The CEO of Redfin explains Austin’s housing price correction:

A “investor craze” unheard of in the American housing market since the housing bubble of the 2000s was unleashed by the Pandemic Housing Boom. In the hopes of creating Airbnb oligarchies, everyday people flocked to the market. Institutional investors soon grew their single-family home portfolios, including Blackstone-owned Home Partners of America. Building began on a record number of “spec” homes as homebuilders rushed to seize the moment. While Opendoor and Zillow, two iBuyers, increased the scope of their algorithmic home-buying efforts.

In October, investor panic has taken the place of that investor euphoria. Many investors have shied away from the market because of the ongoing market correction—US home prices have dropped 1.6% between June and August. This is the first countrywide fall in home prices since 2012.

The retreat of investors makes sense. Most housing experts acknowledge that this housing price correction is more severe than it was in 2006, even though they do not predict a correction on the same size as the Great Financial Crisis bust, which saw a 27% decline in U.S. home prices between 2006 and 2012. The delayed Case-Shiller Index already indicates an 8.2% decline in San Francisco home values.

What effect did investors have on the real estate market?

Glenn Kelman, CEO of Redfin, believes that the Pandemic Housing Boom’s investor frenzy contributes to the reason why this time around, home prices are dropping more quickly. Home values have a tendency to fluctuate over time. Simply put, sellers won’t lower their prices unless economics, such a supply glut, compels them to do so. For institutional investors and builders, this is less true. They prefer to leave first if they anticipate a price decline. According to Kelman, the fact that investors made up a larger percentage of buyers during the Pandemic Housing Boom eventually makes the U.S. housing market more susceptible to a quicker swing down.

Investors should leave first when the shiitake mushrooms hit the fan. Determine the location of the lowest sale and aim to be 2% below it. Move it down [again] if it doesn’t sell in the first weekend, advises Kelman.

In other words, Kelman contends that real estate investors, such as Redfin’s iBuyer division, aided in accelerating the rise of home prices during the boom and will do the same during the correction.

“In my opinion, a quicker correction results from more inventory being accounted for by builders and iBuyers. We are an iBuyer, one of them, adds Kelman. “We instantly notice when fewer individuals are visiting our website and signing up for trips… We currently possess properties worth $350 million that we either paid for outright or, worse still, financed with borrowed funds. Additionally, we always assured investors that we would act fast to protect our balance sheet. We do not employ hope as a tactic. We started noting things down right away.

View this interactive chart.

Why did investors rush into the home market during the epidemic? It became simply unaffordable for investors due to a mix of cheap borrowing rates, historic appreciation, and rising rents. It attracted everyone, including Wall Street titans and mom-and-pop landlords to people who flip houses.

What contributed to the housing boom?

To be clear, though, investor hysteria did not cause the Pandemic Housing Boom, which saw a 43% increase in U.S. housing prices. Instead, a perfect storm sparked a record increase in property prices. White-collar workers paid more for larger residences and moved to far-flung places like Boise as a result of being able to work from anyplace. Additionally, historically low mortgage rates—which peaked in January 2021 at 2.65%—made mortgage payments more manageable despite rising prices. Not to mention that all of this happened during a time of low inventory and favorable demographics for first-time millennial homebuyers.

View this interactive chart.

While rising mortgage rates have historically reduced buyer desire, this has not resulted in a significant increase of inventory. Most homeowners don’t fear anything. So how may housing prices decrease despite low inventory levels? It is as a result of leveraged investors not wanting to engage in a “wait and see” strategy. Additionally, lowering comps for an entire area only requires one property to sell for less than its comparable home.

“We started marking homes down as soon as demand started to decline, which lowers prices. Every home in the neighborhood where we reduced the listing now has a comparable sale that every buyer will be aware of and discuss, according to Kelman.

Naturally, the so-called investor hysteria that occurred during the Pandemic Housing Boom wasn’t universal. Western boomtowns like Phoenix, Austin, and Las Vegas were particularly hit hard by the investment frenzy. That explains in part why the inflated housing markets are currently seeing such a sharp correction.

Does the housing price correction effect ibuyers?

Simply look at this residence in North Las Vegas. For $540,800, Opendoor purchased the house in May. Opendoor put it up for sale in July for $581,000 just a few weeks later. Opendoor, however, arrived too late because the housing market in Las Vegas had already collapsed. When October rolled around, the property had recently been taken off the market with a list price of $472,000.

At first glance, it could appear that Opendoor will shortly experience a loss on the asset of about 13%. Not quite. You see, in exchange for the quick transaction, iBuyers like Redfin and Opendoor charge sellers a “service fee” when they purchase a home. On the one hand, that protects the iBuyer from a possible loss. On the other side, because of the buffer, the iBuyer is less reluctant to reduce the price.

Everyone does not concur with Kelman. Back in May, representatives of Zillow told Fortune that the Pandemic Housing Boom wasn’t fueled by the company’s unsuccessful iBuyer program, which was known for overpaying for properties until Zillow announced in November that it would end the program. The buying program was simply too tiny, in Zillow’s opinion, to do this.

While Kelman credits investors and builders for hastening the housing price correction brought on by rising mortgage rates, he adds that other factors were also at play. First off, he claims that in the years after the housing meltdown of 2008, the U.S. home market has become more sensitive to changes in mortgage rates. Second, he claims that the housing bust educated both buyers and sellers that home prices might in fact decrease.

“I believe that the belief that house prices constantly rise, which people held from 1946 to 2008, is no longer valid. According to Kelman’s parents, it was practically impossible for housing values to decrease. But the 2008 meltdown, in his opinion, destroyed that housing “religion.” People now react to that correction with something akin to PTSD, and they withdraw much more swiftly.

Where will housing costs go next?

Home values are expected to stagnate over the next few years, according to organizations like Freddie Mac and the Mortgage Bankers Association. Additionally, businesses like Moody’s Analytics and Goldman Sachs forecast a 10% national decrease from peak to trough. Moody’s forecasts a nationwide decline of 15%–20% in the event of a recession. Simply told, there are many different home price outlooks.

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