Economic Outlook Symposium Outlook for Key Sectors II

SPEAKER 1: OK, I'm going to come up to the podium to introduce Daryl. So, Daryl is our next speaker. And she's going to be talking to us about the real estate market. Daryl is the chief economist at Redfin, where, you're not going to be surprised to hear this, she does research on the housing market.

So in thinking about Redfin a little bit, it turns out this is my favorite app for looking at homes for sale. And I don't know whether I'm extremely well-informed these days. I used it a lot back when I was looking for a home, like, seven or eight years ago.

And I have no idea now what the best app is. But I liked it the best back then. And I haven't really been looking hard now because now, of course, I'm locked into a really low interest rate mortgage. But I still think it seems like Redfin certainly is going to have a lot of great data.

And I'm really glad to have Daryl come up and share some of the things she's learned about from the Redfin data and just about the housing market in general. So, Daryl, please come up and join us.

DARYL FAIRWEATHER: Hi, everyone. Thank you for having me. It's good to be at the Chicago Fed. This is the fifth member bank that I've been to. I feel like it should have been first because I went to University of Chicago, so it was here the whole time. But this is my first time in the building. And I'm excited.

So I'm here to talk about the housing market outlook. Long story short is the housing market is messed up. I don't know if you've tried to buy a home or rent one recently, but it's pretty difficult.

And you can blame the pandemic. You can blame the Fed. But I'm not here to assign blame. I'm just going to tell you what happened.

So I'm going to start with for-sale housing. The biggest thing in the housing market that is distorting it right now-distortion is a technical term, not messed up-- is that many homeowners are locked into a very low mortgage. So in this graph, you can see that before the pandemic, before 2020, it was a good mix of different rates in the market.

Some people had rates above 6%. A lot of people had rates that were lower. Maybe they refinanced during a previous recession, got a good rate. But then when the Fed lowered interest rates, just about everybody who owned a home went to go lock in a 3% rate.

And everybody went to go buy homes, second homes even, they were buying during the pandemic. If you recall, during the pandemic, there were these stay-at-home orders. Remote work became much more ubiquitous. So we saw a lot of people buying homes during that time because their lifestyle was changing, but also because there were these record low rates that they could take advantage of.

So now we're at a point where the vast majority of homeowners have mortgage rates on 30-year fixed mortgage rate below 5%. And the prevailing rate right now for a 30-year fixed rate is close to 7%. So if you have one of those great rates, you're going to be spending hundreds of dollars more just to move into a similar priced home, if you wanted to move. A lot of people don't want to pay hundreds of dollars more just to get a similar valued home, so they're staying in place instead.

And what that has caused is a decline in new listings. I'll draw your attention to the y-axis, because I cut off a little bit here, so you can see it a bit better. But before the pandemic, we had about six million new listings a year. And now it's down to a little over five, so a big drop-off.

We had a big drop-off right when rates went up. It's recovered a bit, but really not very much. And this has led to a stark decline in home sales as well.

Now, home sales are a function both of supply, the amount of new listings coming on the market, also demand. And it's normal that when mortgage rates go up, we see less demand and fewer home sales. But what's not normal is the supply side part that's impacting the supply of homes on the market just as much as it is the demand. And that's why we've seen this steep drop off in sales and a decline in active listings here, but really not a big drop off in prices.

Prices dipped right when the Fed started raising interest rates in 2023. We're coming off a bubble in prices. I would say it was a bubble. It wasn't a catastrophic bubble.

But with prices going up, over 15% between 2021 and 2022, it was causing a lot of erratic behavior. People were getting into bidding wars, paying way above asking price, especially in places like Austin and Boise, these migration destinations. So it was natural that we would have a correction.

But interest rates have kept going up since 2023. But prices have recovered. And now prices are growing at about 4% a year. And that's above the overall rate of inflation. The housing market is still going up in value despite these high interest rates.

And if you look at it from the perspective of a home buyer, the median monthly mortgage payment, that's a combination of both home prices and the prevailing interest rate, has gone up tremendously. So back in 2021, you could get a typical home for about a $1,500 mortgage. And now it's closer to $2,500.

And I don't think a lot of people have $1,000 extra per month in their housing budget now compared to in 2021. And that's why so many people have been priced out of the market. But at the same time, there aren't homes for sale, so it isn't impacting values. Values continue to remain high.

