destinations. That said, Phoenix will almost always be cheaper to live in Phoenix than LA; which is one of the main places that people are coming from when they’re moving to Phoenix. The same is true with Austin. As you look at Austin as maybe a substitute for the Bay Area, Austin’s likely to remain cheaper than the Bay Area for the next decade. Even though prices are growing substantially faster in Austin than they are in the Bay Area, it’ll take a long time before prices actually were to surpass these coastal cities. Austin is also building a lot of housing, so is Houston, San Antonio. These other places that a lot of people are moving there are still relatively affordable, even though they’re appreciating a little bit faster.
The thing is, though, that there’s still a premium to live in some of these more expensive areas. The labor tends to be a little bit more productive, that commands higher wages. So these other patterns might keep … the beautiful weather in California might always make California a little bit more desirable than Arizona. So there are these longstanding premiums that people pay that are likely to continue. So maybe there’s a discount to living in Phoenix over LA, and that discount is shrinking but it’s still likely to be a little bit cheaper.
There are some exceptions, where so many people have moved there that have just pushed up prices. I think Austin might be a good example for comparing Texas metro areas, where Austin has just gotten so expensive that it’s starting to turn away a lot of people who maybe wanted to move to Austin and instead are now considering Dallas or Houston, in that area.
The other thing is, we mentioned politics as playing a role in migration too. Now, a lot of the political response during the pandemic had to do with things like mask orders, whether schools were open, businesses were open. And that influences people’s decision to move. But that’s not to say that politics is becoming less of an issue as we move past the pandemic. Politics will continue to be an issue, as there is things like abortion rights and things like policies related to schools. I mean, there’s still a lot of ways that politics is becoming more ingrained and connected to where you live.
And this phenomenon of the big sort, of people moving and self-sorting into areas that share their political beliefs, I believe was accelerated during the pandemic and really is showing no signs of going away. It still plays a large role in where people want to move. So some of the areas that are most unaffordable, like the Bay Area, these coastal cities, tend to be very liberal. And some people might not want to move where it’s more affordable and more conservative, where land is more plentiful. These other factors that might go along with that still influence the migration patterns as well.

Henry:
That’s awesome. So you talked briefly before about a market like Minnesota, where rents actually came down because of the increased volume in multi-family. And a lot of the people that listen to the show are looking to invest in real estate by buying and holding property. Typically, rents go up with the rise in price of real estate, but also they lag a little bit behind because there’s things like leases in place that have to come due before you can raise rents and all that.
So what have you seen, as far as rents, as it relates to prices, as we’re starting to cool off a little bit? Are rents still on the rise or are you seeing that cool down as well, with the real estate prices?

Taylor:
Yeah. So the rental market is a little bit trickier, because most of what we are observing is asking rents. What’s on the market today? How much are the rents being asked for all of the available inventory? By that metric, we are seeing that asking rents actually slowed for the first time in April in more than a year. So it’s been accelerating, climbing. We’re starting to see some signs that maybe that’s cooling off a little bit.
We do expect that rent price growth … which was 17% at its peak in March and now is 15% in April … will continue to slow, as affordability and these other factors with inflation really weigh on how much people are able to spend, demand is cooling off generally. But, overall, I think rents are likely to continue to increase and maybe even outpace some of what we’re seeing in for sale real estate prices. I do think people who are just staying in place, renewing their leases, they’re still experiencing pretty strong rent growth but definitely not as dramatic. I think that’s also expected to continue to be quite strong.
One of the things with inflation being so hot, what it is, that’s also playing a driver in terms of keeping wage growth being pulled up as well. People are demanding wages to increase in tandem with their cost of living. What’s most top of mind for people is really rents as well as gas prices, those are the more salient measures of inflation that people are feeling that drive them to ask for wage increases as well. So the growth of wages is also contributing to some of this rent growth.
And there’s also an increasing pool of higher income renters that are in the market, that maybe are turned away from real estate because of higher interest rates as well and opting to maybe even rent a single-family long-term rental. We’re seeing a trend in that as well.

Dave:
You’ve generally said that a lot of the markets that are receiving net positive migration are Phoenix, Austin, Tennessee, sort of the Southeast, South area. Are you seeing any patterns about the submarkets that you can share with us? Are people moving to the suburbs? Are they moving downtown? Is it all spread equally?

