Digging Deep into Redfin’s 2022 Predictions

Back in November, Redfin came out with their top 10 predictions, as reported here. Let’s dive into it:

Prediction #1: Mortgage rates will rise to 3.6%, bringing price growth down to earth

This makes sense. Rates at one point were in the low 2% range, which is practically free money. Typically, there is a correlation with interest rates versus how the economy is doing. As of November of 2021, unemployment rate is at 4.2%, down from the peak in April of 2020 at 14.8%. With rising rates, it does mean a change in buying power, especially for the First Time Home Buyer market. Keep in mind borrowers qualify for a set dollar amount each month towards housing. Of that dollar amount, part of it is principal and part of it is interest (imagine a pie graph). The higher the interest, it eats away from the pie, which means less towards principal, which is what the purchase price would be. In Los Angeles, because we have so many different neighborhoods at a variety of price points, one could just shift their buying focus to more affordable neighborhoods. For example, a buyer originally looking in Granada Hills might just shift over to Mission Hills or someone looking in Hancock Park might shift over and looking in Sycamore Square. However, the lowest priced tier of buyers would be in trouble if there is no other neighborhood to go.

Prediction #2: New listings will hit a 10-year high, which will hardly make a dent in the ongoing supply shortage

Now is a good time to sell. You have Baby Boomers ready to cash out and retire, millennials who live in condos and ready to expand their families, and other life events that will encourage people to move. More importantly, because wages aren’t keeping up with home prices, it will force those move up and move down buyers to sell their existing home to get the extra cash. But even so, inventory is coming from such a low place, I agree that it isn’t going to make much of a difference other than instead of 10 offers on a property, it might be 3–7. On our latest listing in Chatsworth, which was launched on December 29th of 2021, we still received 8 offers.

Prediction #3: Rents will increase by 7%

In high cost and tenant friendly areas, I won’t be surprised if it is closer to 10% or more. People are on the move and with that comes quick housing needs. Plus, there will be a surge of new tenants as the mortgage forbearance comes to an end. Those homeowners will sell their home and need a place to go. With areas like Los Angeles, where mom-and-pop landlords got burned during the COVID pandemic, some will choose to either no longer be a landlord and sell altogether or reinvest out of the area, creating an even lower supply of rentals. For those tenants under rent control paying below market rents, there is no incentive to move, thus that inventory remains off the table for those searching.

Prediction #4: Homebuyers will relocate to affordable cities like Columbus, OH, Indianapolis and Harrisburg, PA over the Sun Belt

This is a given. People can work remote and keep a good portion of their original salary, allowing them to live like royalty. Plus, if they sold their equity rich properties, they could come in with cash, making it an easier transition. On a more micro level for Los Angeles, it is equivalent to people moving from the Westside to the San Fernando Valley. You get more for your money and with developments of new shops and restaurants happening, the only “concern” really will be weather.

Prediction #5: People will vote with their feet, moving to places that align with their politics

It certainly feels like the divide between red and blue continues to be greater. Plus, people naturally like to be in tribes. Because of this, people are going to want to move to areas that align with their ideals. That can also vary by city. For example, Texas historically has been a red state, but Austin is a blue city. So, people from areas like New York and Los Angeles who want a more affordable place to live (like Texas) but needs to be at least in a city where it aligns with political principles (such as Austin).

Prediction #6: Condo demand will take off

This is an affordability and density game. A buyer can’t afford a $1,000,000 home, so they will compromise on a $400,000 condo. Plus, with new building code guidelines allowing for multiple dwellings, the inventory should be coming down the pipeline.

Prediction #7: Homebuyers will take climate risks seriously

I believe there are two parts to this. The first part is just being environmentally conscious of what’s going on in the world and people wanting to do their part. For example, driving Tesla vehicles, solar panels, and drought tolerate landscaping. On the other side, there are concerns about floods and fires. This brings up what can be a very expensive item, which is insurance. In high fire zones, many insurance carriers have declined coverage, forcing the state to come in with their insurance options. This affects Buyers’ bottom lines and even qualifying.

Prediction #8: Housing policy will become central to political battles about climate change

This will be interesting because no one wants to pay out when there is a natural disaster. That goes without saying. But that will also result in new building codes. I wouldn’t be surprised in high flood areas it will be required to have sump pumps for example. This will just increase the cost to developers, which will be forced to pass on to home buyers and more building in the luxury sector, where the cost of that sump pump is the same whether it is a $500,000 or a $5,000,000 home.

Prediction #9: iBuyers will focus on perfecting a niche service instead of market domination

We must take this prediction with a grain of salt because Redfin has their own iBuying service. With that said, they are correct. Zillow’s iBuying Program flopped, losing thousands of dollars per transaction. Just like a lot of businesses, niches get riches. iBuyers are just another cash investor who needs to figure out what kind of properties work for them. Maybe it is price point, specific locations, or maybe even the type of property. Generally, the best deals are the ones that are more complicated. They could focus on properties with liens, permit issues, etc. where they have the capital to correct the issues with the right staff and resources and buy the property at a good price. The more problems you can inherit, the better the price.

Prediction #10: The DOJ will crack down on how real estate agents are paid

Even with rising prices, the percentage of commission paid to agents hasn’t changed much. Of course, I’m going to be bias because this directly correlates with my income, but we will see what ultimately happens. One potential outcome that Redfin points out is that buyers might have to pay for their own agents outside of the transaction. This is going to be detrimental because (1) it is going to exclude buyers who can barely afford the down payment and closing costs as it is and (2) it just may encourage more dual agency (one agent represents both sides) which isn’t always ideal either because of conflict of interest on who the agent truly represents.

With every housing change (such as the pandemic and the housing meltdown of 2008), we tend to learn more and more. This gives us insight and makes things easier to predict going forward. Chances are, most if not all these predictions will come true, but we will see.