All right, I'm going to talk a bit about new construction now because that also changed a lot since 2020. So, historically, new construction, it's made up a significant but small fraction of the homes that are available for sale. It was declining in the 2010s because we really slowed down new construction post Great Recession.

That recession started in the housing market. And the housing market took a very long time to recover. A lot of people left that industry and never came back. Also, zoning laws made it a lot more difficult to build. So we were experiencing slow new construction.

But now, new construction is making up a lot larger share of homes for sale. Part of that is because there are so few existing homes for sale because so many people are locked in. But also, new construction, it also benefited from low rates back in 2020. And those homes are still coming online right now.

And you can see that in this chart. This is housing completions. Housing completions have been rising since the pandemic, mostly driven by five plus units, so multifamily housing.

And that's mostly been happening in the South. I should give you some Chicago or Midwest details. For the most part, the Midwest looks like the rest of the country. Prices have been going up faster here more recently. That's because there wasn't much price growth during the pandemic, or not as much. And now it's kind of recovering.

But I'll talk a bit more about that in a bit.

OK, anyway, back to new construction. So even though housing completions have been going up, housing starts are already starting to decline. So those great interest rates that builders were able to take advantage of are long gone. There's not much demand for housing because of high mortgage rates as well. So they have slowed down the number of projects that they are starting.

Now on to the rental market. So you can see the impact of new construction, how it's impacting the rental market. I talked about how multifamily has been a big driver in new construction. And because there's been more multifamily coming on the market, asking rents have stabilized.

So at Redfin, we have rentals on our website. We cover a good portion of the market, but not all of it. And we can see how much apartments are being rented for. And as you can see, rents started stabilizing in 2022 and have not increased much. And we attribute that mostly to the increases in supply, also some slowdown in household formation as the economy has slowed.

So we are seeing more households deciding to rent. I mean, of course, if buying a home has become so much more expensive and renting a home isn't getting much more expensive, more people are going to decide to rent. I mean, it's good that there are more rentals available. But these people might have gotten shut out of the housing market too.

A lot of people got great mortgage rates during the pandemic, have become homeowners, are probably going to be homeowners for the rest of their lives. And a lot of people just didn't get in during that window. And now they feel a bit shut out of the housing market and deciding to rent.

So that's an overview of where we're at. I'm going to go back just to prices just to talk a little bit more about what's been going on in the Midwest relative to the nation. So this is a national prices-- the difference between Chicago and the rest of the nation is that there wasn't this huge increase during 2021 in prices in the Midwest.

The Midwest was not a place that people were flocking to as they were leaving coastal California or New York. Most of those people went down to the South. So prices didn't go up so much then. But now they're going up more now. And the same is true for rents, that there wasn't this increase in 2021 in rents in Chicago or Milwaukee. But now they're seeing pretty steep increases in rents as a catch-up effect.

But on to my predictions for the next year. So we think, at Redfin, that pent-up demand will lead to more home sales than we've had, which is great, but not as many as we would like. And many would-be homeowners are going to opt to rent instead, because we also think that the rental market is going to be pretty stable.

So we're predicting home prices will rise 4% in 2025, similar to what we're seeing now. We're anticipating that mortgage rates will remain near 7%. If you asked us three months ago, we were optimistic that mortgage rates would fall in 2025.

But now with tariffs on the horizon, tax cuts, we're a bit more pessimistic about rates falling. We're thinking that the market is interpreting that rates are going to stay the same. And we're going to go with that too, which means that affordability is not going to get much better, prices going up, mortgage rates staying the same, affordability will slightly worsen for first-time homebuyers unless there's a big increase in their incomes, which will make 2025 more of a renters market.

We are seeing that there's still vacancies in the rental market, especially in the South, where there's been a lot of building. And those property managers are going to give incentives to get people into those buildings, is going to draw more people into the rental market or keep people in the rental market instead of becoming first-time homebuyers because buying a home for the first time is very expensive.

Another trend that we think will be increasingly important is climate risk. We have already seen that insurance costs have gone up significantly, I think 30%, in the last year in Florida. Texas is close behind. And that is already having an impact.

Florida was this huge migration destination during the pandemic. But now Florida home prices are much higher.

Cost of living is higher. It's had faster inflation than the rest of the nation. And now insurance costs are going up.

Also, HOA dues have gone up.