Taylor:
Yeah, we are seeing that buyers overall flocked to the suburbs. I view it as a ripple effect, where a lot of renters maybe were renting an apartment and purchased maybe a condo or a home a little bit further away. It’s not like the person living downtown moved to the exurbs, it’s more like they moved a little bit further away from their urban core, those households that were at the edge of the city are moving a little bit further out into the suburbs.
So we see basically everyone taking a step a little bit further out. As people commute less, even if they’re still going to go to the office, if they only commute in two or three days a week instead of five, they can basically increase their commute and not really commute anymore as a weekly basis, but really afford a lot more real estate.
I ran some numbers in Seattle during the last year. And what I found was that the typical person in Seattle could effectively double their home size, for the same price, by just moving out to the same commute distance, 50 minutes of a commute instead of 30 minutes. But if they only do that two days a week or three days a week, they’re still going to be commuting a little bit less, on average, than they did before the pandemic. They would demand a home office. So we’re seeing that suburbanization really drive a lot of what happened during the pandemic.
Now, that also came with not an increase in supply, that pushed up prices a little bit faster than the urban core. So the natural feedback loop is, “Well, I would like more space, but I’m not willing to pay that much for it.” So that’s slowing down a little bit of that suburbanization trend, as the suburbs have been very hot. And a lot of people are still opting to buy condos in urban cores, but definitely not as competitive and still not as hot. Even as certain markets have opened back up and we’re seeing more people commute, we haven’t really seen the real estate demand completely bounce back in the urban core at the same time.

Dave:
One thing we’ve talked about on the show, Taylor, a few times, recently, is the so-called lock in effect, or the impact of ultra low interest rates over the last few years and how that might be impacting homeowners decisions to sell. And a lot of what we’ve talked about has been based on your research.
So I’d love this opportunity to ask you if you can explain to our listeners a little bit about the research you’ve done about the lock-in effect and what you think the impacts for the housing market might be?

Taylor:
So the lock-in effect is something that researchers have known about for a long time; which is basically when someone has a really low interest rate they’re going to be less incentivized to trade up maybe a 4% rate for a 5% or a 6% rate on a new home if the rate that maybe they refid to, or when they purchase their home, is just so much lower than the prevailing market rate.
Now, the latest that Freddie Mac has said rates are at is about 5.25%. But we know that more than half of homeowners have been able to take advantage of low rates over the last couple years, and either purchase a home or refinance to a rate under 4%. So that’s half of all homeowners. In fact, more than a third of homeowners also have rates even lower than that, around 3% or under.
So there’s a substantial amount of households that are really going to face a dramatically higher mortgage payment, even for the exact same home price. So if you have a $500,000 home and you’re looking at moving across the street to another $500,000 home, and you have a 3% rate but now you would have to take on a 5% mortgage rate, your mortgage payments are just going to grow substantially. So that’s basically how it can disincentivize homeowners from selling their home and becoming a move-up buyer. Not only does that discourage buying a property, but it also takes out some of the supply that would maybe hit the market.
It’s a little unclear as to how many of those homeowners would have listed in the next year but now, because of the interest rate sensitivity, they might not opt to sell their home. I think the research is a little bit more mixed on how large of a role this will play. And certainly there are other strategies that households are using, such as switching and opting for an adjustable rate mortgage to reduce that challenge of trading a 4% for a 5%.
So there’s a lot of different factors at play here. As I mentioned before, someone who’s maybe selling a home in a coastal city and cashing in on half a million dollars of home equity and then buying in a more affordable area, they might be able to pay cash. So that might still contribute to some listings in the market.
But what we do know is that when rates are higher in the market and we have a substantial number of households that have lower rates, logically, you would expect some of those households to just be disincentivized from listing. And over the last couple months, as rates have been rising, we did actually observe that listings were not keeping pace. They were down about 7% or 8%, year over year, for quite a while. It was only this past week that we started to see a little bit more listings hit the market. And that could be maybe sellers who are thinking maybe home prices are peaking and they want to take advantage at the last moment for a strong market. Maybe what’s contributing to the listings also hitting the market.
But this lock-in effect is definitely something that will be top of mind for some households that are looking at what they can afford at today’s rates, and look at their current mortgage payment with a substantially lower rate and just think, “Well, I just think we should stay put for a little bit longer.” So that’s what we are seeing happen. And that tends to hit some markets a little bit more than others. If there’s markets that have a higher share of properties that have lower mortgage rates, that can also weigh on housing supply in those areas too.

Henry:
Awesome. We’ve talked a lot about people migrating away from coastal cities and even areas in the Bay Area; more people migrating out than migrating in. Are you seeing in the data that that’s impacting the market, where maybe home prices are coming down in those areas because there’s more people leaving than coming there? These really, really expensive markets, are they getting a little more affordable?

