‘Plan B Is Drink Our Own Urine,’ Says Redfin CEO On Mortgage Rates

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Mortgage rates have been dropping for the past several weeks. This has been good news for the mortgage industry as buyers swarm in to get the rates while they are lower. The latest data from the Mortgage Bankers Association shows that mortgage applications soared by 17% during the week ending August 9. Refinances, which have been lackluster as rates remained high, were up by a healthy 35%.

Last week’s Freddie Mac Primary Mortgage Market Survey put the rate at 6.47% for a 30-year fixed-rate mortgage, the lowest level in over 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 time for home sales, this season has been weaker than usual. The existing home sales data for June from the National Association of Realtors showed that sales were down 5.4% year over year. While some of that can be attributed to higher prices, the cost of a mortgage is weighing on many potential buyers’s minds. The monthly mortgage payment on a typical existing home is up over 10% from last year.

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However, a few good weeks of low rates do not necessarily a trend make. That’s one thing that is worrying 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, which was up 5% year over year and in line with expectations.

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

Kelman called the scenario a ‘Twilight Zone,’ saying he didn’t remember seeing a market like this before where a rate drop didn’t correspond with an uptick in sales. He said his economists had surfaced a period 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 happens if mortgage rates don’t significantly improve? 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 come down and went back up as high as 7%. He pointed out that in August 2023, people thought rates would drop, but they didn’t. Kelman said that on the last earnings call, he quoted The Who song “Won’t Get Fooled Again” about mortgage rates. “Plan B is drink our own urine or our competitors’ blood, stay in the foxhole,” added Kelman.

That rather visceral image sums up a lot of what is happening in both the housing and mortgage markets. The National Association of Realtors Chief Economist Lawrence Yun calls 6% the new normal for mortgages. While the most recent Mortgage Bankers Association data seems to show that lower rates are finally having an impact on applications, that can change week by week. For real change to take hold, mortgage rates would need to be consistently lower, and home prices may need to drop as well because many people are worried about their ability to buy a home. As real estate expert Lance Lambert put it in his ResiClub newsletter, “To improve existing home sales in any meaningful way, the U.S. housing market likely needs a meaningful affordability improvement.”

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