Q&A: Redfin Economist on Remote Work’s Long Tail

Daryl Fairweather declared last fall that the Bay Area residential market had been “irrevocably changed” by remote work. Even though home prices have started going back up, and some areas are back to their pandemic peaks, Redfin’s Chief Economist sticks to her original assessment.

“Remote work just completely changed the economics of how the housing market works in the Bay Area because before there was this huge pull of talent to the area that earned very high incomes and that talent is no longer tethered to the Bay Area,” she said. “Those high home prices have to come down to meet demand where it’s at now.”

Fairweather spoke to The Real Deal about other pandemic-era trends that still impact the Bay Area and beyond, the migration destinations that are still hot (Florida) or not (Austin), and why insurance costs may be the reason buyers finally start caring about climate change.

How could a return-to-work effort impact demand in San Francisco’s residential market?

Even though these employers are calling people back to the office, they’re not going out and expanding their office footprints. That says a lot about where they see their talent located long term.

What needs to happen to get the city back to where it was pre-pandemic with prices?

I don’t know if that should be the goal. San Francisco has the most expensive housing market in the entire country. It’s extremely unaffordable for anybody who’s making even a middle class salary. So I think that the goal should be building more housing at affordable price points, not necessarily getting home values back up.

San Francisco needs to be a place where people want to live because that will attract development. So I think what the city should focus on is making San Francisco a desirable place to live even without tech jobs being the main draw. The city has a lot of great things about it: nature, culture, all that. There are obviously some other problems that might be scaring people away.

Do you think that negative perception is why the Peninsula has recovered more quickly?

The liveability of those areas is a draw, as well as the return to work. If you’re an executive at one of these tech companies, you’re probably going to want to be in the office, and anybody who wants to be on that trajectory is probably going to want to be in the office. There is still a draw to being where the action is. Some people make a great amount of money and can afford these high prices. They’re going to want to buy these homes because the expense isn’t that meaningful to them.

On the listing side, a lot of people who bought these homes during the pandemic, or even before the pandemic, were able to get record low mortgage rates and those people don’t want to give that up. So that has constricted inventory and also held up prices. There has been a pullback in demand, but there has also been a large pullback in supply. So that’s why home values haven’t dropped further and why they have remained elevated in some of these more desirable neighborhoods.

Eventually, people are going to want to move or are going to need to tap their equity and need to refinance, so I think it’s going to be a slow trickle of people who become unshackled by those golden handcuffs. I could see it happening in the Bay Area sooner than in other markets because the Bay Area tends to have a lot of people who have owned their homes for a very long time, so I could see people being more towards the end of their mortgages anyway.

Are first-time buyers coping with today’s higher mortgage rates?

For a while they were getting used to it, and then interest rates went up again. So they got another shock. Buyers are very rate-sensitive, so any small movement up or down is going to encourage or discourage them to come into the housing market.

So where’s the market going from here?

We’ve been waiting for mortgage rate relief. We haven’t gotten it yet. So it’s hard to see the situation changing. We’ve already hit the bottom of the housing market, and I think we’re going to continue at the bottom until rates fall. I think that’s true for the nation and for San Francisco.

Homes in the suburbs with three bedrooms, a nice yard, and a good school may sell for more than what they would have at peak. But for the most part, people are seeking out more affordable homes.

San Francisco is a city that has been losing domestic home buyers for a long time and that picked up during the pandemic. It continues to be true and, given how high interest rates are, sometimes the only path forward for people who live in San Francisco who want to buy a home is to leave the area entirely and go buy somewhere else. That’s going to continue to make San Francisco’s housing market weaker than other parts of the country, though if the tech sector has a boom year next year, that would mean that the housing market would probably have a stronger year than what they’re having now.

Where are people from the Bay Area moving?

Sacramento more than anywhere else. They’re gaining Bay Area residents, and that has driven up home prices in Sacramento. We just put out a migration report in July and Sacramento was the number two migration destination in the entire country, with most people coming in from the San Francisco area. It was the number two destination, right after Las Vegas, where the migration is overwhelmingly coming from Los Angeles.

Where else are people leaving in large numbers? And where are they going?

New York has sent a ton of people to Florida. It’s not one Florida metro in particular. It’s Orlando, Tampa, Sarasota [and] Cape Coral.

Are those second homes or are they leaving New York completely?

We don’t know that. But what we do know is that second home demand is lower than it was even pre-pandemic. It’s easy to get a second home when interest rates are at 3 percent. It’s a lot harder to do when they’re at 7 percent.

Are there any pandemic boomtowns that have fallen off the radar?

Boise became a bubble. Prices got so elevated that they became untethered from reality, and then they had to return to some kind of normalcy. Austin used to be a top migration destination. It doesn’t rank anymore.

Florida is still hot, surprisingly. I would think that given the return to work, and the decline in second homes, that Florida would be hurting right now, but they’re not. It’s still more affordable than Northeastern cities like D.C., New York and Boston, so it continues to attract people, despite all the natural disaster risks and the fact that prices have gone up a lot since before the pandemic.

When could we expect to see climate change impact sales in Florida and other coastal areas?

I believe that they will start registering it when it shows up in their insurance bills. I just put out a report about how insurance quotes went up 20 percent from last year, and they went up 35 percent in Florida. So I think when people start to financially see the costs of living in a place that has more risk, they’re going to make different decisions, because ultimately the thing that’s top of mind for people is affordability more than long-term risks, like natural disasters.

What generational trends are you seeing?

Baby Boomers are a very large generation, and so are Millennials. Baby Boomers are either going to be downsizing, or they’re going to be staying in place. So we’re paying attention to which avenue they choose. People were choosing to age in place more and more often, except during the pandemic it reversed. But now it’s probably back to normal where people are staying in their homes longer.

Millennials, a good portion of them, were able to take advantage of the record-low mortgage rates and buy their first homes during the pandemic. But some people did not, and they may never buy a home. So that’s something that we want to investigate. We just put out a survey recently that showed that one in five millennials feel like they’ll never own a home.

Gen X is interesting because they’re going to be the empty nesters. Are they going to hold on to their single-family homes or are they going to try to cash out some equity earlier? Are they going to age in place like Baby Boomers did? I think that’s something we should look into.