Taylor:
So, relatively speaking, home prices have not appreciated as much in these areas that are losing a lot of residents. That said, there’s a lot of other factors that contributed to the home price boom over the last couple years. Lower interest rates, as I mentioned, was a key factor in really allowing buyers to afford more house, and that’s been a big factor in pushing up prices. Also, demand for more space, demand to just be a homeowner and build equity; with demographics of millennials hitting that prime home buyer age increasingly happening every year.
So these other factors also did contribute to prices rising in places like the Bay Area or LA or DC. And certainly, the suburbanization that’s happened in all of these markets has tended to mask, a little bit, the outflow of people because there’s been a boom in all of these major metro areas in their suburbs. So even if the urban core has lost a lot of people, some of the suburbs of these areas that have lost people on net have actually gained quite a bit from suburbanization to offset a lot of that decline.
So you might not see it. If you’re a home buyer in the DC Metro area, where I live, and you’re looking in the suburbs, you wouldn’t think that more people have left the metro area during the pandemic because prices and competition have been wild. Say it is true in places around Southern California, as you move east, out of LA, into Riverside, as you go out past the Bay Area into places closer to Sacramento. All of those places have experienced a big boom in home prices. It’s really the most urban core of all of these markets that has seen, in some cases, rent declines, home prices declines. Spending on the exact property that you’re looking at, like condos in particular, have seen some declines throughout the pandemic. But then these other factors … investor activity and low interest rates … might have offset some of that.

Dave:
Given what you’re saying, is it possible … because you’re saying it hasn’t slowed down, but some of the other variables that have impacted housing prices, like low interest rates, are receding to some degree … that migration could continue to be one of the primary … or might be the primary driver of home price appreciation in the years to come?

Taylor:
That’s definitely true. What I think is that migration continues to be one of the most important factors in understanding what’s driving some of these real estate trends. In the 2021 census data that came out, what we saw is slower birth rates, slower immigration rates, and higher death rates from the pandemic. And it was domestic migration that was really the key variable in explaining all of the demographic shifts that happened across the country.
I see that continuing into 2022, even as interest rates rise. And it might make the difference of which markets are still competitive, not experiencing as much of a slow down. Markets in North Carolina, for example … there’s a lot of migration into North Carolina, into Florida, into Tennessee … from what I hear from agents on the ground there is that the market’s still pretty is pretty strong. I have a friend who put their home on the market in Charlotte last weekend and had offers. Pre-listing, there was a lot of touring activity nonstop, all weekend.
So compare that to some of the urban cores that are really expensive, like Seattle, where I know some other people who have been listing homes, and, really, there’s been a much larger drop off in the more expensive coastal urban areas. Those tend to be a little bit more sensitive to change in market conditions, like interest rates, or financial market conditions as well. So this has always been the case, that these more expensive urban core areas fluctuate a little bit more. The more affordable places in the Midwest tend to just be a little bit more stable, less volatile in general.

Dave:
Taylor, this has been super enlightening. But before we get out of here, I did want to ask you about some market conditions. You mentioned earlier today … and for anyone listening were recording this in late May … some data came out that showed that home sales declined pretty dramatically, and more than most people were expecting. What does that mean for the housing market? Could you help our audience understand how home sales impact the market?

Taylor:
Yeah. So what it means is that buyers are stepping back. They’re seeing higher interest rates, they’re seeing what their monthly payment would be or maybe how much home they can afford given today’s rates, and some of them are being priced out of the market. And there’s been other factors going on, markets that have a lot of second home buyer demand or new home buyer demand. We’re seeing also factors influence the market in both of those segments and pull back.
But overall, as buyers step back and we see home sales decline month over month now, for several months, and the market reacting to higher interest rates, that also will play a role in how fast home prices are growing. So we expect price growth to continue to slow. Price growth is already slowing. It may slow down all the way down to single digits. And we’ve been having double digit price growth for the last couple years now, hitting all the way up to 20%.
But as buyers step back, we’re seeing sales decline, we’re going to see less builder activity happening, fewer people just moving in general. So you might even see less supply in the market, if you’re just looking at new listings. Overall, homes will take longer to sell. We’re seeing that in some places, where the typical home is sitting on the market just a little bit longer. We’re seeing fewer homes selling within a week or two weeks, compared to a year ago. We’re seeing more homes that have been hitting the market, pricing a little too aggressively and having to drop their price, as I mentioned earlier.
And this is basically how markets always transition when rates change. So in 2018 we saw mortgage interest rates increased throughout that year by about a percentage point. And pretty much what you observed is the same thing that we’re observing right now. You saw price drops start to increase, homes sit a little bit longer, inventory become a little bit more balanced.
Now, it was still, throughout that time, a seller’s market. For the average home, there was still a lot more demand than there was homes hitting the market in most cities across the country. And that’s still true today. With the market even cooling, there’s really just not enough supply on the market right now to meet where the buyers are. That is at that price.
Now, as prices start to come down and react to higher interest rates, that might draw more buyers back in who are maybe on the sidelines. So that’s likely to continue to happen, as an adjustment, a recalibration, where the prices just need to really come down more in line with buyer’s budgets.

