STACEY VANEK SMITH, HOST:
2018 was remarkable for many reasons. But one of them was that it marked the 10-year anniversary of the housing crisis, a crisis which nearly took down the entire global economy. Ten years later, the economy has recovered. And housing has come back too, though a lot more slowly.
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UNIDENTIFIED MODERATOR: Good day and welcome to the Redfin Corporation Q3 2018 earnings call.
VANEK SMITH: Redfin is an online real estate brokerage, so this was just a run-of-the-mill typical earnings call. It went on for about an hour, with investors and analysts asking their questions. Earnings calls like this - usually pretty deadly. But there are moments of greatness, like this one, when CEO Glenn Kelman responded to this question about the housing market.
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UNIDENTIFIED PERSON: What are you watching for in regards to, you know, signs that headwinds are either, you know, getting worse or maybe abating?
GLENN KELMAN: The market was significantly better in October than it seems to be going into November and December. You know, we are not ending the year market-wide with a bang but with a whimper.
UNIDENTIFIED PERSON: Got it. Thanks.
KELMAN: God, I hope that isn't the last question (laughter).
UNIDENTIFIED MODERATOR: Thank you. And we have no additional questions at this time.
VANEK SMITH: This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. And all this week, we are looking at some of our indicators of the year. These are indicators that we thought had a special cultural or economic significance in 2013. Today on the show, the housing market - what is going on with it? Why? And what does it mean for the rest of the economy?
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VANEK SMITH: Today's indicator is 13 percent. Last month, the number of single-family homes that started getting built was down 13 percent from November of 2017. And homebuilder sentiment is at its lowest level in three years. And all of this made me think of that Redfin earnings call, so I decided to call up CEO Glenn Kelman and ask him about it.
So you think 2018 is going to end with a whimper (laughter)?
KELMAN: I do.
VANEK SMITH: Yeah.
KELMAN: It hasn't been a strong market so far. And then, October to November to December, it's been getting worse month by month by month.
VANEK SMITH: I mean, that sounds troubling.
KELMAN: (Laughter) I don't want to scare you.
VANEK SMITH: So Glenn says don't panic. There were a few very concrete things that happened to the housing market in 2018. The first? Rise of the rental. So this has been going on for years, but it kind of came to a head this year. After the financial crash, people were really skittish about buying homes. They wanted to rent instead. So the rental market started getting really hot, and rent started going up.
KELMAN: We became this landlord nation where people who were thinking about selling their home decided to rent it out instead because they could get such a high rent and where all the new construction was really focused on rentals.
VANEK SMITH: And eventually, there were just a lot of rentals everywhere. And this year, says Glenn, things kind of came to a head. There were so many rental units that some of them weren't getting filled. And so rent started to fall, even in cities where that traditionally almost never happens, like in New York.
And of course, as the rental market was heating up, and more rentals were getting built and prices were going down, even people who technically could afford to buy a home were like, these rents are really reasonable. Why would I buy? So reason number one that the housing market ended 2018 with a whimper? The rise of the rental.
Second thing that happened to the housing market in 2018? You could call it the "Green Acres" effect. People started leaving big cities.
KELMAN: Americans are moving into the center of the country en masse.
VANEK SMITH: Really?
KELMAN: I mean - oh, yes. I know you're from Idaho, but Boise is one of the hottest markets we have right now, Boise, Idaho.
VANEK SMITH: I know my parents just sold their house. And they're trying to buy a house, and it's apparently really hard.
KELMAN: See what I mean?
VANEK SMITH: Glenn says a couple of things are happening here. The first is that, you know, everyone is finally realizing that Boise is awesome. The second, though, is that technology like Slack and FaceTime means that people can work remotely. You no longer have to move to the place where your company is based to work there. So a lot of people are choosing to live in more affordable cities, and they're just working with teams that are scattered all over the country. And companies are increasingly fine with that.