A while back, there was a condo collapse. And a lot of new regulations on condos have caused a rise in HOAs. And it's not exactly related to climate change, but that condo collapse was caused by erosion. And then there was a regulatory response. And I think we'll see more of those types of events where we realize that housing needs more maintenance.

And it's going to become more expensive to do that maintenance, more expensive to insure, and that will lead to less attractive homes in those risky areas. That's a Florida problem, but it's also a Midwest problem, a Chicago problem. Chicago does have flooding. Its infrastructure, especially with its sewer system, is not ready for climate risk, especially on the South side, too.

So even in places like Chicago, we're expecting to see more of a divergence in home values depending on what those climate risks are. And if you're curious about what the climate risk is for your home, you can go look it up on Redfin. We have risk scores from first street for flood, storm, heat, wind, air quality. I think I'm getting all those right.

So we think climate is going to be an increasingly important thing in the housing market. Also, we think that there's going to be a reversal from the flight from city centers. During the pandemic, a lot of people left the urban core, went to more rural and suburban areas. They were leaving because of remote work. But also, there has been some sentiment that urban cores aren't as livable as they used to be.

But recently, we've seen a reversal on that, too, where there's been more of a push to make urban centers more attractive to live in. So we think that that's going to be successful. And we might see a reversal of that there, too.

I know I went through all that really quickly. But I wanted to leave lots of room for questions because that's always my favorite part.

SPEAKER 1: Great. Thanks. All right, I'm going to invite you, again, to put your questions into Pigeonhole. And let's start, though, with my questions.

So I guess I want to know about-- well, let's start with this. So interest rates are supposed to come down some, I think, is in the forecast. I think it makes sense to me that that's going to lead to greater activity in the for-sale market for the reasons you mentioned. Can you talk about possibilities for-- or talk a little bit more about how it's going to affect the rental market?

DARYL FAIRWEATHER: Yes. So we're actually anticipating that mortgage rates for the 30-year fixed rate will stay pretty much where they are. And part of that has to do with the long-term outlook for the economy. So that's pretty opaque. So our guess could be wrong.

But assuming mortgage rates stay high for the next year, it's going to push more people into the rental market simply because it's going to remain more expensive to buy a home relative to renting one by a significant amount. The reason we still think there's going to be an increase in demand in the for-sale housing market despite renting being a better deal that you can't rent all the homes that you would want to buy. A lot of the homes that are for sale tend to be single family and are more difficult to rent.

A lot of people want a place that they will be able to stay in long-term. They don't want just a one year lease. They want something they can build a family in. And also, people recognize that rents, although they are stable now, could go up in the future.

So we still think that there are people who are going to want to buy homes next year. They've been waiting for three years thinking rates are going to come down. They have not come down. So even that game of waiting, we think, is up. And people are just going to come back to the market even if rates don't come down because there's no reason to wait if there's no forecast that rates are going to come down.

On the renters side, so we're thinking there's going to be more people in the rental market. But it's not going to push up rents, at least not this year, because there is that excess of supply. There are vacancies. We see that especially in the South.

But in a lot of cities and states across the country, zoning has been liberalized. It's become easier to build like ADUs. And so an ADU in the backyard of single family home, that could be a rental unit, take a lot of pressure off of the bigger apartment complexes in terms of how much demand they are bringing in.

So for all those reasons, we think there's going to be more demand for rents. But rents will still stay stable. More demand for homes, despite it being objectively less affordable because people still have that desire for homeownership long-term.

SPEAKER 1: Great. Thanks. All right, so the two top votes questions were ones that I also had. I'm going to start with this one. Oh, keeps moving.

What is the impact of corporate ownership on the availability and cost of housing? I think there have been some stories about the rise of single family rentals, if you want to weigh in on that development.

DARYL FAIRWEATHER: Yeah, I wish I had the chart here. But, basically, what the chart looks like is that the share of corporations buying homes has been increasing. It's been increasing since before the pandemic. It increased during the pandemic. When interest rates went up, it fell because investors are pretty savvy and one of the quickest to react to changes in profitability, rents, interest rates. But it's going back up again now. So we think that corporations buying homes is going to continue to be a growing part of the housing market, the single family housing market and multifamily.