Dave:
That’s super helpful. Thank you for explaining that. I know you don’t have a crystal ball and you have a team there at Redfin who does these types of projections. So I’m curious, you said single digits is where you expect appreciation to be by the end of the year. Do you think, at any point, they’ll be going flat or declining in the next few years?

Taylor:
I definitely do think that there’s going to be some homes that see their values decline, there’s going to be some cities that see their values decline. But, on average, as I look across the country, what’s typical or what’s average for how homes are appreciating, I do think still we’ll see some appreciation, it just won’t be double digits, where we’ve been at. For the next couple years we really expect home price growth to not only slow down to single digits, but if inflation continues to be running hotter than 2%, 3%, when you adjust for the higher inflation you might see real home prices actually declining. Which would be something we haven’t seen in a long time.
So that’s my outlook. We are still seeing strong wage gains and other factors that are keeping the price level a little bit higher in some areas. I mentioned migration, as people are able to come in with higher incomes, that’s keeping prices growing pretty fast in some areas. But the higher interest rates really does start to weigh on the typical buyer that’s in the market right now.

Dave:
Taylor, is there anything that we haven’t asked you that we should ask you, and that you think it is important for our listeners to know? I’m taking your silence, that means that Henry and I are excellent hosts and we’ve asked only extremely relevant and important questions.

Taylor:
You guys are great hosts. So, I mean, there’s a lot of other trends we could go deeper into, regarding investor activity, second homes, there’s new construction trends. There’s a lot of things that we track here. We also track bidding wars. I don’t think I cited those stats very much at all, but …

Henry:
Are you tracking investors, hedge fund buyers?

Taylor:
So yeah, some of that would show up in our investor data. Overall, we track all of investment, like LLCs, that includes iBuyers, it includes mom and pop investors, but it also includes institutional investors. And our latest data runs through the fourth quarter of 2021, which reached a record of 18.4% of all US home sales.

Dave:
It sounds like we’re going to need to have you back, because those are big meaty topics that we would love to cover with you in more detail than we probably can in the remaining time we have on this show. So hopefully you’re willing to come back because you’ve been a wealth of information. I think I speak for our audience in saying that this is really valuable for all of us and we appreciate your time.

Henry:
Thank you so much.

Taylor:
Yeah. Thanks for having me on. It was great to be here and always love talking about migration and housing trends. And the great thing is, the market’s always changing and people need fresh perspective.

Dave:
That’s what we’re talking about. That’s why we’re here.

Henry:
Yeah.

Dave:
But Taylor, before we get out of here, how can people connect with you if they want to?

Taylor:
Yeah. So you can follow me on Twitter, I’m @TaylorAMarr. Or just go to redfin.com/news, and we put all of our research onto our blog there and release a wealth of housing data on our data center on that blog as well. So I recommend checking out any of those places and, yeah, feel free to reach out.

Dave:
All right. Thanks again, Taylor. We’ll see you again soon.

Henry:
Thank you.

Taylor:
Thanks for having me.

Dave:
Man, I feel like we just got taken to school.

Henry:
Man, that was a ton of information. But it’s cool to hear some of the actual stats and numbers behind a lot of the things we’ve been talking about from someone who lives and breathes that information every day. So it was super, super insightful.

Dave:
You know they’re a good guest, because I wrote out all these questions and I didn’t even need to ask half of them because he just proactively knew what to talk about and was just dropping knowledge on us the whole time.

Henry:
Absolutely, man. It was, by far, one of the favorite interviews I’ve done.

Dave:
Yeah. I mean all of our guests are great, but I really mean it when we should have Taylor back at some point. He was just saying these huge other topics that we need to get into at some point, like investor activity and bidding wars. So I have a feeling we’ll be seeing him again.

Henry:
I mean, absolutely. There’s so much shifting happening in the market from day to day, we could spend hours talking about each individual topic. And it’s all relevant, valuable information for people who are just your average everyday home buyer and investor. Man, super, super good stuff.

Dave:
Yeah. That’s why we’re here on On the Market, just trying to bring everyone this data and news about this constantly shifting market.
We are not going to do a crowdsource today because we had Taylor here. But in lieu of that, Henry, where can people find you if they want to connect with you?

Henry:
Yeah, absolutely. Best place to reach me is at Instagram, @thehenrywashington on Instagram. Or you can check out my website, which is henrywashington.com. Best place to reach me.

Dave:
All right. And if you want to connect with me, you can do so on Instagram as well, @thedatadeli.
For Henry Washington and me, Dave Meyer, this is On the Market. Thank you all so much for listening. If you liked this episode, please make sure to leave us a review. We really appreciate it. And we’ll see you next week.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub. And a very special 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.