Consumers Need to Get Real About Rates: Redfin Economist

Millennials and others who are worried about interest rate increases from the current near-record lows need a reality check.

"People still bought homes when rates were at 18% in 1981," Nela Richardson, the chief economist for real estate brokerage Redfin, said at the SourceMedia Mortgage Servicing Conference Wednesday in Dallas. "Homebuyers are pretty myopic. They want the best rate possible. They want the rate their neighbor got three months ago."

There is a school of thought that rising interest rates will motivate those who are sitting on the sidelines to get motivated and get back into the market.

"I think buying a house is like having kids; there is never a perfect time," but some people might need an incentive — and there is no bigger incentive than the threat of higher home-financing costs, she said.

Even if the Fed raises short-term rates, Richardson thinks rates for the 30-year, fixed-rate mortgage will not go much higher than 4% for 2015 and will stay under 5% in 2016.

Housing was supposed to pull the U.S. out of its funk, and that is why the Federal Reserve kept rates low. The view was with low rates builders would build and buyers would buy.

And even now it is still hard to get builders to build and buyers to buy, the "most basic functions" of the housing market, Richardson said. So when we think about what is next for housing, "there's a lot going on but there is still a lot left to do."

The economy has been improving, but it is the slow pace of that improvement that is worrisome. There had been a 12-month stretch of the economy posting more than 200,000 new jobs per month, but in March that streak was broken.

Potential homebuyers do not like that. "When they see numbers like that, they get a little jittery," Richardson said.

Even lower prices at the gas pump have not motivated more spending. Consumers have been pocketing the savings and not spending it at the mall, holding down gross domestic product growth.

The strong dollar hurts exports, and that also affects GDP growth.

However, "consumers continue to be confident," Richardson said. "The oil price decline may not have made them spend more, but at least it made them feel better about their spending, so that's an improvement."

Wages have not kept up with even the minimal amount of inflation, and that affects current homeowners and their ability to keep up with tax increases and potential buyers and their ability to keep pace with price increases.

Another concern for the housing market is student loan debt, but this is not just a millennial issue, she said. Their parents may have refinanced a mortgage to help pay for their education. Those families may have lost equity in their home and cannot trade up or down into another property.

But challenges remain. For a long time housing has been driven by what happened in the macroeconomy. Now consumers are more driven by what is happening in their local economy.

The one thing that has been really consistent since the start of 2015 is "buyer demand has been off the charts," Richardson said.

She gave an anecdote about a Redfin agent from Boston who conducted an open house this winter even as the record snowfall was still on the streets. It drew 100 people, and the police had to shut it down because of the commotion.

Cash "is no longer king" in home purchases as traditional buyers are replacing investors. But in some hot markets, cash remains important. Competitiveness of the market is driving up prices, and there is a worry that the appraisal won't reach that value. So they are demanding down payments as high as 30% to 50%.

Others are doing short-term loans from friends and family to buy the home and then turning around and getting a mortgage, Richardson said.

So while 2015 could be the biggest year in housing since the bust, several variables including rising interest rates and the lack of inventory could derail everything. The number of homes for sale shrunk in March for the first time since September 2013.

While much of the discussion has been about how the economy affects homebuyers, little has been mentioned about how it affects sellers.

Among the likely reasons for the shortage is that many potential sellers are still in negative equity even as home values have risen in recent years. Even for those whose values have recovered, they have not reached a 20% level of equity yet, leaving them with little cash to put down on a house, Richardson said.

Even if someone is "downsizing" to a smaller property, that property could cost as much or more than their current home, she noted.