And part of that is because fewer people can afford to buy homes. If fewer people can afford to buy homes themselves because interest rates are so high, but there's somebody who has cash who will buy it out and rent it to you, then that creates a marketplace. So I think that this narrative that investors are the problem is incorrect. Really, the problem is the shortage of housing, the lack of affordability when it comes to buying homes for firsttime homebuyers is keeping people in the rental market and creating this market of single family home rentals.

But right now, it's a lot cheaper to rent a single family home than it is to buy one. So those people, I think, are probably OK with this arrangement, but would probably prefer that rates be lower so they could just buy it themselves instead of paying an intermediary.

SPEAKER 1: Great. OK. Next question is about-- this is one I get sometimes, too, so I want to know what you think. So does Redfin expect some reverse-- so we're based in the Midwest here. We're thinking about all the people leaving for the South and the West all the time. So lots of people want to know whether the climate change has the potential to reverse that.

So let me read the question. Does Redfin expect some reverse migration from places like the South Florida due to things like climate risks and rising insurance prices?

DARYL FAIRWEATHER: Yes, I think, probably the first thing we'll see is just fewer people moving to Florida. And even on the margin, you're seeing this slightly. I live in Wisconsin. And there are a lot of people who spend their summers in Wisconsin, winters in Florida, but spend a little over 50% of their time in Florida so they don't have to pay income taxes.

And that can be a good deal up until the point that your insurance costs in Florida are going up, your HOA costs are going up in Florida. Maybe people will still try to rent. But I expect that rental costs will go up as those costs are passed on to renters, too.

So I think fewer people will find it as attractive to move to Florida. Will people move back? We've already heard stories of people selling their condos and deciding to move back, but still renting in Florida because they still like that mix, but not necessarily buying homes and committing long-term to that.

Miami, for the first time, saw outmigration in our data. We track where people are moving to and also match that with climate risks. And up until this year, people were overwhelmingly leaving low-risk areas like in the Midwest and some of the coasts to go to the South, which has higher climate risks.

But we have noticed that slowing down, in Miami, in particular, people are moving out of Miami. Part of that due to insurance costs and climate risks, also, just gotten really expensive. So I think Florida is heyday is in the past. That would be my prediction. Apologies to Florida.

SPEAKER 1: Well, I'm guessing you're choosing to live in Wisconsin, is that right?

DARYL FAIRWEATHER: Yes.

SPEAKER 1: It might be a little biased in terms of the benefits Florida possibly offers.

DARYL FAIRWEATHER: Yeah.

SPEAKER 1: So next question, although, I'm on board with that all the same. So the next question is another hot topic, is conversion of commercial to residential. So I'm going to read the question.

Is the flipping of urban office buildings to residences realistic in the next three to five years? Does it take government subsidies to make it happen? And very specifically, is the Chicago Fed going to have some new neighbors soon? Is that possible?

DARYL FAIRWEATHER: Yes. And this was a really hot topic, like 2022, as we were emerging out of the pandemic and commercial real estate was way down because of remote work. And the problem with converting commercial to residential is that commercial buildings are built very different than residential. A big office building like this, there's only one bathroom in the center of this floor. You can't have one bathroom per floor for residential.

SPEAKER 1: Two bathrooms.

DARYL FAIRWEATHER: Two bathrooms, excuse me.

SPEAKER 1: I know the secrets.

DARY FAIRWEATHER: But if you imagine sectioning off this floor into apartments, it would be very difficult. You'd have this big gap in the middle because apartments need to have windows. The plumbing would be all in the center, not on the sides of the apartment buildings. It would be very expensive to turn a building like this into residences unless you change the zoning laws and you allowed for things like single residency occupants with communal kitchens and communal bathrooms, which, unfortunately, we haven't seen a lot of innovation in zoning. So I don't think we're going to see a lot of commercial converted to residential unless the building just so happens to be a good candidate for that. But most buildings aren't, unfortunately.

SPEAKER 1: So follow-up to that. I mean, this isn't your department.

DARYL FAIRWEATHER: Exactly.

SPEAKER 1: So does that just mean that rents and commercial spaces have to go down?

DARYL FAIRWEATHER: Yeah.

SPEAKER 1: They're going to be continued to use commercial space in some way.

DARYL FAIRWEATHER: Yes. I think that commercial rents-- I haven't looked into how much they've corrected already. I know that they have a lag because of the way that their leases work. But I would expect that commercial rents would fall relative to residential rents because there's still that increase in demand for residential compared to commercial.