The second factor, says Glenn, is the tax bill. This is the bill that the Trump administration passed last year. And part of the bill said that people in certain states could no longer deduct their state taxes from their federal tax bill. This included California and New York, states where taxes are really high. Glenn says shortly after this passed, he started to see people leaving those cities and states.
KELMAN: Think it's become a tipping point for many people to say, I've had enough of Los Angeles or New York or New Jersey, and then move to Ohio or Atlanta or Denver. And so past few years have seen the rise of the Second City, what you in New York would call flyover country, are the markets that are booming.
VANEK SMITH: I would never call it flyover country. I'm from flyover country (laughter).
KELMAN: I know you wouldn't (laughter).
VANEK SMITH: The thing is houses in these smaller cities tend to be cheaper than houses in big cities. So that means if you look at the housing market overall, the national housing market, there's just less money sloshing around. So even though some cities like Boise are seeing a housing boom, the national housing market is hurting. So that is reason number two.
Now, reason number three that the housing market ended 2018 with a whimper? Credit. So back in 2006, 2007, it was clearly way too easy for people to get credit. That has changed. But Glenn says it may have overcorrected because, he says, ever since the economy started recovering, he's seen this buildup of people who want to buy a house, really want to buy a house, but who cannot get a loan.
KELMAN: And the way that I experienced that is just on my way out of the office, we run these home-buying classes where we buy free pizzas for everyone and tell them that home prices are fairly low. And for the past four or five years, I would see people with their arms folded in the back, saying, I know that, but I can't get the credit. And they were mad.
VANEK SMITH: And Glenn says he just does not see this changing anytime soon.
KELMAN: Used to be that there was this real consensus that we have to house the next generation, and mayors would work with builders and create new tracts of suburban housing. And that consensus is gone. On the left and the right, everyone is opposed to zoning for more density, bringing in the cranes and building more housing.
And that's the real reason that millennials aren't settling down and are living in their parents' (laughter) basement and all the rest. We just had a real deep social commitment to housing people, and we don't have that anymore.
VANEK SMITH: The year the housing market ended with a whimper. This is freaking people out because the housing market tends to be a predictor for where the rest of the economy is going. So when the housing market starts to falter, people get really worried, including Glenn.
KELMAN: I was at a (laughter) bus stop and saw that GM was going to idle five plants and had that here-we-go-again feeling. And it's not like 2008 or anything close. But there is that sense that maybe housing is the first crack in the facade of the U.S. economy, that it could be weakening in a significant way going into 2019. And no one knows the answer to that.
VANEK SMITH: Still, says Glenn, there are a couple reasons for optimism. First, he thinks the Federal Reserve is likely going to hit pause on raising interest rates in 2019. When interest rates go up, of course it makes loans more expensive. And that especially affects big loans like home loans. So if the Federal Reserve does what Glenn expects it will do, home buying should get a boost.
And second, the job market is really strong. And by now, there's a backlog of people who probably want to buy a home but who've been holding off. And now those people are likely to have steady jobs and steady incomes. So those two things could converge in 2019 to cause a little home-buying boom.
All of this, says Glenn, will reveal itself in February. Glenn says there is this weekend, one weekend, when the die is cast for the whole year - Super Bowl Sunday.
KELMAN: That weekend is the weekend where the housing market either goes crazy, or it takes a nap.
VANEK SMITH: In February?
KELMAN: Yeah. It's sort of a Groundhog Day for the housing market. What I'll be watching that weekend is just how many people are touring houses and, on Sunday night, how many of them decide to make an offer.
VANEK SMITH: Glenn says by the time the new Super Bowl rings have been handed out, we should know if 2019 will be the year that the housing market ends with a bang or with a whimper.
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KELMAN: All right. Thanks, everybody. We'll see you next quarter.
UNIDENTIFIED MODERATOR: Thank you all for your attention. This concludes today's call. All participants may now disconnect.
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