“Plan B is to drink our own urine,” Redfin CEO says of mortgage rates

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Mortgage rates have fallen over the past few weeks. That was good news for the mortgage industry as buyers flock to get rates while they are lower. The latest data from the Mortgage Bankers Association shows that mortgage applications rose by 17% in the week ending August 9. Refinances, which have been weak as rates have remained high, rose 35%.

Last week’s Freddie Mac Primary Mortgage Market Survey pegged the rate at 6.47 percent for a 30-year fixed-rate mortgage, the lowest level in more than a year. Many industry watchers hope this is the start of an easing that will send buyers back to the table. Although April through October is traditionally the hottest period for home sales, this season has been weaker than usual. Existing home sales data for June from the National Association of Realtors showed sales fell 5.4 percent year over year. While some of this can be attributed to higher prices, the cost of a mortgage weighs heavily on the minds of many potential buyers. The monthly mortgage payment for a typical existing home has increased by more than 10% over last year.

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However, a few good weeks of low rates does not necessarily represent a trend. That’s something that worries Glenn Kelman, CEO of Redfin (NASDAQ: RDFN ). Redfin is both a real estate brokerage and a mortgage lender. In 2022, it acquired Bay Equity Home Loans for $138 million to supercharge its mortgage business. Redfin’s mortgage segment generated $40 million in revenue, up 5% year-over-year and in line with expectations.

On the Aug. 7 earnings call, Kelman noted that from the end of April through July 24, mortgage interest rates fell from 7.5 percent to 6.9 percent, but that he didn’t move the needle for homebuyers and that it was the first time in years that a major rate cut did not boost demand. “We’re not making a significant assumption about the housing market improving as we go forward from here because of the lower mortgage interest rates that we’ve seen more recently,” Kelman said.

Kelman called the scenario the “Twilight Zone,” saying he doesn’t recall seeing a market like this before where a rate drop doesn’t match a sales increase. He said his economists came to the surface in 2016 when something similar happened. Rates in 2016 were significantly lower; the annual average was 3.65%, so it was a very different market.

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What if mortgage rates don’t improve significantly? Wedbush analyst Jay McCanless recently reiterated his neutral rating on Redfin and asked Kelman what Plan B would look like if mortgage rates didn’t go down and went back up to 7%. He pointed out that in August 2023, people thought the rates would drop, but they didn’t. Kelman said that on the last earnings call, he quoted The Who’s song “Won’t Get Fooled Again” about mortgage rates. “Plan B is to drink our own urine or the blood of our competitors, sit in the foxhole,” Kelman added.

This rather visceral image sums up much of what is happening in both the real estate and mortgage markets. National Association of Realtors Chief Economist Lawrence Yun calls 6% the new normal for mortgages. While the latest data from the Mortgage Bankers Association seems to show that lower rates are finally having an impact on applications, this can change from week to week. For real change to happen, mortgage rates would have to be consistently lower, and home prices might have to fall as well, as many people worry about their ability to afford a home. As real estate expert Lance Lambert said in his ResiClub newsletter, “To improve existing home sales in any meaningful way, the U.S. housing market likely needs a significant improvement in affordability.”

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