SPEAKER 1: Great. Thanks. Yeah, OK. So now we're going to get your opinion on Chicago in particular. So Chicago continues to lose population. I'm not sure whether the asker is thinking about the city of Chicago or the metro, but might be similar anyway.

Chicago continues to lose population and households to other regions. Those other regions have vibrant housing prospects. Will and when will Chicago housing prospects improve?

DARYL FAIRWEATHER: So Chicago rents have been going up this year. I think they're up 9% in our data. So it's not that there isn't enough demand given supply, at least in the rental market. In the housing market, I know that the suburbs of Chicago have been really popular since the pandemic.

Yes, people, on net, are leaving Chicago. I think that probably just has more to do with the economic opportunity relative to the cost of living and not so much a housing problem in particular. I mean, yes, if housing was cheaper, the cost of living would be cheaper. But I think if Chicago wants to keep people here, it's probably more about the job market and job opportunities than the housing market, because Chicago is one of the more affordable major metros in the country.

You can blame the weather a little bit. But Boston is just as cold as Chicago, so I don't think you can blame it on that entirely. I think part of it has to do with the taxes. Part of it has to do with the business environment and just the job opportunities.

SPEAKER 1: OK, great. Well, we've got one more upvoted, and then get to ask another question that I really want to. I'm going to upvote another question in a second, myself.

But we'll stick with Chicago for a second. What is the outlook for the multifamily market in Chicago? Seems that there is still a shortage in that market as well. Do you agree with that?

DARYL FAIRWEATHER: Yes. I think that when we're four million homes short, as a nation, so like everywhere in the nation should be building more homes where people want to live. In terms of Chicago, so Chicago has been going up in price this year. And I would expect for that to continue next year.

I think Chicago and the Midwest are probably going to outpace this 4% median price growth maybe by a percentage point or so, because the Midwest, in general, is more affordable than the rest of the country. And people are starting to realize that maybe they would rather stay in Chicago than go somewhere else.

The other thing that Chicago has going for it is good public transit. You don't necessarily need a car to live here. So I think that will be attractive to people. But I would pay attention to the labor market here.

I think the labor market is going to be the most indicative thing about whether people will come back, whether prices will continue to go up even more. Right now, I'm saying Chicago will go up faster in price just because I think that there's a bit of an affordability edge that Chicago has over other competing places.

SPEAKER 1: Great. Thanks. So now to ask a bigger picture question, which is more just about home affordability in general. So at the Chicago Fed, we're going to be looking at this really closely in our community development group in the coming year.

There's just been, with the huge increase in home prices since the pandemic, like child care, home affordability has been top-of-mind for folks. And we all know, as been mentioned, that the Midwest is the cheapest part of the country. But it's not like it feels super cheap all the same for a lot of people.

So I think there's a lot of interest now in trying to understand why home prices and rents have gone up so much. And then, what are the policy changes that come to mind that are at the top of your mind as you think about these longer term trends for improving rent and home affordability?

DARYL FAIRWEATHER: Got it. So there are a couple barriers to building more housing. One is interest rates. Interest rates being high is not helpful for the construction industry because they have to borrow to fund their projects. But that's manageable.

The other issue is labor in the construction industry. And with looming deportations, that could be something that really holds back construction from having a stronger recovery in the coming years. And then zoning and red tape, and the zoning and red tape are really the biggest issues to building new construction.

It seems like little issues. But where I live in Wisconsin, there's a planning commission that approves new housing. It has to go through them. It's just a couple of local residents who decide, hey, I think that front-facing garages are ugly. We should have them be side-facing.

But a little change like that means you can build 5% fewer homes on a lot. And if everybody around the country is making these arbitrary decisions about aesthetics, it can really limit housing. So I think the Midwest hasn't had the problems of California, hasn't had the problems of these East Coast cities because there hasn't been as much demand. And as demand increases because people are moving in for a variety of reasons, the Midwest really needs to get ahead of this issue and liberalize zoning and the approval process for building homes.

Less red tape, more liberal zoning, I think, will lead to much more sustainable housing growth here. But luckily, there's time. It's not like San Francisco where they've been ignoring that problem for 15 years, and just liberalizing zoning isn't going to be enough for them. But in the Midwest, that could be enough.

