LOS ANGELES — Soaring mortgage rates knocked the housing market into a deep slump in 2022, and the prospects of a swift turnaround in 2023 look dim, especially with the average rate on the benchmark 30-year mortgage still hovering above 6%, or double what it was this time last year.
Shares in Redfin, which boasts it runs the No. 1 real estate brokerage site in the U.S., have lost about 90% of their value since hitting a high in early 2021. CEO Glenn Kelman recently spoke to The Associated Press about why he expects 2023 to be another slow year for housing. The Seattle native who’s run Redfin since 2005 also discussed the layoffs and other steps Redfin took last year and why many first-time homebuyers will struggle to find an affordable home for years to come.
Q: Was the housing slowdown last year avoidable? And is it healthy in the long-term, given how crazy it got in recent years?
A: It was unavoidable and absolutely salutary. Home prices were becoming completely out of sight for most American families, and this country has a divided attitude about that. I know we view it as a calamity when prices collapse, and obviously I wish that the process could be more gradual, but nonetheless, it’s necessary because there’s just no other way that millennials are going to be able to buy into the American dream.
Q: How do you see the housing market faring in 2023 after its downturn last year?
A: 2023 will be a standoff between buyers and sellers. Inventory hasn’t really increased. It’s up from historic lows in 2020, but only barely. People who got a 3% mortgage, either when they bought their home or when they refinanced it, aren’t going to give that up easily. Many customers we’re talking to about selling their homes decide to hold onto their house and rent it out instead because they want to hold onto the mortgage and get somebody else to pay the rent. That just means there’s going to be this huge swath of inventory locked by 2020-2021′s low rates for the next 30 years.
Q: How about prices?
A: Even though demand is low, inventory will be low too, and the housing industry will suffer through really low sales volume. The price declines that people are worried could be catastrophic are just unlikely to happen. So, yes, prices are coming down. But in 2008, 30% of homes were underwater. At the end of 2022, it was less than 2%. And even if prices fall another 5%, the number of homes underwater would be 2.2%. So there isn’t going to be anything forcing price discovery among individual homeowners. And that’s what usually leads to a faster, actually healthier correction.
Q: Where does this leave millennials and others who haven’t bought a home?
A: It’s still going to be hard for millennials to buy a home. When boomers were about 30 years-old in 1989, they owned 21% of the national wealth. Millennials at this same point now own about 6.5%. It’s certainly hard if you’re a millennial, and you’re in your late 20s, and in 2020 houses start shooting through the roof over the next two years, prices increase 40%. And if you’re on the other side of that, where you weren’t able to buy a house before that run-up occurred, housing prices have a long way to go down before you’re going to be able to get back in. And right now, instead of a 40% drop, we’re looking at maybe a 4%-5% drop in 2023 in home prices. That’ll provide some relief, but mostly the millennials really missed out on a bonanza.
Q: You had a couple of rounds of layoffs last year. How much smaller is your work force now than a year ago?
A: Our work force is about 30% smaller than it was before we started all of these cuts.
Q: You also shuttered your so-called iBuying business, RedfinNow, which made sellers quick cash offers for their homes. Do you think you’ve made enough changes to weather another possible down year for housing?
A: I think we’ve made enough changes. You can never guarantee that you’re not going to manage performance with one employee or another, or that there won’t be some kind of tactical maneuver to limit costs. We hope that we’ve made the changes that we need to make to adapt to this environment. I’ve now been in this seat 18 years, I think. I’ve seen it all. (The financial crisis in) 2008 was nasty, and it just makes me feel better prepared for 2023. I probably should have closed the iBuying business earlier. It shouldn’t have taken a housing market correction to realize how capital-intensive and risky that was.
Q: You’ve said you’re planning on generating your first annual profit in 2024. What's going to get you there?
A: The reckoning that we had in 2022 was to eliminate the iBuying business. We closed our own lending business and bought a profitable lender. So really, we’re just exposing a brokerage that has been profitable for a long time. So it’s addition by subtraction. The commitment we’ve made is that we’re going to generate adjusted EBITDA in 2023. That’s important because that means that we’ll be generating cash to serve our debt. And we’ll generate an overall profit, including stock-based compensation, in 2024.
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