SPEAKER 1: Just because I'm a curious person, I mean, do you have specific red tape policies aside from zoning broadly or planning commissions broadly that you think are really key for getting out of the way of home development?

DARYL FAIRWEATHER: Yeah. So apart from turning single family zoning into multifamily zoning or mixed use is one. Putting caps on approval lengths, so instead of it taking months and months for an approval process to go through, limiting that to weeks. A lot of times, the approvals just get hung up on little issues and gets delayed, delayed, delayed.

But those delays cost builders real money. They're borrowing money to build these projects. And they have interest costs. So those can add significant costs, just the time it takes to get a project approved, getting stretched out.

SPEAKER 1: Great. Thanks. OK, so we've got some more questions here. OK, we've got a couple that are upvoted. So we'll go with that one. Thinking about first-time homebuyers. Are there certain policies that you think could be done or expanded to help first-time homebuyers buy a home?

DARYL FAIRWEATHER: So one thing that's usually proposed for first-time homebuyers are first-time home buying credits like down payment assistance or more favorable interest rates given through FHA. The issue with subsidizing demand for first-time homebuyers is that it can lead to higher prices.

If you're going to give money to first-time homebuyers, you're not creating new home-owner households necessarily. You're shifting demand away from wealthier buyers to maybe lower income buyers. But unless you create new housing, it's probably not going to help that much.

I think creating starter homes would be especially beneficial to first-time homebuyers in the long run. So, townhomes, for example, where the yard is smaller and maybe you share a wall with the house next door can be an attractive investment for a first-time homebuyer, much more affordable than a single family home on a large lot.

But a lot of times, those homes aren't legal to build. There are minimum lot requirements or setback requirements that make it so you can't build at that more affordable price point. So making it easier to build those kinds of homes that a first-time homebuyer could afford would help first-time homebuyers in a more sustainable way than just giving the first-time homebuyer down payment assistance.

Really, you could do both. But we've been so far behind on supply that I am cautious against putting more money on the demand side. It really should be going more-- not necessarily money, but making it easier to build more supply is really what the priority should be at this point.

SPEAKER 1: Yeah, so it sounds like you're not even thinking subsidy as much as just getting rid of the red tape that keeps supply from coming online. Also, it sounds like you're saying there's a certain type of home that--

DARYL FAIRWEATHER: Yeah.

SPEAKER 1: I think we often hear from builders that the higher priced point homes, they're more profitable there. And so it's also just hard to figure out how to make it profitable to build starter homes.

DARYL FAIRWEATHER: Yeah. So if you just gave builders subsidies for new construction, they would probably build more of the kind of housing that they're currently building, single family homes out in the suburbs, maybe the land is cheaper, so it's a little bit more affordable in that single family home in the city center.

But the person buying it is going to need a car. They're going to be spending more on gas. So you'd have to give them a significant subsidy to make that affordable to that first-time homebuyer who is being pushed out, and therefore, spending money on other things.

That's why I think focusing on building denser housing in the urban core where people aren't as reliant on cars, can use public transit would actually be more beneficial. And that requires zoning reform. It requires getting rid of red tape to make building that kind of housing cheaper and match market demand.

I see this where I am right now, that all the new construction is going on corn fields that used to be agriculture. But over time, that's going to create a problem because you're going to get more traffic. These sprawling homes, they're going to need cars. It's just going to add to more costs and not necessarily make it more affordable for the people who are buying those homes.

SPEAKER 1: OK, great. We'll go with one more question-- Or maybe not one more. I guess we've got a few more minutes.

DARYL FAIRWEATHER: OK.

SPEAKER 1: Unless you're--

DARYL FAIRWEATHER: No, that's great.

SPEAKER 1: --exhausted.

DARYL FAIRWEATHER: No.

SPEAKER 1: All right. So have you seen any movement-- this might actually be for if we have mortgage people in the audience. But with 30-year rates being so high, are people opting for 15-year mortgages or adjustable rate mortgages? Or do you have any insight on the mortgage market?

DARYL FAIRWEATHER: Yeah, adjustable rate mortgages have become slightly more popular, but not that much more. The 30-year fixed rate is still the most popular mortgage product out there, and has been since the foreclosure crisis. The spread between the 30-year fixed and 15-year is not that big. So it's just not that much more affordable to go down to the 15-year.

But we have seen more people opting for adjustable rate mortgages. And in the new construction market, builders were offering incentives like this thing called a buy-down, where they buy down your rate for two years, and then it resets. They were enticing people to do that back in 2022 and 2023.

A lot of those people are going to have their rates reset coming up, and they're probably hoping they'd be lower by now, but they're not. But yeah, a lot of people are just taking the rate now and hoping that they can refinance later, not necessarily doing the adjustable rate, but just taking the fixed and hoping they can refinance.

SPEAKER 1: Yeah, OK. Makes sense. All right, I think I'm going to bring-- I know that lunch is at noon, but I think we can handle a few more questions.

DARYL FAIRWEATHER: OK.

SPEAKER 1: Hopefully, you're not too hungry yet. OK, so this is one that's more about what's happened. So why do you believe that home values have not fallen as rates have increased and lumber prices have fallen? If it's demand driven, then why have housing starts not increased more dramatically? Does that make sense?

DARYL FAIRWEATHER: Yeah. Let me go back to these charts to help tell that story. So prices did go down when rates went up in 2023. But the reason they've recovered is because these homeowners don't want to give up their homes. During the pandemic, people were buying homes, they were buying second homes even, and those people got those really low mortgage rates. They don't want to give them up. But you would think that new construction would compensate for that, like, if there's still people wanting to buy homes and builders would step in, which they did.

But because of all the reasons we talked about, like single family zoning and red tape, they really couldn't respond as fully as demanded. Also, labor is not something they can just ramp up overnight. So although new construction has increased a bit, and it's become a much more significant part of the homes for sale, it hasn't really reset home values.

New construction is more expensive than existing homes. They're not building new $200,000 homes anymore unless it's a multi-family. There's no new $200,000 single family homes. But you can still find those older homes like that in the Chicago suburbs.

So it's helped a bit. But it hasn't been the perfect match for what people really want, which I think is why-- and existing homes make up such a huge portion of the market, or at least they have historically, that it hasn't allowed prices to correct that much. And going back to this price chart, which I'll go to here, the big adjustment in homebuyer costs for home payments happened between 2021 and 2022.

And since then, prices have stabilized enough that the mortgage payment hasn't increased all that much. Right now, it's up, I think, about 3% from last year. But that's similar to the rate of inflation.

Since interest rates went up, although home values have gone up, it hasn't gotten meaningfully more expensive since then. So I guess that's all to say is that we think that home prices do reflect these 7% rates already. If you look at the sale to list ratio, it's at about 99% right now. So sellers and buyers are on the same page.

It's not that sellers are holding out. They're pricing their homes appropriately for how much demand is there. So that, actually, is good for next year because when sellers and buyers are on the same page, we tend to see more transactions.

SPEAKER 1: OK, we're going to keep going because we got two more minutes.

DARYL FAIRWEATHER: I love it.

SPEAKER 1: All right, I like this one from David. If you are a current homeowner, but want to move in the future, when will it make the most financial sense to make a move over the next five years?

DARYL FAIRWEATHER: So, for some, I think the big dilemma right now, let's say that you-- I'll try to use Chicago as an example. You live, let's say, in Hyde Park. And you work in Hyde Park. But let's say you got a--

Let's say you're a Chicago professor. You live in Hyde Park. You work in Hyde Park. You got a new job at Northwestern. And you're deciding, should I sell my Hyde Park home and move to Evanston, buy the same price house?

It'll reduce my commute by an hour. I'll have a better life. But it's going to cost me, potentially, $1,000 more per month in the monthly mortgage payment. You're probably not going to make that move. And you're probably not going to make it until interest rates come down enough or your commute gets so bad that you can't take it anymore.

Or I mean, if you don't care about being a homeowner, you might sell your home and rent in Evanston. But a lot of people don't want to do that. Once people become homeowners, they think it's a step down to become a renter again, because I think homeownership has this status in the United States of being upper class.

So I think a lot of people are either not going to move at all and just tough it out with their commutes or they're going to wait until they've paid off enough of their mortgage that they can take the equity and buy their next home with more cash, and so the interest rate difference isn't as big. I don't know if that's good advice. But I think that's a reality.

SPEAKER 1: All right. Well, it is 12:00 o'clock now. So it's time for time for lunch. We're going to be back in here to have some Chicago Fed experts talk to us in, say, 15, 20 minutes or so. But let's all thank Daryl for the great presentation and go get some food.